Overview

Astro-Med is a multi-national enterprise, which designs, develops, manufactures, distributes and services a broad range of products that acquire, store, analyze and present data in multiple formats. The Company organizes its structure around a core set of competencies, including research and development, manufacturing, service, marketing and distribution. It markets and sells its products and services through the following three sales product groups:

• Test and Measurement Product Group (T&M)-represents a suite of telemetry recorder products sold to the aerospace and defense industries, as well as portable data acquisition recorders, which offer diagnostic and test functions to a wide range of manufacturers including paper, energy, automotive and steel fabrication. In addition, T&M also includes a suite of ruggedized printer products designed for military and commercial applications to be used in the avionics industry to print weather maps, communications and other flight critical information.

• QuickLabel Systems Product Group (QuickLabel)-offers hardware, software and media products that create on demand color labels, store the images and produce the images in color or non-color formats on a broad range of media substrates.

• Grass Technologies Product Group (GT)-centers on diagnostic and monitoring products that serve the clinical neurophysiology markets, as well as a range of biomedical instrumentation products and supplies focused on the life sciences markets.

Astro-Med markets and sells its products and services globally through a diverse distribution structure of sales personnel, manufacturing representatives and dealers that deliver a full complement of branded products and services to customers in our respective markets.

Our strategic growth strategy centers on organic growth through product innovation made possible by research and development initiatives, as well as acquisitions that fit into existing core businesses. Research and development activities are funded and expensed by the Company at approximately 6.8% of annual sales for fiscal 2009.

Our continued success in increasing our product revenues will be dependent on our ability to introduce new and/or enhanced product lines each year. We target approximately 45% of annual hardware sales to be generated by products developed or acquired within the past three years.

In 2009, Astro-Med experienced a slowdown in customer demand during the latter months of the fiscal year, especially the fourth quarter. The effects of the worldwide recession were evident as customers deferred capital expenditures and curtailed consumable purchases. In order to respond to the current uncertainty in the global economy and to mitigate the effects of the related business slowdown, Astro-Med has adopted a Company-wide cost reduction initiative involving instituting 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 are being implemented in the first quarter of fiscal 2010 and 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 growth and profitability of the Company going forward.

Results of Operations

($ in thousands)                                   2009                                                         2008                                             2007
                             Net            As a % of              % Change               Net            As a % of              % Change               Net            As a % of
                            Sales        Total Net Sales        Over Prior Year          Sales        Total Net Sales        Over Prior Year          Sales        Total Net Sales
T&M                        $ 15,796                 22.0 %                 (4.3 )%      $ 16,505                 22.8 %                  5.2 %       $ 15,695                 23.9 %
QuickLabel                   37,398                 52.1 %                 (2.0 )%        38,144                 52.7 %                 22.6 %         31,121                 47.5 %
GT                           18,589                 25.9 %                  4.9 %         17,722                 24.5 %                 (5.2 )%        18,703                 28.6 %

Total                      $ 71,783                100.0 %                 (0.8 )%      $ 72,371                100.0 %                 10.5 %       $ 65,519                100.0 %

Fiscal 2009 compared to Fiscal 2008

Astro-Med's sales in fiscal 2009 were $71,783,000, down 0.8% from the prior year's sales of $72,371,000. Domestic sales of $49,960,000 decreased 1.0% from the prior year sales of $50,479,000. The lower revenue was driven by T&M domestic sales which declined 6.5% from the prior year, primarily due to lower sales of Ruggedized products, partially offset by an increase in shipments of Everest and Dash products. The decrease in domestic sales in fiscal 2009 was tempered by an increase in both QuickLabel and GT domestic sales. International shipments of $21,823,000 were flat over previous year's sales of $21,892,000, as increases in T&M and GT sales of 6.0% and 14.1%, respectively, were tempered by an 8.0% decline in QuickLabel sales. The impact of foreign exchange rate changes added approximately $272,000 or 1.2% in sales through the international channel when compared to the prior year.

Hardware sales in fiscal 2009 were $34,521,000, down 1.7% from the prior year sales of $35,128,000. The decrease from prior year was driven by lower sales of T&M's Ruggedized products, QuickLabel's color printer systems and GT's EEG systems. Increased hardware sales for fiscal 2009 as compared to prior year were attributable to T&M's Dash and Everest and GT's diagnostic sleep product lines.

Consumable sales in fiscal 2009 were $32,027,000, relatively flat compared to prior year sales of $31,986,000, as the increase in GT's product lines was offset by lower sales of consumable products in T&M's and QuickLabel's product lines.

Service and related products in fiscal 2009 were $5,235,000, flat compared to prior year sales of $5,257,000, as the increase in repair revenues was offset by the lower service and freight revenue.

Current year gross profit was $31,068,000, comparable to the prior year's gross profit of $31,111,000. Astro-Med realized a gross profit margin of 43.3% as compared to prior year's gross margin of 43.0%. The Company was able improve its gross profit margin for fiscal 2009 as compared to the prior year due to sales mix and manufacturing cost reductions, especially freight and warranty expense.

Operating expenses for the current year were $26,442,000, approximately flat with the prior year's operating expenses of $26,397,000 (excluding the prior year $515,000 restructuring charge related to the closure of the sales and service centers located in Italy and the Netherlands). Specifically, selling and marketing expenses decreased 1.0% to $16,942,000 in fiscal 2009, representing 23.6% of sales, relatively flat from the prior year's 23.7% of sales. The decrease in selling and marketing was primarily the result of lower benefits, as well as lower commissions and travel spending. General and administrative (G&A) expenses decreased 1.4% to $4,615,000 in fiscal 2009. The decrease in G&A was primarily due to a decrease in benefits as compared to prior year. Spending on research & development (R&D) in fiscal 2009 increased 6.5% to $4,885,000. This level represents 6.8% of sales, higher than the prior year's level of 6.3%. The increase in R&D during the current year is primarily due to purchases of outside software engineering services.

Investment income in fiscal 2009 was $489,000, down from $611,000 in fiscal 2008. The decrease in investment income during fiscal year 2009 was due to lower overall interest rates, as well as the Company investing in tax-exempt municipal bonds. Other expense was $538,000 in fiscal 2009 as compared to other income of $244,000 in fiscal 2008. The decrease is primarily attributable to foreign exchange losses due to the strengthening of the US dollar during the second half of the year.

As a result of the adoption of SFAS No. 123(R), Astro-Med's fiscal 2009 pretax income was reduced by approximately $472,000 in stock-based compensation expense. During fiscal 2008, Astro-Med's pretax income was reduced by approximately $585,000 in stock-based compensation expense.

During fiscal 2009 the Company incurred an income tax expense of $1,613,000 and had an effective tax rate of 35.2%. The current year's income tax expense includes 1) an expense of $1,692,000 on the current year's

pre-tax income, 2) expense of $59,000 related to a discrete payment of additional state franchise tax, 3) a benefit of $111,000 related to the recently passed extension of the R&D tax credit and 4) a benefit of $27,000 related to differences between the prior year tax provision and the actual return as filed. This compares to an income tax expense of $744,000 and an effective tax rate of 14.7% in the prior year which includes 1) an expense of $2,128,000 on the current year's pre-tax income, 2) a benefit of $167,000 related to the completion of an IRS exam, 3) a benefit of $319,000 related to changes in uncertain R&D and foreign tax credit positions, 4) an expense of $40,000 related to differences between the prior year tax provision and the actual return as filed and 5) tax benefits of $938,000 related to the restructuring and closing of the sales and service centers located in Italy and the Netherlands.

Net income for fiscal year 2009 was $2,964,000 reflecting a return on sales of 4.1% and generating an EPS of $0.40 per diluted share. On a comparative basis, prior year's net income was $4,310,000 providing a return of 6.0% on sales and an EPS of $.57 per diluted share which includes $.06 of favorable tax benefits and $.05 of favorable adjustments related to the restructuring of the sales and service centers located in Italy and the Netherlands.

Fiscal 2008 compared to Fiscal 2007

Astro-Med sales in fiscal 2008 were $72,371,000, up 10.5% from the prior year's sales of $65,519,000. Domestic sales of $50,479,000 increased 6.3% from the prior year sales of $47,504,000. The increase was driven by growth in the T&M and QuickLabel product groups. T&M domestic sales increased 12.7% on strong growth from the Dash and Ruggedized products. QuickLabel System domestic sales increased 13.7% over the prior year sales as demand for color printer systems and consumables remained strong. GT domestic sales decreased 11.5% as a result of lower sleep systems and research product sales. Sales through the Company's international channels were $21,892,000, representing a 21.5% increase from the prior year sales of $18,016,000. The increase was driven by growth in the QuickLabel and GT product groups. QuickLabel international sales increased 43.9% on strong demand for color printer systems and consumable sales while GT international sales increased 11.0% on strong demand for sleep systems and electrode consumables. T&M international sales declined 19.9% due to lower Everest product sales. The impact of foreign exchange rate changes added approximately $1,271,000 in sales through the international channel when compared to the prior year.

Hardware sales were $35,128,000, up 7.2% from the prior year sales of $32,779,000. The increase was driven by the T&M Ruggedized and Dash products, the QuickLabel printer systems and the GT LTM systems. Lower hardware sales were experienced in the T&M Everest and GT Sleep and Research product lines.

Consumable sales were $31,986,000, up 14.3% from the prior year sales of $27,991,000. This increase was driven by QuickLabel consumable sales and GT electrode product lines which increased 17.8% and 4.0%, respectively.

Service and related products were $5,257,000, up 10.7% from the prior year sales of $4,749,000 as a result of higher revenue from parts and repairs invoicing.

Gross profit was $31,111,000, an increase of 15.2% over the prior year's gross profit of $26,998,000. This year's gross profit margin of 43.0% was higher than the prior year's gross margin of 41.2%. The increase in gross profit margin was the result of an improvement in absorption driven by the higher volume of sales. The impact of product mix on gross margin during the year was nominal.

Operating expenses grew 14.5% to $26,912,000. Specifically, selling and marketing expenses increased 10.9% to $17,126,000, representing 23.7% of sales, flat compared to the prior year's 23.6% of sales. The increased selling and marketing spending was the result of higher personnel costs, commissions and travel expenses. General and administrative (G&A) expenses increased 20.5% to $4,682,000 in fiscal 2008. The increase in G&A was primarily due to higher personnel cost and legal and other professional fees. During fiscal

2008, the Company spent approximately $362,000 in connection with preparations related to Sarbanes-Oxley Section 404 requirements. Research & Development (R&D) expenses increased 9.6% to $4,589,000. This level of spending represents 6.3% of sales which was nominally lower than the prior year's level of 6.4%. Also included in operating expenses is approximately $515,000 of restructuring charges related to the decision to reorganize and close the sales and service centers located in Italy and the Netherlands.

Investment income in fiscal 2008 was $611,000, down from $649,000 in fiscal 2007. The decrease in investment income during fiscal year 2008 was attributable to lower average cash balances during the year and lower pretax investment yields associated with the Company's move towards tax exempt investments. Other income was $244,000 in fiscal 2008 as compared to other income of $235,000 in fiscal 2007.

As a result of the adoption of SFAS No. 123(R), during fiscal 2008 the Company's pretax income was reduced by approximately $585,327 in stock-based compensation expense. The composition included $97,378 recorded in cost of sales, $390,816 recorded in SG&A and $97,378 recorded within R&D. During fiscal 2007, the Company's pretax income was reduced by $412,693 in stock-based compensation expense. The composition included $78,085 recorded in cost of sales, $261,169 recorded in SG&A and $73,439 recorded within R&D.

During fiscal 2008 the Company incurred an income tax expense of $744,000. The current year's income tax expense includes 1) an expense of $2,128,000 on the current year's pre-tax income, 2) a benefit of $167,000 related to the completion of an IRS exam, 3) a benefit of $319,000 related to changes in uncertain R&D and foreign tax credit positions, 4) an expense of $40,000 related to differences between the prior year tax provision and the actual return as filed and 5) tax benefits of $938,000 related to the restructuring and closing of the sales and service centers located in Italy and the Netherlands. This compares to an income tax expense of $3,566,000 in the prior year which includes
1) an expense of $1,671,000 on the current year's pre-tax income, excluding the gain on sale of real estate, 2) a benefit of $232,000 related to differences between the prior year tax provision and the actual return as filed primarily due to additional tax credits, R&D credits and lower state income taxes and 3) an expense of $2,127,000 related to the net gain on the sale of the Company's former Braintree property.

Included in the fiscal 2008 net income per common share-diluted of $.57 is $.06 of favorable tax benefits and $.05 of favorable adjustments related to the restructuring of the sales and service centers located in Italy and the Netherlands. Included in fiscal 2007 net income per common share-diluted of $.82 is $.03 of favorable tax adjustments and $.42 for the gain on the sale of the Company's former Braintree property.

Segment Analysis

Astro-Med reports three segments consistent with its sales product groups:
Test & Measurement (T&M), QuickLabel Systems (QuickLabel) and Grass Technologies (GT). Segment performance is evaluated based on the operating segment's profit before corporate and financial administration expenses.

The following table summarizes selected financial information by segment:

(Dollars in thousands)                                                                                     Segment Operating Profit as
                                             Net Sales                  Segment Operating Profit                a % of Net Sales
                                     2009       2008       2007       2009          2008      2007      2009          2008          2007
T&M                                $ 15,796   $ 16,505   $ 15,695   $   2,463      $ 3,056   $ 2,592      15.6 %        18.5 %        16.5 %
QuickLabel                           37,398     38,144     31,121       3,664        4,222     1,248       9.8 %        11.1 %         4.0 %
GT                                   18,589     17,722     18,703       2,553        1,583     3,109      13.7 %         8.9 %        16.6 %

Total                              $ 71,783   $ 72,371   $ 65,519       8,680        8,861     6,949      12.1 %        12.2 %        10.6 %

Corporate Expenses                                                      4,054        4,147     3,460
Restructuring Charges                                                      -           515        -
Gain on Sale of Real Estate, Net                                           -            -      5,252

Operating Income                                                        4,626        4,199     8,741
Other Income (Expense), Net                                               (49 )        855       884

Income Before Income Taxes                                              4,577        5,054     9,625
Income Tax Provision                                                    1,613          744     3,566

Net Income                                                          $   2,964      $ 4,310   $ 6,059

Test & Measurement

T&M's sales decreased 4.3% in fiscal 2009 to $15,796,000 from $16,505,000 in the prior year. Within the product group, the Ruggedized product sales were down 21.3% from the prior year due to delays in the deployment of the new Airbus A380 and the Boeing 787 commercial aircraft. However, current year sales from the Everest and Dash product line grew 30.9% and 2.3%, respectively from the prior year. Selling and marketing expenses as a percent of sales were up slightly from the prior year. T&M's segment operating profit was $2,463,000 in fiscal 2009, as compared to prior year's segment operating profit of $3,056,000. The decrease in fiscal 2009 segment operating profit resulted in operating profit margin of 15.6% as compared to fiscal 2008 operating profit margin of 18.5%. The current year's decline in operating profits is an outgrowth of lower sales volume, especially Ruggedized products, and reduced standard margins.

T&M's sales increased 5.2% in fiscal 2008 to $16,505,000 from $15,695,000 in the prior year. The increase is traceable to sales growth within the Dash products which were up 9.8% and the Ruggedized products which were up 41.7%. These increases were tempered by lower volume from the Everest product line. T&M's segment operating profit was $3,056,000 in fiscal 2008. This result compares favorably to the prior year's segment operating income of $2,592,000. The current year's improvement is due to higher sales volume from the Ruggedized product line, better manufacturing absorption and lower R&D and selling expenses.

QuickLabel Systems

QuickLabel Systems sales decreased 2.0% in fiscal 2009 to $37,398,000 from sales of $38,144,000 in the prior year. This year's sales decline was primarily due to a 6.3% decrease in printer systems and a 1.7% decrease in service and other sales. Media sales within the product group for fiscal 2009 were flat as compared to the prior year. Selling and marketing expenses as a percent of sales were up slightly from the prior year. The QuickLabel

Product Group segment operating profit was $3,664,000 during fiscal 2009 compared to the prior year's segment operating profit of $4,222,000. The decrease in fiscal 2009 segment operating profit resulted in operating profit margin of 9.8% as compared to fiscal 2008 operating profit margin of 11.1%. The 13.2% decrease in segment operating profit for fiscal 2009 as compared to the prior year was driven by lower printer sales and increased selling and R&D spending.

QuickLabel Systems sales increased 22.6% in fiscal 2008 to $38,144,000 from $31,121,000 in the prior year. This year's sales growth was driven by a 42.2% increase in printer systems and a 17.8% increase in consumable products. The QuickLabel Product Group segment operating profit was $4,222,000 during fiscal 2008. This amount is an increase from the prior year's segment operating profit of $1,248,000. The improved segment operating profit was driven by gross profit improvement from volume growth in color printers and related consumables, as well as lower manufacturing cost from increased absorption. Selling and marketing expenses as a percent of sales were consistent with the prior year.

Grass Technologies

GT's sales increased 4.9% in fiscal 2009 to $18,589,000 from $17,722,000 in the prior year. The product group's increase in sales for the current year was achieved through growth of the clinical products (EEG, sleep and long term monitoring diagnostic products) of 10% and the consumable products of creams and electrodes of 7.3%, partially offset by a decrease in the service and other product lines of 10.2%. The GT product Group segment operating profit was $2,553,000 during fiscal 2009. The increase in fiscal 2009 segment operating profit resulted in operating profit margin of 13.7% as compared to fiscal 2008 operating profit margin of 8.9%. The 61.3% improvement from the prior year's segment operating profit was due to the 10% sales increase in the clinical diagnostic systems, especially sleep applications, lower manufacturing costs, better production absorption and lower field selling and customer service expenses. The improved operating profits were tempered somewhat from higher R&D spending.

GT's sales decreased 5.2% in fiscal 2008 to $17,722,000 from $18,703,000 in the prior year. The product group's lower sales were due to decreases within Sleep systems which were down 18.6% and research products which were down 11.6%. EEG systems were essentially flat while LTM systems were up 15.1%. The GT product group's consumable sales were essentially flat with the prior year. The GT Product Group segment operating profit was $1,583,000 during fiscal 2008. The decrease from the prior year's segment operating profit of $3,109,000 was traceable to lower gross profits stemming from reduced sales of clinical and research products compounded by higher spending on R&D projects and additional personnel in the field selling organization.

Liquidity and Capital Resources

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 $3,500,000 unsecured bank line of credit, all of which is currently available. Borrowing under this line of credit bears 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.

Astro-Med's Statements of Cash Flows for the three years ended January 31, 2009, 2008 and 2007 are included on page 36. Net cash flow provided by operating activities in fiscal year 2009 was $6,955,000. The net cash flow provided by operations is attributed to the positive cash flow generated from net income and from the reductions in accounts receivable and inventory balances of $3,515,000 and $1,224,000, respectively. Cash flow from operating activities was lowered by funding accounts payable and accrued expenses of $1,906,000. The increase in working capital is in support of the Company's growth.

Net cash flow used in investing activities was $973,000 which was mostly the result of capital expenditures of approximately $1,665,000 for machinery and equipment of $903,000, information technology of $218,000, tools and dies of $59,000 and building improvements of $485,000.

Net cash flow used by financing activities was $752,000 in fiscal 2009. During the year the Company paid dividends of $1,678,000. Also during the current year, the Company generated $793,000 in cash through the exercise of employee stock options and Employee Stock Purchase Plan transactions and $134,000 in excess tax benefits resulting from share-based compensation.

Dividends paid for fiscal 2009, 2008, and 2007 were $ 1,678,000, $1,380,000 and $1,274,000, respectively. The Company's annual dividend per share was $0.24 in fiscal 2009 and $0.20 in fiscal 2008 and 2007. Since the inception of the common stock buy back program in fiscal 1997, the Company has repurchased 1,149,335 shares of its common stock. At January 31, 2009, the Company has the Board of Directors' authorization to purchase an additional 392,289 shares of the Company's common stock in the future.

Contractual Obligations, Commitments and Contingencies

Astro-Med is subject to contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, including, among others, contract and employment claims, workers compensation claims, product liability, warranty and modification, adjustment or replacement of component parts of units sold. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on our consolidated financial position or results of operations. It is possible, however, that future results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies or changes out of the Company's control.

Critical Accounting Policies and Estimates

Astro-Med's discussion and analysis of our financial condition and results of operations are based upon the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and year-end reporting requirements. These judgments . . .