UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2008

or

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 000-19720

ABAXIS, INC.

California		77-0213001
(State of Incorporation)		(I.R.S. Employer Identification No.)

3240 Whipple Road
Union City, California 94587
(Address of principal executive offices)

(510) 675-6500
(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ            No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o            No þ

As of February 5, 2009, there were 21,899,000 shares of the Registrant’s common stock outstanding.

 

 

ABAXIS, INC.
Form 10-Q

For the Quarter Ended December 31, 2008

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2008 and 2007			3
Condensed Consolidated Balance Sheets as of December 31, 2008 and March 31, 2008			4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2008 and 2007			5
Notes to the Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			34
Item 4T. Controls and Procedures			34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			34
Item 1A. Risk Factors			34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 3. Defaults Upon Senior Securities			44
Item 4. Submission of Matters to a Vote of Security Holders			44
Item 5. Other Information			44
Item 6. Exhibits			45
SIGNATURES			46
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

ABAXIS, INC.

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Revenues		$	26,964			$	25,690			$	79,224			$	73,813
Cost of revenues			11,859				12,081				35,274				33,331
Gross profit			15,105				13,609				43,950				40,482
Operating expenses:
Research and development			2,037				1,629				6,116				5,104
Sales and marketing			6,061				6,056				18,382				17,666
General and administrative			2,241				1,571				5,855				4,760
Total operating expenses			10,339				9,256				30,353				27,530
Income from operations			4,766				4,353				13,597				12,952
Interest and other income (expense), net			352				552				1,140				1,580
Income before income taxes			5,118				4,905				14,737				14,532
Income tax provision			1,762				1,700				5,308				5,341
Net income		$	3,356			$	3,205			$	9,429			$	9,191
Net income per share:
Basic net income per share		$	0.15			$	0.15			$	0.43			$	0.43
Diluted net income per share		$	0.15			$	0.14			$	0.42			$	0.41
Shares used in the calculation of net income per share:
Weighted average common shares outstanding — basic			21,879,000				21,561,000				21,798,000				21,441,000
Weighted average common shares outstanding — diluted			22,264,000				22,359,000				22,325,000				22,208,000
Share-based compensation expense by function:
Cost of revenues		$	33			$	33			$	108			$	88
Research and development			64				39				178				110
Sales and marketing			143				91				401				259
General and administrative			225				122				613				374
Total share-based compensation expense		$	465			$	285			$	1,300			$	831

See accompanying Notes to the Condensed Consolidated Financial Statements.

ABAXIS, INC.

		December 31,				March 31,
		2008				2008
ASSETS
Current assets:
Cash and cash equivalents		$	60,158			$	17,219
Short-term investments			14,489				6,991
Trade receivables (net of allowances of $356 at December 31, 2008 and $272 at March 31, 2008)			21,557				20,873
Inventories, net			17,104				18,657
Prepaid expenses			1,241				427
Net deferred tax asset — current			3,481				2,426
Total current assets			118,030				66,593
Long-term investments			—				35,463
Property and equipment, net			15,130				14,599
Intangible assets, net			319				375
Other assets			29				5
Net deferred tax asset — non-current			3,874				3,868
Total assets		$	137,382			$	120,903
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	5,920			$	6,421
Accrued payroll and related expenses			2,822				4,277
Other accrued liabilities			1,472				1,369
Deferred revenue			922				807
Warranty reserve			1,637				1,219
Total current liabilities			12,773				14,093
Non-current liabilities:
Deferred rent			183				286
Deferred revenue			1,516				1,146
Warranty reserve			748				729
Total non-current liabilities			2,447				2,161
Commitments and contingencies (Note 8)
Shareholders’ equity:
Preferred stock, no par value; 5,000,000 shares authorized; no shares issued and outstanding			—				—
Common stock, no par value; 35,000,000 shares authorized; 21,895,000 and 21,706,000 shares issued and outstanding at December 31, 2008 and at March 31, 2008, respectively			115,700				109,031
Retained earnings (accumulated deficit)			6,462				(2,967	)
Accumulated other comprehensive loss			—				(1,415	)
Total shareholders’ equity			122,162				104,649
Total liabilities and shareholders’ equity		$	137,382			$	120,903

See accompanying Notes to the Condensed Consolidated Financial Statements.

ABAXIS, INC.

		Nine Months Ended
		December 31,
		2008				2007
Cash flows from operating activities:
Net income		$	9,429			$	9,191
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			3,179				2,563
(Gain) loss on disposal of property and equipment			(8	)			2
(Gain) loss on foreign exchange translation			81				—
Share-based compensation expense			1,300				831
Excess tax benefits from share-based awards			(5,120	)			(270	)
Deferred income taxes			4,051				4,906
Changes in assets and liabilities:
Trade receivables, net			(753	)			(3,933	)
Inventories, net			(114	)			(4,501	)
Prepaid expenses			(814	)			644
Other assets			(24	)			19
Accounts payable			(487	)			542
Accrued payroll and related expenses			(1,455	)			(243	)
Other accrued liabilities			25				306
Deferred rent			(103	)			(71	)
Deferred revenue			485				(171	)
Warranty reserve			437				806
Net cash provided by operating activities			10,109				10,621
Cash flows from investing activities:
Purchases of available-for-sale investments			—				(20,575	)
Purchases of held-to-maturity investments			(21,579	)			(21,167	)
Proceeds from redemptions of available-for-sale investments			36,975				—
Proceeds from maturities of held-to-maturity investments			14,081				32,804
Purchases of property and equipment			(1,992	)			(2,522	)
Proceeds from disposal of property and equipment			20				—
Net cash provided by (used in) investing activities			27,505				(11,460	)
Cash flows from financing activities:
Proceeds from issuance of common stock under stock plans, net			242				2,178
Excess tax benefits from share-based awards			5,120				270
Net cash provided by financing activities			5,362				2,448
Effect of exchange rate changes on cash and cash equivalents			(37	)			—
Net increase in cash and cash equivalents			42,939				1,609
Cash and cash equivalents at beginning of period			17,219				10,183
Cash and cash equivalents at end of period		$	60,158			$	11,792
Supplemental disclosure of cash flow information:
Cash paid for interest		$	6			$	4
Cash paid for income taxes, net of refunds		$	1,147			$	340
Supplemental disclosure of non-cash flow information:
Change in unrealized gain (loss) on investments, net of tax		$	1,415			$	—
Transfers of equipment between inventory and property and equipment, net		$	1,674			$	1,307
Capitalized share-based compensation		$	7			$	13
Common stock withheld for employee taxes in connection with share-based compensation		$	280			$	110

See accompanying Notes to the Condensed Consolidated Financial Statements.

ABAXIS, INC.

NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business. Abaxis, Inc. (the “Company”), incorporated in California in 1989, develops, manufactures, markets and sells portable blood analysis systems for use in the human or veterinary patient-care setting to provide clinicians with rapid blood constituent measurements.

On July 1, 2008, the Company’s sales office in Darmstadt, Germany was incorporated as Abaxis Europe GmbH to market, promote and distribute diagnostic systems for medical and veterinary uses. As a result, Abaxis Europe GmbH became a wholly-owned subsidiary of the Company. The subsidiary was formed to provide customer support in a timely manner in response to the growing and increasingly diverse services needs of customers in the European market. The accompanying unaudited condensed consolidated financial statements as of and for the three and nine month periods ended December 31, 2008 include the accounts of the Company and its wholly-owned subsidiary, Abaxis Europe GmbH. All intercompany transactions and balances have been eliminated in consolidation.

Basis of Presentation. The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim periods. The unaudited condensed consolidated financial statements included herein reflect all normal recurring adjustments, which are, in the opinion of management, necessary to state fairly the results of operations and financial position for the periods presented. The results for the three and nine month periods ended December 31, 2008 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2009 or for any future period.

These unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2008.

Reclassifications. Certain reclassifications have been made to prior periods’ financial statements to conform to the current period presentation. These reclassifications had no material impact on previously reported results of operations or financial position.

Use of Estimates in Preparation of Financial Statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such management estimates include allowance for doubtful accounts, fair value of investments, sales and other allowances, inventory reserves, income taxes, valuation allowance for deferred tax assets, share-based compensation and warranty reserves. Actual results may differ from these estimates.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

In March 2008, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”), which is intended to enable investors to better understand how derivative instruments and hedging activities affect an entity’s financial position, financial performance and cash flows through enhanced disclosure requirements. SFAS No. 161 will be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 will become effective for the Company on April 1, 2009. The Company is currently evaluating the impact of adopting SFAS No. 161 on its financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS No. 141(R) will become effective for the Company on April 1, 2009. The Company is currently evaluating the impact of adopting SFAS No. 141(R) on its financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS No. 160”), which establishes new accounting and reporting standards for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 160 will become effective for the Company on April 1, 2009. The Company is currently evaluating the impact of adopting SFAS No. 160 on its financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). Unrealized gains and losses on instruments for which the fair value option has been elected are reported in earnings at each subsequent reporting period. SFAS No. 159 is applied prospectively upon adoption. The Company adopted SFAS No. 159 effective April 1, 2008. To date, the Company has not elected the fair value option for any of its financial assets or financial liabilities.

NOTE 3. FAIR VALUE MEASUREMENTS

On April 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) to measure the fair value of its financial assets and financial liabilities. In February 2008, the FASB issued FSP FAS 157-2 “Effective Date of FASB Statement No. 157” which delayed the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. The adoption of SFAS No. 157 for financial assets and liabilities did not have a material impact on the Company’s financial position, cash flows or results of operations.

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under SFAS No. 157 are described below:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Directly or indirectly observable market based inputs used in models or other valuation methodologies.

Level 3: Unobservable inputs that are supported by little or no market data and require the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

The following table summarizes financial assets, measured at fair value on a recurring basis, by level within the fair value hierarchy as of December 31, 2008 (in thousands):

		As of December 31, 2008
		Quoted Prices in				Significant
		Active Markets				Other				Significant
		for Identical				Observable				Unobservable
		Assets				Inputs				Inputs
		Level 1				Level 2				Level 3				Total
Assets
Cash and cash equivalents(1)		$	60,158			$	—			$	—			$	60,158
Short-term investments:
Certificates of deposits			14,489				—				—				14,489
Total assets at fair value		$	74,647			$	—			$	—			$	74,647

The fair value of the Company’s Level 1 financial assets is based on quoted market prices of the underlying security. As of December 31, 2008, the Company did not have any Level 2 or 3 financial assets or liabilities.

At September 30, 2008, the par value of the Company’s investments in auction rate securities totaled $28.4 million and the fair value of these auction rate securities was $28.0 million. In September 2008, the Company’s bank where its auction rate securities were held, reached agreements with the Financial Industry Regulatory Authority, the State of Michigan Attorney General and the Michigan Office of Financial and Insurance Regulation regarding the repurchase of auction rate securities. In October 2008, the Company received a commitment from its bank to repurchase all of its remaining auction rate securities, which repurchases were completed in the third quarter of fiscal 2009. During the three and nine months ended December 31, 2008, the Company redeemed $28.4 million and $37.0 million, respectively, of its auction rate securities at 100% of par value by the issuer of the auction rate securities.

The following table summarizes the changes in the beginning and ending balances in the carrying value associated with Level 3 financial assets for the nine months ended December 31, 2008 (in thousands):

		Auction Rate
		Securities
Balance at March 31, 2008		$	35,463
Redemptions during the period			(4,000	)
Transfers			—
Total gain or loss (realized or unrealized)
Included in earnings (loss)			—
Included in other comprehensive loss			96
Balance at June 30, 2008		$	31,559
Redemptions during the period			(4,550	)
Transfers			—
Total gain or loss (realized or unrealized)
Included in earnings (loss)			—
Included in other comprehensive loss			998
Balance at September 30, 2008		$	28,007
Redemptions during the period			(28,425	)
Transfers			—
Total gain or loss (realized or unrealized)
Included in earnings (loss)			—
Included in other comprehensive loss			418
Balance at December 31, 2008		$	—

NOTE 4. INVESTMENTS

The following table summarizes, by major security type, the cost and fair value of investments (in thousands):

		December 31, 2008
						Unrealized				Fair
		Cost				Gain (Loss)				Value
Short-term investments
Held-to-maturity:
Certificates of deposits		$	14,489			$	—			$	14,489
Total short-term investments in held-to-maturity		$	14,489			$	—			$	14,489

		March 31, 2008
						Unrealized				Fair
		Cost				Gain (Loss)				Value
Short-term investments
Held-to-maturity:
Certificates of deposits		$	2,974			$	—			$	2,974
Municipal bonds			4,017				—				4,017
Total short-term investments in held-to-maturity		$	6,991			$	—			$	6,991
Long-term investments
Available-for-sale:
Auction rate securities		$	36,975			$	(1,512	)		$	35,463
Total long-term investments in available-for-sale		$	36,975			$	(1,512	)		$	35,463

As of December 31, 2008 and March 31, 2008, unrealized loss on investments, net of related income taxes, was $0 and $1.4 million, respectively.

At December 31, 2008, the contractual maturities for certificates of deposits were one year or less from the date of purchase. At March 31, 2008, the Company determined that its auction rate securities were not liquid since several auctions related to its auction rate securities failed beginning in February 2008 and accordingly, the Company’s auction rate securities were classified as long-term investments at March 31, 2008. In September 2008, the Company’s bank where its auction rate securities were held, reached agreements with the Financial Industry Regulatory Authority, the State of Michigan Attorney General and the Michigan Office of Financial and Insurance Regulation regarding the repurchase of auction rate securities. In October 2008, the Company received a commitment from its bank to repurchase all of its remaining auction rate securities, which repurchases were completed in the third quarter of fiscal 2009. During the three and nine months ended December 31, 2008, the Company redeemed $28.4 million and $37.0 million, respectively, of its auction rate securities at 100% of par value by the issuer of the auction rate securities.

NOTE 5. INVENTORIES, NET

Inventories, net, include material, labor and overhead, and are stated at the lower of cost (first-in, first-out method) or market. Components of inventories, net, were as follows (in thousands):

		December 31,				March 31,
		2008				2008
Raw materials		$	9,552			$	9,067
Work-in-process			2,667				4,315
Finished goods			4,885				5,275
Inventories, net		$	17,104			$	18,657

NOTE 6. WARRANTY RESERVES

The Company provides for the estimated future costs to be incurred under the Company’s standard warranty obligation on its instruments. Starting on July 1, 2007, the Company provides for the estimated future costs to be incurred under the Company’s warranty obligation on its reagent discs as part of warranty reserves. Prior to July 1, 2007, the Company maintained a provision for defective reagent discs as part of sales allowances.

Instruments. Since the beginning of fiscal 2006, the Company’s standard warranty obligation on instruments is two years. The estimated contractual warranty obligation is recorded when the related revenue is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated. The estimated accrual for warranty exposure is based on historical experience, estimated product failure rates, material usage, freight incurred in repairing the instrument after failure and known design changes.

Reagent Discs. Beginning on July 1, 2007, the Company records a provision for defective reagent discs when the related sale is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated. The warranty cost includes the replacement costs and freight of a defective reagent disc. Prior to July 1, 2007, the Company recorded a provision for defective reagent discs as part of sales allowances since the Company primarily issued a credit to customers for defective reagent discs. Starting on July 1, 2007, the provision for defective reagent discs is recorded as part of warranty reserves, since the Company replaces defective reagent discs rather than issue a credit to customers. The change did not have a material impact on the Company’s financial statements. During the three and nine months ended December 31, 2008, the provision for warranty expense related to replacement of defective reagent discs was $81,000 and $291,000, respectively. The balance of accrued warranty reserve related to replacement of defective reagent discs at December 31, 2008 and 2007 was $392,000 and $270,000, respectively, which was classified as current liability on the balance sheet.

The Company evaluates its estimates for warranty reserves on an ongoing basis and believes it has the ability to reasonably estimate warranty costs. However, unforeseeable changes in factors may impact the estimate for warranty and such changes could cause a material change in the Company’s warranty reserve accrual in the period in which the change was identified.

The change in the Company’s accrued warranty reserve during the three and nine months ended December 31, 2008 and 2007 is summarized as follows (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Balance at beginning of period		$	2,242			$	1,294			$	1,948			$	847
Provision for warranty expense			387				625				1,406				1,499
Warranty costs incurred			(244	)			(266	)			(969	)			(693	)
Balance at end of period			2,385				1,653				2,385				1,653
Non-current portion of warranty reserve			748				496				748				496
Current portion of warranty reserve		$	1,637			$	1,157			$	1,637			$	1,157

NOTE 7. LINE OF CREDIT

The Company has a line of credit with Comerica Bank-California which provides for borrowings of up to $2.0 million. The line of credit may be terminated upon notification by either party and any outstanding balance is payable upon demand. The line of credit bears interest at the bank’s prime rate minus 0.25%, which totaled 3.00% at December 31, 2008, and is payable monthly. At December 31, 2008, of the $2.0 million available, $97,000 was committed to secure a letter of credit for the Company’s facilities lease. At December 31, 2008, there was no amount outstanding under the Company’s line of credit. The weighted average interest rates on the line of credit during the three months ended December 31, 2008 and 2007 were 3.81% and 7.27%, respectively.

The line of credit agreement contains certain financial covenants, which are evaluated on a quarterly basis. At December 31, 2008, the Company was in compliance with each of these covenants. Included in these financial covenants, among other stipulations, are the following requirements:

•		The Company must have a minimum net income of $25,000 before preferred stock dividends and accretion on preferred stock in any three quarters of a fiscal year, provided that any loss before preferred stock dividends and accretion on preferred stock incurred in the remaining quarter is not to exceed $250,000.
•		The Company is required to be profitable, as defined, on a fiscal year to date basis beginning, with respect to the current fiscal year, with the six month period ended September 30, 2008 and to have net income before preferred stock dividends and accretion on preferred stock of at least $1.2 million for the fiscal year ending March 31, 2009.
•		The Company is required to comply with certain financial covenants as follows:

Financial Covenants		Requirements
Quick ratio, as defined		Not less than 2.00 to 1.00
Cash flow coverage, as defined		Not less than 1.25 to 1.00
Debt to net worth ratio, as defined		Not greater than 1.00 to 1.00
Tangible effective net worth, as defined		Not less than $25.7 million

Borrowings under the line of credit are collateralized by the Company’s net book value of assets of $122.2 million at December 31, 2008, including its intellectual property.

NOTE 8. COMMITMENTS AND CONTINGENCIES

Purchase Commitments. In November 2003, the Company entered into an original equipment manufacturing (“OEM”) agreement with Diatron Messtechnik GmbH (“Diatron”) of Austria to purchase Diatron hematology instruments. The Diatron hematology instruments are currently supplied by Diatron Medical Instruments PLC. Under the terms of the OEM agreement, the Company became committed to purchase a minimum number of hematology instruments from Diatron once the product was qualified for sale, which occurred in May 2004. In September 2006, the terms of the OEM agreement, with respect to the purchase commitments, were revised and the Company completed its purchase commitments in the quarter ended December 31, 2007. In February 2008, the terms of the OEM agreement, with respect to the purchase commitments, were again revised. Under the amended OEM agreement currently in effect, the Company is committed to purchase a minimum number of hematology instruments through fiscal 2009. In August 2008, the Company entered into a purchase order with scheduled shipping terms through January 2009 for the remaining number of hematology instruments to be purchased under the amended OEM agreement.

Effective January 5, 2009, the Company entered into a license agreement with Inverness Medical Switzerland GmbH (“Inverness”), pursuant to which the Company licensed co-exclusively certain worldwide patent rights related to lateral flow immunoassay technology in the field of animal health diagnostics in the professional marketplace. The license agreement provides that Inverness shall not grant any future rights to any third parties under its current lateral flow patent rights in the animal health diagnostics field in the professional marketplace. The license agreement enables the Company to develop and market products under rights from Inverness to address animal health and laboratory animal research markets.

The Company paid a $5.0 million up-front license fee to Inverness in January 2009 and is required to pay royalties, including annual minimum royalties of $500,000 to $1.0 million per year over the term of the agreement, starting in fiscal 2011 through the date of the expiration of the last patent licensed under the agreement. Royalties are based on sales of products covered by claims under the licensed Inverness patent rights.

Litigation. The Company is involved from time to time in various litigation matters in the normal course of business. The Company believes that the ultimate resolution of these matters will not have a material effect on its financial position or results of operations.

NOTE 9. SHARE-BASED COMPENSATION

Effective April 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”) using the modified prospective method. SFAS No. 123(R) requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including stock options and restricted stock units based on their fair values, in the Company’s results of operations. The share-based compensation expense includes expense for unvested awards at March 31, 2006 and all awards granted subsequent to March 31, 2006. Share-based compensation expense for the unvested awards outstanding at March 31, 2006 is based on the grant-date fair value as used in calculating the pro forma disclosures in prior period financial statements in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.”

Share-based compensation has been classified in the income statement or capitalized on the balance sheet in the same manner as cash compensation paid to employees. Non-cash compensation expense recognized for share-based awards during the three months ended December 31, 2008 and 2007 was $465,000 and $285,000, respectively, and during the nine months ended December 31, 2008 and 2007 was $1.3 million and $831,000, respectively.

Capitalized share-based compensation cost at December 31, 2008 and 2007 was $34,000 and $26,000, respectively, which was included in inventory on the balance sheet.

Cash Flow Impact

SFAS No. 123(R) requires cash flows resulting from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised stock options and vested restricted stock units in excess of the deferred tax asset attributable to share-based compensation expense for such share-based awards. Excess tax benefits classified as a financing cash inflow for the three months ended December 31, 2008 and 2007 were $2.0 million and $132,000, respectively, and for the nine months ended December 31, 2008 and 2007 were $5.1 million and $270,000, respectively.

Equity Compensation Plans

The Company’s share-based compensation plans are described below.

2005 Equity Incentive Plan. The Company’s 2005 Equity Incentive Plan (the “Equity Incentive Plan”) restated and amended the Company’s 1998 Stock Option Plan. The Equity Incentive Plan allows for the awards of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares, performance units, deferred compensation awards or other share-based awards to employees, directors and consultants. On October 28, 2008, the Company’s shareholders approved an amendment to the Equity Incentive Plan to increase the shares reserved for issuance under the Equity Incentive Plan by 500,000 shares. As of December 31, 2008, the Equity Incentive Plan provides for the issuance of a maximum of 5,386,000 shares, of which 706,000 shares of common stock were then available for future issuance.

Options granted to employees and directors generally expire ten years from the grant date. Options granted to employees generally become exercisable over a period of four years based on cliff-vesting terms and continuous employment. Options granted to non-employee directors generally become exercisable over a period of one year based on monthly vesting terms and continuous service. See the “Stock Options” section in this Note 9 for additional information.

Restricted stock units awarded to employees generally vest over a period of four years and the awards may also be subject to accelerated vesting upon achieving certain performance-based milestones and continuous employment during the vesting period. Restricted stock units awarded to non-employee directors generally vest in full one year after the grant date based on continuous service. See the “Restricted Stock Units” section in this Note 9 for additional information.

1992 Outside Directors’ Stock Option Plan. Under the Company’s 1992 Outside Directors’ Stock Option Plan (the “Directors Plan”), options to purchase shares of common stock were automatically granted, annually, to non-employee directors. Options under the Directors Plan were nonqualified stock options and were granted at the fair market value on the date of grant and expired ten years from the date of grant. Options granted to non-employee directors generally become exercisable over a period of one year based on monthly vesting terms and continuous service. The Directors Plan provided for the issuance of a maximum of 250,000 shares. As of December 31, 2008, all outstanding options under the Directors Plan were fully vested and fully exercisable and no shares of common stock were available for future issuance because the time period for granting options expired in accordance with the terms of the Directors Plan in June 2002.

The Company’s current practice is to issue new shares of common stock from its authorized shares for share-based awards upon the exercise of stock options or vesting of restricted stock units.

Stock Options

Prior to April 1, 2006, the Company granted stock options to employees, with an exercise price equal to the closing market price of the Company’s common stock on the date of grant and with cliff-vesting terms over four years, conditional on continuous employment with the Company. In addition, prior to April 1, 2006, the Company granted stock options to non-employee directors with an exercise price equal to the closing market price of the Company’s common stock on the date of grant and became exercisable over a period of one year based on monthly vesting terms, conditional on continuous service to the Company. There were no stock options granted during fiscal 2007 or 2008 or during the nine months ended December 31, 2008.

The Company used the Black-Scholes option pricing model to determine the fair value of stock options granted prior to March 31, 2006. The fair value of each stock option granted was estimated on the date of the grant using the Black-Scholes option pricing model, based on a multiple option valuation approach, and forfeitures were recognized as they occurred. As of December 31, 2008, the total unrecognized compensation expense related to stock options granted amounted to $4,000, which is expected to be recognized over a weighted average period of 0.12 years.

Stock Option Activity

The following table summarizes information regarding options outstanding and options exercisable at December 31, 2008 and the changes during the nine-month period then ended:

						Weighted				Weighted
						Average				Average				Aggregate
						Exercise				Remaining				Intrinsic
		Number of				Price				Contractual				Value
		Shares				Per Share				Life (Years)				(In thousands)
Outstanding at March 31, 2008			1,044,000			$	7.82
Granted			—				—
Exercised			(156,000	)			3.35
Canceled or forfeited			(1,000	)			11.85
Outstanding at December 31, 2008			887,000			$	8.60				3.38			$	7,527
Vested and expected to vest at December 31, 2008			887,000			$	8.60				3.38			$	7,525
Exercisable at December 31, 2008			884,000			$	8.59				3.38			$	7,513

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on the Company’s closing stock price as of December 31, 2008, that would have been received by the option holders had all option holders exercised their stock options as of that date. Total intrinsic value of stock options exercised during the three months ended December 31, 2008 and 2007 was $1.3 million and $4.3 million, respectively, and during the nine months ended December 31, 2008 and 2007 was $2.4 million and $8.3 million, respectively. Cash proceeds from stock options exercised during the three months ended December 31, 2008 and 2007 were $181,000 and $663,000, respectively, and during the nine months ended December 31, 2008 and 2007 were $522,000 and $2.3 million, respectively.

Restricted Stock Units

The Company grants restricted stock unit awards to employees and directors as part of its share-based compensation program which began in fiscal 2007. The restricted stock unit awards entitle holders to receive shares of common stock at the end of a specified period of time. Vesting for restricted stock unit awards is based on continuous employment or service of the holder. Upon vesting, the equivalent number of common shares are typically issued net of tax withholdings. If the vesting conditions are not met, unvested restricted stock unit awards will be forfeited. Generally, the restricted stock unit awards vest according to one of the following time-based vesting schedules:

•		Restricted stock unit awards to employees: Four year time-based vesting as follows: five percent vesting after the first year; additional 10 percent after the second year; additional 15 percent after the third year; and the remaining 70 percent after the fourth year of continuous employment with the Company.
•		Restricted stock unit awards to non-employee directors: 100 percent vesting after one year of continuous service to the Company.

Certain restricted stock unit awards to employees in fiscal 2007 may also be subject to accelerated vesting upon achieving certain performance-based milestones. Additionally, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”), in its discretion, may provide in the event of a change in control for the acceleration of vesting and/or settlement of the restricted stock unit held by a participant upon such conditions and to such extent as determined by the Compensation Committee. The Company’s Board of Directors has adopted an executive change in control severance plan, which it may terminate or amend at any time, that provides that awards granted to executive officers will accelerate fully on a change of control. The vesting of non-employee director awards granted under the Equity Incentive Plan automatically will also accelerate in full upon a change in control.

The fair value of restricted stock unit awards used in the Company’s expense recognition method is measured based on the number of shares granted and the closing market price of the Company’s common stock on the date of grant. Such value is recognized as an expense over the corresponding requisite service period. The Company’s policy is to recognize the expense based on the vested portions of the awards. The share-based compensation expense is reduced for an estimate of the restricted stock unit awards that are expected to be forfeited. The forfeiture estimate is based on historical data and other factors, and compensation expense is adjusted for actual results. As of December 31, 2008, the total unrecognized compensation expense related to restricted stock unit awards granted amounted to $13.1 million, which is expected to be recognized over a weighted average period of 2.39 years.

Restricted Stock Unit Activity

The following table summarizes restricted stock unit activity for the nine months ended December 31, 2008:

						Weighted
						Average
		Number of				Grant Date
		Shares				Fair Value(1)
Unvested at March 31, 2008			494,000			$	23.21
Granted			247,000				23.81
Vested			(44,000	)			23.32
Canceled or forfeited			(10,000	)			20.68
Unvested at December 31, 2008			687,000			$	23.46

Total intrinsic value of restricted stock units vested during the three months ended December 31, 2008 and 2007 was $14,000 and $4,000, respectively, and during the nine months ended December 31, 2008 and 2007 was $1.1 million and $481,000, respectively. The total grant date fair value of restricted stock units vested during the three months ended December 31, 2008 and 2007 was $30,000 and $3,000, respectively, and during the nine months ended December 31, 2008 and 2007 was $1.0 million and $544,000, respectively.

NOTE 10. NET INCOME PER SHARE

Basic net income per share is computed by dividing the net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income attributable to common shareholders by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common shares for all potential dilutive common shares outstanding using the treasury stock method. Dilutive potential common shares outstanding include outstanding stock options, restricted stock units and warrants.

The following is a reconciliation of the weighted average number of common shares outstanding used in calculating basic and diluted net income per share (in thousands, except share and per share data):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Numerator:
Net income		$	3,356			$	3,205			$	9,429			$	9,191
Denominator:
Weighted average common shares outstanding — basic			21,879,000				21,561,000				21,798,000				21,441,000
Weighted average effect of dilutive securities:
Stock options			381,000				707,000				493,000				720,000
Restricted stock units			4,000				91,000				34,000				43,000
Warrants			—				—				—				4,000
Weighted average common shares outstanding — diluted			22,264,000				22,359,000				22,325,000				22,208,000
Net income per share:
Basic net income per share		$	0.15			$	0.15			$	0.43			$	0.43
Diluted net income per share		$	0.15			$	0.14			$	0.42			$	0.41

The Company excluded the following stock options and warrants from the computation of diluted weighted average shares outstanding because the exercise price of the stock options and warrants is greater than the average market price of the Company’s common stock during the period and, therefore, the inclusion of these stock options and warrants would be antidilutive to net income per share:

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Weighted average number of shares underlying antidilutive stock options and warrants			185,000				—				159,000				—
Weighted average exercise price per share underlying antidilutive stock options and warrants		$	21.02			$	—			$	21.65			$	—

The Company excluded the following restricted stock units from the computation of diluted weighted average shares outstanding because the inclusion of these awards would be antidilutive to net income per share:

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Weighted average number of shares underlying antidilutive restricted stock units			679,000				—				190,000				4,000

NOTE 11. INCOME TAXES

The Company’s effective tax rate for the three months ended December 31, 2008 and 2007 was 34% and 35%, respectively, and for the nine months ended December 31, 2008 and 2007 was 36% and 37%, respectively.

During the three and nine months ended December 31, 2008 and 2007, the effective tax rate included a tax benefit for tax-exempt investments and included a tax benefit for the federal research and development tax credit. During the three and nine months ended December 31, 2008, the effective tax rate also included a benefit for federal qualified production activities. The decrease in the effective tax rate for the three and nine months ended December 31, 2008, as compared to the three and nine months ended December 31, 2007, was due to the recording of a tax benefit for federal and California research and development tax credits relating to the prior year which have been recorded in the three months ended December 31, 2008 as a discrete item.

The Company did not have any unrecognized tax benefits as of December 31, 2008 or December 31, 2007. During the three and nine months ended December 31, 2008 and 2007, the Company did not recognize any interest or penalties related to unrecognized tax benefits.

NOTE 12. COMPREHENSIVE INCOME

The following is a summary of comprehensive income for the three and nine months ended December 31, 2008 and 2007 (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Net income		$	3,356			$	3,205			$	9,429			$	9,191
Other comprehensive income:
Change in unrealized gain (loss) on investments, net of tax			393				—				1,415				—
Comprehensive income		$	3,749			$	3,205			$	10,844			$	9,191

NOTE 13. SEGMENT REPORTING INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

The Company develops, manufactures, markets and sells portable blood analysis systems for use in the human or veterinary patient-care setting to provide clinicians with rapid blood constituent measurements. The Company identifies its reportable segments as those customer groups that represent more than 10% of the combined revenue or gross profit or loss of all reported operating segments. The Company manages its business on the basis of the following two reportable segments: (i) the medical market and (ii) the veterinary market, which are based on the products sold by market and customer group. Each reportable segment has similar manufacturing processes, technology and shared infrastructures. The accounting policies for segment reporting are the same as for the Company as a whole. Assets are not segregated by segments since the Company’s chief operating decision maker does not use assets as a basis to evaluate a particular segment’s performance.

Medical Market

In the medical market reportable segment, the Company serves a worldwide customer group consisting of military installations (ships, field hospitals and mobile care units), physicians office practices across all specialties, urgent care and walk-in clinics (free-standing or hospital-connected), home care providers (national, regional or local), nursing homes, ambulance companies, oncology treatment clinics, hospital labs and draw stations. The products manufactured and sold in this segment primarily consist of Piccolo chemistry analyzers and medical reagent discs.

Veterinary Market

In the veterinary market reportable segment, the Company serves a worldwide customer group consisting of companion animal hospitals, animal clinics with mixed practices of small animals, birds and reptiles, equine and bovine practitioners, veterinary emergency clinics, veterinary referral hospitals, universities, government, pharmaceutical companies, biotechnology companies and private research laboratories. The products manufactured and sold in this segment primarily consist of VetScan chemistry analyzers and veterinary reagent discs. The Company also sells OEM-supplied products in this segment, consisting primarily of hematology analyzers and hematology reagent kits.

The table below summarizes revenues, cost of revenues and gross profit from the Company’s two operating segments and from certain unallocated items for the three and nine months ended December 31, 2008 and 2007 (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Revenues:
Medical Market		$	7,175			$	6,005			$	19,719			$	16,455
Veterinary Market			17,907				18,073				54,465				52,498
Other(1)			1,882				1,612				5,040				4,860
Total revenues			26,964				25,690				79,224				73,813
Cost of revenues:
Medical Market			3,548				2,946				9,772				8,194
Veterinary Market			7,389				8,677				22,672				23,525
Other(1)			922				458				2,830				1,612
Total cost of revenues			11,859				12,081				35,274				33,331
Gross profit:
Medical Market			3,627				3,059				9,947				8,261
Veterinary Market			10,518				9,396				31,793				28,973
Other(1)			960				1,154				2,210				3,248
Gross profit		$	15,105			$	13,609			$	43,950			$	40,482

NOTE 14. REVENUES BY PRODUCT CATEGORY AND GEOGRAPHIC REGION AND SIGNIFICANT CONCENTRATIONS

Revenue Information

The following is a summary of revenues for each group of products provided by the Company (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
Revenues by Product Category		2008				2007				2008				2007
Instruments		$	7,976			$	8,393			$	22,670			$	22,319
Reagent discs and kits			16,751				15,305				50,378				45,244
Other products			1,340				1,462				3,767				4,797
Product sales, net			26,067				25,160				76,815				72,360
Development and licensing revenue			897				530				2,409				1,453
Total revenues		$	26,964			$	25,690			$	79,224			$	73,813

The following is a summary of revenues by geographic region based on customer location (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
Revenues by Geographic Region		2008				2007				2008				2007
North America		$	22,852			$	21,628			$	65,629			$	61,868
Europe			3,040				3,397				10,766				9,629
Asia Pacific and rest of the world			1,072				665				2,829				2,316
Total revenues		$	26,964			$	25,690			$	79,224			$	73,813

Significant Concentrations

Revenues from significant customers as a percentage of total revenues were as follows:

						Three Months Ended								Nine Months Ended
		Geographical				December 31,								December 31,
Distributor		Location				2008				2007				2008				2007
Walco International, Inc., d/b/a DVM Resources		United States					<10	%			12	%			<10	%			13	%

During the three and nine months ended December 31, 2008, there were no distributors or direct customers that accounted for more than 10% of total worldwide revenues.

At December 31, 2008, one distributor in the United States accounted for 14% of the Company’s trade receivables. At December 31, 2007, one distributor in the United States accounted for 16% of the Company’s trade receivables.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements, which reflect Abaxis’ current views with respect to future events and financial performance. In this report, the words “will,” “anticipates,” “believes,” “expects,” “intends,” “plans,” “future,” “project,” “estimate,” “would,” “may,” “could,” “should,” “might,” and similar expressions identify forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties, including but not limited to those discussed below, in Part II, Item 1A of this report and in Part I, Item 1A of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”), that could cause actual results to differ materially from historical results or those anticipated. Such risks and uncertainties include, but are not limited to, the market acceptance of our products and the continuing development of our products, required United States Food and Drug Administration (“FDA”) clearance and other government approvals, risks associated with manufacturing and distributing our products on a commercial scale, free of defects, risks related to the introduction of new instruments manufactured by third parties, risks associated with entering the human diagnostic market on a larger scale, risks related to the protection of Abaxis’ intellectual property or claims of infringement of intellectual property asserted by third parties, risks involved in carrying of inventory, risks associated with the ability to attract, train and retain competent sales personnel, general market conditions and competition. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Abaxis assumes no obligation to update any forward-looking statements as circumstances change.

BUSINESS OVERVIEW

Abaxis, Inc. (“Abaxis,” “us” or “we”) was incorporated in California in 1989. Our principal offices are located at 3240 Whipple Road, Union City, California 94587. Our telephone number is (510) 675-6500 and our Internet address is www.abaxis.com. We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our common stock trades on the NASDAQ Global Market under the symbol “ABAX.”

We develop, manufacture, market and sell portable blood analysis systems for use in the human or veterinary patient-care setting to provide clinicians with rapid blood constituent measurements. Our primary product is a blood analysis system, consisting of a compact portable analyzer and a series of single-use plastic discs, called reagent discs, containing all the chemicals required to perform a panel of up to 14 tests on human patients and 13 tests on veterinary patients. We manufacture the system in our manufacturing facilities in Union City, California and we market our blood chemistry analyzers in both the medical market and in the veterinary market, as described below.

•		Medical Market: We currently market the blood analysis system in the medical market under the name Piccolo xpress®. Through October 2006, we marketed the blood analysis system in the medical market as the Piccolo®, now referred to as the Piccolo Classic. We continue to support and service our current population of Piccolo xpress and Piccolo Classic chemistry analyzers.
•		Veterinary Market: We currently market the blood analysis system in the veterinary market under the name VetScan VS2®. Through March 2006, we marketed the blood analysis system in the veterinary market as the VetScan®, now referred to as the VetScan Classic. We continue to support and service our current population of VetScan VS2 and VetScan Classic chemistry analyzers.

In September 2007, we introduced a veterinary hematology instrument under the name VetScan HM5. The VetScan HM5 offers a 22-parameter complete blood count (CBC) analysis, including a five-part differential cell counter specifically designed for veterinary applications. In May 2004, we introduced a veterinary hematology instrument that offers an 18-parameter CBC analysis, including a three-part white blood cell differential, marketed originally as the VetScan HMII, and is now referred to as the VetScan HM2. We currently purchase the hematology instruments from Diatron Medical Instruments PLC. of Budapest, Hungary. Through April 2004, we marketed a veterinary hematology instrument under the name VetScan HMT. We continue to support and service our current population of VetScan HM5, VetScan HM2, VetScan HMII and VetScan HMT hematology instruments. We also market reagent kits to be used with our hematology instruments which we currently purchase from three suppliers: Clinical Diagnostic Solutions, Inc., Diatron and Mallinckrodt Baker BV.

On July 1, 2008, our sales office in Darmstadt, Germany was incorporated as Abaxis Europe GmbH to market, promote and distribute diagnostic systems for medical and veterinary uses. As a result, Abaxis Europe GmbH became a wholly-owned subsidiary of Abaxis. The subsidiary was formed to provide customer support in a timely manner in response to the growing and increasingly diverse services needs of customers in the European market.

Our sales for any future periods are not predictable with a significant degree of certainty, and may depend on a number of factors outside of our control, including but not limited to inventory or timing considerations by our distributors. We generally operate with a limited order backlog because our products are typically shipped shortly after orders are received. As a result, product sales in any quarter are generally dependent on orders booked and shipped in that quarter. Our expense levels, which are to a large extent fixed, are based in part on our expectations of future revenues. Accordingly, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. As a result, any such shortfall would negatively affect our operating results and financial condition. In addition, our sales may be adversely impacted by pricing pressure from competitors. Our ability to be consistently profitable will depend, in part, on our ability to increase the sales volumes of our Piccolo and VetScan products and to successfully compete with other competitors. We believe that period to period comparisons of our results of operations are not necessarily meaningful indicators of future results.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and the sensitivity of these estimates to deviations in the assumptions used in making them. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. However, there can be no assurance that our actual results will not differ from these estimates.

We have identified the policies below as critical because they are not only important to understanding our financial condition and results of operations, but also because application and interpretation of these policies requires both judgment and estimates of matters that are inherently uncertain and unknown. Accordingly, actual results may differ materially from our estimates. The impact and any associated risks related to these policies on our business operations are discussed below. A more detailed discussion on the application of these and other accounting policies are included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2008.

Revenue Recognition and Deferred Revenue. Our primary customers are distributors and direct customers in both the medical and veterinary markets. Revenues from product sales, net of estimated sales allowances and rebates, are recognized when (i) evidence of an arrangement exists, (ii) upon shipment of the products to the customer, (iii) the sales price is fixed or determinable and (iv) collection of the resulting receivable is reasonably assured. Rights of return are not provided.

We recognize revenue associated with extended maintenance agreements ratably over the life of the contract. Amounts collected in advance of revenue recognition are recorded as a current or non-current liability based on the time from the balance sheet date to the future date of revenue recognition. We provide incentives in the form of free goods or extended maintenance agreements to customers in connection with the sale of our instruments. Revenues from such sales is allocated separately to the instruments and incentives based on the relative fair value of each element. Revenues allocated to incentives is deferred until the goods are shipped to the customer or is recognized ratably over the life of the maintenance contract.

We periodically offer trade-in programs to customers for trading in an existing instrument to purchase a new instrument and we will either provide incentives in the form of free goods or reduce the sales price of the instrument. These incentives in the form of free goods are recorded according to the policies described above.

Distributor and Customer Rebates. We offer distributor pricing rebates and customer incentives from time to time. The distributor pricing rebates are offered to distributors upon meeting the sales volume requirements during a qualifying period. The distributor pricing rebates are recorded as a reduction to gross revenues during the qualifying period. Cash rebates are offered to customers who purchase specific instruments during a promotional period. Cash rebates are recorded as a reduction to gross revenues.

Sales and Other Allowances. We estimate a provision for defective reagent discs as part of sales allowances when we issue credits to customers for defective reagent discs. We also establish, upon shipment of our products to distributors, a provision for potentially defective reagent discs, based on estimates derived from historical experience. The provision for potentially defective reagent discs was recorded in sales allowances, using internal data available to estimate the level of inventory in the distribution channel, the lag time for customers to report defective reagent discs and the historical rates of defective reagent discs. Starting on July 1, 2007, the provision for potentially defective reagent discs is recorded as part of warranty reserves, instead of sales allowances, since we replace defective reagent discs rather than issue a credit to customers. Changes in our estimates for accruals related to provisions for defective reagent discs have not been material to our financial position or results of operations. In the future, the actual defective reagent discs may exceed our estimates, which could adversely affect our financial results.

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts based on our assessment of the collectibility of the amounts owed to us by our customers. In determining the amount of the allowance, we make judgments about the creditworthiness of customers which is mostly determined by the customer’s payment history and the outstanding period of accounts. We specifically identify amounts that we believe to be uncollectible and the allowance for doubtful accounts is adjusted accordingly. An additional allowance is recorded based on certain percentages of our aged receivables, using historical experience to estimate the potential uncollectible and our assessment of the general financial condition of our customer base. If our actual collections experience changes, revisions to our allowances may be required, which could adversely affect our operating income.

Warranty Reserves. We provide for the estimated future costs to be incurred under our standard warranty obligation on our instruments. Our standard warranty obligation on instruments is two years. The estimated contractual warranty obligation is recorded when the related revenue is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated. While we engage in product quality programs and processes, including monitoring and evaluating the quality of our suppliers, our estimated accrual for warranty exposure is based on historical experience, estimated product failure rates, material usage and freight incurred in repairing the instrument after failure and known design changes.

A provision for defective reagent discs is recorded when related sales are recognized and any additional amounts are recorded when such costs are probable and can be reasonably estimated, at which time they are included in cost of revenues. Prior to July 1, 2007, we primarily issued a credit to customers for defective reagent discs and, therefore, the provision for estimated costs for defective reagent discs, which includes the replacement costs and freight of a defective reagent disc, was recorded as part of sales and other allowances. Starting on July 1, 2007, the provision for defective reagent discs is recorded as part of warranty reserves, since we replace defective reagent discs rather than issue a credit to customers.

We analyze the adequacy of the ending accrual balance of warranty reserves each quarter. The determination of warranty reserves requires us to make estimates of the expected costs to repair or replace the instruments and to replace defective reagent discs under warranty. If actual repair or replacement costs of instruments or replacement costs of reagent discs differ significantly from our estimates, adjustments to cost of revenues may be required.

Inventories. We state inventories at the lower of cost or market, cost being determined using standard costs which approximates the first-in, first-out (FIFO) method. Inventories include material, labor and overhead. We establish provisions for excess, obsolete and unusable inventories after evaluation of future demand and market conditions. If future demand or actual market conditions are less favorable than those estimated by management or if a significant amount of the material were to become unusable, additional inventory write-downs may be required, which would have a negative effect on our operating income.

Long-Lived Assets. The carrying value of our long-lived assets is reviewed for impairment, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We look to current and future profitability, as well as current and future undiscounted cash flows, excluding financing costs, as primary indicators of recoverability. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposal is less than the carrying amount. If impairment is determined to exist, any related impairment loss is calculated based on fair value.

Income Taxes. We account for income taxes using the liability method under which deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts to be recovered.

Effective April 1, 2007, we adopted the provisions of Financial Accounting Standards Board Interpretation 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Our policy to include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes did not change despite the adoption of FIN 48.

Share-Based Compensation Expense. Effective April 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”) using the modified prospective method. Under the fair value provisions of SFAS No. 123(R), we recognize share-based compensation expense, net of an estimated forfeiture rate, for those shares expected to vest over the requisite service period of the award to employees and directors.

We use the Black-Scholes option pricing model to determine the fair value of stock options granted prior to March 31, 2006. Determining the appropriate fair value model and calculating the fair value of share-based awards requires highly subjective assumptions, as described below.

•		Risk-free interest rate: The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option.
•		Expected stock price volatility: We estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock.
•		Expected term: We estimate the expected term of stock options granted based on historical exercise and post-vesting termination patterns, which we believe are representative of future behavior.
•		Expected dividends: We have not paid cash dividends on our common stock and we do not anticipate paying cash dividends in the foreseeable future; consequently, we use an expected dividend yield of zero.

For restricted stock units, the assumptions to calculate compensation expense is based on the fair value of our stock at the grant date. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future.

As required by SFAS No. 123(R), employee share-based compensation expense recognized is calculated based on the awards expected to vest and reduced for estimated forfeitures. The forfeiture rate is estimated based on historical data of our share-based awards that are granted and cancelled prior to vesting and upon historical experience of employee turnover. Changes in estimated forfeiture rates and differences between estimated forfeiture rates and actual experience may result in significant, unanticipated increases or decreases in share-based compensation expense from period to period. To the extent we revise our estimate of the forfeiture rate in the future, our share-based compensation expense could be materially impacted in the quarter of revision, as well as in following quarters.

Fair Value Measurements. Effective April 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) to measure the fair value of our financial assets and financial liabilities. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under SFAS No. 157 are described below:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. We used Level 1 assumptions for our cash, cash equivalents and certificates of deposits, which are traded in an active market. The valuations are based on quoted prices of the underlying security that are readily and regularly available in an active market, and accordingly, a significant degree of judgment is not required. As of December 31, 2008, we had Level 1 financial assets or liabilities consisting of cash, cash equivalents and certificates of deposits.

Level 2: Directly or indirectly observable market based inputs used in models or other valuation methodologies. As of December 31, 2008, we did not have any Level 2 financial assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market data and require the use of significant management judgment. As of December 31, 2008, we did not have any Level 3 financial assets or liabilities.

RESULTS OF OPERATIONS

We develop, manufacture, market and sell portable blood analysis systems for use in the human or veterinary patient-care setting to provide clinicians with rapid blood constituent measurements. We operate in two segments: (i) the medical market and (ii) the veterinary market. See “Segment Results” in this section for a detailed discussion.

Total Revenues

Revenues by Geographic Region and by Product Category. Revenues by geographic region based on customer location and revenues by product category during the three and nine months ended December 31, 2008 and 2007 were as follows (in thousands, except percentages):

		Three Months Ended																Nine Months Ended
		December 31,								Change								December 31,								Change
										Increase/				Percent												Increase/				Percent
Revenues by Geographic Region		2008				2007				(Decrease)				Change				2008				2007				(Decrease)				Change
North America		$	22,852			$	21,628			$	1,224				6	%		$	65,629			$	61,868			$	3,761				6	%
Percentage of total revenues			85	%			84	%											83	%			84	%
Europe			3,040				3,397				(357	)			(11	%)			10,766				9,629				1,137				12	%
Percentage of total revenues			11	%			13	%											14	%			13	%
Asia Pacific and rest of the world			1,072				665				407				61	%			2,829				2,316				513				22	%
Percentage of total revenues			4	%			3	%											3	%			3	%
Total revenues		$	26,964			$	25,690			$	1,274				5	%		$	79,224			$	73,813			$	5,411				7	%

		Three Months Ended																Nine Months Ended
		December 31,								Change								December 31,								Change
										Increase/				Percent												Increase/				Percent
Revenues by Product Category		2008				2007				(Decrease)				Change				2008				2007				(Decrease)				Change
Instruments		$	7,976			$	8,393			$	(417	)			(5	%)		$	22,670			$	22,319			$	351				2	%
Percentage of total revenues			30	%			33	%											29	%			30	%
Reagent discs and kits			16,751				15,305				1,446				9	%			50,378				45,244				5,134				11	%
Percentage of total revenues			62	%			59	%											63	%			61	%
Other products			1,340				1,462				(122	)			(8	%)			3,767				4,797				(1,030	)			(21	%)
Percentage of total revenues			5	%			6	%											5	%			7	%
Product sales, net			26,067				25,160				907				4	%			76,815				72,360				4,455				6	%
Percentage of total revenues			97	%			98	%											97	%			98	%
Development and licensing revenue			897				530				367				69	%			2,409				1,453				956				66	%
Percentage of total revenues			3	%			2	%											3	%			2	%
Total revenues		$	26,964			$	25,690			$	1,274				5	%		$	79,224			$	73,813			$	5,411				7	%

Three Months Ended December 31, 2008 Compared to Three Months Ended December 31, 2007

North America. During the three months ended December 31, 2008, total revenues in North America increased 6%, or $1.2 million, as compared to the three months ended December 31, 2007. Components of the change in North America were as follows:

Instruments. During the three months ended December 31, 2008, total revenues from instruments sold in North America decreased 6%, or $378,000, as compared to the three months ended December 31, 2007. The primary factors of the change were as follows:

(i) Sales of our Piccolo chemistry analyzers in North America (excluding the U.S. government) decreased 30%, or $602,000, primarily due to economic conditions and the resulting impact of reduced capital spending at the physician office level and lower average selling prices due to sales of reconditioned Piccolo chemistry analyzers. The decrease was partially offset by an increase in sales of our Piccolo chemistry analyzers to the U.S. government of 142%, or $451,000, primarily due to an increase in the U.S. Military’s needs for these products, which were not predictable.

(ii) Sales of our VetScan chemistry analyzers in North America increased 17%, or $328,000, primarily due to (a) quality and reliability improvements on our VetScan chemistry analyzers and (b) a shift in our sales and marketing focus to our VetScan chemistry analyzers and reagent discs during the second and third quarters of fiscal 2009.

(iii) Sales of our hematology instruments in North America decreased 22%, or $555,000, primarily due to a shift in our sales and marketing focus to our VetScan chemistry analyzers and reagent discs during the second and third quarters of fiscal 2009.

Reagent discs and kits. During the three months ended December 31, 2008, total revenues from reagent discs and kits sold in North America increased 11%, or $1.4 million, as compared to the three months ended December 31, 2007. The primary factors of the change were as follows:

(i) Medical reagent discs sales in North America (excluding the U.S. government) increased 51%, or $1.0 million, primarily due to the expanded installed base of our Piccolo chemistry analyzers. The increase was partially offset by a decrease in medical reagent discs sold to the U.S. government of 42%, or $229,000, primarily due to the U.S. Military’s decreased needs for these products, which were not predictable.

(ii) Veterinary reagent discs sales in North America increased 6%, or $556,000, primarily due to the expanded installed base of our VetScan chemistry analyzers and higher average selling prices.

(iii) Sales of our hematology reagent kits in North America increased 9%, or $85,000, primarily due to an expanded installed base of our hematology instruments.

Other products. During the three months ended December 31, 2008, total revenues from other products sold in North America decreased 14%, or $206,000, as compared to the three months ended December 31, 2007. The net decrease in other products was primarily due to a decrease in demand from Becton, Dickinson and Company for products using the Orbos Discrete Lyophilization Process, which is seasonal.

Development and licensing. During the three months ended December 31, 2008, total revenues from development and licensing in North America increased 69%, or $367,000, as compared to the three months ended December 31, 2007. The increase from development and licensing revenue is primarily due to a licensing agreement with Cepheid, related to our proprietary technology, the Orbos^® Discrete Lyophilization Process.

Significant concentration. There were no distributors or direct customers that accounted for more than 10% of our total worldwide revenues for the three months ended December 31, 2008. One distributor in the United States, DVM Resources, accounted for 12% of our total worldwide revenues for the three months ended December 31, 2007.

Europe. During the three months ended December 31, 2008, total revenues in Europe decreased 11%, or $357,000, as compared to the three months ended December 31, 2007. Components of the change in Europe were as follows:

Instruments. During the three months ended December 31, 2008, total revenues from instruments sold in Europe decreased 8%, or $110,000, as compared to the three months ended December 31, 2007. The primary factors of the change were as follows:

(i) Sales of our Piccolo chemistry analyzers in Europe decreased 11%, or $58,000.

(ii) Sales of our VetScan chemistry analyzers in Europe increased 4%, or $25,000.

(iii) Sales of our hematology instruments in Europe decreased 44%, or $77,000.

Reagent discs and kits. During the three months ended December 31, 2008, total revenues from reagent discs and kits sold in Europe decreased 16%, or $330,000, as compared to the three months ended December 31, 2007. The primary factors of the change were as follows:

(i) Medical reagent discs sales in Europe increased 159%, or $495,000, primarily due to sales to a new distributor in Europe to supply medical reagent discs into local government hospitals.

(ii) Veterinary reagent discs sales in Europe decreased 49%, or $840,000, primarily due to (a) the timing of purchases by a distributor during the third quarter of fiscal 2009 and (b) the impact of the global economic downturn, which lowered the average consumption rate of veterinary reagent discs.

(iii) Sales of our hematology reagent kits in Europe increased 31%, or $15,000, as compared to the three months ended December 31, 2007.

Other products. During the three months ended December 31, 2008, total revenues from other products sold in Europe increased 1037%, or $83,000.

Asia Pacific and rest of the world. During the three months ended December 31, 2008, total revenues in Asia Pacific and rest of the world increased 61%, or $407,000, as compared to the three months ended December 31, 2007. Components of the change in Asia Pacific and rest of the world were as follows:

Instruments. During the three months ended December 31, 2008, total revenues from instruments sold in Asia Pacific and rest of the world increased 21%, or $71,000, as compared to the three months ended December 31, 2007. The primary factors of the change were as follows:

(i) Sales of our Piccolo chemistry analyzers in Asia Pacific and rest of the world increased 96%, or $43,000.

(ii) Sales of our VetScan chemistry analyzers in Asia Pacific and rest of the world increased 121%, or $108,000.

(iii) Sales of our hematology instruments in Asia Pacific and rest of the world decreased 40%, or $80,000.

Reagent discs and kits. During the three months ended December 31, 2008, total revenues from reagent discs and kits sold in Asia Pacific and rest of the world increased 102%, or $335,000, as compared to the three months ended December 31, 2007. The primary factors of the change were as follows:

(i) Medical reagent discs sales in Asia Pacific and rest of the world increased 163%, or $31,000.

(ii) Veterinary reagent discs sales in Asia Pacific and rest of the world increased 93%, or $264,000, primarily due to the expanded installed base of our VetScan chemistry analyzers.

(iii) Sales of our hematology reagent kits in Asia Pacific and rest of the world increased 148%, or $40,000.

Other products. During the three months ended December 31, 2008, total revenues from other products sold in Asia Pacific and rest of the world were substantially the same as in the three months ended December 31, 2007.

Nine Months Ended December 31, 2008 Compared to Nine Months Ended December 31, 2007

North America. During the nine months ended December 31, 2008, total revenues in North America increased 6%, or $3.8 million, as compared to the nine months ended December 31, 2007. Components of the change in North America were as follows:

Instruments. During the nine months ended December 31, 2008, total revenues from instruments sold in North America increased 2%, or $290,000, as compared to the nine months ended December 31, 2007. The primary factors of the change were as follows:

(i) Sales of our Piccolo chemistry analyzers to the U.S. government increased 180%, or $1.2 million, primarily due to an increase in the U.S. Military’s needs for these products during the first and third quarters of fiscal 2009, which were not predictable. Sales of our Piccolo chemistry analyzers in North America (excluding the U.S. government) decreased 17%, or $928,000, primarily due to economic conditions and the resulting impact of reduced capital spending at the physician office level.

(ii) Sales of our VetScan chemistry analyzers in North America increased 30%, or $1.6 million, primarily due to (a) quality and reliability improvements on our VetScan chemistry analyzers and (b) a shift in our sales and marketing focus to our VetScan chemistry analyzers and reagent discs during the second and third quarters of fiscal 2009.

(iii) Sales of our hematology instruments in North America decreased 24%, or $1.6 million, primarily due to a shift in our sales and marketing focus to our VetScan chemistry analyzers and reagent discs during the second and third quarters of fiscal 2009.

Reagent discs and kits. During the nine months ended December 31, 2008, total revenues from reagent discs and kits sold in North America increased 10%, or $3.6 million, as compared to the nine months ended December 31, 2007. The primary factors of the change were as follows:

(i) Medical reagent discs sales in North America (excluding the U.S. government) increased 46%, or $2.7 million, primarily due to the expanded installed base of our Piccolo chemistry analyzers. Medical reagent discs sold to the U.S. government decreased 13%, or $216,000, primarily due to the U.S. Military’s decreased needs for these products, which were not predictable.

(ii) Veterinary reagent discs sales in North America increased 2%, or $589,000, primarily due to higher average selling prices, partially offset by a decrease in units sold to our distributors.

(iii) Sales of our hematology reagent kits in North America increased 19%, or $489,000, primarily due to an expanded installed base of our hematology instruments and a higher average selling price on reagents kits for our VetScan HM5, a 5-part differential hematology instrument.

Other products. During the nine months ended December 31, 2008, total revenues from other products sold in North America decreased 23%, or $1.1 million, as compared to the nine months ended December 31, 2007. The net decrease in other products was primarily due to (i) an increase in maintenance contracts offered to customers from time to time as incentives in the form of free goods in connection with the sale of our products and (ii) a decrease in demand from Becton, Dickinson and Company for products using the Orbos Discrete Lyophilization Process, which is seasonal.

Development and licensing. During the nine months ended December 31, 2008, total revenues from development and licensing in North America increased 66%, or $956,000, as compared to the nine months ended December 31, 2007. The increase from development and licensing revenue is primarily due to a licensing agreement with Cepheid, related to our proprietary technology, the Orbos^® Discrete Lyophilization Process.

Significant concentration. There were no distributors or direct customers that accounted for more than 10% of our total worldwide revenues for the nine months ended December 31, 2008. One distributor in the United States, DVM Resources, accounted for 13% of our total worldwide revenues for the nine months ended December 31, 2007.

Europe. During the nine months ended December 31, 2008, total revenues in Europe increased 12%, or $1.1 million, as compared to the nine months ended December 31, 2007. Components of the change in Europe were as follows:

Instruments. During the nine months ended December 31, 2008, total revenues from instruments sold in Europe decreased 4%, or $136,000, as compared to the nine months ended December 31, 2007. The primary factors of the change were as follows:

(i) Sales of our Piccolo chemistry analyzers in Europe decreased 7%, or $81,000.

(ii) Sales of our VetScan chemistry analyzers in Europe decreased 2%, or $48,000.

(iii) Sales of our hematology instruments in Europe were substantially the same as in the nine months ended December 31, 2007.

Reagent discs and kits. During the nine months ended December 31, 2008, total revenues from reagent discs and kits sold in Europe increased 20%, or $1.2 million, as compared to the nine months ended December 31, 2007. The primary factors of the change were as follows:

(i) Medical reagent discs sales in Europe increased 74%, or $623,000, due to sales to a new distributor in Europe to supply medical reagent discs into local government hospitals, primarily in the third quarter of fiscal 2009.

(ii) Veterinary reagent discs sales in Europe increased 12%, or $593,000, primarily due to (a) the expanded installed base of our VetScan chemistry analyzers and (b) higher average selling prices.

(iii) Sales of our hematology reagent kits in Europe increased 12%, or $19,000.

Other products. During the nine months ended December 31, 2008, total revenues from other products sold in Europe increased 57%, or $38,000, as compared to the nine months ended December 31, 2007.

Asia Pacific and rest of the world. During the nine months ended December 31, 2008, total revenues in Asia Pacific and rest of the world increased 22%, or $513,000, as compared to the nine months ended December 31, 2007. Components of the change in Asia Pacific and rest of the world were as follows:

Instruments. During the nine months ended December 31, 2008, total revenues from instruments sold in Asia Pacific and rest of the world increased 22%, or $197,000, as compared to the nine months ended December 31, 2007. The primary factors of the change were as follows:

(i) Sales of our Piccolo chemistry analyzers in Asia Pacific and rest of the world increased 58%, or $69,000.

(ii) Sales of our VetScan chemistry analyzers in Asia Pacific and rest of the world increased 44%, or $158,000, primarily due to renewed distributor sales in Japan.

(iii) Sales of our hematology instruments in Asia Pacific and rest of the world decreased 7%, or $30,000.

Reagent discs and kits. During the nine months ended December 31, 2008, total revenues from reagent discs and kits sold in Asia Pacific and rest of the world increased 22%, or $314,000, as compared to the nine months ended December 31, 2007. The primary factors of the change were as follows:

(i) Medical reagent discs sales in Asia Pacific and rest of the world were substantially the same as in the nine months ended December 31, 2007.

(ii) Veterinary reagent discs sales in Asia Pacific and rest of the world increased 21%, or $251,000, primarily due to the expanded installed base of our VetScan chemistry analyzers.

(iii) Sales of our hematology reagent kits in Asia Pacific and rest of the world increased 70%, or $63,000.

Other products. During the nine months ended December 31, 2008, total revenues from other products sold in Asia Pacific and rest of the world were substantially the same as in the nine months ended December 31, 2007.

Segment Results

Three Months Ended December 31, 2008 Compared to Three Months Ended December 31, 2007

The following table presents revenues, cost of revenues, gross profit and percent of revenues by operating segments for the three months ended December 31, 2008 and 2007 (in thousands, except percentages):

		Three Months Ended
		December 31,																Change
						Percent of								Percent of				Increase/				Percent
		2008				Revenues(1)				2007				Revenues(1)				(Decrease)				Change
Revenues:
Medical Market		$	7,175				100	%		$	6,005				100	%		$	1,170				19	%
Percentage of total revenues			27	%							23	%
Veterinary Market			17,907				100	%			18,073				100	%			(166	)			(1	%)
Percentage of total revenues			66	%							70	%
Other(2)			1,882								1,612								270				17	%
Percentage of total revenues			7	%							7	%
Total revenues			26,964								25,690								1,274				5	%
Cost of revenues:
Medical Market			3,548				49	%			2,946				49	%			602				20	%
Veterinary Market			7,389				41	%			8,677				48	%			(1,288	)			(15	%)
Other(2)			922								458								464				101	%
Total cost of revenues			11,859								12,081								(222	)			(2	%)
Gross profit:
Medical Market			3,627				51	%			3,059				51	%			568				19	%
Veterinary Market			10,518				59	%			9,396				52	%			1,122				12	%
Other(2)			960								1,154								(194	)			(17	%)
Gross profit		$	15,105							$	13,609							$	1,496				11	%