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 U.S. and Europe. Our advanced products will eventually contribute a higher profit margin than our base products, and our Rochester Medical branded products contribute a higher profit margin than private label sales, particularly branded sales in the United Kingdom and elsewhere in Europe. Increasing our percentage of sales of branded products versus private label sales over time will have a positive impact on our gross margin. Branded sales accounted for 65% of total sales for the quarter ended March 31, 2009, and 66% of total sales year to date, compared to 62% for the quarter ended March 31, 2008 and 66% for the same period last year. Advanced products accounted for 11% of total sales for the quarter ended March 31, 2009, and 12% of total sales year to date, compared to 12% for the quarter ended March 31, 2008 and 11% for the same period last year.
The following discussion pertains to our results of operations and financial position for the quarters and six month periods ended March 31, 2009 and 2008. Results of the periods are not necessarily indicative of the results to be expected for the complete year. For the second quarter ended March 31, 2009, we reported net income of $0.03 per diluted share, compared to a net loss of $0.01 per diluted share for the same period last year. Loss from operations was $90,000 for the quarter ended March 31, 2009 compared to a loss of $429,000 for the quarter ended March 31, 2008, while net income was $361,000 for the quarter ended March 31, 2009 compared to a net loss of $167,000 for the same period last year.
As of March 31, 2009, we had $5.9 million in cash and cash equivalents, and $29 million invested in marketable securities. The marketable securities primarily consist of $26.8 million invested in U.S. treasury bills and $2.2 million invested in a mutual fund. Our investments in marketable securities are subject to interest rate risk and the value thereof could be adversely affected due to movements in interest rates. Our investment choices, however, are conservative and are intended to reduce the risk of loss or any material impact on our financial condition. We are currently reporting an unrealized loss $1,053,096 related to the mutual fund as a result of the recent fluctuations in the credit markets impacting the current market value. We consider this unrealized loss temporary as we have the intent and ability to hold this investment long enough to avoid realizing any significant losses. 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         Six Months Ended
                                               March 31,                 March 31,
                                            2009          2008        2009         2008
       Net Sales                             100 %        100 %        100 %       100 %
       Cost of Sales                          48 %         54 %         51 %        52 %

       Gross Margin                           52 %         46 %         49 %        48 %

       Operating Expenses:
       Marketing and Selling                  29 %         26 %         30 %        26 %
       Research and Development                4 %          3 %          4 %         3 %
       General and Administrative             21 %         22 %         19 %        21 %

       Total Operating Expenses               54 %         51 %         53 %        50 %

       Loss from Operations                   (2 )%        (5 )%        (4 )%       (2 )%
       Interest Income (Expense), Net         (1 )%         3 %          0 %         3 %
       Other Income,                          12 %          0 %          7 %         0 %

       Net Income (loss) before taxes         10 %         (2 )%         3 %         1 %

       Income tax expense                      6 %          0 %          2 %         0 %

       Net Income (loss) after taxes           4 %         (2 )%         1 %         1 %

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 March 31,
                                                     2009                                                    2008
                                Domestic          International          Total          Domestic          International          Total
Private label sales:
Base products                  $    1,678        $         1,148        $ 2,826        $    2,095        $           948        $ 3,043
Advanced products                     111                      -            111               441                      -            441

Total private label sales           1,789                  1,148          2,937             2,535                    948          3,483

Branded sales:
Base products                       1,036                  3,657          4,693             1,000                  4,024          5,024
Advanced products                     671                    144            815               616                     92            708

Total branded sales                 1,707                  3,801          5,508             1,616                  4,116          5,732

Total net sales:               $    3,496        $         4,949        $ 8,445        $    4,151        $         5,064        $ 9,215




                                                                  Fiscal Year to Date Ended March 31,
                                                     2009                                                     2008
                                Domestic          International          Total           Domestic          International          Total
Private label sales:
Base products                  $    3,205        $         2,249        $  5,454        $    3,423        $         1,884        $  5,307
Advanced products                     355                      -             355               605                      -             605

Total private label sales           3,560                  2,249           5,809             4,028                  1,884           5,912

Branded sales:
Base products                       1,927                  7,428           9,355             1,997                  8,143          10,140
Advanced products                   1,342                    375           1,717             1,203                    185           1,388

Total branded sales                 3,269                  7,803          11,072             3,200                  8,328          11,528

Total net sales:               $    6,829        $        10,052        $ 16,881        $    7,228        $        10,212        $ 17,440

Three Month and Six Month Periods Ended March 31, 2009 and March 31, 2008 Net Sales. Net sales for the second quarter of fiscal 2009 decreased 8% to $8,445,000 from $9,215,000 for the comparable quarter of last fiscal year. The sales decrease primarily resulted from a decrease in sales of private label products and a decrease in branded sales in the U.K., offset by slightly higher sales of branded products domestically and increased branded sales internationally outside of the U.K. Domestic sales of branded products increased by 5.6% for the quarter compared to the same period last year. Our international branded sales decreased 2.3% compared to the same period last year, primarily as a result of the change in foreign currency exchange rates in the United Kingdom as the U.S. dollar was significantly stronger versus the British pound, thereby affecting total branded sales given the significant volume of our branded product sales in the United Kingdom. Private label sales were down 16% from last year. Private label sales accounted for approximately 35% of total sales. Management continues to focus on growth in branded sales, and total branded sales volumes of intermittent catheters and Foley catheters increased for the second quarter compared to last fiscal year. In line with our strategic decision to increase investments in sales and marketing to drive growth in branded sales, we have initiated direct sales efforts into Japan and mainland Europe.
Net sales for the six months ended March 31, 2009 decreased 3% to $16,881,000 from $17,440,000 for the comparable six-month period of last fiscal year. The decrease in sales primarily resulted from a decrease in domestic private label sales and a decrease in branded sales in the U.K. as a result of the change in the foreign currency exchange

rate in the United Kingdom of the British pound to the U.S. dollar from last year, offset by increased sales of private label products internationally and branded sales internationally outside of the U.K. Sales of branded products domestically were virtually flat compared to the same period last year.
Gross Margin. Our gross margin as a percentage of net sales for the second quarter of fiscal 2009 was 52% compared to 46% for the comparable quarter of last fiscal year. The increase in gross margin this quarter was primarily due to increased sales of higher margin product, including male external catheters and script easy in the U.K. and other international markets, and favorable manufacturing variances and efficiencies, partially offset by the change in the foreign currency exchange rate in the United Kingdom of the British pound to the U.S. dollar and increased medical claim costs. Gross margin for the six months ended March 31, 2009 increased slightly to 49% from 48%. Factors affecting the comparative six month gross margin are generally consistent with those discussed above for the current quarter.
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 second quarter of fiscal 2009 increased 3% to $2,448,000 from $2,380,000 for the comparable quarter of last fiscal year. The increase in marketing and selling expense is primarily due to increased sales personnel and related expenses incurred through the addition of sales and marketing staff in both our U.S. and U.K. operations, and increased advertising expense related to marketing in the U.K. and the U.S. of our new intermittent catheter and preparation for our advanced Foley catheter launch, partially offset by the change in the foreign currency exchange rate in the United Kingdom of the British pound to the U.S. dollar from last year. Marketing and selling expense as a percentage of net sales for the fiscal quarters ended March 31, 2009 and 2008 was 29% and 26%, respectively.
Marketing and selling expense for the six months ended March 31, 2009 increased 9% to $5,014,000 from $4,605,000 for the comparable six-month period of last fiscal year. Factors affecting the comparative six-month expense levels are generally consistent with those discussed above for the current quarter.
Research and Development. Research and development expense primarily includes internal labor costs, as well as expense associated with third-party vendors performing validation and investigative research regarding our products and development activities. Research and development expense for the second quarter of fiscal 2009 decreased 2% to $299,000 from $304,000 for the comparable quarter of last fiscal year. The decrease in research and development expense relates primarily to decreased expenses related to testing and development of new and enhanced products as we introduced our new line of intermittent catheters earlier this year. Research and development expense as a percentage of net sales for the fiscal quarters ended March 31, 2009 and 2008 was 4% and 3%, respectively.
Research and development expense for the six months ended March 31, 2009 increased 16% to $617,000 from $533,000 for the comparable six-month period of last fiscal year. The increase in research and development expense for the six months ended March 31, 2009 primarily relates to increased testing and development of new products during the first quarter of fiscal 2009.
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 and accounting advisors. General and administrative expense for the second quarter of fiscal 2009 decreased 13% to $1,757,000 from $2,017,000 for the comparable quarter of last fiscal year. The decrease in general and administrative expense is primarily related to decreased legal fees, stock option compensation expenses, audit related expenses and the change in the foreign currency exchange rate in the United Kingdom of the British pound to the U.S. dollar from last year, offset by increased professional fees related to tax matters. General and administrative expense as a percentage of net sales for the fiscal quarters ended March 31, 2009 and 2008 was 21% and 22%, respectively.
General and administrative expense for the six months ended March 31, 2009 decreased 14% to $3,123,000 from $3,632,000 for the comparable six-month period of last fiscal year. The decrease in general and administrative expenses for the six month period primarily reflects a decrease in legal, audit fees and stock option compensation expenses from the prior year.

Interest Income. Interest income for the second quarter of fiscal 2009 decreased 90% to $34,000 from $356,000 for the comparable quarter of last fiscal year. The decrease in interest income reflects significantly lower interest rates on investments.
Interest income for the six months ended March 31, 2009 decreased 75% to $202,000 from $809,000 for the comparable six-month period of last fiscal year. Factors affecting the comparative six-month interest income are generally consistent with those discussed above for the current quarter.
Interest Expense. Interest expense for the second quarter of fiscal 2009 decreased $48,000 to $80,000 from the comparable quarter of last fiscal year. The decrease in interest expense reflects lower amounts of debt as a result of quarterly debt payments.
Interest expense for the six months ended March 31, 2009 decreased $114,000 to $164,000 from $278,000 for the comparable six-month period of last fiscal year. The decrease in interest expenses for the six month period are generally consistent with those discussed above for the current quarter.
Income Taxes. For the quarter ended March 31, 2009, we had an effective income tax rate of approximately 49.6%. The tax rate is in line with our expectation due to the increased volume of incentive stock option activity, of which the book expense is a permanent add-back item for tax purposes and increased our effective tax rate by 9% for the quarter. In future periods of taxable earnings, we expect to report an income tax provision using an effective tax rate in the range of 40 - 42% for U.S. income. The effective tax rate on worldwide income may fluctuate depending upon inter-company eliminations and U.K. operation profitability.
Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities were $34.9 million at March 31, 2009 compared to $37.0 million at September 30, 2008. The decrease in cash primarily resulted from capital expenditures, repayment of long-term debt and the repurchase of common stock offset by cash provided from operations, borrowing on our new credit facility and the sale of common stock upon exercise of options. As of March 31, 2009, we had $29 million invested in marketable securities as a result of the cash settlements received from lawsuits. The marketable securities primarily consist of $26.8 million invested in U.S. treasury bills and $2.2 million invested in a mutual fund. We are currently reporting an unrealized loss $1,053,096 related to the mutual fund as a result of the recent fluctuations in the credit markets impacting the current market value. We consider this unrealized loss temporary as we have the intent and ability to hold this investment long enough to avoid realizing any significant losses.
During the six-month period ended March 31, 2009, we generated $982,000 of cash in operating activities compared to $539,000 of cash being used by operations during the comparable period of the prior fiscal year. Increased net cash from operating activities in the first six months of fiscal 2009 primarily reflects net income before depreciation and decreases in accounts receivable and other current assets and increases in other current liabilities, offset by increases in inventories and decreases in accounts payable. Accounts receivable balances during this period decreased 2% or $142,000, primarily due to increased collections. Inventories increased 6% or $535,000. Accounts payable decreased 28% or $605,000, primarily reflecting timing of expenses. Other current liabilities increased 2% or $25,000, primarily reflecting payments of annual executive bonuses offset by timing of normal operating accruals. In addition, capital expenditures during this period were $715,000 compared to $668,000 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 consisted 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%. In March 2009, we paid off the entire term loan and terminated the revolving line of credit.
In February 2009, we entered into a $14,000,000 credit facility with UBS Financial. The credit facility consists of a revolving line of credit of up to $14,000,000 with interest accruing monthly at a floating rate based on the quoted one-month LIBOR rate plus 0.50%. As of March 31, 2009, we had an outstanding balance of $2,000,000 under the revolving line of credit. Our obligations under the credit facility are payable on demand and are secured by our investments in marketable securities held at UBS.

We believe that our capital resources on hand at March 31, 2009, 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. Any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve significant restrictive covenants. 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 current domestic and international economic conditions that could adversely affect the level of demand for our products and increased volatility in foreign exchange rates;

• 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.