Summary of NATIONAL PRESTO INDUSTRIES INC

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations, elsewhere in this Form 10-Q, in the Company's 2007 Annual Report to Shareholders, in the Proxy Statement for the annual meeting held May 20, 2008, and in the Company's press releases and oral statements made with the approval of an authorized executive officer are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by some of the statements made herein. Investors are cautioned that all forward-looking statements involve risks and uncertainty. In addition to the factors discussed herein and in the notes to consolidated financial statements, among the other factors that could cause actual results to differ materially are the following: consumer spending and debt levels; interest rates; continuity of relationships with and purchases by major customers; product mix; the benefit and risk of business acquisitions; competitive pressure on sales and pricing; increases in material, freight/shipping, or production cost which cannot be recouped in product pricing; delays or interruptions in shipping or production from machine issues work or labor disruptions stemming from a unionized work force; changes in government requirements and funding of government contracts, failure of subcontractors or vendors to perform as required by contract; and the efficient start-up and utilization of capital equipment investments. Additional information concerning these and other factors is contained in the Company's Securities and Exchange Commission filings, copies of which are available from the Company without charge.

Comparison of Third Quarter 2008 and 2007

Readers are directed to Note B, "Business Segments" for data on the financial results of the Company's three business segments for the Quarters ended September 28, 2008 and September 30, 2007.

On a consolidated basis, sales increased by $13,691,000 (14%), gross margins increased by $1,723,000 (9%), selling and general expense decreased by $1,283,000 (20%), and other income decreased by $253,000 (21%). Earnings before the provision for income taxes increased by $2,753,000 (21%), as did net earnings by $1,489,000 (17%). Details concerning these changes can be found in the comments by segment below.

Housewares/small appliance net sales increased by $1,394,000 from $29,735,000 to $31,129,000, or 5%. The increase was primarily attributable to price increases, approximately half of which was offset by a reduction in net units shipped.
Defense net sales increased by $7,703,000 from $53,961,000 to $61,664,000, or 14%, stemming primarily from an increase in sales related to the US Department of the Army 40mm Systems program. Absorbent products net sales increased by $4,594,000 from $15,796,000 to $20,390,000, or 29%, approximately 90% of which was derived from an increase in unit shipments, with the balance attributable to price increases.

Housewares/small appliance gross profits increased by $256,000 from $6,896,000 in the prior quarter to $7,152,000 in the current quarter. The increase primarily reflected the increase in sales noted above. Defense gross profits increased $1,547,000 from $11,834,000 from the prior year's quarter to $13,381,000. The increase related to the sales increase noted above. Absorbent products gross profits were a negative $381,000 in the current quarter versus a negative $301,000 in the prior period, an unfavorable change of $80,000, primarily reflecting increased commodity costs, offset by improved efficiency.

Housewares/small appliance segment selling and general expenses were essentially flat. Defense segment selling and general expenses decreased by $1,192,000, reflecting in largest part the absence of performance based accruals pertaining to the four-year earn-out of the Spectra Technologies, LLC purchase price and an incentive program for key executives to promote the rapid growth of the defense segment. Absorbent segment selling and general expenses were essentially unchanged.

The above items were responsible for the change in operating profit.

Other income decreased $253,000, due primarily to lower interest income resulting from decreased yields on a decreased level of investments, reflecting the use of more funds to support operations.

Earnings before provision for income taxes increased $2,753,000 from $13,075,000 to $15,828,000. The provision for income taxes increased from $4,363,000 to $5,627,000, which resulted in an effective income tax rate increase from 33% to 36% as a result of increased earnings subject to income. Net earnings increased $1,489,000 from $8,712,000 to $10,201,000, or 17%.

Comparison of First Nine Months 2008 and 2007

Readers are directed to Note B, "Business Segments" for data on the financial results of the Company's three business segments for the Nine Months ended September 28, 2008 and September 30, 2007.

On a consolidated basis, sales increased by $25,105,000 (9%), gross margins increased by $6,102,000 (13%), selling and general expense decreased by $4,597,000 (23%), and other income decreased by $788,000 (19%). Earnings before the provision for income taxes increased by $9,911,000 (32%), as did net earnings by $5,351,000 (26%). Details concerning these changes can be found in the comments by segment below.

Housewares/small appliance net sales increased by $8,461,000 from $66,895,000 to $75,356,000, approximately 75% of which reflected pricing increases, with the balance attributable to an increase in recorded net units shipped. Defense net sales increased by $11,089,000 from $162,119,000 to $173,208,000, or 7%, primarily due to increased shipments for the US Department of the Army's 40mm Systems program. Absorbent products net sales increased by $5,555,000 from $47,734,000 to $53,289,000, or 12%, reflecting an increase in unit shipments (approximately 90% of the increase) with the balance attributable to an increase in pricing.

Housewares/small appliance gross profits increased by $1,408,000 from $14,579,000 in the prior year's period to $15,987,000 in the current period.
The increase related largely to the increase in sales noted above. Defense gross profits increased $3,913,000 from $32,853,000 from the prior year's period to $36,766,000. The increase related to the sales increase noted above.
Absorbent products gross profits were a negative $439,000 in the current period versus a negative $1,220,000 in the prior year's period, an improvement of $781,000, reflecting improved efficiency, offset by increased commodity costs.

Period to period, housewares/small appliance segment selling and general expenses decreased $1,588,000. The Company accrues for unexpended selling and advertising costs, primarily for housewares/small appliances, budgeted for the year against each quarter's sales. Selling and advertising charges included in selling expense in each quarter represent that percentage of the annual sales and advertising budget associated with that quarter's shipments. Revisions to this budget result in periodic changes to the accrued liability for committed selling and advertising expenditures, and approximately $180,000 of the decrease was attributable to such revisions during the respective periods. The balance of the decrease was primarily due to the absence of $1,130,000 of professional fees incurred in 2007 attributable to the reaudit of financial statements for 2003 through 2005. The reaudits were necessitated by a chain of events stemming from the investment company case brought by the Securities and Exchange Commission on which the Company ultimately prevailed. Defense segment selling and general expenses decreased by $3,092,000, reflecting in largest part the absence of performance based accruals pertaining to the four-year earn-out of the Spectra Technologies, LLC purchase price and an incentive program for key executives to promote the rapid growth of the defense segment. Absorbent segment selling and general expenses were essentially unchanged.

The above items were responsible for the change in operating profit.

Other income decreased $788,000, due primarily to lower interest income resulting from decreased yields on a reduced level of investments, reflecting the fact that more funds were used to support operations.

Earnings before provision for income taxes increased $9,911,000 from $30,622,000 to $40,533,000. The provision for income taxes increased from $9,940,000 to $14,500,000, which resulted in an effective income tax rate increase from 32% to 36% as a result of increased earnings subject to income tax and the increase to the FIN 48 tax reserve (see Note I). Net earnings increased $5,351,000 from $20,682,000 to $26,033,000, or 26%.

Liquidity and Capital Resources

Net cash provided by operating activities was $9,026,000 during the first nine months of 2008, as compared to $11,619,000 provided during the first nine months of 2007. The principal factors behind the decrease in cash provided can be found in the changes in the components of working capital within the Consolidated Statement of Cash Flows, combined with the increase in net earnings of $5,351,000. Of particular note were increases in cash used to pay accrued liabilities and payables that were only partially offset by increases in cash received from collections of the higher levels of receivables at year-end.
Inventory was also a factor; although inventory levels as of the third quarter increased from year-end in both years, the increases from year-end 2006 to the third quarter 2007, the first full year of delivery of product under the 40mm Systems contract, was more dramatic than the increase from year-end 2007 to third quarter 2008.

Net cash used by investing activities during the first nine months of 2008 was $2,528,000, as compared to $19,716,000 used during the first nine months of 2007. The change in investment activity cash flow is primarily attributable to the increased use in 2008 of proceeds from the "sale" (which includes tendering cash-like variable rate demand notes) and maturities of marketable securities to fund operating activities, offset by the absence in 2008 of the 2007 earnout payment made in connection with the 2006 acquisition of certain assets of Amron, LLC by the Company's defense segment.

Cash flows from financing activities for the first nine months of 2008 and 2007 primarily differed as a result of the $.05 and $.40 per share increases in the regular and extra dividends paid during those periods, respectively.

Working capital increased by $228,000 to $227,232,000 at September 28, 2008.
The Company's current ratio was 5.2 to 1.0 at September 28, 2008, as compared to 4.0 to 1.0 at December 31, 2007.

As of September 28, 2008, there were approximately $560,000, $190,000, and $60,000 of open equipment/facilities purchase commitments to expand the product lines in the defense, housewares/small appliances, and absorbent products segments, respectively. The Company expects to continue to evaluate acquisition opportunities that align with its business segments and will make further acquisitions as well as continue to make capital investments in these segments if the appropriate return on investment is projected.

The Company has substantial liquidity in the form of cash and short-term maturity marketable securities to meet all of its anticipated capital requirements, to make dividend payments, and to fund growth through acquisitions and other means. The company intends to continue its investment strategy of safety and short-term liquidity throughout its investment holdings. The interest rate environment is a function of national and international monetary policies as well as the growth and inflation rates of the U.S. and foreign economies and is not controllable by the Company.

Critical Accounting Policies

The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates. The Company reviewed the development and selection of the critical accounting policies and believes the following are the most critical accounting policies that could have an effect on the Company's reported results. These critical accounting policies and estimates have been reviewed with the Audit Committee of the Board of Directors.

Inventories

New Housewares/Small Appliance product introductions are an important part of the Company's sales to offset the morbidity rate of other Housewares/Small Appliance products and/or the effect of lowered acceptance of seasonal products due to weather conditions. New products entail unusual risks and have occasionally in the past resulted in losses related to obsolete or excess inventory as a result of low or diminishing demand for a product. There were no such obsolescence issues that had a material effect during the current year and, accordingly, the Company did not record a reserve for obsolete product. In the future should product demand issues arise, the Company may incur losses related to the obsolescence of the related inventory. Inventory risk for the Company's other segments is not deemed to be significant, as products are largely built pursuant to customers' specific orders. The Company's Form 10-Q for the period ended March 30, 2008 referenced several lots of ammunition that were produced to specifications and met ballistic requirements, but were placed on hold. One lot was released and billed at the end of the second quarter. The balance of the lots were released and billed during third quarter 2008.

Product Liability

The Company is subject to product liability claims in the normal course of business. The Company does carry insurance to limit its product liability claims in excess of a self-insured retention. The self-insured retention and excess coverage vary from policy year to policy year. Moreover, there is typically a limit on all types of insurance coverage. The limits also vary from policy year to policy year. The Company records an accrual for known claims, including an estimate for related legal fees in the Company's consolidated financial statements. It utilizes historical trends and other analysis to assist in determining the appropriate accrual. Currently, there are no known claims that would have a material adverse impact on the Company beyond the reserve levels that have been accrued and recorded on the Company's books. An increase in the number or magnitude of claims could have a material impact on the Company's financial condition and results of operations.

Sales and Returns

Sales are recorded net of discounts and returns. The latter pertain primarily to warranty returns, returns of seasonal items, and returns of those newly introduced products sold on a guaranteed basis. The calculation of warranty returns is based in large part on historical data, while seasonal and new product returns are primarily developed using customer provided information.

New Accounting Pronouncements

Please refer to Note G for information related to the effect of adopting new accounting pronouncements on the Company's consolidated financial statements.

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