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, Everest Telementary 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 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-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 patient data for review and analysis using sophisticated Grass clinical software for diagnosing sleep disorders and epilepsy. Customers for other Grass products include researchers at university based research centers and pharmaceutical 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 predominantly consist of sensing devices that are used to collect 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 August 1, 2009 vs. Three Months Ended August 2, 2008

Net sales by product group and current quarter percentage change over prior year
for the three months ended August 1, 2009 and August 2, 2008 were:



                                         As a                         As a          % Change
                          August 1,      % of          August 2,      % of            Over
(Dollars in thousands)      2009       Net Sales         2008       Net Sales      Prior Year
T&M                      $     3,877        23.6 %    $     4,490        22.7 %         (13.7 )%
QuickLabel                     8,146        49.6 %         10,633        53.7 %         (23.4 )%
GT                             4,393        26.8 %          4,661        23.6 %          (5.7 )%

Total                    $    16,416       100.0 %    $    19,784       100.0 %         (17.0 )%

Our current year second quarter results continue to reflect the effects of the global recession in all of our markets and product lines as customers are reluctant to make capital equipment purchases and are limiting consumable product purchases to quantities necessary to satisfy immediate needs. 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 deferred. Astro-Med is continuing 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 second quarter sales were $16,416,000, representing a 17.0% decrease as compared to the previous year's second quarter sales of $19,784,000, but an 11.8% improvement over current year first quarter sales of $14,677,000. Sales through the domestic channels for the current quarter were $11,724,000, a decline of 13.1% over the prior year. Current year second quarter international shipments of $4,692,000 were also down by 25.5% from the previous year. A negative impact from foreign exchange rates contributed $446,000 to the current year's second quarter international sales decline as compared to the same period of the prior year.

Hardware sales in the current quarter were $7,683,000, an increase of 18.9% over the current year first quarter sales of $6,460,000, but down 22.1% over the prior year's second quarter hardware sales of $9,863,000. The decrease in hardware sales in the current quarter was evident in all three product groups, with T&M down 13.4%, QuickLabel down 52.4 % and Grass Technologies down 5.2% compared to the second quarter of the prior year. This decrease was tempered by a 13.4% increase in sales of T&M's Everest product line, and 38.0% and 20.8% increases in Grass Technologies' EEG and Long-Term Monitoring Systems, respectively. The overall 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 $7,450,000, representing an increase of 4.6% from the current year first quarter consumable sales of $7,123,000, but a decrease of 13.0% over the prior year's second quarter consumable sales of $8,561,000. The overall decrease in consumable sales for the current quarter for all product groups was slightly reduced by a 29.7% 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 $1,283,000 in the current quarter were up 17.3% over the first quarter service and other revenue of $1,094,000, but were down 5.6% from prior year's second quarter service and other revenues of $1,359,000. The decline in service and other sales was shared among the three product groups, as the increase in service revenue in Grass Technologies and slight increase in parts and repairs revenue in T&M and QLS was offset by lower service, freight, repair and parts revenue in all other product groups.

Current year second quarter gross profit was $6,951,000, reflecting a 19.6% improvement over the current year first quarter gross profit of $5,813,000, but a 19.9% decrease from the prior year's second quarter gross profit of $8,681,000. The Company's gross profit margin of 42.3% in the current quarter reflects a decrease from the prior year's second quarter gross profit margin of 43.9%. The lower gross profit margins for the current quarter is primarily attributable to lower sales volume as compared to prior year.

Operating expenses for the current quarter were $6,065,000, a 10.2% decrease from prior year's second quarter operating expenses of $6,752,000 primarily a result of the Company's cost reduction initiative. Specifically, selling and marketing expenses for the current quarter decreased 14.3% to $3,724,000 as compared to the previous year's second quarter selling and marketing expenses of $4,343,000. 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 3.6% to $1,166,000 in the second quarter of the current year as compared to prior year's second quarter G&A expenses of $1,210,000. The decrease in G&A was primarily due to a decrease in wages, benefits, and banking and insurance fees as compared to prior year. Spending on research & development (R&D) in the second quarter of the current year of $1,175,000 represents a 2.0% decrease compared to prior year's second quarter spending of $1,199,000. The current quarter spending in R&D represents 7.2% of sales, higher than the prior year's second quarter level of 6.1%, consistent with management's plan of maintaining current R&D levels in order to continue the development of new products and expand and improve existing products.

The Company returned to profitability in the second quarter with income from operations of $886,000 although this level of income is behind the prior year's second quarter operating income of $1,928,000. Operating margin for the second quarter of the current year of 5.4% is down compared to the prior year's second quarter margin of 9.7%. The lower operating income and related margins for the second quarter of the current year are primarily attributable to the lower sales volume during the current quarter as compared to the second quarter of the prior year.

Other income during the second quarter was $14,000 compared to $61,000 in the second 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. The decrease is slightly tempered by foreign exchange gains recognized in the current quarter due to the continuing weakening of the US dollar as compared to foreign exchange losses for the same period in the prior year.

The provision for federal and state income taxes for the second quarter of the current year was $315,000 reflecting an effective tax rate of 35.0%. This result compares to the prior year's second quarter income tax expense of $835,000 reflecting an effective tax rate of 42.0%. The lower effective tax rate for the second quarter of the current year as compared to the prior year is primarily due to the lower pre-tax income and the effect of the extension of the R&D tax credit that took place in the third quarter of fiscal 2009.

The Company reported $585,000 in net income for the second quarter of the current year, reflecting a return on sales of 3.6% and generating EPS of $0.08 per diluted share. As compared to net income of $1,154,000 earning a return on sales of 5.8% and an EPS of $0.15 per diluted share in the previous year's second quarter.

                                ASTRO-MED, INC.

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

                           AND RESULTS OF OPERATIONS

Results of Operations (Continued)

Six Months Ended August 1, 2009 vs. Six Months Ended August 2, 2008

Net sales by product group and current quarter percentage change over prior year
for the six months ended August 1, 2009 and August 2, 2008 were:



                                         As a                         As a          % Change
                          August 1,      % of          August 2,      % of            Over
(Dollars in thousands)      2009       Net Sales         2008       Net Sales      Prior Year
T&M                      $     7,546        24.3 %    $     8,450        22.0 %         (10.7 )%
QuickLabel                    15,641        50.3 %         20,382        53.0 %         (23.3 )%
GT                             7,906        25.4 %          9,640        25.0 %         (18.0 )%

Total                    $    31,093       100.0 %    $    38,472       100.0 %         (19.2 )%

Net sales for the six month period of the current fiscal year were $31,093,000, a 19.2% decline as compared to $38,472,000 reported for the first six months of the prior fiscal year. Sales through the domestic channels for the first six months of the current year were $22,099,000, a 16.7% decrease from the prior year. International sales of $8,994,000 for the first six months of the current year reflects a 24.7% decrease as compared to the prior year. Unfavorable foreign exchange of $1,189,000 accounts for 40.3% of the international sales decline. All three segments have reported a decrease in sales for the first six months of the current year as compared to prior year's sales for the same period.

The Company's hardware sales were $14,143,000 in the first six months of fiscal 2010, declining 24.8% as compared to the same period in the prior year. This decline was evident in the three product groups. The overall decrease in hardware sales in the current quarter for all product groups was slightly tempered by a 10.2% increase in sales of T&M's Everest product line. Consumable sales for the first six months of the current year of $14,573,000 declined 13.9% from the prior year six month period. The decrease in consumable sales was apparent in all product groups except in QuickLabel's Vivo! and Zeo! supplies which increased 40.6% compared to the same period in the prior year. Service and other sales revenues for the six months ended August 1, 2009 were $2,377,000, a decrease of 13.0% from the prior year. The decline in service and other sales was shared among the three product groups as the slight increase in service revenue in Grass Technologies and QuickLabel was offset by lower freight, repair and parts revenue in all product groups.

The Company achieved $12,763,000 in gross profit for the first six months of fiscal 2010 and generated a gross profit margin of 41.0% as compared to prior year's gross profit margin of 43.8%. The decline in gross profit margin for the first six months of the current year is due to lower sales volume.

Operating expenses in the first six months of the current year were $12,337,000, representing a 9.6% decrease from the prior year primarily a result of the Company's cost reduction initiative. Selling and marketing expenses for the first six months of the current year declined 13.2% from the prior year to $7,607,000 with the decrease traceable to personnel costs related to wages, benefits, commissions and travel spending. R&D spending for the current six months of $2,402,000 remained approximately flat with prior year R&D of $2,425,000. Current year spending in R&D represents 7.7% of the current year's sales compared to 6.3% of sales in the prior year. General and administrative expenses for the first six months of the current year were $2,328,000, a 5.2% decrease from the prior year. The lower spending level in the current year is mainly attributed to the reduction of the corporate bonus.

The Company earned $426,000 in operating income during the first six months of fiscal year 2010, as compared to $3,223,000 for the same period in the prior year. On a margin basis, this year's operating income reflects an operating margin of 1.4% on sales compared to prior year's operating margin of 8.4%.

Other income realized during the first six months of the current fiscal year has decreased $118,000 or 49.8% as compared to the other income reported in the previous year. This lower level of other income is a result of a reduction in other income and lower interest income.

The Company has provided federal and state income tax expense of $191,000 for the six month period ended August 1, 2009. This year's provision reflects an effective tax rate of 35.0%, down from the prior year's effective tax rate of 40.7%. The lower effective tax rate in fiscal 2010 as compared to the prior year is primarily due to the lower pre-tax income and the effect of the extension of the R&D tax credit in the third quarter of fiscal 2009.

Net income earned during the first six months of the current fiscal year was $354,000, lower than the prior year's first six months of net income of $2,051,000 and reflects a return on sales of 1.1% as compared to 5.3% reported for the previous year. This year's net income resulted in an EPS of $0.05 per diluted share as compared to an EPS of $0.27 per diluted share reported for the prior year's first six months.

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                                            Six Months Ended
                                           Net Sales              Segment Operating Profit              Net Sales              Segment Operating Profit
                                    August 1,     August 2,      August 1,        August 2,      August 1,     August 2,      August 1,        August 2,
(In thousands)                        2009          2008           2009             2008           2009          2008           2009             2008
T&M                                $     3,877   $     4,490   $         361    $         882   $     7,546   $     8,450   $         636    $       1,510
QuickLabel                               8,146        10,633             771            1,522        15,641        20,382             903            2,532
GT                                       4,393         4,661             774              587         7,906         9,640             927            1,334

Total                              $    16,416   $    19,784           1,906            2,991   $    31,093   $    38,472           2,466            5,376

Corporate Expenses                                                     1,020            1,063                                       2,040            2,153

Operating Income                                                         886            1,928                                         426            3,223
Other Income - Net                                                        14               61                                         119              237

Income Before Income Taxes                                               900            1,989                                         545            3,460
Income Tax Provision                                                     315              835                                         191            1,409

Net Income                                                     $         585    $       1,154                               $         354    $       2,051

Test & Measurement-T&M

Sales revenues from the Test & Measurement product group were $3,877,000 for the second quarter of the current fiscal year representing a 13.7% decrease as compared to sales of $4,490,000 for the same period in the prior year as our industrial customers have continued to defer purchases of monitor recorders during this economic slowdown. Within the product group, we achieved modest sales growth from the Everest product line; however, this increase in sales was offset by a slight decrease in the Dash line of portable recorders and a decline in Ruggedized product sales as compared to the second quarter of the prior year. The lower level of Ruggedized revenue is traceable directly to manufacturing delays in the introduction of their new aircraft as reported by Boeing and Airbus. Operating expenses were slightly higher in the current quarter as compared to the previous year's second quarter spending level. As a consequence of the lower sales, a shift in product mix and increased operating expenses, T&M's segment operating profit for the second quarter was $361,000, well below the prior year's segment operating profit of $882,000.

For the first six months of the current fiscal year, sales revenue of the T&M product group were $7,546,000 as compared to $8,450,000 for the same period of the previous year. The decrease in sales stems from the Dash and Ruggedized product lines, tempered by an increase in sales of the Everest product line. This year's segment operating profit of $636,000 decreased 57.9% from the prior year's segment operating profit and provided an operating profit margin of 8.4%, down from the prior year's margin of 17.9%. The decrease in T&M current year's profit margin is traceable to lower sales volume, higher manufacturing cost and unfavorable factory absorption in the current fiscal year.

QuickLabel Systems-QuickLabel

Sales revenues from the QuickLabel Systems product group were $8,146,000 in the second quarter of the current year as compared to $10,633,000 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 effected 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 in the second quarter of the current fiscal year, although sales volume was lower by 13.1% 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 sales growth of supplies was due to an increase in the installed base of printers placed in service during the second half of the prior fiscal year. QuickLabel's current quarter segment operating profit was $771,000 reflecting a profit margin of 9.5%, a decrease from prior year's second quarter segment profit margin of 14.3%. This decline is due to lower sales volume and related unfavorable factory absorption costs.

The QuickLabel product group had sales revenue of $15,641,000 for the first six months of the current fiscal year as compared with $20,382,000 in sales revenues reported for the same period in the prior year. The current year's sales decline is a result of lower sales volume in all QuickLabel products lines, except for significant growth in the Vivo! and Zeo! product supply lines. The QuickLabel segment operating profit decreased in the current year to $903,000 from $2,532,000 in the same period of the prior year. Segment operating profit margin of 5.8% for the first six months of the current year has decreased as compared to a 12.4% for the same period of the previous year. The decline is due to lower gross profit margins due to sales volume and product mix.

Grass Technologies-GT

Current year second quarter sales of $4,393,000 rose sharply at 25.1% over the current year first quarter sales of $3,513,000 but still trailed the prior year's second quarter sales of $4,661,000. The improvement over the first quarter was dominated by growth in Grass Technologies' hardware line of diagnostic equipment where sales increased by 45.2%. Notwithstanding this growth spurt, hardware sales were still somewhat behind the prior year's hardware sales volume in the second quarter. Specifically, sales in the clinical line of Sleep Systems have been adversely affected by the economic downturn and lower funding . . .