Business Overview

This section should be read in conjunction with the Condensed Consolidated Financial Statements of the Company included elsewhere herein and the Company's Form 10-K for the fiscal year ended January 31, 2008.

The Company develops and manufactures systems that have the ability to acquire, process, analyze, store and present electronic data in a variety of useable forms. The Company sells its product under brand names including Astro-Med Test & Measurement (T&M), QuickLabel Systems (QuickLabel) and Grass Technologies (GT). Products sold under the Astro-Med brand acquire and record data and print the output onto charts or electronic media. Products sold under the QuickLabel Systems brand create product and packaging labels and tags in one or many colors. Products sold under the Grass Technologies brand electronically capture and record neurological data that is used to diagnose epilepsy or to study sleep disorders. The Company supplies a range of products that include hardware, software and consumables to customers who are in a variety of industries.

The Company competes worldwide in many markets including clinical and research medicine, aerospace, automotive and general manufacturing. The Company retains a competitive position in its respective markets by virtue of proprietary technology, product reputation, delivery, technical assistance and service to customers. The Company markets its products worldwide by advertising and promotion using major national and international trade journals, scientific meetings and trade shows, direct mailing campaigns and the internet. The products are sold by direct field sales persons as well as independent dealers and representatives. In the United States, the Company has direct field sales people located in major cities from coast to coast specializing in either T&M Recorders and Data Acquisitions systems, QuickLabel Color Label printers and media systems, or Grass Technologies Neurological Instrumentation products. Additionally, the Company has direct field sales and service centers in Canada, England, France and Germany. In the remaining parts of the world, the Company utilizes approximately 80 independent dealers and representatives selling and marketing its products in 40 countries.

Products sold under the Astro-Med brand include ToughWriter page printers and ToughSwitches for use in passenger and military aircraft. ToughWriter page printers are used in both the cockpit and the cabins of aircraft. ToughSwitches are also used in military vehicles. These and other similar products are ruggedized and comply with rigorous military standards specifications for operation under extreme environmental conditions. The Company is currently furnishing ToughWriters for the Airbus A380, the Boeing C-17, B-787, B-777, B-747, B-767, and the Lockheed C-130. Other products sold under the Astro-Med brand include the Everest, a telemetry workstation used widely in the aerospace industry to monitor and track space vehicles, aircraft and missiles under test. The Everest ranges in price from $18,000 to $35,000 depending on features and options selected. The Astro-Med brand Dash Series constitute a family of portable electronic data acquisition systems which are used as maintenance and troubleshooting instruments for pulp, paper, metal mills, power plants, automotive R & D centers and manufacturing plants. Included in the Dash Series are the Dash 2EZ, Dash 8X, Dash 8HF, Dash 8XPM, Dash 32HF and the Dash 18 and they range in price from $3,500 to $20,000 depending on model and features and options selected.

Products sold under the QuickLabel System brand include a family of digital color label printers including the Vivo!, the first electrophotographic roll-to-roll printer, the QLS-4100 XE, QLS-8100 XE, QLS-2000 and QLS-3000 thermal transfer label printers, the ZEO inkjet printer which was introduced in fiscal 2008, as well as a line of monochrome thermal transfer digital label printers including the Pronto! Series. This Series includes four models used in printing bar code labels. QuickLabel digital color label printers are sold via a direct sales force throughout the US, Canada and Western Europe, and serviced by a factory-trained, direct technical support staff. In the rest of the world, QuickLabel uses a broad network of dealers to sell and support its products. QuickLabel's unique labeling solutions are aimed at label printing applications in which product packaging requires frequent content changes. QuickLabel digital color label printers fill a critical need in environments that require on-demand flexibility to package multiple product variations, and to add value to the product itself, as in private labeling, to produce OEM packaging, and to customize virtually any product. Industries that require instant label production flexibility include food and beverage, foodservice distribution, grocery retailing, chemical and sanitary supplies, pharmaceutical and medical products, personal care products, advertising specialties, tire manufacturing and apparel. Custom QuickLabel, a custom label creation software package, is an integral part of the QuickLabel printing system, and was designed by the same team of engineers who designed the digital label printers. The latest generation of QuickLabel's proprietary user-friendly label creation software offers significant new tools for simplifying label creation and for controlling and enhancing label output. The Company's patented MicroCell ® half-toning algorithms have been improved in this latest version of the software, so that printers driven by Custom QuickLabel now render process-color print quality that closely approximates digital artwork. QuickLabel digital label printers generate revenue through label, tag, thermal transfer ribbon and toner cartridge consumables sales. The Company engineers and manufactures unique printing supplies especially for use in optimizing the performance of the QuickLabel brand of digital label printers.

Products sold under the Grass Technologies (GT) brand include systems, instruments and software products to detect, amplify and display the electrical activity of the human brain commonly called electroencephalography (EEG). EEG data is used by clinicians to diagnose epilepsy and other neurological conditions including sleep apnea. Included in the GT line of products are the Comet, the Aura, the wireless Aura PSG, and the Beehive. These systems are all operated under the Twin software system, a Windows-based multi-module software program developed by the Company over the past six years. Included also is a line of amplifiers, electrodes, transducers and stimulators used by clinicians and researchers. Products sold under the Grass Technologies brand are sold to hospitals, sleep centers, clinics and doctors offices. All GT clinical products which are connected to the human body are approved by the Food and Drug Administration (FDA).

Results of Operations

Three Months Ended August 2, 2008 vs. Three Months Ended August 4, 2007

The Company reports three reporting segments consistent with its sales product groups: Test & Measurement (T&M); QuickLabel Systems (QuickLabel) and Grass-Technologies (GT). The Company evaluates segment performance based on the segment profit before corporate and financial administration expenses.

Net Sales by product group, percentage change and percent of Net Sales for the three months ended August 2, 2008 and August 4, 2007 were:

                                   As a                             As a         % Change
                                   % of                             % of           Over
               August 2, 2008    Net Sales      August 4, 2007    Net Sales     Prior Year
 T&M          $      4,490,000        22.7 %   $      4,500,000        24.1 %         (0.2 )%
 QuickLabel         10,633,000        53.7 %          9,661,000        51.7 %         10.1 %
 GT                  4,661,000        23.6 %          4,533,000        24.2 %          2.8 %

 Total        $     19,784,000       100.0 %   $     18,694,000       100.0 %          5.8 %

The Company's sales revenues were $19,784,000 in the second quarter, reaching a record level of quarterly sales and improving on the previous year's sales in the second quarter of $18,694,000 by 5.8%. Sales through the domestic channels were $13,486,000, up 6.8% over the prior year, whereas international shipments at $6,298,000 grew by 3.8% from the previous year. Favorable impact from foreign exchange rates contributed $443,000 to the second quarter's sales growth.

Hardware sales in the quarter were $9,863,000, up 3.9% over the prior year's hardware sales of $9,491,000. Growth in hardware sales was evident in two product groups, QuickLabel Systems and Grass Technologies, while the Test & Measurement hardware sales were flat with the prior year.

Consumables sales in the quarter were $8,561,000, an increase of 8.0% from the prior year's sales of $7,925,000, with each product group reporting healthy growth in their respective consumable product lines as the hardware installed base continues to grow.

Service and other revenues at $1,360,000 in the quarter achieved a 6.3% improvement over the prior year's service and other revenues of $1,278,000. All three product groups reported growth in their respective service and other sales product lines.

Relative to the Company's three product groups, the QuickLabel Systems product group of color and monochrome printing systems dominated the second quarter's sales with revenues of $10,633,000, up 10.1% from the previous year's sales of $9,661,000. Also contributing to the quarter's growth were sales in the Grass Technologies product group, where revenues of $4,661,000 rose 2.8% from the prior year's sales of $4,533,000. Sales revenues from the Company's Test & Measurement product group were virtually flat at $4,490,000 with the prior year's sales of $4,500,000.

The Company continued its improvement in gross profit during the second quarter. Gross profit was $8,681,000 in the quarter, a 10.9% increase from the prior year's gross profit in the second quarter and a 6.0% increase over the first quarter's gross profit of $8,188,000. The results also reflect a gross profit margin improvement during the quarter. The Company achieved a gross profit margin of 43.9% in the quarter, a 200 basis point improvement from the prior year's gross profit margin of 41.9% and a nominal improvement over the first quarter's margin of 43.8% due to better factory absorption and productivity improvements.

The Company's spending in the operating accounts of selling, research & development and general and administrative rose 2.8% from the prior year to $6,752,000. Specifically, selling & marketing expenses increased 1.6% from the previous year due to increments in compensation expense and marketing programs. Research & Development (R&D) expenses in the quarter were $1,199,000, a 5.6% increase from the prior year's second quarter's spending, but down 2.2% from the first quarter's expense level. The increased spending in R & D is confined to purchases of outside professional engineering services. R&D expenses consumed 6.1% of the second quarter's sales, being consistent with the previous year. General & administrative spending rose 4.5% from prior year to $1,210,000. The increased expense is due to professional service fees and insurance costs.

The Company achieved income from operations of $1,928,000 in the quarter. This level of profitability improved on the prior year's second quarter's operating income by 52.8% and reflects an operating margin of 9.7% as compared to the prior year's 6.8% margin.

Other income during the second quarter declined to $61,000 from our prior year level of $214,000. The lower level of other income stems from lower investment income, higher foreign currency losses and miscellaneous charges.

The provision for federal and state income taxes in the second quarter was $835,000, reflecting an effective tax rate of 42.0% as compared to the prior year's effective tax rate of 40.0%. This quarter's expense includes a discrete item related to the payment of additional state franchise taxes.

The Company earned $1,154,000 in net income for the second quarter reflecting a return on sales of 5.8% and generating an EPS of $0.15 per diluted share. On a comparative basis with the previous year's second quarter, net income was $886,000 providing a return of 4.7% on sales and reporting an EPS of $0.12 per diluted share.

Results of Operations (Continued)



Summarized below are the Net Sales and Segment Operating Profit for each
reporting segment for the three months ended August 2, 2008 and August 4, 2007:



                                        Net Sales              Segment Operating Profit
                                August 2,      August 4,       August 2,       August 4,
                                   2008           2007            2008           2007
  T&M                          $  4,490,000   $  4,500,000   $      882,000   $   888,000
  QuickLabel                     10,633,000      9,661,000        1,522,000     1,075,000
  GT                              4,661,000      4,533,000          587,000       340,000

  Total                        $ 19,784,000   $ 18,694,000        2,991,000     2,303,000

  Corporate Expenses                                              1,063,000     1,040,000

  Operating Income                                                1,928,000     1,263,000
  Other Income, Net                                                  61,000       213,000

  Income Before Income Taxes                                      1,989,000     1,476,000
  Income Tax Provision                                              835,000       590,000

  Net Income                                                 $    1,154,000   $   886,000

Test & Measurement - T&M

Sales revenues from the Test & Measurement product group were $4,490,000 for the second quarter, essentially flat with the sales of $4,500,000 for the same period in the prior year. Within the product group, Dash recorder sales were comparable to the prior year and ruggedized products were down due to timing on the avionic printer orders year over year. However, sales of the Everest product line were up significantly from the prior year. Gross Profit margins were up from last year while operating expenses rose 1.8% from the prior year spending level. Segment operating profits were approximately flat with the prior year, while the segment operating profit margins of 19.6% were comparable to the prior year's margin of 19.7%.

QuickLabel Systems - QLS

Sales revenues from the QuickLabel Systems product group were $10,633,000 in the quarter as compared to $9,661,000 in the prior year's same quarter. The sales growth of 10.1% over the prior year was distributed among hardware products, up 16.5%, consumable products, up 8.1% and service and other sales, up 4.4%. Gross profit increased over the prior year, while the gross profit margin improved by 230 basis points. Operating expenses rose 6.4% from the previous year as higher personnel costs and compensation related commission expense drove the increased spending. The QLS segment operating profits were up 41.6% over the prior year and reflect a profit margin of 14.3% against the prior year's segment profit margin of 11.1%.

Grass Technologies - GT

Sales in the quarter were $4,661,000 against $4,533,000 in the prior year's second quarter. The growth rate of 2.8% was shared among hardware systems up 1.2%, consumable products up 8.5% and service and other revenues up 0.5%. Gross profit was 10.0% while gross profit margins improved as well. Operating expenses were down 1.7% from the previous year's second quarter spending due to savings realized from the restructuring initiative implemented in the prior year. Segment operating profits were up significantly in the quarter with the segment achieving an operating profit margin of 12.6% as compared to a segment operating profit margin of 7.5% reported in the prior year.

Six Months Ended August 2, 2008 vs. Six Months Ended August 4, 2007

Net Sales by product group, percent change, and percent of Net Sales for the six
months ended August 2, 2008 and August 4, 2007 were:



                                    As a                         As a         % Change
                    August 2,       % of         August 4,       % of           Over
                       2008       Net Sales         2007       Net Sales     Prior Year
      T&M          $  8,450,000        22.0 %   $  7,965,000        22.7 %          6.1 %
      QuickLabel     20,382,000        53.0 %     18,577,000        52.9 %          9.7 %
      GT              9,640,000        25.0 %      8,559,000        24.4 %         12.6 %

      Total        $ 38,472,000       100.0 %   $ 35,101,000       100.0 %          9.6 %

Net sales for the six month period of the current fiscal year were $38,472,000, a 9.6% improvement over the $35,101,000 reported for the first six months of the prior fiscal year. T&M sales revenues were $8,450,000, reflecting an increase of 6.1% over the previous year and representing 22.0% of the Company's total sales for six months. QuickLabel Systems with sales revenues of $20,382,000 for six months grew 9.7% over the prior year's sales and represent 53.0% of the Company's total sales for the current six months. Grass Technologies sales revenues were $9,640,000 for the first half of fiscal 2009 representing a 12.6% increase over the prior year's sales for six months and reflecting 25.0% of the Company's total sales for the first six months of the current fiscal year.

Results of Operations (Continued)

The Company's hardware sales grew 13.0% in the first half to $18,819,000 with the Dash, Everest, QuickLabel printer lines and Grass Technologies clinical products responsible for this year's growth. Consumable sales of $16,919,000 rose 6.9% from the six month period with QuickLabel media and Grass Technologies' electrodes and creams products accounting for the increase. Service and other sales revenues for the six months were $2,734,000, an increase of 4.4% from the prior year with the sales growth traceable to an increase in parts and repair invoicing.

Relative to Astro-Med's various channels of distribution, the Company reported domestic sales of $26,524,000, an increase of 7.9% from the previous year's sales of $24,576,000 and representing 69.0% of the Company's total sales revenues. International shipments for the six month period increased by 13.5% to $11,948,000 and represent 31.0% of the Company's total sales revenues. Foreign currency exchange rates had a favorable impact on international sales of $916,000 or 8.7%.

The Company realized $16,868,000 in gross profit for the first six months and generated a gross profit margin of 43.8% on sales. This result reflects a 200 basis point improvement over the prior year's gross profit margin of 41.8% and is due to better factory absorption, product mix and productivity improvements.

Operating expenses in the six months were $13,645,000, a 6.7% increase in spending in selling, R&D and general and administrative expenses from the prior year. Selling and marketing expenses rose 5.0% from last year to $8,764,000 with the increase traceable to personnel costs related to compensation from higher commission expense. R&D spending grew by 8.6% to $2,425,000 from the prior year's six months spending. The increase in expenses is confined to an increase in the procurement of outside software engineering services. R&D spending is 6.3% of the current year's sales and comparable to the spending of 6.4% of sales reported in the prior year. General and administrative expense rose 11.0% from the prior year to $2,456,000 for the first six months. The higher spending level is traceable to an increase in professional service fees.

The Company has earned $3,223,000 in operating income during the first six months of fiscal year 2009. This achievement reflects a 71.1% improvement in operating income over the prior year's first half operating income. On a margin basis, this year's operating income reflects an operating margin of 8.4% on sales, a 300 basis point increase from the prior year's operating margin of 5.4%.

Other income realized during the first six months of the current fiscal year was $237,000 as compared to the other income of $463,000 reported in the previous year. This lower level of other income stems from lower interest income (municipal bonds), lower foreign currency gains and lower miscellaneous income than reported in the prior year.

The Company has provided federal and state income tax expense of $1,409,000 for the six month period ended August 2, 2008. This year's provision reflects an effective tax rate of 40.7%, up slightly from the prior year's effective tax rate of 40.0%. The increase is the result of the payment of additional discrete state franchise taxes incurred in the current fiscal year.

Net income earned during the first six months of the current fiscal year was $2,051,000, a 45.7% increase over the prior year's net income of $1,408,000 and reflects a return on sales of 5.3% against 4.0% reported for the previous year. This year's net income translates into an EPS of $0.27 per diluted share against an EPS of $0.19 per diluted share reported for the prior year's first six months.

Summarized below are the Net Sales and Segment Operating Profit for each reporting segment for the six months ended August 2, 2008 and August 4, 2007:

                                        Net Sales              Segment Operating Profit
                                August 2,      August 4,       August 2,       August 4,
                                   2008           2007            2008           2007
  T&M                          $  8,450,000   $  7,965,000   $    1,510,000   $ 1,300,000
  QuickLabel                     20,382,000     18,577,000        2,532,000     1,987,000
  GT                              9,640,000      8,559,000        1,334,000       575,000

  Total                        $ 38,472,000   $ 35,101,000        5,376,000     3,862,000

  Corporate Expenses                                              2,153,000     1,978,000

  Operating Income                                                3,223,000     1,884,000
  Other Income, Net                                                 237,000       462,000

  Income Before Income Taxes                                      3,460,000     2,346,000
  Income Tax Provision                                            1,409,000       938,000

  Net Income                                                 $    2,051,000   $ 1,408,000

Results of Operations (Continued)

Test & Measurement - T&M

This year's sales revenue of the T&M product group was $8,450,000 for the first six months as compared to $7,965,000 for the same period of the previous year. The improved sales volume of 6.1% stems from growth in the Dash, Everest and parts product lines. This year's segment operating profit increased 16.2% from the prior year's segment operating profit and provided an operating profit margin of 17.9%, up from the prior year's margin of 16.3%. The improvement is traceable to higher gross profit margins in the current fiscal year.

QuickLabel System - QLS

The QuickLabel product group has sales revenue of $20,382,000 for the first six months as compared with $18,577,000 in sales revenues reported for the same period in the prior year. The current year's sales growth of 9.7% results from sales increases in the hardware (printers), up 18.7% and consumables (labels & Vivo & Zeo supplies) up 7.3%. The QuickLabel segment operating profit increased significantly in the current year, reporting profit improvement of 27.4% from last year, with an operating profit margin of 12.4% as compared to a 10.7% operating profit margin for the same period of the previous year. The improvement is due to higher gross profit margins from sales volume and product mix.

Grass Technologies - GT

Sales revenues of the Grass Technologies product group have been especially strong in the current fiscal year. GT sales were $9,640,000 for the six months compared to $8,559,000 for the same period of the prior year. The year over year increase of 12.6% was achieved through growth of the clinical products (sleep and long term monitoring diagnostic products) up 15.1%, and research instruments up 22.9%, as well as the consumable products of electrodes and creams up 8.5%. The segment's operating profit of the GT product group has improved dramatically from last year, more than doubling its segment operating profit margin to 13.8% from 6.7% reported in the previous year. The increased profitability is an outgrowth of sales volume, factory absorption and product mix.

Financial Condition and Liquidity

The Company expects to finance its future working capital needs, capital expenditures and acquisition requirements through internal funds. To the extent the Company's capital and liquidity requirements are not satisfied internally, the Company may utilize a $3.5 million unsecured bank line of credit, all of which is currently available. Borrowings under this line of credit bear interest at the bank's prime rate. The expiration date of this line of credit is July 31, 2009.

The Company's statement of cash flows for the six months ended August 2, 2008 and August 4, 2007 are included on page 5. Net cash flows provided by operating activities were $3,965,000 in the current year compared to net cash used by operating activities of $670,000 in the previous year. The cash provided in the current year is an outgrowth of lower accounts receivable and inventory balances and strong net income. Accounts receivable decreased to $11,980,000 at the end of the second quarter compared to $12,761,000 at year end. The accounts receivable collection cycle decreased to 53 days sales outstanding at the end of the quarter, down from 58 days sales outstanding at year end. Inventory balances also declined 3.2% to $13,598,000 at the end of the second quarter compared to $14,051,000 at year end. Inventory days on hand also declined to 110 days on hand at the end of the quarter from 126 days at year end.

Cash and Cash equivalents and investments at the end of the second quarter totaled $20,415,000 compared to $17,556,000 at year end. The higher cash and investments position resulted from higher net income and proceeds from employees . . .