Because our instrument consumables and rapid assay products are sold in the U.S. and certain other geographies by distributors, distributor purchasing dynamics have an impact on our reported sales of these products. Distributors purchase products from us and sell them to veterinary practices, who are the end users. Distributor purchasing dynamics may be affected by many factors and may be unrelated to underlying end-user demand for our products. As a result, fluctuations in distributors' inventories may cause reported results in a period not to be representative of underlying end-user demand. Therefore, we believe it is important to track distributor sales to end users and to distinguish between the impact of end-user demand and the impact of distributor purchasing dynamics on reported revenue growth.
Where growth rates are affected by changes in end-user demand, we refer to the impact of practice-level sales on growth. Where growth rates are affected by distributor purchasing dynamics, we refer to the impact of changes in distributors' inventories. If during the comparable period of the prior year, distributors' inventories grew by more than those inventories grew in the current year, then changes in distributors' inventories have a negative impact on our reported sales growth in the current period. Conversely, if during the comparable period of the prior year, distributors' inventories grew by less than those inventories grew in the current year, then changes in distributors' inventories have a positive impact on our reported sales growth in the current period.
Approximately 23% of our revenue is derived from products manufactured in the U.S. and sold internationally. Strengthening of the U.S. dollar relative to other currencies has a negative impact on our international revenues and on margins of products manufactured in the U.S. and sold internationally. In addition, to the extent that the U.S. dollar is stronger in future periods relative to the exchange rates in effect in the corresponding prior periods, our growth rate will be negatively affected. The related impact on foreign currency denominated operating expenses and the impact of foreign currency hedge contracts in place partly offset this exposure. See also the section of this Quarterly Report on Form 10-Q captioned "Quantitative and Qualitative Disclosures About Market Risk."
We believe that our financial results in the first quarter of 2009 continued to be negatively impacted by economic conditions that weakened over the course of 2008 due, in large part, to fewer patient visits to U.S. and European veterinary clinics for routine screening, preventative care and elective procedures. In the first quarter, we also began to see impacts to capital sales reflecting more cautious spending by veterinarians. These observations are consistent with other market data that is available to us, particularly with respect to changes in patient visits to U.S. veterinary medical hospitals. Beyond our companion animal business, we are also seeing economic impacts to non-regulatory Water testing volumes, driven by a decline in new home construction and reduced consumer willingness to spend on certain luxury items, such as vacation cruises. While we expect these trends to continue in the near-term, we believe the fundamental drivers of demand in our served markets remain intact and that we will be well positioned to return to more historic growth rates when economies stabilize.
• Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to 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, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that we believe 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. The significant accounting policies used in preparation of these condensed consolidated financial statements for the three months ended March 31, 2009 are consistent with those discussed in Note 3 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008. The critical accounting policies and the significant judgments and estimates used in the preparation of our condensed consolidated financial statements for the three months ended March 31, 2009 are consistent with those discussed in our Annual Report on Form 10-K for the year ended December 31, 2008 in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates."

• Results of Operations Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008 Revenue Total Company. The following table presents revenue by operating segment:

                                                     For the Three Months Ended March 31,
                                                                                                                                  Percentage
                                                                                                                                 Change Net of
                                                                                                            Percentage           Acquisitions/
                                                                                      Percentage           Change from           Divestitures
Net Revenue                                           Dollar        Percentage        Change from         Acquisitions/          and Currency
(dollars in thousands)     2009          2008         Change          Change         Currency (1)        Divestitures (2)           Effect

CAG                      $ 193,692     $ 202,791     $  (9,099 )           (4.5 %)            (6.0 %)                 (1.6 %)               3.1 %
Water                       15,851        16,816          (965 )           (5.7 %)            (8.3 %)                    -                  2.6 %
PAS                         18,266        21,162        (2,896 )          (13.7 %)            (9.7 %)                    -                 (4.0 %)
Other                        8,646         8,305           341              4.1 %             (1.8 %)                    -                  5.9 %

Total                    $ 236,455     $ 249,074     $ (12,619 )           (5.1 %)            (6.4 %)                 (1.3 %)               2.6 %

(1) Represents the percentage change in revenue attributed to the effect of changes in currency rates from the three months ended March 31, 2008 to the three months ended March 31, 2009.

(2) Represents the percentage change in revenue during the three months ended March 31, 2009 compared to the three months ended March 31, 2008 attributed to incremental revenues from businesses acquired or revenues lost from businesses divested subsequent to December 31, 2007.

Companion Animal Group. The following table presents revenue by product and service category for CAG:

                                                              For the Three Months Ended March 31,
                                                                                                                                                    Percentage
                                                                                                                                                   Change Net of
                                                                                                                            Percentage             Acquisitions/
                                                                                                    Percentage             Change from             Divestitures
Net Revenue                                                     Dollar          Percentage          Change from           Acquisitions/            and Currency
(dollars in thousands)           2009            2008           Change            Change           Currency (1)          Divestitures (2)             Effect

Instruments and
consumables                    $  72,235       $  75,610       $  (3,375 )             (4.5 %)              (7.3 %)                      -                    2.8 %
Rapid assay products              37,677          38,711          (1,034 )             (2.7 %)              (1.7 %)                      -                   (1.0 %)
Laboratory and consulting
services                          68,692          70,107          (1,415 )             (2.0 %)              (7.8 %)                      -                    5.8 %
Practice information
management systems and
digital radiography               15,034          15,025               9                0.1 %               (3.0 %)                      -                    3.1 %
Pharmaceutical products               54           3,338          (3,284 )            (98.4 %)                 -                    (100.0 %)                 1.6 %

Net CAG revenue                $ 193,692       $ 202,791       $  (9,099 )             (4.5 %)              (6.0 %)                   (1.6 %)                 3.1 %

(1) Represents the percentage change in revenue attributed to the effect of changes in currency rates from the three months ended March 31, 2008 to the three months ended March 31, 2009.

(2) Represents the percentage change in revenue during the three months ended March 31, 2009 compared to the three months ended March 31, 2008 attributed to incremental revenues from businesses acquired or revenues lost from businesses divested subsequent to December 31, 2007.

The following revenue analysis reflects the results of operations net of the impact of currency exchange rates on sales outside the U.S. and net of incremental sales from businesses acquired or revenues lost from businesses divested subsequent to December 31, 2007.
Instruments and consumables revenue increased due to higher instrument sales volumes and higher average unit sales prices realized on most of our consumable products, primarily on slides that are sold for use in our chemistry analyzers, partly offset by lower consumables sales volume. Higher instrument sales volumes were driven by sales of Catalyst Dx™ chemistry analyzers and SNAPshot Dx® analyzers, which were both launched at the end of the first quarter of 2008. The increase in volume due to the placements of these instruments was partly offset by a decrease in sales of most of our other IDEXX VetLab® instruments, due primarily to a shift in focus of our sales team to our newer instruments. The decrease in the volume of consumables was due primarily to reductions in distributor inventories, partly offset by higher volume of sales of consumables used with our newer instruments. Higher instrument service revenue was due to the increase in number of instruments covered under service contracts as our active installed base of instruments continued to increase. The impact from changes in distributors' inventory levels reduced reported instruments and consumables revenue growth by 3%.

The decrease in rapid assay sales was due to changes in distributor inventories, partially offset by higher practice-level sales. The increase in practice-level sales was due primarily to higher sales volumes of canine combination test products, resulting from customer purchase programs offering promotional discounting on purchases made in the first quarter. The favorable impact that the promotional programs had on sales volume was partly offset by the unfavorable impact of the programs on average unit sales prices. The impact from changes in distributors' inventory levels reduced reported rapid assay revenue growth by 5%.
The increase in sales of laboratory and consulting services was primarily driven by the impact of price increases.
The increase in sales of practice information management systems and digital radiography resulted primarily from higher sales volumes of companion animal radiography systems and, to a lesser extent, increased sales of hardware and peripheral equipment used with practice information management systems. These favorable impacts were partly offset by lower sales volumes of equine digital radiography systems and lower average unit prices for companion animal radiography systems.
Pharmaceutical revenue was not significant in the first quarter of 2009. In the fourth quarter of 2008, we sold a substantial portion of our pharmaceutical assets and product lines, and therefore will not have recurring pharmaceutical product revenue beyond the first quarter of 2009. We have retained certain intellectual property and licenses for developed products as well as certain less significant product lines, which have been reassigned to other business units.
Water. The decrease in Water revenue resulted primarily from the unfavorable impact of currency exchange rates and lower sales volume of our Colilert® product, partly offset by higher average unit sales prices. Higher average unit sales prices were attributable to higher relative sales in geographies where products are sold at higher average unit sales prices, and to the impact of first-quarter price increases for certain products sold in the U.S. and other regions. The unfavorable impact of currency exchange rates reduced reported Water revenue by 8%.
Production Animal Segment. The decrease in PAS revenue resulted primarily from the unfavorable impact of currency exchange rates, which reduced reported PAS revenue by 10%, and from lower average unit sales prices for certain bovine tests, partly offset by higher average unit sales prices for our poultry tests. Other. The increase in Other operating units revenue was due primarily to higher sales volume of OPTI Medical products and of Dairy SNAP® antibiotic residue tests.
Gross Profit
Total Company. The following table presents gross profit and gross profit percentages by operating segment:

                                    For the Three Months Ended March 31,
Gross Profit                           Percent of                    Percent of       Dollar      Percentage
(dollars in thousands)     2009          Revenue         2008          Revenue        Change        Change

CAG                      $  96,442            49.8 %   $ 101,554            50.1 %   $ (5,112 )          (5.0 %)
Water                       11,156            70.4 %      10,315            61.3 %        841             8.2 %
PAS                         13,108            71.8 %      14,233            67.3 %     (1,125 )          (7.9 %)
Other                        3,548            41.0 %       3,558            42.8 %        (10 )          (0.3 %)
Unallocated amounts            179             N/A           176             N/A            3             1.7 %

Total Company            $ 124,433            52.6 %   $ 129,836            52.1 %   $ (5,403 )          (4.2 %)

Companion Animal Group. Gross profit for CAG decreased due to overall lower sales volume and a slight decrease in the gross profit percentage. The decrease in the gross profit percentage was due primarily to higher costs of instrument service relating to the larger installed base of IDEXX VetLab®instruments and higher relative sales of lower margin laboratory and consulting services and IDEXX VetLab® instruments. These unfavorable impacts were partly offset by the favorable impact of foreign currency hedge contracts and the favorable currency impact of foreign currency denominated expenses, net of the unfavorable impact that strengthening of the U.S. Dollar had on sales denominated in foreign currencies, and the impact of higher selling prices.
Water. Gross profit for Water increased due to an increase in the gross profit percentage to 70% from 61%. The increase in the gross profit percentage was due primarily to the favorable impact of foreign currency hedge contracts and the favorable currency impact of foreign currency denominated expenses, net of the unfavorable impact that strengthening of the U.S. Dollar had on sales denominated in foreign currencies. The gross profit percentage was also favorably impacted by the non-recurrence of discrete costs incurred in the first quarter of 2008 in connection with a discontinued project to qualify a second source supplier for certain products, by lower royalty costs, and by higher average unit sales prices.
Production Animal Segment. Gross profit for PAS decreased due to lower sales volume, partly offset by an increase in the gross profit percentage to 72% from 67%. The increase in the gross profit percentage was due primarily to the favorable impact of foreign currency hedge contracts and the favorable currency impact of foreign currency denominated expenses, net of the unfavorable impact that strengthening of the U.S. Dollar had on sales denominated in foreign currencies and, to a lesser extent, to higher relative sales of higher margin products, and to lower royalty costs. These favorable items were partly offset by the impact of revenue recognized in 2008 on shipments prior to January 1, 2008 to a customer for which we recognize revenue on the cash basis of accounting due to uncertain collectibility.
Other. Gross profit for Other operating units decreased slightly as higher sales volumes were predominantly offset by a decrease in the gross profit percentage to 41% from 43%. The decrease in the gross profit percentage was due primarily to comparatively higher costs of production and relatively higher sales of Dairy SNAP® antibiotic residue tests in geographies where the products are sold at lower unit prices. These unfavorable impacts were partly offset by the favorable impact of foreign currency hedge contracts and the favorable currency impact of foreign currency denominated expenses, net of the unfavorable impact that strengthening of the U.S. Dollar had on sales denominated in foreign currencies. Operating Expenses and Operating Income
Total Company. The following tables present operating expenses and operating income by operating segment:

                                   For the Three Months Ended March 31,
Operating Expenses                    Percent of                   Percent of       Dollar      Percentage
(dollars in thousands)     2009         Revenue         2008         Revenue        Change        Change

CAG                      $ 67,363            34.8 %   $ 72,430            35.7 %   $ (5,067 )          (7.0 %)
Water                       3,844            24.3 %      4,045            24.1 %       (201 )          (5.0 %)
PAS                         8,158            44.7 %      8,405            39.7 %       (247 )          (2.9 %)
Other                       3,419            39.5 %      3,316            39.9 %        103             3.1 %
Unallocated amounts         3,208             N/A        2,921             N/A          287             9.8 %

Total Company            $ 85,992            36.4 %   $ 91,117            36.6 %   $ (5,125 )          (5.6 %)




Operating Income                      Percent of                   Percent of      Dollar       Percentage
(dollars in thousands)     2009         Revenue         2008         Revenue       Change         Change

CAG                      $ 29,079            15.0 %   $ 29,124            14.4 %   $   (45 )           (0.2 %)
Water                       7,312            46.1 %      6,270            37.3 %     1,042             16.6 %
PAS                         4,950            27.1 %      5,828            27.5 %      (878 )          (15.1 %)
Other                         129             1.5 %        242             2.9 %      (113 )          (46.7 %)
Unallocated amounts        (3,029 )           N/A       (2,745 )           N/A        (284 )          (10.3 %)

Total Company            $ 38,441            16.3 %   $ 38,719            15.5 %   $  (278 )           (0.7 %)

Companion Animal Group. The following table presents CAG operating expenses by functional area:

                                         For the Three Months Ended March 31,
Operating Expenses                          Percent of                     Percent of        Dollar        Percentage
(dollars in thousands)          2009          Revenue          2008          Revenue         Change          Change

Sales and marketing           $ 34,844             18.0 %    $ 37,299             18.4 %    $ (2,455 )            (6.6 %)
General and administrative      22,822             11.8 %      23,888             11.8 %      (1,066 )            (4.5 %)
Research and development         9,697              5.0 %      11,243              5.5 %      (1,546 )           (13.8 %)

Total operating expenses      $ 67,363             34.8 %    $ 72,430             35.7 %    $ (5,067 )            (7.0 %)

In the fourth quarter of 2008, we sold a substantial portion of our pharmaceutical assets and product lines and restructured the remainder of this business. As a result, we have not incurred meaningful expenses related to this business in the first quarter of 2009 and will not incur meaningful expenses in the future. This impact on sales and marketing expense, general and administrative expense and research and development expense is referred to in the following operating expense analysis as the impact of "the pharmaceutical transaction."
The decrease in sales and marketing expense resulted primarily from the favorable impacts of exchange rates on foreign currency denominated expenses and from the pharmaceutical transaction noted above. To a lesser extent, lower spending on sales commissions and marketing programs also reduced sales and . . .