Business Overview

This section should be read in conjunction with Astro-Med's Condensed Consolidated Financial Statements included elsewhere herein and our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

Astro-Med develops and manufactures systems that have the ability to acquire, process, analyze, store and present electronic data in a variety of useable forms. We sell our product under brand names including Astro-Med® Test & Measurement (T&M), QuickLabel® Systems (QuickLabel) and Grass® Technologies (GT). Products sold under the Astro-Med T&M brand acquire and record data and print the output onto charts or electronic media. Products sold under the QuickLabel brand create product and packaging labels and tags in one or many colors. Products sold under the GT 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.

Astro-Med competes worldwide in many markets including clinical and research diagnostics, aerospace, specialty printing systems and data acquisition and analysis. We retain a competitive position in our respective markets by virtue of proprietary technology, product reputation, delivery, technical assistance and service to customers. We market our products worldwide by advertising and promotion using major national and international trade journals, scientific meetings and trade shows, direct mailing campaigns and the internet. Our products are sold by direct field sales persons as well as independent dealers and representatives. In the United States, the Company has factory-trained direct field sales people located in major cities from coast to coast specializing in either Astro-Med T&M products, QuickLabel products or Grass Technologies products. Additionally, we have direct field sales and service centers in Canada, England, France, United Kingdom and Germany staffed by our own employees. In the remaining parts of the world, Astro-Med utilizes approximately 60 independent dealers and representatives selling and marketing our products in 80 countries.

Products sold under the Astro-Med T&M brand include ToughWriter printers, ToughSwitches Ethernet switches, Everest recorders and Dash series data recorders. ToughWriter ruggedized page printers are used on the flight deck and in the cabins of military and commercial aircraft to print hard copies of airport maps, flight itineraries, weather maps, gate information and ground communications. ToughSwitches Ethernet switches are used in commercial and military aircraft and military vehicles to connect multiple computers or Ethernet-compatible devices together. These products are ruggedized to comply with rigorous military and commercial flightworthiness standards for operation under extreme environmental conditions. The Company is currently furnishing ToughWriters for the Airbus A380, the Airbus A400M, Bombardier B145, the Boeing C-17, B-787, B-777, B-747, B-767, and Lockheed C-130. Other products sold under the Astro-Med brand include the Everest, used widely in the aerospace industry to monitor and track space vehicles, aircraft, missiles and other systems in flight. The Company's Dash Series product line consists of a family of portable data recorders used as maintenance and troubleshooting instruments in pulp and paper mills, metal mills, power plants, automotive R&D centers and manufacturing plants. Dash Series include the Dash 2EZ, Dash 8X, Dash 8HF, Dash 8XPM, Dash 18, Dash 20HF and the Dash 32HF.

Products sold under the QuickLabel System brand include digital color label printers developed for short-run, in-house label printing; label substrates and thermal transfer ribbon, toner, and inkjet printing inks developed for use in label printers; and a range of labeling software, accessory products, and printing services which allow QuickLabel Systems sales and support staff to serve customers at virtually every level of their label printing needs. With its broad range of entry-level, mid-range, and high-performance digital label printers, QuickLabel Systems is able to provide its customers a continuous path to upgrade to new products. QuickLabel products are primarily sold to end-user manufacturers, processors, and retailers who either package products on a Just-in-Time basis; label products for private label, OEM, or contract packaging customers; or label products in foreign languages for export markets. These end-users can benefit from the time savings and cost-savings of printing their own labels digitally on-demand. Industries that commonly benefit from short-run label printing include apparel, chemicals, cosmetics, electronics, foods and beverages, medical products, and pharmaceuticals, among many other manufactured goods. Current QuickLabel models include the Vivo!, a patented electrophotographic label printer developed to print on continuous rollstock for in-house label printing; the Zeo!, a lower-duty inkjet printer developed in partnership with Hewlett-Packard; and the Xe Series of color thermal transfer label printers including the QLS-4100 Xe, QLS-8100 Xe, QLS-2000 Xe and QLS-3000 Xe. The Xe Series of digital color thermal transfer label printers are unique in the industry in that they can be directly integrated with production line equipment and represent a novel, patented application of multi-color thermal transfer technology, historically only commercialized in single-color barcode label printers. QuickLabel also sells and supports its own Pronto! family of monochrome/barcode printers which utilize thermal transfer label printing technology in a single color.

Products sold under the Grass Technologies brand include electronic equipment, software and consumable products. The electronic equipment is primarily sold into the diagnostic markets of Sleep Disorders, Epilepsy Monitoring and Long-Term Monitoring (LTM). These products are sold to hospitals, free standing clinics and private physicians' offices. The equipment sold to these markets detects and amplifies bio signals for review and analysis via the special GT software programs. Customers for the secondary equipment line are typically researchers in university-based research centers or companies engaged in drug research. This equipment consists of diagnostic recording systems, stimulation devices and accessories. The consumable line of products offered by GT are typically utilized with the systems described above. These products are predominantly made up of sensing devices that are used for the purpose of collecting physiological data from patients.

                                ASTRO-MED, INC.

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

                           AND RESULTS OF OPERATIONS

Results of Operations

Three Months Ended May 2, 2009 vs. Three Months Ended May 3, 2008

Net Sales by product group and current quarter percentage change over prior year
for the three months ended May 2, 2009 and May 3, 2008 were:



                                                        As a                            As a          % Change
                                                        % of                            % of            Over
(Dollars in thousands)                May 2, 2009     Net Sales       May 3, 2008     Net Sales      Prior Year
T&M                                  $       3,669         25.0 %    $       3,960         21.2 %          (7.3 )%
QuickLabel                                   7,495         51.1 %            9,748         52.2 %         (23.1 )%
GT                                           3,513         23.9 %            4,979         26.6 %         (29.4 )%

Total                                $      14,677        100.0 %    $      18,687        100.0 %         (21.5 )%

Astro-Med's current year first quarter results largely reflect the affects of the global recession in all of our markets and product lines as customers are reluctant to make capital equipment purchases and are only purchasing consumable products in order to satisfy immediate needs, with no provision to stock supplies for future use. We have responded to this worldwide recession and uncertainty in the global economy by implementing a Company-wide cost reduction initiative beginning in the first quarter of the current fiscal year which involves wage and salary freezes, layoffs and a general reduction in hours worked by production staff. Additionally, all non-essential capital expenditures have been temporarily deferred. These cost reduction initiatives will remain in effect until the Company determines otherwise. Astro-Med will, however, continue all Research and Development activities as planned, as we believe that the development of new products and the enhancement of existing products will promote future growth and profitability for the Company.

The Company's current year first quarter sales were $14,677,000, representing a 21.5% decrease as compared to the previous year's first quarter sales of $18,687,000. Sales through the domestic channels were $10,375,000, a decline of 20.4% over the prior year. Current year first quarter international shipments of $4,302,000 were also down by 23.9% from the previous year. A negative impact from foreign exchange rates contributed $743,000 to the current year's first quarter international sales decline.

Hardware sales in the current quarter were $6,460,000, down 27.9% over the prior year's first quarter hardware sales of $8,956,000. The decrease in hardware sales in the current quarter was evident in all three product groups, with T&M down 3.7%, QuickLabel down 45.0 % and Grass Technologies down 39.8%. The overall decrease in hardware sales in the current quarter for all product groups was slightly reduced by a 36.2% increase in sales of T&M's Ruggedized product line. The lower volume of hardware shipments is an outgrowth of soft demand for capital equipment emanating from the worldwide recession.

Consumables sales in the current quarter were $7,123,000, representing a decrease of 14.8% over the prior year's first quarter consumable sales of $8,359,000. The double-digit decrease in consumable sales was apparent in all product groups except in Grass Technologies' consumable line of electrodes, creams and inks which had single-digit declines. The overall decrease in consumable sales for the current quarter for all product groups was slightly reduced by a 54.5% increase in sales of QuickLabel System's VIVO and Zeo! supplies. The reduced level of consumable sales is traceable to our customer's lowering inventory supply balances in response to their current lower volume of business.

Service and other revenues of $1,094,000 in the current quarter were down 20.3% from prior year's first quarter service and other revenues of $1,372,000. The decline in service and other sales was shared among the three product groups as the slight increase in service revenue in Grass Technologies was offset by lower freight, repair and parts revenue in all product groups.

Current year first quarter gross profit was $5,813,000, a 29.0% decrease from the prior year's first quarter gross profit of $8,188,000. The Company's gross profit margin of 39.6% in the current quarter reflects a decrease from the prior year's first quarter gross profit margin of 43.8%. The lower gross profit margins for the current quarter are attributable to lower sales volume and related under absorption of factory costs in the manufacturing plants.

Operating expenses for the current quarter were $6,273,000, a 9.0% decrease from prior year's first quarter operating expenses of $6,893,000. Specifically, selling and marketing expenses decreased 12.2% to $3,883,000 as compared to the previous year's first quarter selling and marketing expenses of $4,421,000. Selling and marketing expenses represent 26.5% of sales for the current quarter as compared to 23.7% of sales for the prior year's first quarter. The decrease in selling and marketing for the current quarter was primarily the result of lower commissions, wages, benefits, as well as lower travel spending. General and administrative (G&A) expenses decreased 6.7% to $1,162,000 in the first quarter of the current year as compared to prior year's first quarter G&A expenses of $1,246,000. The decrease in G&A was primarily due to a decrease in employee benefits as compared to prior year. Spending on research & development (R&D) in the first quarter of the current year of $1,228,000 remained approximately flat with prior year's first quarter spending of $1,226,000. The current year's spending in R&D represents 8.4% of sales, higher than the prior year's first quarter level of 6.6%, due to the lower sales level.

The Company's loss from operations of $460,000 in the current quarter is off sharply from prior year's first quarter operating income of $1,295,000. Operating margin for the first quarter of the current year of negative 3.1% is down compared to the prior year's first quarter margin of 6.9%. The lower operating income and related margins for the first quarter of the current year are mainly attributable to the lower sales volume during the current quarter.

Other income during the first quarter was $105,000 compared to $176,000 in the first quarter of the previous year. The decrease in other income for the current quarter was primarily due to lower investment income, due to lower overall interest rates and the Company's investment in tax-exempt municipal bonds. Lower foreign exchange gains in the current quarter due to the continuing strengthening of the US dollar also contributed to the decrease in other income as compared to the same period in the prior year.

Due to the Company's loss position, in the first quarter of the current year, the Company recognized a benefit for federal and state income taxes of $124,000 reflecting an effective tax rate of 35.0%. This result compares to the prior year's first quarter income tax expense of $574,000 reflecting an effective tax rate of 39.0%. The lower effective tax rate for the first quarter of the current year as compared to the prior year is primarily due to the lower pre-tax loss and the effect of the recently passed extension of the R&D tax credit.

The Company recognized a $231,000 net loss for the first quarter of the current year, reflecting a negative return on sales of 1.6% and generating a loss of $0.03 per diluted share. On a comparative basis with the previous year's first quarter, net income was $897,000 earning a return of 4.8% on sales and an EPS of $0.12 per diluted share.

Results of Operations (Continued)

Segment Analysis

The Company reports three 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.

Summarized below are the Net Sales and Segment Operating Profit for each reporting segment:

                                                                  Three Months Ended
                                                    Net Sales                    Segment Operating Profit
(In thousands)                            May 2, 2009       May 3, 2008      May 2, 2009         May 3, 2008
T&M                                      $       3,669     $       3,960     $        275        $        628
QuickLabel                                       7,495             9,749              132               1,010
GT                                               3,513             4,979              153                 747

Total                                    $      14,677     $      18,688              560               2,385

Corporate Expenses                                                                  1,020               1,090

Operating (Loss) Income                                                              (460 )             1,295
Other Income, Net                                                                     105                 176

(Loss) Income Before Income Taxes                                                    (355 )             1,471
Income Tax (Benefit) Provision                                                       (124 )               574

Net (Loss) Income                                                            $       (231 )      $        897

Test & Measurement-T&M

Sales revenues from the Test & Measurement product group were $3,669,000 for the first quarter of the current fiscal year representing a 7.3% decrease as compared to sales of $3,960,000 for the same period in the prior year as our industrial customers have deferred purchases of monitor recorders during this economic slowdown. Within the product group, we achieved sales growth from both the Ruggedized and Everest product lines, however, the Dash line of portable recorders were down sharply from the prior year. Operating expenses were lower in the quarter by 8.0% from the previous year's spending level. As a consequence of the lower sales and related profit margins, T&M's segment operating profit for the first quarter was $275,000, well below the prior year's segment operating profit of $628,000.

QuickLabel System-QuickLabel

Sales revenues from the QuickLabel Systems product group were $7,495,000 in the first quarter of the current year as compared to $9,748,000 in the same quarter of the prior year. The lower sales volume was evident in QuickLabel's line of digital printers where constraints placed on capital equipment purchases by our industrial customers have compromised the product line's previous growth rate. This current market environment is an outgrowth of the ongoing worldwide recession. Consumable product sales fared somewhat better than hardware sales, although the first quarter's sales volume was lower by 16.0% from the prior year as customer demand has limited media purchases to an "as needed" basis. Notwithstanding QuickLabel's sales decline, we are encouraged by the continued double digit growth in demand realized in the Vivo and Zeo! lines of product supplies. This sale growth of supplies was due to an increase in the installed based of printers placed in service during the second half of the prior fiscal year. QuickLabel's current quarter segment operating profit was $132,000 reflecting a profit margin of 1.8%, a decrease from prior year's first quarter segment profit margin of 10.4%.

Grass Technologies-GT

Sales in the first quarter of the current year for Grass Technologies' product group were $3,513,000 as compared to $4,979,000 in the prior year's first quarter. The sales decrease is traceable primarily to the product group's hardware line of diagnostic equipment. Specifically, sales in the clinical line of EEG, Sleep and Long Term Epilepsy Monitoring Systems have been adversely affected by lower funding sources currently being experienced by hospitals, laboratories and research facilities. The Grass Technologies line of consumable electrodes, creams, inks, etc., was also lower than the previous year, but confined to a single digit 4.1% decline. First quarter current year operating expenses for GT were down 20.0% from the previous year's first quarter spending due to lower commissions, travel, and marketing related spending that was curtailed. Segment operating profits were down in the current quarter primarily due to lower sales volume, with the segment achieving an operating profit margin of 4.4% as compared to a segment operating profit margin of 15.0% reported in the first quarter of the prior year.

Financial Condition and Liquidity

We expect to finance our future working capital needs, capital expenditures and acquisition requirements through internal funds. To the extent that our capital and liquidity requirements are not satisfied internally, we 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, at which time we plan to review our line of credit options.

The Company's statements of cash flows for the three months ended May 2, 2009 and May 3, 2008 are included on page 5. Net cash flows provided by operating activities were $573,000 in the current year compared to net cash provided by operating activities of $1,931,000 in the previous year. The declining cash flows provided in the first quarter of the current year as compared to the same period in the previous year are primarily related to the net loss for the period, an increase in tax payments and an increase in inventory. Inventory balances increased to $13,188,000 at the end of the first quarter compared to $12,826,000 at year end. Inventory days on hand also increased to 134 days on hand at the end of the current quarter from 127 days at year end.

The Company's current and non-current cash, cash equivalents and investments, at the end of the first quarter totaled $22,475,000 compared to $22,104,000 at year end. The higher cash and investments position resulted from operating cash flow, as noted above, and employees exercising stock options. Cash flows were utilized to acquire property, plant and equipment of $121,000 and to pay cash dividends of $425,000.

The Company's backlog decreased 13.4% to $5,549,000 at the end of the first quarter from a backlog of $6,405,000 at year-end.

Critical Accounting Policies, Commitments and Certain Other Matters

In the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2009, the Company's most critical accounting policies and estimates upon which our financial status depends were identified as those relating to revenue recognition, warranty claims, bad debts, inventories, income taxes, long-lived assets, goodwill and share-based compensation. We considered the disclosure requirements of Financial Release ("FR") 60 ("FR-60") regarding critical accounting policies and FR-61 regarding liquidity and capital resources, certain trading activities and related party/certain other disclosures, and concluded that nothing materially changed during the quarter that would warrant further disclosure under these releases.

Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect our current expectations concerning future events and results. We generally use the words "believes," "expects," "intends," "plans," "anticipates," "likely," "continues," "may," "will," and similar expressions to identify forward-looking statements. Such forward-looking statements, including those concerning our expectations, involve risks, uncertainties and other factors, some of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors which could cause actual results to differ materially from those anticipated include, but are not limited to (a) general economic, financial and business conditions;
(b) declining demand in the test and measurement markets, especially defense and aerospace; (c) competition in the specialty printer industry; (d) ability to develop market acceptance of the QuickLabel color printer products and effective design of customer required features; (e) competition in the data acquisition industry; (f) competition in the neurophysiology industry; (g) the impact of changes in foreign currency exchange rates on the results of operations; (h) the ability to successfully integrate acquisitions; (i) the business abilities and judgment of personnel and changes in business strategy; (j) the efficacy of research and development investments to develop new products; (k) the launching of significant new products which could result in unanticipated expenses;
(l) bankruptcy or other financial problems at major suppliers or customers that could cause disruptions in the Company's supply chain or difficulty in collecting amounts owed by such customers; (m) and other risks included under "Item 1A-Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009. We assume no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.