The information in this Management's Discussion and Analysis of Financial Condition and Results of Operations contains both historical financial information and forward-looking statements. Neogen Corporation management does not provide forecasts of future financial performance. While management is optimistic about the Company's long-term prospects, historical financial information may not be indicative of future financial results.

Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food production, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation and other risks detailed from time to time in the Company's reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation's results to differ materially from those indicated by such forward-looking statements, including those detailed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations."

In addition, any forward-looking statements represent management's views only as of the day this Report on Form 10-K was first filed with the Securities and Exchange Commission and should not be relied upon as representing management's views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of the Company's financial condition and results of operations are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including those related to receivable allowances, inventories and intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The following critical accounting policies reflect management's more significant judgments and estimates used in the preparation of the consolidated financial statements.

Revenue Recognition

Revenue from sales of products is recognized at the time title of goods passes to the buyer and the buyer assumes the risks and rewards of ownership, which is generally at the time of shipment. Where right of return exists, allowances are made at the time of sale to reflect expected returns based on historical experience.

Accounts Receivable Allowance

Management attempts to minimize credit risk by reviewing customers' credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for possible losses on accounts receivable is established based upon factors surrounding the credit risk of specific customers, historical trends and other information, such as changes in overall changes in customer credit and general credit conditions. Actual collections can differ from historical experience, and if economic or business conditions deteriorate significantly, adjustments to these reserves could be required.

Inventory

A reserve for obsolescence is established based on an analysis of the inventory taking into account the current condition of the asset as well as other known facts and future plans. The amount of reserve required to record inventory at lower of cost or market may be adjusted as conditions change. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations.

Valuation of Intangible Assets and Goodwill

Management assesses goodwill and other non-amortizable intangible assets for possible impairment on no less often than an annual basis. This test was performed in the fourth quarter of fiscal 2008 and it was determined that no impairment exists. There was also no impairment indicated for 2007 or 2006. In the event of changes in circumstances that indicate the carrying value of these assets may not be recoverable, management will make an assessment at any time. Factors that could cause an impairment review to take place would include:

• Significant under performance relative to expected historical or projected future operating results.

• Significant changes in the use of acquired assets or strategy of the Company.

• Significant negative industry or economic trends.

When management determines that the carrying value of definite-lived intangible assets may not be recoverable based on the existence of one or more of the above indicators of impairment, the carrying value of the reporting unit's net assets is compared to its fair value using projected discounted cash flows of the reporting unit using a discount rate commensurate with the risk inherent in the Company's current business model. If the carrying amounts of these assets are greater than their fair value, such assets are reduced by the estimated shortfall of fair value to recorded value. Changes to the discount rate or projected cash flows used in the analysis can have a significant impact on the results of the impairment test.

Equity Compensation Plans

Financial Accounting Standards Board Statement No. 123(R), "Share-Based Payment", (SFAS 123(R)) addresses the accounting for share-based employee compensation and was adopted by the Company on June 1, 2006 utilizing the modified retrospective transition method. Further information on the Company's equity compensation plans, including inputs used to determine fair value of options is disclosed in Note 6 to the consolidated financial statements. SFAS 123(R) requires that share options awarded to employees and shares of stock awarded to employees under certain stock purchase plans are recognized as compensation expense based on their fair value at grant date. The fair market value of options granted under the Company's stock option plans was estimated on the date of grant using the Black-Scholes option-pricing model using assumptions for inputs such as interest rates, expected dividends, volatility measures and specific employee exercise behavior patterns based on statistical data. Some of the inputs used are not market-observable and have to be estimated or derived from available data. Use of different estimates would produce different option values, which in turn would result in higher or lower compensation expense recognized.

To value options, several recognized valuation models exist. None of these models can be singled out as being the best or most correct one. The model applied is able to handle some of the specific features included in the options granted, which is the reason for its use. If a different model were used, the option values would differ despite using the same inputs. Accordingly, using different assumptions coupled with using a different valuation model could have a significant impact on the fair value of employee stock options. Fair value could be either higher or lower than the ones produced by the model applied and the inputs used.

RESULTS OF OPERATIONS

Executive Overview

On an overall basis, the 2008 fiscal year had a 19% revenue increase in comparison with the fiscal year ended May 31, 2007, as a result of revenue increases in both of the Company's operating segments. A portion of the revenue increase came from the Company's August 2007 acquisition of Kane Enterprises and the December 2007 acquisition of Rivard Instruments. Revenue from continuing product sales increased by 13%. This continuing product growth came as a result of the further implementation of sales and marketing plans and continuing recognition of the ease of use and beneficial results from the Company's products. Gross margins increased by 25 basis points to 52% for the year and net income was up 33% to $12,098,000. These increases resulted principally due to sales gains translating to greater absorption of fixed costs, changes in product mix, the current year effect of reorganizations completed in past years and continued strong control of costs. Operating expenses decreased from 36% to 34% in fiscal 2008.

REVENUES



                                                                         Twelve Months Ended
                                                          Increase /                           Increase /
(dollars in thousands)                  May 31, 2008      (Decrease)         May 31, 2007      (Decrease)        May 31, 2006
Food Safety:

Natural Toxins, Allergens & Drug
Residues                               $       29,036             15 %      $       25,238             52 %     $       16,633
Bacterial & General Sanitation                 16,866             24 %              13,623             35 %             10,115
Dry Culture Media & Other                      11,762             42 %               8,304              2 %              8,174

                                       $       57,664             22 %      $       47,165             35 %     $       34,922

Animal Safety:

Life Sciences & Other                  $        5,567             13 %      $        4,922              6 %     $        4,622
Vaccine                                         2,197            (25 %)              2,938              6 %              2,768
Rodenticides & Disinfectants                   10,318             (6 %)             10,926              3 %             10,651
Veterinary Instruments & Other                 26,672             32 %              20,187              4 %             19,470

                                               44,754             15 %              38,973              4 %             37,511

Total Revenues                         $      102,418             19 %      $       86,138             19 %     $       72,433

Within the Food Safety Segment, Natural Toxins, Allergens and Drug Residue sales were up 15% in fiscal year 2008 in comparison with sales in 2007 following an increase of 52% in the prior year. FY 2008 increases were broad based and resulted from deeper market penetration in both US and International markets. A significant portion of the increase in this category in 2007 resulted from sales of products acquired in December 2005. Exclusive of the dairy antibiotic testing products, Natural Toxins and Allergens revenues increased in 2007 by 16% in comparison with the 2006 fiscal year. Increases in diagnostic test kit sales to detect naturally occurring toxins such as aflatoxin continue to be realized due to superior technologies and marketing by the Company.

Sales of Bacterial and General Sanitation products, including the sales of products contributed by the acquisition of Centrus International in February 2006, increased by 24% in fiscal year 2008 in comparison with fiscal 2007 and increased by 35% from fiscal year 2007 to 2006. Sales of the AccuPoint ATP general sanitation test continued to gain momentum domestically and internationally throughout fiscal year 2008 and 2007 following a move from an outside supplier of ATP product to a more user friendly and stable internally produced product with improved margins. The Centrus acquisition added 40% to sales increases of existing products in fiscal year 2008.

Dehydrated culture media and other sales increased by 42% in 2008 and by 2% in 2007. The 2008 increase came as a result of increased market penetration both domestically and internationally. The Company's focus on customer service and resolution of customer operating problems has resulted in sales increases in each fiscal year. Acumedia experienced gains in the sales for scientific related uses and experienced gains within the products for detection of ecoli in water.

Within the Animal Safety Segment, sales of life science and other products increased by 13% in fiscal year 2008 in comparison with 2007 and by 6% in 2007 in comparison with the 2006 fiscal year. Increases in 2008 were due to new direct international customers and instrument placements for forensic customers Sales of forensic drug tests, TMB Substrates and diagnostic research kits each contributed to the sales growth as the Company continues to add business from the existing customer base as well as by adding new customers.

Vaccine product sales decreased by 25% in 2008 in comparison with 2007 after having experienced a 6% increase in fiscal 2007 in comparison with 2006. This fluctuation was due to the timing of purchases by key domestic and international distributors.

Sales of Hacco rodenticides and Hess and Clark disinfectants decreased 6% in fiscal year 2008 following an increase of 3% in fiscal 2007. Rodenticide revenue decreases in 2008 were due to cyclical downturns in the rodenticide market. In general, mild and dry weather conditions in the western United States have led to fewer infestations in 2008 and 2007. Internationally, sales of rodenticide products were up 24%.

Veterinary instruments and other sales increased in 2008 by 32% and increased by 4% in 2007. Fiscal year 2008 increases in Ideal Instrument veterinary product sales and sales of products obtained in the Kane acquisition were offset by declines in revenues related to equine supplements, certain wound care and other products. In 2007 increases were driven by 9% increase in sales of veterinary instruments.

COST OF GOODS SOLD

(dollars in thousands) 2008 Increase 2007 Increase 2006 Cost of Goods Sold $ 49,185 18 % $ 41,575 17 % $ 35,427

Cost of goods sold increased by 18% in 2008 and by 17% in 2007 in comparison with the prior year. This compares against a 19% increase in revenues in 2008 and in 2007. Expressed as a percentage of revenues, cost of goods sold was 48%, 48% and 49% in 2008, 2007, and 2006 respectively. Overall margins in 2006 were affected negatively by costs related to relocation of operating facilities then located in Baltimore to Lansing.

Food Safety gross margins were 63%, 60% and 59% in 2008, 2007 and 2006, respectively. Changes in margins between periods relate primarily to changes in product mix. Margins improved from 2007 as the effects of efficiencies resulting from investments in manufacturing facilities and the change to automate the manufacture the ATP product.

Animal Safety gross margins were 38%, 41% and 43% in 2008, 2007 and 2006, respectively. Changes in margins between periods relate primarily to product
mix. Gross margins in this segment were also adversely affected by a fall in rodenticide margins resulting from cost increases that have not yet been fully reflected in sales prices.

OPERATING EXPENSES



     (dollars in thousands)         2008     Increase       2007     Increase       2006
     Sales and Marketing          $ 20,648         12 %   $ 18,463         17 %   $ 15,799
     General and Administrative     10,927         17 %      9,301         25 %      7,414
     Research and Development        3,639         10 %      3,295         10 %      2,988

Sales and marketing expense categories increased by 12% in 2008 and by 17% in 2007 as compared with the prior year. As a percentage of sales, sales and marketing expense declined to 20% in 2008 but was unchanged in 2007 when compared to 2006. Management plans to continue to expand the Company's sales and marketing efforts both domestically and internationally in the future and currently expects related expenses to remain between 20% and 22% expressed as a percentage of sales.

General and administrative expenses increased by 17% in 2008 and by 25% in 2007. These expenses have remained between 10% and 11% over the past three fiscal years. Increases in 2008 resulted primarily from the acquisitions as well as due to increased levels of operations. Increases in 2007 were related to increase levels of operations, litigation costs surrounding the Company's detectable needle patents and added amortization related to business acquired.

Research and development expenses increased by 10% in 2008 and 2007 in comparison with 2007 and 2006. As a percentage of revenue these expenses were 4% in each the years ended May 31, 2008, 2007 and 2006, respectively. Although some fluctuation in research and development expenses will occur, management expects research and development expenses to approximate 4% to 6% of revenues over time. These expenses approximate 8% to 10% of revenues from products and product lines that are supported by research and development. Certain Company products require relatively less in research and development expenses.

OPERATING INCOME

(dollars in thousands) 2008 Increase 2007 Increase 2006 Operating Income $ 18,019 33 % $ 13,504 25 % $ 10,805

During fiscal year 2008 and 2007, the Company's operating income increased by 33% and 25% as to compared to the respective prior year. As a percentage of revenues it was 18%, 16% and 15% in 2008, 2007 and 2006 respectively. The Company has been successful in improving its operating income in 2008 and 2007 from revenue growth from existing products and acquisitions and from control of manufacturing and distribution costs.

OTHER INCOME (NET)

(dollars in thousands) 2008 Increase 2007 Increase 2006 Other Income-Interest and Other (Net) $ 479 29 % $ 371 706 % $ 46

Other income increased by 29% in comparison with 2007 and increased by 706% in 2007 in comparison with 2006. Interest revenue and expense is a result of the Company's cash versus debt position in the periods. Investment earnings were $442,000 in 2008, $373,000 in fiscal 2007 and $80,000 in 2006. In 2006, the Company recognized grant income of $250,000 related to a grant from governmental units located in various states which offset interest expense on outstanding debt.

FEDERAL AND STATE INCOME TAXES

(dollars in thousands) 2008 Increase 2007 Increase 2006 Federal and State Income Taxes $ 6,400 35 % $ 4,750 24 % $ 3,822

Federal and state income tax rates used in the computation of income tax expense in the periods remained comparable to those in the prior year. Expressed as a percentage of income before tax, such rates were 35% in 2008, 34% in 2007 and 35% in 2006.

NET INCOME AND NET INCOME PER SHARE



(dollars in thousands-except per share data)     2008     Increase      2007     Increase      2006
Net Income                                     $ 12,098         33 %   $ 9,125         30 %   $ 7,029
Net Income Per Share-Basic                     $    .84                $   .66                $   .57
Net Income Per Share-Diluted                   $    .81                $   .64                $   .55

Net income and net income per share increased by 33% in 2008 and 30% in 2007 in comparison with the prior year. As a percentage of revenue, net income was 12%, 11% and 10% in 2008, 2007 and 2006 respectively. All of the above factors contributed to the increase in net income.

FUTURE OPERATING RESULTS

Neogen Corporation's future operating results involve a number of risks and uncertainties. Actual events or results may differ materially from those discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed below as well as those discussed elsewhere in this report. Management's ability to grow the business in the future depends upon its ability to successfully implement various strategies, including:

• expanding the Company's markets by fostering increased use of Company products by customers;

• maintaining gross and net operating margins in changing cost environments;

• strengthening sales and marketing activities in geographies outside of the U.S.;

• developing and implementing new technology development strategies; and

• identifying and completing acquisitions that enhance existing businesses or create new business areas.

FINANCIAL CONDITION AND LIQUIDITY

On May 31, 2008, the Company had $14,270,000 in cash and cash equivalents, working capital of $54,495,000 and stockholders' equity of $111,248,000. In addition to cash and security balances, a bank line with unused borrowings of $10,000,000 was available if necessary to support ongoing operations or to make acquisitions.

Cash and cash equivalents increased $846,000 during 2008. Cash provided from operations was $7,873,000 and stock option exercise proceeds provided an additional $5,060,000 of cash. Additions to property and equipment and other non-current assets used cash of $2,471,000 including expenditures on automated equipment used in the production of Food Safety diagnostic test kits.

Accounts receivable increased $4,470,000 or 30% when compared to May 31, 2007. This resulted from increased sales, as a result of organic sales growth and acquisitions and some lengthening of average days outstanding for certain international accounts. These accounts are being actively managed and no losses there on are currently expected. Days sales outstanding increased from 54 days at May 31, 2007 to 58 days at May 31, 2008.

Inventory levels increased 45% or $8,683,000 in 2008 as compared to 2007. The change in inventory came from increases related to higher levels of sales, inventory of acquired companies, to new product introductions in food safety, increases to help provide for inventory cost stability and to aid in assurance of supplies in tightening markets and overall effects of inflation on inventory values. The Company has maintained a strategy of shipping inventory to many of its customers on a same day basis. Sufficient levels of inventory are maintained to assure that this strategy can be achieved.

The company has no construction in progress and facilities are generally believed to be adequate to support existing operations in the short run.

CONTRACTUAL OBLIGATIONS

The Company has the following contractual obligations due by period:



                                                         Less than                               More than
(in thousands)                              Total         one year     1-3 years    3-5 years     5 years
Long-Term Debt                           $         -    $         -    $       -    $       -    $       -
Operating Leases                            1,130,000        327,000      506,000      297,000           -
Unconditional Purchase Obligations         14,327,000     14,327,000           -            -            -

                                         $ 15,457,000   $ 14,654,000   $  506,000   $  297,000   $       -

Neogen has been profitable from operations for its last 61 quarters and has generated positive cash flow from operations during the period. However, the Company's current funds may not be sufficient to meet the Company's cash requirements to commercialize products currently under development or its plans to acquire additional technology and products that fit within the Company's mission statement. Accordingly, the Company may be required to or may choose to issue equity securities or enter into other financing arrangements for a portion of the Company's future capital needs.

The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, will not have a material effect on its results of operations or financial position.

NEW ACCOUNTING PRONOUNCEMENTS

See discussion of any New Accounting Pronouncements in Note 1 to Consolidated Financial Statements.