Three Months Ended                     Six Months Ended
                                        July 31,     July 31,       %        July 31,      July 31,        %
(in thousands except per share data)      2008         2007       Change       2008          2007        Change

Net sales                              $ 69,278     $ 55,653         24 %   $ 144,444     $ 113,756         27 %
Operating income                         10,312        8,543         21 %      26,953        21,381         26 %
Net income                                6,815        5,843         17 %      17,697        14,383         23 %
Diluted earnings per share                 0.38         0.32         19 %        0.98          0.79         24 %
Gross margins                              22.8 %       24.1 %                   26.2 %        27.1 %
Operating cash flow                                                            22,891        19,342         18 %
Dividends                                                                       4,692         3,980         18 %
Common stock repurchases                                                        5,180           282

Segment Results
The solid second quarter and first half financial results have been fueled by the continued success of the Flow Controls segment and solid contribution of Aerostar. The 27% increase in net sales for the first half of fiscal 2009 is the result of year-over-year sales growth in Engineered Films (12%), Flow Controls (82%), and Aerostar (46%). In addition, the company reported strong year-over-year and quarter-over-quarter gains in operating income, net income, diluted earnings per share, and operating cash flow.
Flow Controls has benefited from healthy agricultural fundamentals optimizing this opportunity by capitalizing on strong brand recognition, industry leading service, new products and greater acceptance of precision agriculture as a means of controlling rising input costs. These factors have contributed to solid growth in sales and operating margins. Engineered Films has benefited from the year-over-year increase in energy costs through increased sales of pit lining films to the energy sector. However, operating margins have been negatively impacted by the year-over-year increase in the price of natural gas which has resulted in higher plastic resin costs and contracted margins. Engineered Films ability to push rising raw material costs through selling prices has been constrained due to increased pricing pressure as competitors seek to expand capacity utilization to offset weakened demand from the construction market. Electronic Systems sales and operating income have been negatively impacted by the loss of a customer through an

acquisition and the sluggish construction market which has negatively impacted net sales of electronic bed controls. Aerostar posted gains in net sales and operating margins as a result of increased shipments and operational efficiency gains associated with the MC-6 U.S. Army parachutes contract. Administrative Expenses
Administrative expenses increased 7% to $2.2 million, or 3.2% of net sales in the second quarter of 2009, compared to $2.1 million, or 3.8% of net sales in the second quarter of fiscal 2008. Administrative expenses increased 11% to $4.4 million, or 3.1% of net sales in the first half of fiscal 2009, compared to $4.0 million, or 3.5% of net sales in the first half of fiscal 2008. The comparative increases were due primarily to higher compensation costs and professional service fees.
Interest Income and Other, Net
Second quarter non-operating income of $176,000 decreased $138,000 (44%) as compared to the similar period last year. First half non-operating income of $294,000 decreased $207,000 (41%) as compared to the similar period last year. The decline is due to foreign exchange losses and decreased interest income. Interest income decreased as a result of a decrease in the average portfolio yield which was partially offset by higher average cash, cash equivalent, and short-term investment balances.
Income Taxes
The effective tax rate for the second quarter and first half of fiscal 2009 was 35.0% versus an effective tax rate of 34.0% and 34.3% for the second quarter and first half, respectively of fiscal 2008. The increase in the rate was mainly due to the expiration of the U.S. research and development tax credit. Special Dividend
On August 26, 2008, the Board of Directors, noting the company's strong cash position, approved a special cash dividend of $1.25 per share in addition to the regular cash dividend of 13 cents. The special dividend will total approximately $22.5 million and is payable November 14, 2008 to shareholders of record on October 24, 2008.
Outlook
Management anticipates another record year of sales, earnings, and operating cash flows. Operating cash flows and the company's short-term line of credit are expected to be sufficient to fund day-to-day operations and the special dividend.
Global farm conditions remain strong as a result of depleted grain inventories and rising demand for food and energy. Commodity prices have been tamed but remain very strong by historical standards. Management expects Flow Controls to continue to expand their global footprint as they capitalize on healthy market conditions and increased acceptance of precision agricultural equipment as an essential tool for maximizing yields in an environment of rising input costs. Management expects Flow Controls to post favorable sales and profit comparables in the third quarter of fiscal 2009 versus fiscal 2008. Sequentially, the year-over-year rate of growth is expected to moderate. Additionally, sales programs designed to alleviate second half fiscal 2009 manufacturing capacity constraints may partially offset the impact of seasonality. Management anticipates continued strong customer demand for Flow Controls products and continues to accelerate resource allocation to this business segment. Engineered Films has strong long-term growth prospects through increased penetration of existing markets and the introduction of innovative products. However, in the near term the impact of high resin prices and increased price competition has continued to erode margins. Engineered Films continues their effort to capitalize on interest in new products such as VaporBlock Plus™ radon barrier, and FortressPro™ house wrap. Certain builders have opted for the quality characteristics of these new products such as superior air and water protection as a means of differentiation in order to gain a competitive advantage. Management expects a modest year-over-year increase in sales for the third quarter of fiscal 2009 and, if resin prices decline, believes that margins will begin to rebound in the second half of fiscal 2009.
Electronics Systems third quarter sales and profits are expected to fall considerably short of last year's third quarter results. Year-over-year comparables continue to be adversely impacted by the loss of $7.0 million of annual sales through a customer acquisition and the adverse trend in hand-held bed control demand. Increased revenue from avionic electronics products is expected to partially offset the aforementioned factors.
Aerostar third quarter sales and profits are expected to continue to improve as the segment accelerates shipments under the two-year $18 million MC-6 Army parachute contract and continues shipments of protective wear. Additionally, management is optimistic about Aerostar's prospects in the high-altitude research balloon and tethered aerostats markets.

RESULTS OF OPERATIONS
Engineered Films
In the second quarter of fiscal 2009, Engineered Films net sales of $26.5 million increased $2.8 million (12%) and operating income of $3.5 million decreased $1.8 million (33%) as compared to the second quarter of fiscal 2008. In the first half of fiscal 2009, Engineered Films net sales of $48.5 million increased $5.2 million (12%) and operating income of $7.4 million decreased $2.9 million (28%) as compared to the first half of fiscal 2008.
The comparative rise in second quarter and first half fiscal 2009 sales and decline in second quarter and first half fiscal 2009 operating income are primarily the result of the following:
• Strong sales of pit-lining films fueled by the rising cost of oil and increased shipments of vapor retarders were partially offset by a decline in sales to the manufactured housing market.

• Despite modest increases in selling prices, operating margins in the current quarter and first half were adversely impacted by increases in raw material costs. Specifically, the cost of plastic resins has increased over 20%. The ability to pass on rising material costs has been constrained due to increased price competition in a sluggish construction market. Consequently, increases in production costs outpaced increases in selling prices.

• Gross margins decreased from 26.2% and 27.9% for the second quarter and first half of fiscal 2008 respectively to 16.8% and 19.3% for the second quarter and first half of fiscal 2009, respectively. The decrease is attributable to the aforementioned rise in material costs and increased price competition.

• Second quarter fiscal 2009 selling expenses of $901,000 decreased $19,000 (2%) reflecting lower product development costs. First half fiscal 2009 selling expenses of $1.9 million increased $100,000 (4%) reflecting increases in salary, advertising, and trade show expenses related to the promotion of new products, partially offset by lower product development costs. Last year's first half expense reflects costs associated with developing new products and current year expense reflects marketing expense related to those products.

Flow Controls
Flow Controls net sales of $22.7 million in the second quarter of fiscal 2009 increased $10.9 million (93%) and operating income of $7.1 million in the second quarter of fiscal 2009 increased $4.5 million (172%) as compared to the second quarter of fiscal 2008. For the first half ended July 31, 2008, Flow Controls net sales of $57.6 million increased $25.9 million (82%) and operating income of $20.6 million increased $10.9 million (112%) as compared to the first half ended July 31, 2007.
Several factors contributed to the second quarter and first half fiscal 2009 comparative revenue and operating income increases, including the following:
• Commodity prices have fallen from their highs; however, worldwide agricultural conditions remain strong. Growth in developing countries, rising energy costs, droughts, government policies, speculation, and increased demand for ethanol have resulted in heightened demand and low inventory levels which support attractive commodity prices. The strong agricultural market fundamentals continue to influence growers' capital investment decisions, increasing demand for Flow Controls precision agriculture equipment.

• International sales accounted for 22% and 20% of segment sales for the fiscal 2009 second quarter and first half, respectively, compared to 22% and 18% in the fiscal 2008 second quarter and first half, respectively. International sales of $11.7 million in the first half of fiscal 2009 increased $5.9 million (101%) from the first half of fiscal 2008. The increase is largely attributable to return on prior sales and marketing investments in select global markets and healthy global farm fundamentals.

• All of the segment's product categories (standard, precision, steering, and AutoboomTM) reported double-digit sales growth for the quarter and first half ended July 31, 2008, reflecting strong customer demand for new products such as the CruizerTM., a simple and affordable guidance system targeted at new entrants to the precision agriculture market. Sales programs intended to mitigate expected production constraints in the second half of the year also contributed to the second quarter demand.

• Gross margins of 39.1% and 41.8% for the second quarter and first half of fiscal 2009, respectively, compared favorably to second quarter and first half fiscal 2008 gross margins of 33.4% and 38.9%, respectively. The increase is primarily due to positive operating leverage generated through increased sales volume.

• Second quarter fiscal 2009 selling expenses of $1.8 million increased $544,000 (44%) from the second quarter of fiscal 2008. First half fiscal 2009 selling expenses of $3.4 million increased $928,000 (37%) from the first half of fiscal 2008.

The increases reflect year-over-year increases in salaries, advertising, and travel costs to support new products and international expansion.

Electronic Systems
Electronic Systems net sales of $14.7 million in the second quarter of fiscal 2009 decreased $2.0 million (12%) and operating income of $1.2 million in the second quarter of fiscal 2009 decreased $1.3 million (51%) as compared to the second quarter of fiscal 2008. Electronic Systems net sales of $28.0 million in the first half of fiscal 2009 decreased $3.2 million (10%) and operating income of $1.9 million in the first half of fiscal 2009 decreased $3.0 million (62%) as compared to the first half of fiscal 2008.
The comparative decline in fiscal 2009 sales and operating income are primarily the result of the following:
• Hand-held bed control shipments have been negatively impacted by lower consumer spending on non-essential home-related products, reflecting the influence of higher energy costs and a soft construction market.

• Electronic Systems continues to face difficult year-over-year comparables stemming from the loss of $7 million of annual sales through a customer acquisition.

• Increased sales of avionic electronics have partially offset the negative impact of the aforementioned factors.

• Margins have suffered as a result of a less favorable product mix compounded by the impact of negative operating leverage due to lower sales volume.

• Second quarter selling expenses of $236,000 decreased $79,000 (25%) from the second quarter of fiscal 2008. First half selling expenses of $546,000 declined $87,000 (14%) from the first half of fiscal 2008. The drop reflects reduced personnel costs associated with cost cutting initiatives designed to offset decreased sales and operating margins.

Aerostar
Aerostar's fiscal 2009 second quarter sales of $5.5 million increased $1.8 million (49%) and fiscal 2009 second quarter operating income of $718,000 increased $414,000 (136%) as compared to the second quarter of fiscal 2008. Aerostar's fiscal 2009 first half sales of $11.6 million increased $3.7 million (46%) and fiscal 2009 first half operating income of $1.5 million increased $1.0 million (194%) as compared to the first half of fiscal 2008.
The comparative increase in fiscal 2009 sales and operating income is primarily due to the following:
• Aerostar increased shipments of MC-6 parachutes under the two-year $18 million Army contract.

• Gross margins increased to 17.0% and 16.9% for the second quarter and first half, respectively, from 13.2% and 11.5% in the second quarter and first half of fiscal 2008, respectively, as a result of MC-6 Army parachutes shipments and to a lesser extent, profit growth in research balloons.

LIQUIDITY AND CAPITAL RESOURCES
Cash Position
Cash, cash equivalents, and short-term investments totaled $32.2 million at July 31, 2008, a $9.5 million increase compared to cash, cash equivalents, and short-term investments at January 31, 2008 of $22.8 million. The comparable balances one year earlier totaled $21.9 million.
The company expects that current cash and short-term investments, combined with continued positive operating cash flows and the company's short-term line of credit, will be sufficient to fund day-to-day operations and the special dividend of $1.25 per share, or approximately $22.5 million in total, payable November 14, 2008. The company's cash needs are seasonal, with working capital demands strongest in the first quarter.
Operating Activities
Cash provided by operating activities was $22.9 million in the first half of fiscal 2009 compared to $19.3 million in the first half of fiscal 2008. The following items account for the majority of the relative change from first half fiscal 2008 to first half fiscal 2009:
• Net income for the first half of fiscal 2009 increased by $3.3 million compared to the first half of fiscal 2008.

• Non-cash charges to earnings and deferred income taxes increased by approximately $1.4 million year-over-year.

• Changes in operating assets and liabilities resulted in a $1.2 million net decrease in cash flow from operations as result of higher inventory and accounts receivable which was partially offset by the timing of payments to vendors.

Accounts Receivable
The company's net accounts receivable balance was $34.9 million at July 31, 2008 compared to $27.1 million at July 31, 2007. Net accounts receivable levels are impacted by the relative contribution of segment sales to consolidated sales as each segment targets distinct markets and payment terms can vary by market type. The increase in net accounts receivable is due primarily to the timing of sales, increased shipments of Flow Controls products, and seasonal payment terms offered to the agricultural market.
Inventory
The company's net inventory was $42.6 million at July 31, 2008 compared to $32.2 million at July 31, 2007. The increase is attributable to increased inventory levels needed to support Flow Controls product demand and increased inventory levels at Engineered Films as a result of the year-over-year increase in resin costs. Management continues to focus on lowering the risk of obsolescence and improving cash flow while still ensuring competitive delivery performance.
Accounts Payable
The company's accounts payable balance was $12.9 million at July 31, 2008 compared to $7.9 million at July 31, 2007. The increase is attributable to the increase in inventory, more favorable payment terms, and the timing and level of purchases.
Investing Activities
Cash used in investing activities totaled $4.2 million in the first half of fiscal 2009, compared to $4.1 million in the first half of fiscal 2008. The primary use of cash in investing activities was capital expenditures and short-term investments and included the following:
• Net purchases of short-term investments increased $600,000 in the first half of fiscal 2009 as compared to the first half of fiscal 2008.

• Capital expenditures decreased $392,000 during the first half of fiscal 2009 compared to the first half of fiscal 2008. The company anticipates that its capital spending in fiscal 2009 will approximate $8 million.

Financing Activities
Financing activities consumed cash of $9.8 million for the first half ended July 31, 2008 as compared to $4.1 million used in last year's comparable period. Cash used in financing activities is primarily for dividend payments and repurchases of common stock.
Cash used for financing activities in the first half of fiscal 2009 included the following:
• $4.7 million of cash was used to pay dividends versus $4.0 million in the prior year as the quarterly per-share dividend increased to 13 cents per share from 11 cents one year ago.

• $5.2 million of cash was used to purchase 161,100 shares of the company's stock under the share repurchase program compared to $282,000 to purchase 10,150 shares in the prior year.

COMMITMENTS AND CONTINGENCIES
There have been no material changes to the company's contractual obligations since the fiscal year ended January 31, 2008.
NEW ACCOUNTING STANDARDS
At the beginning of fiscal 2009, the company adopted SFAS No. 157, Fair Value Measurement. The standard provides guidance for using fair value to measure assets and liabilities. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements are separately disclosed by level within the fair value hierarchy. The adoption of SFAS No. 157 did not have a material impact on the company's consolidated results of operations, financial condition or cash flows. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures about (a) how and why derivative instruments are used, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The company does not anticipate that the adoption of SFAS No. 161 will have a material effect on its consolidated results of operations, financial condition, or cash flows.

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets. ("FSP No. 142-3") FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). The objective of FSP No. 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(revised 2007), Business Combinations, (SFAS No. 141(R)), and other U.S. GAAP. FSP No. 142-3 applies to all intangible assets, whether acquired in a business combination or otherwise, and shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and should be applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. The Company is in the process of evaluating FSP No. 142-3 and does not expect it to have a material impact on its consolidated financial statements.