Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. The forward looking statements are contained principally in the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

† the extent and timing of future revenues;

† the size and/or growth of our market or market-share;

† the opportunity presented by new products or emerging markets;

† the operating margins or earnings per share goals we may set;

† our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; and

† our estimates regarding the sufficiency of our cash resources.

In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties. We discuss many of these risks in this Quarterly Report on Form 10-Q in greater detail in Part II - Section 1A. "Risk Factors" below. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. You should also read our Annual Report on Form 10-K and the documents that we reference in the Annual Report on Form 10-K and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we expect. All references in this report to "Omnicell, Inc.," "Omnicell," "our," "us," "we" or the "Company" collectively refer to Omnicell, Inc., a Delaware corporation, and its subsidiaries.

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

Overview

We were incorporated in California in 1992 under the name Omnicell Technologies, Inc. and reincorporated in Delaware in 2001 as Omnicell, Inc. We are a leading provider of medication control and patient safety solutions which enhance operational efficiency and patient care for acute care health facilities. Approximately 1,200 hospitals have installed our automated hardware/software solutions for controlling, dispensing, acquiring, verifying and tracking medications and medical/surgical supplies. We have designed our products to enable healthcare professionals to improve patient safety through reduced medication errors and improved administrative controls, while simultaneously improving workflow and increasing operational efficiency. Our products are designed to allow nurses, pharmacists and other clinicians to spend more time on patient care while at the same time providing confirmation that the right patients are receiving the right medication, at the right time, in the right dose, via the right route.

We sell our medication dispensing and supply automation systems primarily in the United States. Substantially all of our revenue is generated in the United States. However, we have seen an increase in our revenue from our international operations and we expect such revenue from our international operations to increase in future periods as we continue to grow our international business. Our sales force is organized by geographic region in the United States and Canada. We also sell through distributors in Asia, Australia, Europe, and South America. We have not sold and have no future plans to sell our products either directly or indirectly to customers located in countries that are identified as state sponsors of terrorism by the U.S. Department of State, and are subject to economic sanctions and export controls.

We operate in one business segment, the design, manufacturing, selling and servicing of medication and supply dispensing systems. Our management team evaluates our profit performance based on company-wide, consolidated results. In general, we recognize revenue when our systems are installed. Installation generally takes place two weeks to nine months after our systems are ordered for all our products except Mobile Carts. Installation of Mobile Carts takes place one to three months after the order is received. The installation process at our customers' sites includes internal procedures associated with large capital expenditures and time associated with adopting new technologies. Given the length of time necessary for our customers to plan for and complete the installation of our systems, our focus is on shipping products based on the installation dates requested by our customers and working at the customer's pace. The amount of revenue recognized in future periods may depend on, among other things, the terms and timing of lease contract renewals, additional product sales and the size of such transactions. We believe that future revenue will be affected by the competitiveness of our products and services.

Operating Environment During the Three Months Ended March 31, 2009

Our business has experienced a decline in revenue year over year caused by general economic conditions driving a decline in our customers demand for and their ability to purchase new automation solutions. Revenue declined 15.9% from $62.1 million during the three months ended March 31, 2008 to $52.2 million during the three months ended March 31, 2009. Notwithstanding our recent revenue decline, we believe our solutions remain attractive relative to our competition. In particular:

† We continue to differentiate ourselves through a strategy intended to create the best customer experience in healthcare;

† We deliver industry-leading products with differentiated product features that are designed to appeal to nurses and pharmacists; and

† Our solutions provide patient safety levels that are demanded in today's medical facilities by both regulatory agencies and patients.

During the first quarter of 2009, we instituted a restructuring plan whereby we reduced our headcount from 844 full-time employees at December 31, 2008 to 756 full-time employees at March 31, 2009 to balance our expenses with the reduced sales and installations volume. The restructuring plan accounted for a reduction of 103 employees, which was partially offset by hiring for newly created positions during the quarter. Net cash used in operating activities totaled $1.7 million during the three months ended March 31, 2009. Our ability to grow revenue and maintain positive cash flow is dependent on our ability to continue to receive orders from customers, the volume of installations we are able to complete, our ability to meet customers' needs and provide a quality installation experience and our flexibility in manpower allocations among customers to complete installations on a timely basis.

Our overall gross margin declined to 45.6% for the quarter ended March 31, 2009 as compared to 52.1% for the quarter ended March 31, 2008, primarily due to the absorption of fixed costs over a smaller revenue base, declines in our service margins and one time restructuring charges. We believe that our gross margins will continue to fluctuate based on the mix of products sold and the related costs and changes in sales and installation headcount compared to our revenue level.

We maintain a development staff with expertise in hospital logistics and computerized automated solutions which allows us to regularly deliver new innovations to the market. In 2008 we began shipping our SinglePointe solution, which allows pharmacists to automate the distribution of specially handled medications and present market opportunities to reduce errors and provide a more efficient workflow for clinicians. During the first quarter of 2009, we introduced the Omnicell Tissue Center system which enables surgical personnel to keep tissue specimens secure, including procurement, processing and preserving of the tissue and also to maintain detailed history records. We believe these new products coupled with enhancements to products we intend to deliver in 2009, along with other patient safety and clinical workflow solutions, will continue to differentiate us in the marketplace.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We regularly review our estimates and assumptions, which are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions. We believe that the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our condensed consolidated financial statements:

†          Revenue recognition;

†          Provision for reserves;

†          Valuation and impairment of goodwill, other intangible assets and
other long lived assets;

†          Inventory;

†          Valuation of share-based awards; and

†          Accounting for income taxes.

During the three months ended March 31, 2009, there were no significant changes in our critical accounting policies and estimates. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2008 for a more complete discussion of our critical accounting policies and estimates.

Recent Issued and Adopted Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board (FASB) issued three related Staff Positions (FSP): (i) FSP 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," or FSP FAS 157-4,
(ii) FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," or FSP FAS 115-2 and (iii) FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," or FSP FAS 107-1, which will be effective for interim and annual periods ending after June 15, 2009. FSP FAS 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS No. 157 in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP FAS 115-2 modifies the requirements for recognizing other-than-temporarily impaired debt securities and revise the existing impairment model for such securities, by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. FSP 107-1 enhances the disclosure of instruments under the scope of SFAS No. 157 for both interim and annual periods. We are currently evaluating these Staff Positions but do not currently expect them to have a material impact on our consolidated financial statements.

In April 2009, the FASB issued FSP No. 141(R)-1 "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies," or FSP FAS 141(R)-1. FSP FAS 141(R)-1 amends the provisions in SFAS No. 141(R), "Business Combinations," for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. The FSP eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in SFAS No. 141(R) and instead carries forward most of the provisions in SFAS No. 141 for acquired contingencies. FSP FAS 141(R)-1 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We do not expect FSP FAS
141(R)-1 will have an impact on our consolidated financial statements unless and until we complete a business combination.

Results of Operations



The table below shows the components of our results of operations as percentages
of total revenues for the three months ended March 31, 2009 and 2008:



                                                 Three Months Ended March 31,
                                       2009      % of Revenue       2008      % of Revenue
                                            (in thousands, except for percentages)
Revenues:
Product revenues                    $   42,295           81.0 %  $   52,415           84.4 %
Services and other revenues              9,909           19.0 %       9,675           15.6 %
Total revenues                          52,204          100.0 %      62,090          100.0 %

Cost of revenues:
Cost of product revenues                20,280           38.9 %      23,970           38.6 %
Cost of services and other
revenues                                 6,895           13.2 %       5,776            9.3 %
Restructuring charges                    1,209            2.3 %           -              - %
Total cost of revenues                  28,384           54.4 %      29,746           47.9 %

Gross profit                            23,820           45.6 %      32,344           52.1 %
Operating expenses:
Research and development                 3,977            7.6 %       4,276            6.9 %
Selling, general and
administrative                          21,499           41.2 %      23,207           37.4 %
Restructuring charges                    1,315            2.5 %           -              - %
Total operating expenses                26,791           51.3 %      27,483           44.3 %
Income (loss) from operations           (2,971 )         (5.7 )%      4,861            7.8 %
Interest and other income
(expense), net                             182            0.3 %       1,410            2.3 %
Income (loss) before provision
for (benefit from) income taxes         (2,789 )         (5.4 )%      6,271           10.1 %
Provision for (benefit from)
income taxes                              (918 )         (1.8 )%      2,538            4.1 %
Net income (loss)                   $   (1,871 )         (3.6 )% $    3,733            6.0 %

Product Revenues, Cost of Product Revenues, Restructuring Charges and Gross
Profit



The table below shows our product revenues, cost of product revenues,
restructuring charges and gross profit for the three months ended March 31, 2009
and 2008 and the percentage change between those quarters:



                                   Three Months Ended March 31,
                                2009              2008         % Change
                              (in thousands, except for percentages)
Product revenues           $       42,295     $      52,415       (19.3 )%
Cost of product revenues           20,280            23,970       (15.4 )%
Restructuring charges               1,008                 -           - %
Gross profit               $       21,007     $      28,445       (26.1 )%

Product revenues decreased $10.1 million, or 19.3% in the three months ended March 31, 2009 as compared to the same period in 2008. The decrease in product revenue was due to a decrease in the number of installations of medication and supply automation systems and pharmacy central products. This decrease in product volume year over year reflects the current global economic downturn and the consequent capital investment constraints and longer sales cycle by our customers.

Cost of product revenues decreased by $3.7 million, or 15.4% in the three months ended March 31, 2009 as compared to the same period in 2008. The decrease was primarily due to the reduction in product revenue resulting in a $3.6 million decrease in direct material cost and a decrease in our spending of $0.1 million, excluding restructuring charges.

Restructuring charges of $1.0 million were recorded to cost of product revenue relating to our work force reduction during the first quarter of 2009. Costs recorded related primarily to severance pay, continuation of benefits and outplacement services. As part of the restructuring we reduced headcount by 50 employees in predominately manufacturing and field operations departments.

Gross profit on product revenue decreased by $7.4 million, or 26.1% in the three months ended March 31, 2009 as compared to the same period in 2008. The decrease in gross profit on product revenue for the three months ended March 31, 2009 was primarily a result of lower product revenues, higher absorption of fixed costs and restructuring charges related to our work force reduction.

Service and Other Revenues, Cost of Service and Other Revenues, Restructuring
Charges and Gross Profit



The table below shows our service and other revenues, cost of service and other
revenues, restructuring charges and gross profit for the three months ended
March 31, 2009 and 2008 and the percentage change between those quarters:



                                               Three Months Ended March 31,
                                            2009               2008        % Change
                                          (in thousands, except for percentages)
  Service and other revenues           $        9,909     $        9,675        2.4 %
  Cost of service and other revenues            6,895              5,776       19.4 %
  Restructuring charges                           201                  -          - %
  Gross profit                         $        2,813     $        3,899      (27.9 )%

Service and other revenues include revenues from service and maintenance contracts, rentals of automation systems, installation of selected product lines, training and professional services. Service and other revenues increased by $0.2 million, or 2.4% in the three months ended March 31, 2009 as compared to the same period in 2008. The modest increase in service and other revenues was primarily the result of the normal increase in service contract revenue from new installations, offset primarily by the expiration of service contracts related to end of life products.

Cost of service and other revenues increased by $1.1 million, or 19.4% in the three months ended March 31, 2009 as compared to the same period in 2008. The increase was primarily due to $0.5 million increase in material costs and a $0.6 million increase in labor and support costs.

Restructuring charges of $0.2 million were recorded to cost of service revenue relating to our work force reduction during the first quarter of 2009. As part of the restructuring we reduced headcount by 10 employees in field, customer and technical service departments. Costs recorded related primarily to severance pay, continuation of benefits and outplacement services.

Gross profit on service and other revenues decreased by $1.1 million, or 27.9% in the three months ended March 31, 2009 as compared to the same period in 2008. The decrease in gross profit on service and other revenues was a combination of the modest increase in revenue, which was affected by the non-renewal of service contracts for end of life products, as well as certain non-recurring revenue adjustments, offset by investments in service infrastructure, the higher consumption of material costs and $0.2 million in restructuring charges. We expect our gross profit on service and other revenues to gradually increase in 2009 as our cost structure is aligned to our current revenue levels.

Operating Expenses



                                                Three Months Ended March 31,
                                             2009              2008         % Change
                                        (in thousands, except for percentages)
  Research and development              $        3,977     $       4,276        (7.0 )%
  Selling, general and administrative           21,499            23,207        (7.4 )%
  Restructuring charges                          1,315                 -           - %
  Total operating expenses              $       26,791     $      27,483        (2.5 )%

Research and Development. Research and development expenses decreased by $0.3 million, or 7.0% in the three months ended March 31, 2009 as compared to the same period in 2008. Research and development expenses represented 7.6% and 6.9% of total revenues in the three months ended March 31, 2009 and 2008, respectively. The decrease was due primarily to $0.6 million increase in capitalization of software development spending, offset by $0.4 million increased support costs.

We expect research and development expenses to remain at the current percent of revenue or increase slightly based on our revenue level and grow in absolute dollars in the future as our revenue grows to improve and enhance our existing technologies and to create new technologies in health care automation.

Selling, General and Administrative. Selling, general and administrative expenses decreased by $1.7 million, or 7.4% in the three months ended March 31, 2009 as compared to the same period in 2008. Selling, general and administrative expenses represented 41.2% and 37.4% of total revenues in the three months ended March 31, 2009 and 2008, respectively. The decrease was due primarily to $0.7 million decrease in group purchasing organization fees from lower sales volume, $0.4 million in lower headcount related costs after the reduction in force and $0.4 million in lower support costs.

We expect selling, general and administrative expenses to stabilize in absolute dollars as we believe that we have aligned our cost structure to the current economic and market environments.

Restructuring charges.In the first quarter of 2009, we recorded $1.3 million related to our work force reduction. As part of this restructuring, we reduced our headcount by 12 employees in research and development, and 31 employees in selling, general and administrative positions. Costs recorded related primarily to severance pay, continuation of benefits and outplacement services.

Provision for Income Taxes

For the three months ended March 31, 2009 we recorded an income tax benefit of $0.9 million as compared with income tax expense of $2.5 million for the same period in 2008. The effective tax rate benefit for the three months ended March 31, 2009 was 32.9%, as compared to an effective tax rate of 40.5% for the same period in 2008. The income tax benefit recorded for the three months ended March 31, 2009 is a result of the book loss recorded for the three months ended March 31, 2009 partially offset by the re-measurement of our California deferred tax assets due to the enactment of California tax legislation. As of March 31, 2009 and 2008, the estimated annual effective tax rates before discrete items were 41.1% and 42.6%. The estimated annual effective rates for both periods differ from the statutory rate of 35.0% due to the impact of certain non-deductible stock compensation charges under SFAS No. 123(R), state income taxes and research and development credits.

In February 2009, California enacted a law change which allows an elective single sales factor apportionment for taxable years beginning on or after January 1, 2011. We expect to benefit from the California single sales factor election. In accordance with SFAS No. 109, "Accounting for Income Taxes," we have re-measured our deferred tax assets, taking into account the reversal pattern and the expected California tax rate under the elective single sales factor. As a result of this change, we recorded a decrease to our California deferred tax assets by $0.2 million which resulted in a discrete income tax expense of $0.2 million for the three months ended March 31, 2009.

Liquidity and Capital Resources

We had cash and cash equivalents of $118.9 million at March 31, 2009, as compared to $120.4 million at December 31, 2008. All of our cash is in low risk short term money market funds or demand deposits. We have no long term investments. We believe our current cash and cash equivalent balances and cash flows generated by operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next twelve months.

Cash Flows

Operating activities used $1.7 million of cash during the three months ended March 31, 2009, as compared to generating $11.0 million for the three months ended March 31, 2008. There were two primary contributors to the decrease in cash from operations: first, our billings were lower as a result of decreased shipments during the quarter; and second, delayed first quarter billings during the implementation of our new enterprise accounting system, which also resulted in lower cash collections occurring in the quarter. Such billing delays are not expected to be a factor in future quarters.

We used $1.6 million of cash for investing activities during the three months ended March 31, 2009, a decrease compared to $2.4 million for the three months ended March 31, 2008. The decrease was primarily due to lower spending to support our information technology infrastructure since the implementation of our new enterprise accounting system is substantially complete.

. . .