We develop, manufacture and market a broad line of innovative, technologically enhanced PVC-free and latex-free urinary continence and urine drainage care products for the extended care and acute care markets. Our products are comprised of our base products, which include our male external catheters and standard silicone Foley catheters, and our advanced products, which include our intermittent catheters, our anti-infection Foley catheters and our FemSoft Insert. We market our products under our Rochester Medical brand, and also supply our products to several large medical product companies for sale under brands owned by these companies, which are referred to as private label sales. The primary markets for our products are distributors, extended care facilities and individual hospitals and healthcare institutions. We sell our products both in the domestic market and internationally. For fiscal 2009, we intend to increase investment in our sales and marketing programs, primarily through cash generated from current operations, to support branded sales growth in the United States and Europe.
The following discussion pertains to our results of operations and financial position for the quarters ended December 31, 2008 and 2007. Results of the periods are not necessarily indicative of the results to be expected for the complete year. For the first quarter ended December 31, 2008, we reported net income of $0.00 per diluted share, compared to $0.02 per diluted share for the same period last year. Loss from operations was $325,000 for the quarter ended December 31, 2008 compared to income from operations of $72,000 for the quarter ended December 31, 2007, while net income was $54,000 compared to $272,000 for the same period last year.
Results of Operations
The following table sets forth, for the fiscal periods indicated, certain items from our statements of operations expressed as a percentage of net sales.

                                                 Three Months Ended
                                                    December 31,
                                                2008            2007
              Net Sales                             100 %           100 %
              Cost of Sales                          53 %            50 %

              Gross Margin                           47 %            50 %

              Operating Expenses:
              Marketing and Selling                  30 %            27 %
              Research and Development                4 %             3 %
              General and Administrative             16 %            20 %

              Total Operating Expenses               50 %            50 %

              Income (loss) from Operations         (3) %             0 %
              Interest Income                         2 %             7 %
              Interest (Expense)                    (1) %           (3) %
              Other Income                            2 %             0 %

              Net Income before taxes                 0 %             4 %

              Income tax expense (benefit)          (1) %             1 %

              Net Income after taxes                  1 %             3 %

The following table sets forth, for the periods indicated, net sales information by product category (base products and advanced products), marketing method (private label and Rochester Medical® branded sales) and distribution channel (domestic and international markets) (all dollar amounts below are in thousands):

                                                                  Fiscal Quarter Ended December 31,
                                                     2008                                                    2007
                                Domestic          International          Total          Domestic          International          Total
Private label sales:
Base products                  $    1,527        $         1,101        $ 2,628        $    1,328        $           936        $ 2,264
Advanced products                     244                      -            244               164                      -            164

Total private label sales           1,771                  1,101          2,872             1,492                    936          2,428

Branded sales:
Base products                         891                  3,771          4,662               997                  4,119          5,116
Advanced products                     671                    231            902               587                     92            679

Total branded sales                 1,562                  4,002          5,564             1,584                  4,211          5,795


Total net sales:               $    3,333        $         5,103        $ 8,436        $    3,076        $         5,147        $ 8,223

Three Month Periods Ended December 31, 2008 and December 31, 2007 Net Sales. Net sales for the first quarter of fiscal 2009 increased 3% to $8,436,000 from $8,223,000 for the comparable quarter of last fiscal year. The sales increase primarily resulted from an increase in private label sales offset by a decrease in branded sales. Domestic sales of branded products decreased by 1% for the quarter compared to the same period last year. A decrease in male external catheter unit sales during the quarter rather than the expected growth was due to the timing of orders from one of our largest distribution partners, which we expect will return to normal in the second quarter. Our international branded sales decreased 5% compared to the same period last year, primarily as a result of the change in exchange rates in the United Kingdom as the U.S. dollar continued to strengthen versus the British pound. Total branded sales volumes met management's expectations, and management believes its strategic decision to increase investments in sales and marketing programs will continue to drive growth in branded sales. Private label sales increased 18% for the quarter compared to the same period last year.
Gross Margin. Our gross margin as a percentage of net sales for the first quarter of fiscal 2009 was 47% compared to 50% for the comparable quarter of last fiscal year. The decrease in gross margin was primarily due to increased raw material costs, increased medical insurance costs and the change in the exchange rate in the United Kingdom of the British pound to the U.S. dollar.
Marketing and Selling. Marketing and selling expense primarily includes costs associated with base salary paid to sales and marketing personnel, sales commissions, and travel and advertising expense. Marketing and selling expense for the first quarter of fiscal 2009 increased 15% to $2,566,000 from $2,224,000 for the comparable quarter of last fiscal year. The increase in marketing and selling expense is primarily due to increased sales and marketing personnel and related expenses of $127,000 incurred through the expansion of our sales force in both the U.S. and our U.K. operations, and increased advertising expense of $182,000, as part of our strategic decision to increase investments in our sales and marketing programs. Marketing and selling expense as a percentage of net sales for the fiscal quarters ended December 31, 2008 and 2007 were 30% and 27%, respectively.
Research and Development. Research and development expense primarily includes internal labor costs, as well as expenses associated with third-party vendors performing validation and investigative research regarding our products and development activities. Research and development expense for the first quarter of fiscal 2009 increased to $318,000 from $229,000 for the comparable quarter of last fiscal year. The increase in research and development expense relates primarily to increased project costs of $66,000 to develop and enhance new and existing products. Research and development expense as a percentage of net sales for each of the fiscal quarters ended December 31, 2008 and 2007 was 4%.

General and Administrative. General and administrative expense primarily includes payroll expense relating to our management and accounting, information technology and human resources staff, as well as fees and expenses of outside legal counsel, accounting advisors and auditors. General and administrative expense for the first quarter of fiscal 2009 decreased 15% to $1,366,000 from $1,615,000 for the comparable quarter of last fiscal year. The decrease in general and administrative expense is primarily related to a decrease of $155,000 for professional fees, a decrease in utilities of $35,000 and a decrease in repairs of $20,000. General and administrative expense as a percentage of net sales for the fiscal quarters ended December 31, 2008 and 2007 were 16% and 20%, respectively.
Interest Income. Interest income for the first quarter of fiscal 2009 decreased 63% to $167,000 from $453,000 for the comparable quarter of last fiscal year. The decrease in interest income reflects significantly lower interest rates on investments and marketable securities.
Interest Expense. Interest expense for the first quarter of fiscal 2009 decreased to $84,000 from $149,000 for the comparable quarter of last fiscal year. The decrease in interest expense reflects decreases in debt and a decrease in the interest rate.
Other Income. Other income for the first quarter of fiscal 2009 was $200,000 compared to zero for the comparable quarter of last fiscal year. The other income reflects a one time payment from Coloplast A/S reimbursing us for lost profit per the terms of our June 2006 asset purchase.
Income Taxes. For the quarter ended December 31, 2008, we had an effective income tax rate of (232%). The higher than expected tax benefit for the current quarter is due to reflecting the impact of recording the full benefit of the R&D credit for the calendar year 2008, as the extension was not effective until the quarter ended December 31, 2008. In future periods, we expect the effective tax rate on income to be in the range of 34-35%. Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities were $35.7 million at December 31, 2008 compared to $37.0 million at September 30, 2008. The decrease in cash primarily resulted from cash used for capital expenditures and repayment of long-term debt as well as the impact of the strengthening of the U.S. dollar compared to the British pound, offset by cash provided by operations and cash received from the sale of common stock upon exercise of options. As of December 31, 2008, we had $25.5 million invested in marketable securities. The marketable securities primarily consist of $23.5 million invested in U.S. treasury bills and $2 million invested in mutual funds. We are currently reporting an unrealized loss of $1,238,916 related to the mutual fund as a result of the recent fluctuations in the credit markets impacting the current market value. We consider these unrealized losses temporary as we have the intent and ability to hold these investments.
During the three-month period ended December 31, 2008, we generated $469,000 of cash in operating activities compared to $547,000 of cash provided by operations during the comparable period of the prior fiscal year. Decreased net cash from operating activities in the first quarter of fiscal 2009 primarily reflects lower net income before depreciation and decreases in accounts receivable and increases in taxes payable, offset by increases in inventory and other current assets and decreases in accounts payable and other current liabilities. Accounts receivable balances during this period decreased 15% or $926,000, primarily as a result of increased collections. Inventories increased 2%, or $185,000, primarily as a result of building inventory for the launch of our new advanced intermittent catheter. Accounts payable decreased 27%, or $573,000 primarily reflecting timing of expenses related to year end. Other current liabilities decreased 15%, or $150,000, primarily reflecting payments of annual executive bonuses. Income tax payable increased $25,000 in the current quarter related to taxes in the United Kingdom. In addition, capital expenditures during this period were $498,000 compared to $345,000 for the comparable period last year.

In June 2006, we entered into a $7,000,000 credit facility with U.S. Bank National Association. The credit facility consists of a $5,000,000 term loan payable in five years and accruing interest at a rate equal to 4.77%, and a revolving line of credit of up to $2,000,000, maturing annually on March 31, with interest payable monthly at a floating rate based on the quoted one-month LIBOR rate plus 1.60%. We have renewed the revolving line of credit through March 31, 2009. As of December 31, 2008, we had no borrowings under the revolving line of credit and the term loan had an outstanding balance of $2,687,759. Our obligations are secured by our assets, including accounts, general intangibles, inventory, and equipment. The term loan agreement and revolving credit agreement require us to comply with certain financial covenants, including a fixed charge coverage ratio and minimum working capital of $8 million, and restrict certain additional indebtedness and liens. As of December 31, 2008, we were in compliance with the financial covenants.
We believe that our capital resources on hand at December 31, 2008, together with cash generated from sales, will be sufficient to satisfy our working capital requirements for the foreseeable future as described in the Liquidity and Capital Resources portion of Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008. In the event that additional financing is needed, we may seek to raise additional funds through public or private financing, collaborative relationships or other arrangements. Any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve significant restrictive covenants. Collaborative arrangements, if necessary to raise additional funds, may require us to relinquish our rights to certain of our technologies, products or marketing territories. Failure to raise capital when needed could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that such financing, if required, will be available on terms satisfactory to us, if at all.
Cautionary Statement Regarding Forward Looking Information Statements other than historical information contained herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by the use of terminology such as "believe," "may," "will," "expect," "anticipate," "predict," "intend," "designed," "estimate," "should" or "continue" or the negatives thereof or other variations thereon or comparable terminology. Such forward-looking statements involve known or unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following:
• the uncertainty of market acceptance of new product introductions;

• the uncertainty of gaining new strategic relationships;

• the uncertainty of timing of revenues from private label sales (particularly with respect to international customers);

• the uncertainty of successfully growing our U.K. operations and the risks associated with operating an international business;

• FDA and other regulatory review and response times;

• the securing of Group Purchasing Organization contract participation;

• the uncertainty of gaining significant sales from secured GPO contracts;

and other risk factors listed from time to time in our SEC reports, including, without limitation, the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended September 30, 2008.