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 does not provide forecasts of future performance. While management is optimistic about the Company's long-term prospects, historical financial information may not be indicative of future financial performance.

Safe Harbor and Forward-Looking Statements

Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Quarterly Report on Form 10-Q. For this purpose, 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 Quarterly Report on Form 10-Q 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 and estimates 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 condition's change. Product obsolescence may be caused by shelf life expiration, discontinuation of a product line, or replacement products in the market place 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. 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 underperformance 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 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 the 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 not recoverable based upon a discounted cash flow analysis, 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. 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.

New Accounting Pronouncements

See note 7 to Interim Consolidated Financial Statements.

RESULTS OF OPERATIONS

Executive Overview

Neogen Corporation revenues increased by 26% in the first quarter of FY-09 to $28.8 million as compared to $22.9 million in the first quarter of FY-08. Food Safety sales increased by 13% and Animal Safety sales increased by 45% in comparison with the first quarter of the prior year. Overall animal safety sales were aided by the Rivard, Kane and DuPont acquisitions. Both segments reported a 13% increase in organic revenue. Sales to the international markets reached 42% of total revenues for the first time ever with strong contributions from Neogen's European subsidiary. Gross margins decreased from 54% to 51% and operating margins remained at 20%. The decline in gross margins was a result of a change in product mix with a greater proportion of revenues from non-diagnostic products in the quarter including products obtained in the Kane and DuPont acquisitions.

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

                                                     Three Months Ended August 31
                                                                       Increase
                                                2008        2007      (Decrease)     %
                                                        (Dollars in thousands)
  Food Safety
  Natural Toxins, Allergens & Drug Residues   $   8,038   $  7,102   $        936   13.2
  Bacteria & General Sanitation                   4,551      4,267            284    6.7
  Dehydrated Culture Media & Other                2,960      2,390            570   23.8

                                                 15,549     13,759          1,790   13.0

  Animal Safety
  Life Sciences & Equine Vaccines                 1,837      1,803             34    1.9
  Rodenticides & Disinfectants                    4,874      2,820          2,054   72.8
  Veterinary Instruments & Other                  6,545      4,527          2,018   44.6

                                                 13,256      9,150          4,106   44.9

  Total Sales                                 $  28,805   $ 22,909   $      5,896   25.7

During the first quarter of FY-09, Food Safety revenues increased 13% in comparison with FY-08. Natural Toxin, Allergen and Drug Residue sales increased by 13%, in comparison with the prior year. Diagnostic tests for natural toxins increased by 12% led by increases in sales of test kits for aflatoxin, DON and histamine. Diagnostic test kits for food allergens increased by 48% with growth in sales of test kits for milk, peanut and egg allergens particularly strong. Sales of diagnostic products for bacteria and general sanitation increased 7% in comparison with FY-08 as Neogen's tests to detect harmful pathogens like E.coli, Salmonella and Listeria were up 14% in comparison with the prior year. Sales of dehydrated culture media and other products increased by 24% over the prior year.

During the first quarter of FY-09, Animal Safety revenues increased by 45% overall in comparison with FY-08. Life sciences and vaccine sales contributed by increasing 2% in comparison with the prior year. Products going to life science markets increased 6% while vaccine sales decreased by 9% in FY-09 in comparison with FY-08, due to the timing of large distributor orders. Rodenticide and Disinfectant Sales increased by 73% in comparison with FY-08 following the June acquisition of DuPont cleaners and disinfectants business. Rodenticide sales to domestic customers in the first quarter of FY-09 increased by 14%, as compared to the first quarter of FY-08. Veterinary instrument and other sales increased by 45% in comparison with the prior year and was helped by the sales of products acquired in the Rivard and Kane acquisitions.

Gross margins decreased from 53.7% in the first quarter of FY-08 to 51.4% in FY-09. This resulted from a change in product mix, principally emanating from the Kane and DuPont acquisitions. Operating margins in the first quarter decreased from 19.8% to 19.6% of sales in FY-09 as compared with FY-08. Sales and marketing expenses as expressed as a percentage of revenues decreased from 20.4% to 19.5%. General and administrative expenses decreased from 10.2% of revenues in FY-08 to 9.0% of revenues in FY-09. The decrease in sales and marketing and general and administrative expenses as a percentage of revenues is the direct effect of the acquisitions during the year that contributed revenue dollars without commensurate increase in distribution or administrative cost. Research expense, growing $210,000 in absolute dollars, increased as a percent of revenues from 3.2% to 3.3%. As a result of increased research and development efforts, management expects this expense as a percentage of revenues to increase during the year.

Financial Condition and Liquidity

Net cash proceeds of $1,172,000 were realized with the exercise of 63,000 stock options and issuance of shares under the Employee Stock Purchase Plan during the first quarter of FY-09. While accounts receivable and inventories grew to accommodate increases in operations, $2,835,000 in cash was generated from operations. Inflation and changing prices are not expected to have a material effect on operations, as the management believes it has and will be successful in offsetting increased input cost with price increases.

Management believes that the Company's existing cash balances at August 31, 2008, along with available borrowings under its credit facility and cash expected to be generated from future operations, will be sufficient to fund activities for the foreseeable future. However, existing cash and borrowing capacity may not be sufficient to meet the Company's cash requirements to commercialize products currently under development or its plans to acquire other organizations, technologies or products that fit within the Company's mission statement. Accordingly, the Company may be required to issue equity securities or enter into other financing arrangements for a portion of the Company's future financing needs.