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

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

Commission File Number 000-19720

ABAXIS, INC.

(Exact name of registrant as specified in its charter)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 August 6, 2009, there were 21,998,000 shares of the Registrant’s common stock outstanding.

 

 

Form 10-Q

For the Quarter Ended June 30, 2009

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2009 and 2008			3
Condensed Consolidated Balance Sheets as of June 30, 2009 and March 31, 2009			4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2009 and 2008			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			28
Item 4. Controls and Procedures			29
Item 4T. Controls and Procedures			30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			40
Item 3. Defaults Upon Senior Securities			40
Item 4. Submission of Matters to a Vote of Security Holders			40
Item 5. Other Information			40
Item 6. Exhibits			40
SIGNATURES			41
Exhibit 10.1
Exhibit 10.3
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1.		Condensed Consolidated Financial Statements (Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)

		Three Months Ended
		June 30,
		2009				2008
Revenues		$	29,625			$	24,572
Cost of revenues			12,470				11,069
Gross profit			17,155				13,503
Operating expenses:
Research and development			2,573				1,997
Sales and marketing			6,360				5,827
General and administrative			2,498				1,662
Total operating expenses			11,431				9,486
Income from operations			5,724				4,017
Interest and other income (expense), net			514				462
Income before income tax provision			6,238				4,479
Income tax provision			2,482				1,703
Net income		$	3,756			$	2,776
Net income per share:
Basic net income per share		$	0.17			$	0.13
Diluted net income per share		$	0.17			$	0.12
Shares used in the calculation of net income per share:
Weighted average common shares outstanding — basic			21,965,000				21,735,000
Weighted average common shares outstanding — diluted			22,357,000				22,398,000
Share-based compensation expense by function:
Cost of revenues		$	49			$	35
Research and development			140				61
Sales and marketing			245				137
General and administrative			462				168
Total share-based compensation expense		$	896			$	401

See accompanying Notes to the Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)

		June 30,				March 31,
		2009				2009
ASSETS
Current assets:
Cash and cash equivalents		$	46,868			$	49,237
Short-term investments			20,215				20,776
Accounts receivables (net of allowances of $473 at June 30, 2009 and $388 at March 31, 2009)			24,159				21,983
Inventories			15,488				15,735
Prepaid expenses			959				957
Net deferred tax asset, current			4,628				4,676
Total current assets			112,317				113,364
Long-term investments			13,759				4,886
Property and equipment, net			14,366				14,798
Intangible assets, net			5,031				5,175
Other assets			35				24
Net deferred tax asset, non-current			2,464				2,464
Total assets		$	147,972			$	140,711
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	4,303			$	3,963
Accrued payroll and related expenses			4,296				3,698
Accrued taxes			2,005				34
Other accrued liabilities			1,135				1,116
Deferred revenue			1,047				1,024
Warranty reserve			1,732				1,714
Total current liabilities			14,518				11,549
Non-current liabilities:
Deferred rent			92				137
Deferred revenue			1,429				1,550
Warranty reserve			653				583
Total non-current liabilities			2,174				2,270
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; 21,985,000 and 21,933,000 shares issued and outstanding at June 30, 2009 and at March 31, 2009, respectively			118,489				117,846
Retained earnings			12,802				9,046
Accumulated other comprehensive loss			(11	)			—
Total shareholders’ equity			131,280				126,892
Total liabilities and shareholders’ equity		$	147,972			$	140,711

See accompanying Notes to the Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

		Three Months Ended
		June 30,
		2009				2008
Cash flows from operating activities:
Net income		$	3,756			$	2,776
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,290				1,004
Investment premium amortization			11				—
(Gain) loss on disposal of property and equipment			6				(20	)
(Gain) loss on foreign exchange translation			(88	)			—
Share-based compensation expense			896				401
Excess tax benefits from share-based awards			(190	)			(1,773	)
Provision for deferred income taxes			245				1,439
Changes in assets and liabilities:
Accounts receivables, net			(2,127	)			(79	)
Inventories			(93	)			(296	)
Prepaid expenses			(2	)			(763	)
Other assets			(11	)			5
Accounts payable			340				(1,613	)
Accrued payroll and related expenses			598				(830	)
Accrued taxes			1,770				120
Other accrued liabilities			19				(280	)
Deferred rent			(45	)			(35	)
Deferred revenue			(98	)			331
Warranty reserve			88				167
Net cash provided by operating activities			6,365				554
Cash flows from investing activities:
Purchases of available-for-sale investments			(3,030	)			—
Purchases of held-to-maturity investments			(11,706	)			(6,991	)
Proceeds from redemptions of available-for-sale investments			—				4,000
Proceeds from maturities of held-to-maturity investments			5,597				6,991
Principal payments of asset-backed securities			798				—
Purchases of property and equipment			(373	)			(524	)
Proceeds from disposal of property and equipment			—				20
Net cash (used in) provided by investing activities			(8,714	)			3,496
Cash flows from financing activities:
Proceeds from issuance of common stock under stock plans, net			(249	)			(11	)
Excess tax benefits from share-based awards			190				1,773
Net cash (used in) provided by financing activities			(59	)			1,762
Effect of exchange rate changes on cash and cash equivalents			39				—
Net (decrease) increase in cash and cash equivalents			(2,369	)			5,812
Cash and cash equivalents at beginning of period			49,237				17,219
Cash and cash equivalents at end of period		$	46,868			$	23,031
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds		$	227			$	144
Supplemental disclosure of non-cash flow information:
Change in unrealized gain (loss) on investments, net of tax		$	(11	)		$	83
Transfers of equipment between inventory and property and equipment, net		$	347			$	589
Net change in capitalized share-based compensation		$	7			$	(6	)
Common stock withheld for employee taxes in connection with share-based compensation		$	287			$	229

See accompanying Notes to the Condensed Consolidated Financial Statements.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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. Abaxis Europe GmbH, a wholly-owned subsidiary of the Company, 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.

Principles of Consolidation. The accompanying unaudited condensed consolidated financial statements as of and for the three-month period ended June 30, 2009 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-month period ended June 30, 2009 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2010 or for any interim or 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, 2009.

In preparing the accompanying unaudited condensed consolidated financial statements, the Company has reviewed, as determined necessary by the Company’s management, events that have occurred after June 30, 2009 and through the time of filing these condensed consolidated financial statements on Form 10-Q with the SEC on August 10, 2009. There were no subsequent events requiring recognition or disclosure in the financial statements.

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 consolidated 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, valuation of inventory, fair values of purchased intangible assets, useful lives of intangible assets, income taxes, valuation allowance for deferred tax assets, share-based compensation and warranty reserves. Management bases their estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results that the Company experiences may differ materially from these estimates.

Significant Accounting Policies. The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2009 filed with the SEC on June 12, 2009, and have not changed significantly as of June 30, 2009.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board (the “FASB”) approved the “FASB Accounting Standards Codification” (the “Codification”) as the single source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”) recognized by the FASB. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered non-authoritative. The Codification is effective for interim and annual periods ending after September 15, 2009. The Codification will be effective for the Company in the interim period ending September 30, 2009 and the Company does not expect the adoption of the Codification to have a material impact on its consolidated financial position, results of operations or cash flows.

In May 2009, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 165, “Subsequent Events” (“SFAS No. 165”). SFAS No. 165 modifies the definition of what qualifies as a subsequent event—those events or transactions that occur following the balance sheet date, but before the financial statements are issued, or are available to be issued—and requires companies to disclose the date through which it has evaluated subsequent events and the basis for determining that date. The Company adopted the provisions of SFAS No. 165 during the quarter ended June 30, 2009, in accordance with the effective date. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.

In April 2009, the FASB issued FASB Staff Position (“FSP”) No. Financial Accounting Standard (“FAS”) 115-2 and FAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP No. FAS 115-2”). FSP No. FAS 115-2 provides guidance in determining whether impairments in debt securities are other than temporary, and modifies the presentation and disclosures surrounding such instruments. FSP No. FAS 115-2 is effective for the Company for interim periods ending after June 15, 2009 and the Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP No. FAS 107-1”). FSP No. FAS 107-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” to require disclosures about fair value of financial instruments in interim reporting periods. Such disclosures were previously required only in annual financial statements. FSP No. FAS 107-1 is effective for the Company’s quarter ended June 30, 2009. FSP No. FAS 107-1 applies only to financial statement disclosures and the Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.

In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP No. FAS 157-4”), which provides additional guidance for estimating fair value in accordance with SFAS No. 157. FSP No. FAS 157-4 is effective for the Company’s quarter ended June 30, 2009 and the adoption did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market For That Asset Is Not Active” (“FSP No. FAS 157-3”). FSP No. FAS 157-3 clarifies the application of SFAS No. 157, “Fair Value Measurements,” in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS No. 157-3 became effective upon issuance, including with respect to prior periods for which financial statements have not been issued. The Company’s adoption of FSP No. FAS 157-3 did not have a material impact on its consolidated financial position, results of operations or cash flows.

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. FAS 142-3”). FSP No. FAS 142-3 amends SFAS No. 142, “Goodwill and Other Intangible Assets,” to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 and other U.S. generally accepted accounting principles. FSP No. FAS 142-3 is effective for fiscal years beginning after December 15, 2008, as well as interim periods within those fiscal years. The Company’s adoption of FSP No. FAS 142-3 did not have a material impact on its consolidated financial position, results of operations or cash flows.

In March 2008, the FASB issued 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 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 was effective for the Company on April 1, 2009. The Company’s adoption of SFAS No. 161 did not have a material impact on its consolidated financial position, results of operations or cash flows.

NOTE 3. INVESTMENTS

The following table summarizes short-term and long-term investments by major security type (in thousands):

		June 30, 2009
		Cost or				Gross Unrealized				Fair
		Amortized Cost				Gain (Loss)				Value
Short-term investments
Held-to-maturity:
Certificates of deposits		$	18,001			$	—			$	18,001
Total short-term investments in held-to-maturity		$	18,001			$	—			$	18,001
Available-for-sale:
Asset-backed securities		$	2,232			$	(18	)		$	2,214
Total short-term investments in available-for-sale		$	2,232			$	(18	)		$	2,214
Total short-term investments		$	20,233			$	(18	)		$	20,215
Long-term investments
Held-to-maturity:
Certificates of deposits		$	3,168			$	—			$	3,168
Corporate bonds			10,591				—				10,591
Total long-term investments in held-to-maturity		$	13,759			$	—			$	13,759

		March 31, 2009
		Cost or				Gross Unrealized				Fair
		Amortized Cost				Gain (Loss)				Value
Short-term investments
Held-to-maturity:
Certificates of deposits		$	20,776			$	—			$	20,776
Total short-term investments in held-to-maturity		$	20,776			$	—			$	20,776
Long-term investments
Held-to-maturity:
Certificates of deposits		$	2,376			$	—			$	2,376
Corporate bonds			2,510				—				2,510
Total long-term investments in held-to-maturity		$	4,886			$	—			$	4,886

As of June 30, 2009 and March 31, 2009, unrealized gain (loss) on investments, net of related income taxes, was $(11,000) and $0, respectively.

The contractual maturities of short-term and long-term investments as of June 30, 2009, are as follows (in thousands):

Investments excluding asset-backed securities		Fair Value
Due in less than one year (fiscal year 2010)		$	18,001
Due in 1 to 2 years (fiscal year 2011)			13,759
Asset-backed securities(1)
Weighted average maturity less than 1 year			621
Weighted average maturity 1 to 2 years			1,593
Total investments		$	33,974

NOTE 4. FAIR VALUE MEASUREMENTS

Effective 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. 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 June 30, 2009 (in thousands):

		As of June 30, 2009
		Quoted Prices in
		Active Markets				Significant Other				Significant
		for Identical				Observable				Unobservable
		Assets				Inputs				Inputs
		Level 1				Level 2				Level 3				Total
Assets
Cash and cash equivalents(1)		$	46,868			$	—			$	—			$	46,868
Short-term investments:
Certificates of deposits			18,001				—				—				18,001
Asset-backed securities			2,214				—				—				2,214
Long-term investments:
Certificates of deposits			3,168				—				—				3,168
Corporate bonds			10,591				—				—				10,591
Total assets at fair value		$	80,842			$	—			$	—			$	80,842

The fair value of the Company’s Level 1 financial assets is based on quoted market prices of the underlying security. As of June 30, 2009, the Company did not have any Level 2 or Level 3 financial assets or liabilities.

NOTE 5. INVENTORIES

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

		June 30,				March 31,
		2009				2009
Raw materials		$	9,032			$	8,539
Work-in-process			2,613				2,592
Finished goods			3,843				4,604
Inventories		$	15,488			$	15,735

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 and reagent discs.

Instruments. The Company’s standard warranty obligation on instruments ranges from two to three 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. 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. During the three months ended June 30, 2009 and 2008, the provision for warranty expense related to replacement of defective reagent discs was $75,000 and $77,000, respectively. The balance of accrued warranty reserve related to replacement of defective reagent discs at June 30, 2009 and 2008 was $461,000 and $407,000, respectively, which was classified as a 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 months ended June 30, 2009 and 2008 is summarized as follows (in thousands):

		Three Months Ended
		June 30,
		2009				2008
Balance at beginning of period		$	2,297			$	1,948
Provision for warranty expense			257				507
Warranty costs incurred			(169	)			(340	)
Balance at end of period			2,385				2,115
Non-current portion of warranty reserve			653				1,007
Current portion of warranty reserve		$	1,732			$	1,108

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 June 30, 2009, and is payable monthly. At June 30, 2009, of the $2.0 million available, $97,000 was committed to secure a letter of credit for the Company’s facilities lease. At June 30, 2009, 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 June 30, 2009 and 2008 were 3.00% and 4.83%, respectively.

The line of credit agreement contains certain financial covenants, which are evaluated on a quarterly basis. At June 30, 2009, 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 ending September 30, 2009 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, 2010.

•

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 $131.3 million at June 30, 2009, including its intellectual property.

NOTE 8. COMMITMENTS AND CONTINGENCIES

Purchase Commitments. In October 2008, the Company entered into an original equipment manufacturing (“OEM”) agreement with Scandinavian Micro Biodevices APS (“SMB”) to purchase coagulation analyzers and coagulation cartridges. In the fourth quarter of fiscal 2009, the Company started marketing the products and, upon achievement of certain milestones by SMB outlined in the agreement, the Company will be subject to the minimum purchase commitments under the OEM agreement. These milestones have not yet been met and the Company is currently purchasing coagulation analyzers and coagulation cartridges on a purchase order basis, but all such purchases will count towards purchase obligations if and when they are triggered.

Patent License Agreement. Effective January 2009, the Company entered into a license agreement with Inverness Medical Switzerland GmbH (“Inverness”). Under the license agreement, 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.

In exchange for the license rights, the Company (i) paid an up-front license fee of $5.0 million to Inverness in January 2009, (ii) agreed to pay royalties during the term of the agreement, based solely on sales of products in a jurisdiction country covered by valid and unexpired claims in that jurisdiction under the licensed Inverness patent rights, and (iii) agreed to pay a yearly minimum license fee of between $500,000 to $1.0 million per year, which fee will be creditable against any royalties due during such calendar year. The royalties, if any, are payable through the date of the expiration of the last valid patent licensed under the agreement that includes at least one claim in a jurisdiction covering products we sell in that jurisdiction. The yearly minimum fees are payable starting in fiscal 2011 for so long as the Company desires to maintain exclusivity under the agreement.

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. Under the fair value provisions of SFAS No. 123(R), the Company recognizes share-based compensation expense, net of an estimated forfeiture rate, for those shares over the requisite service period of the award to employees and directors.

Share-based compensation has been classified in the statements of operations or capitalized on the balance sheets in the same manner as cash compensation paid to employees. Non-cash compensation expense recognized for share-based awards during the three months ended June 30, 2009 and 2008 was $896,000 and $401,000, respectively. Capitalized share-based compensation costs at June 30, 2009 and 2008 were $40,000 and $21,000, respectively, which were included in inventories on the Company’s Condensed Consolidated Balance Sheets.

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 are considered realized when the tax deductions reduce taxes that otherwise would be payable. Excess tax benefits classified as a financing cash inflow for the three months ended June 30, 2009 and 2008 were $190,000 and $1.8 million, 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 June 30, 2009, the Equity Incentive Plan provides for the issuance of a maximum of 5,386,000 shares, of which 539,000 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 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 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 June 30, 2009, 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 since the beginning of fiscal 2007 or during the three months ended June 30, 2009.

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. In accordance with the provisions of SFAS No. 123(R), the Company has recognized compensation expense during the requisite service period of the stock option. As of June 30, 2009, the Company had no unrecognized compensation expense related to stock options granted.

Stock Option Activity

The following table summarizes information regarding options outstanding and options exercisable at June 30, 2009 and the changes during the three-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, 2009			848,000			$	8.86
Granted			—				—
Exercised			(11,000	)			3.27
Canceled or forfeited			—				—
Outstanding at June 30, 2009			837,000			$	8.93				3.01			$	9,886
Vested and expected to vest at June 30, 2009			837,000			$	8.93				3.01			$	9,886
Exercisable at June 30, 2009			837,000			$	8.93				3.01			$	9,886

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on the Company’s closing stock price as of June 30, 2009, 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 June 30, 2009 and 2008 was $165,000 and $818,000, respectively. Cash proceeds from stock options exercised during the three months ended June 30, 2009 and 2008 were $38,000 and $218,000, 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 ten 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 granted 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 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 June 30, 2009, the total unrecognized compensation expense related to restricted stock unit awards granted amounted to $14.8 million, which is expected to be recognized over a weighted average service period of 2.45 years.

Restricted Stock Unit Activity

The following table summarizes restricted stock unit activity for the three months ended June 30, 2009:

						Weighted
						Average
		Number of				Grant Date
		Shares				Fair Value(1)
Unvested at March 31, 2009			690,000			$	23.43
Granted			220,000				15.15
Vested(2)			(59,000	)			24.17
Canceled or forfeited			(56,000	)			23.92
Unvested at June 30, 2009			795,000			$	21.05

Total intrinsic value of restricted stock units vested during the three months ended June 30, 2009 and 2008 was $915,000 and $913,000, respectively. The total grant date fair value of restricted stock units vested during the three months ended June 30, 2009 and 2008 was $1.4 million and $860,000, 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 and restricted stock units.

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
		June 30,
		2009				2008
Numerator:
Net income		$	3,756			$	2,776
Denominator:
Weighted average common shares outstanding — basic			21,965,000				21,735,000
Weighted average effect of dilutive securities:
Stock options			368,000				585,000
Restricted stock units			24,000				78,000
Weighted average common shares outstanding — diluted			22,357,000				22,398,000
Net income per share:
Basic net income per share		$	0.17			$	0.13
Diluted net income per share		$	0.17			$	0.12

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

		Three Months Ended
		June 30,
		2009				2008
Weighted average number of shares underlying antidilutive stock options			176,000				—
Weighted average exercise price per share underlying antidilutive stock options		$	21.34				N/A

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
		June 30,
		2009				2008
Weighted average number of shares underlying antidilutive restricted stock units			400,000				24,000

NOTE 11. INCOME TAXES

The Company’s effective tax rate for the three months ended June 30, 2009 and 2008 was 40% and 38%, respectively.

The increase in the effective tax rate for the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, was primarily due to an increase in non-deductible share-based compensation expense and a change in the Company’s investment portfolio, and partially offset by an increase in federal research and development tax credits and tax benefits for federal qualified production activities.

The Company did not have any unrecognized tax benefits as of June 30, 2009 or June 30, 2008. During the three months ended June 30, 2009 and 2008, 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 months ended June 30, 2009 and 2008 (in thousands):

		Three Months Ended
		June 30,
		2009				2008
Net income		$	3,756			$	2,776
Other comprehensive income:
Change in unrealized gain (loss) on investments, net of tax			(11	)			83
Comprehensive income		$	3,745			$	2,859

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 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 instruments and hematology reagent kits. Starting in the fourth quarter of fiscal 2009, OEM-supplied products also included coagulation analyzers, coagulation cartridges and canine heartworm rapid tests. Starting in the first quarter of fiscal 2010, OEM-supplied products also included i-STAT cartridges.

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 months ended June 30, 2009 and 2008 (in thousands):

		Three Months Ended
		June 30,
		2009				2008
Revenues:
Medical Market		$	5,763			$	6,529
Veterinary Market			21,823				16,613
Other(1)			2,039				1,430
Total revenues			29,625				24,572
Cost of revenues:
Medical Market			2,631				3,226
Veterinary Market			8,717				7,043
Other(1)			1,122				800
Total cost of revenues			12,470				11,069
Gross profit:
Medical Market			3,132				3,303
Veterinary Market			13,106				9,570
Other(1)			917				630
Gross profit		$	17,155			$	13,503

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
		June 30,
Revenues by Product Category		2009				2008
Instruments(1)		$	6,277			$	7,802
Consumables(2)			20,905				14,893
Other products			1,639				1,110
Product sales, net			28,821				23,805
Development and licensing revenue			804				767
Total revenues		$	29,625			$	24,572

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

		Three Months Ended
		June 30,
Revenues by Geographic Region		2009				2008
North America		$	24,111			$	20,295
Europe			4,395				3,385
Asia Pacific and rest of the world			1,119				892
Total revenues		$	29,625			$	24,572

Significant Concentrations

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

Three Months Ended

Geographical

June 30,

Distributor

Location

2009

2008

Walco International, Inc., d/b/a DVM Resources

United States

10

%

<10

%

During the three months ended June 30, 2008, there were no distributors or direct customers that accounted for more than 10% of total worldwide revenues.

At June 30, 2009, one distributor in the United States accounted for 19% of the Company’s total accounts receivable balance. At June 30, 2008, one distributor in the United States accounted for 15% of the Company’s total accounts receivable balance.

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,” “projects,” “estimates,” “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, regulatory clearance and approvals required by the United States Food and Drug Administration (“FDA”) and other government regulatory authorities, 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 facility 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 Medical Instruments PLC. and Mallinckrodt Baker BV.

In July 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.

In January 2009, we introduced a veterinary coagulation analyzer under the name VetScan VSpro. The VetScan VSpro assists in the diagnosis and evaluation of suspected bleeding disorders, toxicity/poisoning, evaluation of Disseminated Intravascular Disease, hepatic disease and monitoring therapy and progression of disease states. The point-of-care coagulation analyzer is offered with a combination assay (PT/aPTT test cartridge) for canine testing. We currently purchase the coagulation analyzers and coagulation cartridges from Scandinavian Micro Biodevices APS of Farum, Denmark.

In January 2009, we introduced a canine heartworm rapid test under the name VetScan Canine Heartworm Rapid Test. The VetScan Canine Heartworm Rapid Test is a highly sensitive and specific test for the detection of Dirofilaria immitis in canine whole blood, serum or plasma. The lateral flow immunoassay technology in the canine heartworm rapid tests provides immediate results.

In May 2009, we entered into an exclusive license agreement with Abbott Point of Care Inc., granting us the right to sell and distribute Abbott’s i-STAT 1 handheld instrument (i-STAT^® 1 analyzer) and associated consumables (for blood gas, electrolyte, basic blood chemistry and immunoassay testing) in the animal health care market worldwide. Our right to sell and distribute these products is initially non-exclusive, but becomes exclusive in all countries of the world, except for Japan, on November 1, 2009. Our rights in Japan remain non-exclusive for the term of the agreement. The initial term of the agreement ends on December 31, 2014, and after this initial term, our agreement continues automatically for successive one-year periods unless terminated by either party. We started marketing and sales activities of the i-STAT cartridges in the first quarter of fiscal 2010. We anticipate selling the i-STAT instrument in its current version in the second quarter of fiscal 2010. We expect to launch an Abaxis-branded version of the i-STAT 1 instrument as part of our VetScan line in the second half of fiscal 2010.

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 consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and pursuant to the rules and regulations of the SEC. 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, 2009.

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 are allocated separately to the instruments and incentives based on the relative fair value of each element. Revenues allocated to incentives are deferred until the goods are shipped to the customer or are 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 a qualifying period. Cash rebates are offered to distributors or customers who purchase certain products or 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.

Fair Value Measurements. Effective April 1, 2008, we adopted Statement of Financial Accounting Standards (“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. As of June 30, 2009, we used Level 1 assumptions for our cash and cash equivalents and investments in asset-backed securities, certificates of deposits and corporate bonds, 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.

Level 2: Directly or indirectly observable market based inputs used in models or other valuation methodologies. As of June 30, 2009, 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. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. As of June 30, 2009, we did not have any Level 3 financial assets or liabilities.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are developed to reflect those that market participants would use in pricing the asset or liability at the measurement date.

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 ranges from two to three 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 amount is recorded when such cost is probable and can be reasonably estimated, at which time they are included in cost of revenues. The warranty cost includes the replacement costs and freight of a defective reagent disc.

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 actual costs using 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.

Valuation of Long-Lived Assets. The carrying value of our long-lived assets, such as property and equipment and amortized intangible assets, are reviewed for impairment, in accordance with 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 No. 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 consolidated financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” 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 over the requisite service period of the award to employees and directors.

We did not grant stock options during fiscal 2007, 2008 or 2009, or during the first quarter of fiscal 2010. For stock options granted prior to March 31, 2006, we use the Black-Scholes option pricing model to determine the fair value. 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 over the requisite service period of the awards and reduced for estimated forfeitures. The forfeiture rate is estimated based on historical data of our share-based compensation 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.

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 months ended June 30, 2009 and 2008 were as follows (in thousands, except percentages):

		Three Months Ended
		June 30,								Change
										Increase/				Percent
Revenues by Geographic Region		2009				2008				(Decrease)				Change
North America		$	24,111			$	20,295			$	3,816				19	%
Percentage of total revenues			81	%			83	%
Europe			4,395				3,385				1,010				30	%
Percentage of total revenues			15	%			14	%
Asia Pacific and rest of the world			1,119				892				227				25	%
Percentage of total revenues			4	%			3	%
Total revenues		$	29,625			$	24,572			$	5,053				21	%

		Three Months Ended
		June 30,								Change
										Increase/				Percent
Revenues by Product Category		2009				2008				(Decrease)				Change
Instruments(1)		$	6,277			$	7,802			$	(1,525	)			(20	%)
Percentage of total revenues			21	%			32	%
Consumables(2)			20,905				14,893				6,012				40	%
Percentage of total revenues			71	%			61	%
Other products			1,639				1,110				529				48	%
Percentage of total revenues			5	%			4	%
Product sales, net			28,821				23,805				5,016				21	%
Percentage of total revenues			97	%			97	%
Development and licensing revenue			804				767				37				5	%
Percentage of total revenues			3	%			3	%
Total revenues		$	29,625			$	24,572			$	5,053				21	%

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

North America. During the three months ended June 30, 2009, total revenues in North America increased 19%, or $3.8 million, as compared to the three months ended June 30, 2008. The increase in total revenues in North America was attributed to the following:

•

Medical reagent discs sales in North America (excluding the U.S. government) increased 12%, or $303,000, primarily due to an increase in units sold resulting from an expanded installed base of our Piccolo chemistry analyzers.

•

Veterinary reagent discs sales in North America increased 42%, or $3.4 million, primarily due to an increase in units sold resulting from an expanded installed base of our VetScan chemistry analyzers.

•

Sales of our canine heartworm rapid tests, which we launched in the fourth quarter of fiscal 2009, were $1.1 million in North America during the three months ended June 30, 2009.

•

Sales of our VetScan VSpro coagulation analyzers, which we launched in the fourth quarter of fiscal 2009, were $220,000 in North America during the three months ended June 30, 2009.

•

During the three months ended June 30, 2009, total revenues from other products sold in North America increased 41%, or $446,000, as compared to the three months ended June 30, 2008. The net increase in revenues from other products was primarily due to a decrease 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, for which revenue is deferred and recognized ratably over the life of the maintenance contract.

The net increase in revenues in North America was partially offset by the following:

•

Medical reagent discs sold to the U.S. government decreased 10%, or $61,000, primarily due to lower average selling prices during the three months ended June 30, 2009. Sales of our medical reagent discs to the U.S. government were based on the U.S. military’s needs for these products, which were not predictable.

•

Sales of our Piccolo chemistry analyzers in North America (excluding the U.S. government) decreased 62%, or $970,000, primarily due to inventory stock adjustments by distributors during the three months ended June 30, 2009.

•

Sales of our Piccolo chemistry analyzers to the U.S. government decreased 8%, or $60,000, primarily due to lower average selling prices during the three months ended June 30, 2009. Sales of our Piccolo chemistry analyzers to the U.S. government were based on the U.S. military’s needs for these products, which were not predictable.

•

Sales of our VetScan chemistry analyzers in North America decreased 35%, or $835,000, and sales of our hematology instruments in North America decreased 16%, or $245,000. The decrease in sales of VetScan chemistry analyzers and hematology instruments was primarily due to economic conditions and the resulting impact of reduced capital spending at the physician office level as a result of the reduced availability of credit to customers.

Europe. During the three months ended June 30, 2009, total revenues in Europe increased 30%, or $1.0 million, as compared to the three months ended June 30, 2008. The increase in total revenues in Europe included the following:

•

Veterinary reagent discs sales in Europe increased 39%, or $688,000, primarily due to an increase in units sold resulting from an expanded installed base of our VetScan chemistry analyzers.

Significant concentration. One distributor in the United States, DVM Resources, accounted for 10% of our total worldwide revenues during the three months ended June 30, 2009. There were no distributors or direct customers that accounted for more than 10% of our total worldwide revenues during the three months ended June 30, 2008.

Segment Results

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

The following table presents revenues, cost of revenues, gross profit and percent of revenues by operating segments for the three months ended June 30, 2009 and 2008 (in thousands, except percentages):

						Three Months Ended
		June 30,																Change
						Percent of								Percent of				Increase/				Percent
		2009				Revenues(1)				2008				Revenues(1)				(Decrease)				Change
Revenues:
Medical Market		$	5,763				100	%		$	6,529				100	%		$	(766	)			(12	%)
Percentage of total revenues			19	%							26	%
Veterinary Market			21,823				100	%			16,613				100	%			5,210				31	%
Percentage of total revenues			74	%							68	%
Other(2)			2,039								1,430								609				43	%
Percentage of total revenues			7	%							6	%
Total revenues			29,625								24,572								5,053				21	%
Cost of revenues:
Medical Market			2,631				46	%			3,226				49	%			(595	)			(18	%)
Veterinary Market			8,717				40	%			7,043				42	%			1,674				24	%
Other(2)			1,122								800								322				40	%
Total cost of revenues			12,470								11,069								1,401				13	%
Gross profit:
Medical Market			3,132				54	%			3,303				51	%			(171	)			(5	%)
Veterinary Market			13,106				60	%			9,570				58	%			3,536				37	%
Other(2)			917								630								287				46	%
Gross profit		$	17,155							$	13,503							$	3,652				27	%

Medical Market

Revenues for Medical Market Segment

During the three months ended June 30, 2009, total revenues in the medical market decreased 12%, or $766,000, as compared to the three months ended June 30, 2008. Components of the change were as follows:

Instruments. Total revenues from sales of our Piccolo chemistry analyzers decreased 38%, or $997,000, during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008. The changes were attributed to (a) a decrease in revenues in North America (excluding the U.S. government) of 62%, or $970,000, primarily due to inventory stock adjustments by distributors during the three months ended June 30, 2009, and (b) a decrease in Piccolo chemistry analyzers sold to the U.S. government of 8%, or $60,000, primarily due to lower average selling prices during the three months ended June 30, 2009. Sales of our Piccolo chemistry analyzers to the U.S. government were based on the U.S. military’s needs for these products, which were not predictable.

Consumables. Total revenues from consumables sold in the medical market increased 8%, or $291,000, during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008. The increase in revenues from medical reagent discs was primarily attributed to an increase in revenues in North America (excluding the U.S. government) of 12%, or $303,000, primarily due to an increase in units sold resulting from an expanded installed base of our Piccolo chemistry analyzers. The increase was partially offset by a decrease in revenues in medical reagent discs sold to the U.S. government of 10%, or $61,000, primarily due to lower average selling prices during the three months ended June 30, 2009. Sales of our medical reagent discs to the U.S. government were based on the U.S. military’s needs for these products, which were not predictable.

Gross Profit for Medical Market Segment

Gross profit for the medical market segment decreased 5%, or $171,000, during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008. Gross profit percentages for the medical market segment during the three months ended June 30, 2009 and 2008 were 54% and 51%, respectively. In absolute dollars, the decrease in gross profit for the medical market segment was primarily due to a decrease in Piccolo chemistry analyzers sold during the three months ended June 30, 2009.

Veterinary Market

Revenues for Veterinary Market Segment

During the three months ended June 30, 2009, total revenues in the veterinary market increased 31%, or $5.2 million, as compared to the three months ended June 30, 2008. Components of the change were as follows:

Instruments. Total revenues from our veterinary instruments sold decreased 10%, or $528,000, during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008. The primary factors of the change were as follows:

•

Sales of our VetScan chemistry analyzers decreased 20%, or $681,000, comprising primarily of a decrease in revenues in North America of 35%, or $835,000. The decrease was primarily due to economic conditions and the resulting impact of reduced capital spending at the physician office level as a result of the reduced availability of credit to customers.

•

Sales of our hematology instruments decreased 5%, or $88,000, comprising primarily of a decrease in revenues in North America of 16%, or $245,000. The decrease was primarily due to economic conditions and the resulting impact of reduced capital spending at the physician office level as a result of the reduced availability of credit to customers.

•

Sales of our VetScan VSpro coagulation analyzers, which we launched in the fourth quarter of fiscal 2009, were $241,000 during the three months ended June 30, 2009.

Consumables. Total revenues from consumables in the veterinary market increased 51%, or $5.7 million, during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008. The primary factors of the change were as follows:

•

Total revenues from reagent discs sold in the veterinary market increased 40%, or $4.1 million, during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008. The increase in revenues from veterinary reagent discs was primarily attributed to an increase in units sold resulting from an expanded installed base of our VetScan chemistry analyzers. The increase in revenues was comprised of (a) an increase in revenues in North America of 42%, or $3.4 million, and (b) an increase in revenues in Europe of 39%, or $688,000.

•

Sales of our canine heartworm rapid tests, which we launched in the fourth quarter of fiscal 2009, were $1.1 million during the three months ended June 30, 2009, primarily in North America.

Gross Profit for Veterinary Market Segment

Gross profit for the veterinary market segment increased 37%, or $3.5 million, during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008. Gross profit percentages for the veterinary market segment during the three months ended June 30, 2009 and 2008 were 60% and 58%, respectively. In absolute dollars, the increase in gross profit for the veterinary market segment was primarily due to (a) an increase in veterinary reagent discs sold during the three months ended June 30, 2009, (b) higher average selling prices of veterinary reagent discs sold during the three months ended June 30, 2009, and (c) cost improvements on veterinary reagent discs sold during the three months ended June 30, 2009.

Cost of Revenues

The following sets forth, our cost of revenues for the periods indicated (in thousands, except percentages):

		Three Months Ended
		June 30,								Change
										Increase/				Percent
		2009				2008				(Decrease)				Change
Cost of revenues		$	12,470			$	11,069			$	1,401				13	%
Percentage of total revenues			42	%			45	%

Cost of revenues includes the costs associated with manufacturing, assembly, packaging, warranty repairs, test and quality assurance for our instruments and consumables and manufacturing overhead, including costs of personnel and equipment associated with manufacturing support.

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

In absolute dollars, the increase in cost of revenues during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, was primarily due to (a) an increase in the sales volume of veterinary reagent discs and (b) the sales of our canine heartworm rapid tests, and coagulation analyzers and cartridges, which we launched in the fourth quarter of fiscal 2009. As a percentage of total revenues, the decrease in cost of revenues during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, was primarily due to higher average selling prices of veterinary reagent discs sold during the three months ended June 30, 2009.

Gross Profit

The following sets forth, our gross profit for the periods indicated (in thousands, except percentages):

		Three Months Ended
		June 30,								Change
										Increase/				Percent
		2009				2008				(Decrease)				Change
Total gross profit		$	17,155			$	13,503			$	3,652				27	%
Total gross margin			58	%			55	%

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

In absolute dollars, the increase in gross profit during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, was primarily due to (a) an increase in veterinary reagent discs sold during the three months ended June 30, 2009 and (b) higher average selling prices of veterinary reagent discs sold during the three months ended June 30, 2009. As a percentage, the increase in gross margin during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, was primarily due to (a) an increase in veterinary reagent discs sold during the three months ended June 30, 2009, (b) higher average selling prices of veterinary reagent discs sold during the three months ended June 30, 2009, and (c) cost improvements on veterinary reagent discs sold during the three months ended June 30, 2009.

Operating Expenses

Research and Development

The following sets forth, our research and development expenses for the periods indicated (in thousands, except percentages):

		Three Months Ended
		June 30,								Change
										Increase/				Percent
		2009				2008				(Decrease)				Change
Research and development expenses		$	2,573			$	1,997			$	576				29	%
Percentage of total revenues			9	%			8	%

Research and development expenses consist of personnel costs (including salaries, benefits and share-based compensation expense), consulting expenses and materials and related expenses associated with the development of new tests and test methods, clinical trials, product improvements and enhancement of existing products.

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

The increase in research and development expenses, in absolute dollars, during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, was primarily due to new product development and enhancement of existing products and clinical trials. Research and development expenses are based on the project activities planned and the level of spending depends on budgeted expenditures. The projects primarily relate to new product development in both the medical and veterinary markets and costs related to compliance with FDA regulations and clinical trials. Share-based compensation expense during the three months ended June 30, 2009 and 2008 was $140,000 and $61,000, respectively.

We anticipate the dollar amount of research and development expenses to increase in fiscal 2010 from fiscal 2009 but remain consistent as a percentage of total revenues, as we complete new products for both the medical and veterinary markets. There can be no assurance, however, that we will undertake such research and development activities in future periods or, if we do, that such activities will be successful.

Sales and Marketing

The following sets forth, our sales and marketing expenses for the periods indicated (in thousands, except percentages):

		Three Months Ended
		June 30,								Change
										Increase/				Percent
		2009				2008				(Decrease)				Change
Sales and marketing expenses		$	6,360			$	5,827			$	533				9	%
Percentage of total revenues			21	%			24	%

Sales and marketing expenses consist of personnel costs (including salaries, benefits and share-based compensation expense), commissions and travel-related expenses for personnel engaged in selling, costs associated with advertising, lead generation, marketing programs, trade shows and services related to customer and technical support.

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

The increase in sales and marketing expenses, in absolute dollars, during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, was primarily due to personnel-related costs resulting from an increase in headcount in various divisions including sales and marketing, customer service and technical service, to support the growth in both our medical and veterinary markets. Share-based compensation expense during the three months June 30, 2009 and 2008 was $245,000 and $137,000, respectively.

General and Administrative

The following sets forth, our general and administrative expenses for the periods indicated (in thousands, except percentages):

		Three Months Ended
		June 30,								Change
										Increase/				Percent
		2009				2008				(Decrease)				Change
General and administrative expenses		$	2,498			$	1,662			$	836				50	%
Percentage of total revenues			8	%			7	%

General and administrative expenses consist of personnel costs (including salaries, benefits and share-based compensation expense), and expenses for outside professional services related to general corporate functions, including accounting, human resources and legal.

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

The increase in general and administrative expenses, in absolute dollars, during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, was primarily related to higher personnel-related costs, which includes share-based compensation expense and an increase in headcount. Share-based compensation expense during the three months ended June 30, 2009 and 2008 was $462,000 and $168,000, respectively.

Interest and Other Income (Expense), Net

The following sets forth our interest and other income (expense), net, for the periods indicated (in thousands, except percentages):

		Three Months Ended
		June 30,								Change
										Increase/				Percent
		2009				2008				(Decrease)				Change
Interest and other income (expense), net		$	514			$	462			$	52				11	%

Interest and other income (expense), net consists primarily of interest earned on cash, cash equivalents, short-term and long-term investments and foreign currency exchange gains and losses.

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

The increase in interest and other income (expense), net, during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, was primarily attributed to favorable foreign currency exchange rates, and was partially offset by lower interest yields in our investment portfolio compared to the same period in fiscal 2009.

Income Tax Provision

The following sets forth, our income tax provision for the periods indicated (in thousands, except percentages):

		Three Months Ended
		June 30,
		2009				2008
Income tax provision		$	2,482			$	1,703
Effective tax rate			40	%			38	%

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

Our effective tax rate for the three months ended June 30, 2009 and 2008 was 40% and 38%, respectively.

The increase in the effective tax rate for the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, was primarily due to an increase in non-deductible share-based compensation expense and a change in our investment portfolio, and was partially offset by an increase in federal research and development tax credits and tax benefits for federal qualified production activities.

We did not have any unrecognized tax benefits as of June 30, 2009 or June 30, 2008. During the three months ended June 30, 2009 and 2008, we did not recognize any interest or penalties related to unrecognized tax benefits.

LIQUIDITY AND CAPITAL RESOURCES

Total cash, cash equivalents and short-term and long-term investments at June 30, 2009 and March 31, 2009 were as follows (in thousands, except percentages):

		June 30,				March 31,
		2009				2009
Cash and cash equivalents		$	46,868			$	49,237
Short-term investments			20,215				20,776
Long-term investments			13,759				4,886
Total cash, cash equivalents and investments		$	80,842			$	74,899
Percentage of total assets			55	%			53	%

Cash Flow Changes

Cash provided by (used in) the three months ended June 30, 2009 and 2008 were as follows (in thousands):

		Three Months Ended
		June 30,
		2009				2008
Net cash provided by operating activities		$	6,365			$	554
Net cash (used in) provided by investing activities			(8,714	)			3,496
Net cash (used in) provided by financing activities			(59	)			1,762
Effect of exchange rate changes on cash and cash equivalents			39				—
Net (decrease) increase in cash and cash equivalents		$	(2,369	)		$	5,812