The Company is aware that economic conditions in the United States and in the foreign markets where the Company's products are sold could substantially affect its sales and profitability. Economic activity in the United States and throughout much of the world has undergone a sudden, sharp economic downturn following the recent housing downturn and subprime lending collapse in both the United States and Europe. As a result, the Company has seen a decline in elective surgeries where the Company's products may be used.
Global credit and capital markets have also experienced unprecedented volatility and disruption, and business credit and liquidity have tightened in much of the world. This has also adversely affected the stock market resulting in material declines in stock prices. The Company's stock price declined significantly during this period. During the fourth quarter of 2008, the Company's market capitalization fell below its recorded net book value, which triggered impairment testings of its goodwill, other intangible assets and long-lived assets with finite lives. Based on the results of the impairment testing, the Company recorded an impairment charge of $380,000 on certain intangible assets related to developed technology that were acquired in the AcryMed transaction. No goodwill impairment was identified. The Company's market capitalization remained below its recorded book value as of March 31, 2009. There was no significant change in the Company's market capitalization since December 31, 2008. The Company will perform its annual impairment test as of June 30, 2009. The Company will continue to monitor its market capitalization. If the Company's market capitalization continues to remain below the Company's book value, it could imply that the carrying amount of the Company's goodwill and other intangible assets may not be recoverable, thereby requiring future interim impairment tests that may result in a non-cash write-down of these assets, which could have a material adverse impact on the Company's condensed consolidated financial statements. See Note 4 of the Notes to Condensed Consolidated Financial Statements for further discussion on the impairment testing performed as of December 31, 2008. It is difficult to predict the breadth and duration of the economic and financial market problems and the many ways in which they may adversely affect the Company's suppliers, customers and its business in general. Results of Operations
Revenue
Net revenues increased 9%, or $2.5 million, to $30.9 million for the three months ended March 31, 2009 from $28.4 million for the three months ended March 31, 2008.
Prior to the acquisition of AcryMed on February 15, 2008, the Company operated in one reportable operating segment. The Company's products were predominately assembled from common subassembly components in a single integrated manufacturing facility, and operating results were reviewed by management and the chief operating decision-maker on a combined basis due to shared infrastructure. Within this single operating segment, the Company has identified two product lines representing specific clinical applications - Regional Anesthesia and Intravenous ("IV") Infusion Therapy. Since the AcryMed acquisition, management and the chief operating decision-maker began to evaluate its performance on a separate internal reporting basis. As such, the Company currently operates in two reportable operating segments: Infusion Pumps for its Regional Anesthesia and IV Infusion Therapy products and Antimicrobial Materials for AcryMed's products. The Company's condensed consolidated financial statements for the year ended December 31, 2008 and subsequent periods include AcryMed's contributions subsequent to the February 15, 2008 acquisition date. Further, the Company believes it is most meaningful for the purposes of revenue analyses to group the product lines in the Infusion Pumps operating segment into two categories representing specific clinical applications - Regional Anesthesia and IV Infusion Therapy.
The Company's revenues from the Infusion Pumps operating segment increased 8%, or $2.3 million, to $30.1 million for the three months ended March 31, 2009 from $27.8 million for the three months ended March 31, 2008.
Regional Anesthesia revenues increased 9%, or $2.1 million, to $24.7 million for the three months ended March 31, 2009 from $22.6 million for the three months ended March 31, 2008. This increase was primarily due to increased clinical usage of the ON-Q PainBuster® Post-Operative Pain Relief System and C-bloc® Continuous Nerve Block System by surgeons in the United States, offset in part by reduced revenues from ON-Q third party billings, which the Company discontinued effective February 2009. U.S. revenue from the C-bloc Continuous Nerve Block System increased 44%, or $2.2 million, to $7.2 million for the three months ended March 31, 2009 compared to the same period in the prior year. The increases in revenue from the C-bloc Continuous Nerve Block System were primarily

due to improved customer awareness of clinical efficacy and favorable reimbursement from third parties. Other Regional Anesthesia products include the Soaker™ Catheter and the SilverSoaker™ Catheter.
Sales of IV Infusion Therapy products, which include the Company's intravenous elastomeric pumps, mechanical infusion devices and disposables, increased 4%, or $0.2 million, to $5.4 million for the three months ended March 31, 2009 from $5.2 million for the three months ended March 31, 2008. The increase was primarily due to increased unit sales of IV Infusion Therapy products to B. Braun Medical Inc., a domestic distributor, offset in part by decreased unit sales from international distributors, including B. Braun Medical S.A. (France). The Company has a distribution agreement with B. Braun Medical S.A., a manufacturer and distributor of pharmaceuticals and infusion products, to distribute the Company's elastomeric infusion pumps in Western Europe, Eastern Europe, the Middle East, Asia Pacific, South America and Africa. The distribution agreement was amended as of March 31, 2009 for updates primarily to territories subject to the agreement. In March 2009, the Company also announced that it entered into a binding letter of intent for an exclusive international distribution agreement with B. Braun Melsungen AG covering the ON-Q PainBuster Post-Operative Pain Relief System and ON-Q C-bloc Continuous Nerve Block System (the latter will be private labeled as Easypump™ C-bloc RA for B. Braun Melsungen AG). The Company expects a definitive agreement to be in place by June 2009.
Antimicrobial Materials revenues increased 39%, or $222,000, to $797,000 for the three months ended March 31, 2009 from $575,000 for the three month-period ended March 31, 2008. The increase was primarily due to revenue contributions of three months in 2009 as compared to revenues for one and one-half months in 2008 subsequent to the acquisition date of AcryMed. Cost of Revenues
Cost of revenues increased 4%, or $0.3 million, to $7.5 million for the three months ended March 31, 2009 from $7.2 million for the three months ended March 31, 2008. The increase was primarily due to higher sales volume. As a percentage of net sales, cost of revenues decreased by approximately one percentage point from 25% to 24% for the three months ended March 31, 2009 compared to the same period in the prior year. The decrease in cost of revenues is primarily due to the favorable change in sales mix toward higher-margin Regional Anesthesia products.
Selling and Marketing Expenses
Selling and marketing expenses decreased 8%, or $1.5 million, to $16.9 million for the three months ended March 31, 2009 from $18.4 million for the three months ended March 31, 2008.
For the three months ended March 31, 2009, the decrease was primarily attributable to decreases in compensation and related expenses ($1.0 million), national sales meeting ($0.4 million), advertising and promotion expenses ($0.2 million), marketing samples ($0.2 million) and consulting ($0.1 million), offset in part by increases in commissions ($0.4 million) and rebates ($0.2 million).
The decreases in compensation and related expenses, national sales meeting, advertising and promotion expenses, marketing samples and consulting expenses were directly related to a reduction in the sales force and decreased spending on marketing programs. As of March 31, 2009 and 2008, the Company had approximately 290 and 340 employees, respectively, in its sales organization. The Company's sales organization is comprised of inside and outside salespeople, nurses, customer service representatives and sales management. Increases in commissions and rebates were primarily due to the increase in revenue. As a percentage of net revenues, selling and marketing expenses decreased by approximately ten percentage points for the three months ended March 31, 2009 versus the same period in the prior year primarily because of the increase in net revenues and decrease in selling and marketing expenses described above. General and Administrative Expenses
General and administrative expenses increased 31%, or $1.5 million, to $6.4 million for the three months ended March 31, 2009 from $4.9 million for the three months ended March 31, 2008.

For the three months ended March 31, 2009, the increase was primarily attributable to increases in legal fees ($1.4 million), accounting fees ($0.2 million), general and administrative expenses incurred by AcryMed ($0.1 million), insurance ($0.1 million) and bad debt expense ($0.1 million), offset in part by a decrease in bonus expense ($0.4 million).
The increase in legal fees was primarily due to increased litigation costs including the patent infringement cases as discussed in Note 10 of the Notes to Condensed Consolidated Financial Statements. The general and administrative expenses incurred by AcryMed were consolidated with the Company's operations effective February 15, 2008 in connection with the Company's acquisition of AcryMed. The increase in insurance expense was primarily due to the increase in product liability insurance coverage effective June 1, 2008.
As a percentage of net revenues, general and administrative expenses increased by approximately four percentage points for the three months ended March 31, 2009 compared to the prior year quarter because general and administrative expenses increased at a rate that outpaced the increase in net revenues described above.
Product Development Expenses
Product development expenses include research and development for new products and the cost of obtaining and maintaining regulatory approvals of products and processes. Product development expenses increased 135%, or $1.2 million, to $2.2 million for the three months ended March 31, 2009 from $0.9 million for the three months ended March 31, 2008. The increase was primarily due to expenses incurred by AcryMed and increases in consulting expense and compensation and related expenses that resulted from an increase in the number of headcount in the Company's product development departments. Expenses incurred by AcryMed were consolidated with the Company's operations effective February 15, 2008 in connection with the Company's acquisition of AcryMed. The Company will continue to incur product development expenses as it continues its efforts to introduce new technology and cost-efficient products into the market. Certain Litigation and Insurance Charges For the three months ended March 31, 2009, the Company recorded $1.5 million in certain litigation and insurance charges. The Company has, to date, been named as a defendant in approximately 69 ongoing lawsuits seeking damages as a result of alleged chondrolysis. Many of these lawsuits name defendants in addition to the Company such as physicians, drug companies and other device manufacturers. SFAS No. 5, Accounting for Contingencies ("SFAS 5"), and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss ("FIN 14"), require the Company to record an estimated loss from loss contingency such as the legal proceedings described immediately above when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range and no amount within the range is a better estimate, the minimum amount of the range is accrued. In most cases, significant judgment is required to estimate the range of probable potential loss and timing of a loss to be recorded. Events may arise that were not anticipated and the outcome of a contingency may result in an uninsured loss to the Company that differs from the previously estimated liability, which could result in a material difference from that recorded in the current period. The Company estimates that the range of probable potential loss to the Company for the legal proceedings described immediately above as of March 31, 2009 is $12.4 million to $89.0 million. The range of probable potential loss included the cost of litigation, which is in compliance with the Company's accounting policy. Since the Company was unable to determine the best estimate within the range, the Company recorded the cumulative low end of the estimated range of $12.4 million in loss contingency, of which $1.5 million and $10.9 million was recognized as part of certain litigation and insurance charges in operating expenses during the three months ended March 31, 2009 and year ended December 31, 2008, respectively. Of the $10.9 million recognized during the year ended December 31, 2008, $8.7 million, $0.1 million and $2.1 million were recognized during the second, third and fourth quarters of 2008, respectively. The Company believes its current funds, together with possible borrowings from its existing line of credit, is sufficient to settle its current estimated loss contingency. However, if the Company's assumptions are wrong and the outcome of the legal proceedings results in a significant unfavorable difference from the previously recorded estimated liability, this will have a material adverse effect on the Company's financial condition and results of operations. The Company may be required to seek additional financing due to the unfavorable outcome. See Note 10 of the Notes to Condensed Consolidated Financial Statements for further information.

Interest and Other Income
Interest and other income decreased 51%, or $0.9 million, to $0.8 million for the three months ended March 31, 2009 from $1.7 million for the three months ended March 31, 2008. The decrease during the three months ended March 31, 2009 compared to the same period in the prior year was primarily due to decreased investment income from lower cash, cash equivalents and short-term investment balances and lower interest rates earned. The decreased cash, cash equivalents and short-term investment balances was primarily due to the payment of $26.7 million in cash for the acquisition of AcryMed on February 15, 2008. Income Taxes
During the three months ended March 31, 2009, the Company recorded an income tax provision of $0.7 million compared to an income tax benefit of $0.8 million for the three months ended March 31, 2008. The Company's effective tax rate for the three months ended March 31, 2009 was a tax expense rate of 24.3% compared to a tax benefit rate of 58.4% for the three months ended March 31, 2008. The increase in the effective income tax expense rate for the three months ended March 31, 2009 was primarily due to the impact from an increase in valuation allowance for deferred tax assets with uncertain future benefit. Liquidity and Capital Resources
During the three-month period ended March 31, 2009, cash provided by operating activities was $2.6 million compared to cash used in operating activities of $11.8 million for the same period in the prior year. The increase in cash provided by operating activities was primarily due to a federal income tax payment of $12.5 million made during the three months ended March 31, 2008 in connection with the taxable gain from sale of InfuSystem in October 2007 and an increase in accounts payable during the current year due to the timing of payments, offset in part by an increase in inventory and a decrease in accrued payroll and related expenses during the current year.
During the three-month period ended March 31, 2009, cash provided by investing activities was $3.6 million compared to cash used in investing activities of $24.1 million for the same period in the prior year. The increase in cash provided by investing activities was primarily due to the $26.7 million cash payment made for the acquisition of AcryMed in February 2008, an increase in the principal payments received from the HAPC note receivable and a decrease in the purchases of investments during the current year, offset in part by the decrease in net proceeds from the maturities of investments during the current year. The Company's investing activities are impacted by sales, maturities and purchases of its short-term investments. The Company currently invests its excess cash primarily in a highly liquid money market fund that holds principally U.S. Treasury securities. The Company does not hold any direct or indirect investments in auction rate securities.
During the three-month period ended March 31, 2009, cash used in financing activities was $1.1 million compared to cash used in financing activities of $3.4 million for the same period in the prior year. The decrease in cash used in financing activities was primarily due to a lesser amount of cash paid for the purchase of shares of stock under the Company's stock repurchase program and shares purchased by the Company related to employee payroll tax withholdings from the vesting of certain restricted stock and restricted stock units during the three months ended March 31, 2009 compared to the same period in the prior year.
As of March 31, 2009, the Company had cash and cash equivalents of $44.5 million, short-term investments of $5.7 million, net accounts receivable of $18.7 million and net working capital of $75.2 million. Management believes the current funds, together with possible borrowings on the existing line of credit and other bank loans, are sufficient to provide for the Company's projected needs to maintain operations for at least the next 12 months. The Company may decide to sell additional equity securities or increase its borrowings in order to fund or increase its expenditures for selling and marketing, to fund increased product development, or for other purposes. The Company has a $20.0 million working capital line of credit with Silicon Valley Bank. The line of credit facility initially expired on October 15, 2008 and originally included a revolving credit facility of $10.0 million. Effective December 18, 2008, the Company renewed the line of credit facility for $20.0 million and extended the term of the credit facility to December 17, 2009. The Company is able to borrow, repay and reborrow under the line of credit

facility at any time. Amounts outstanding under the line of credit facility bear interest at one percentage point above Silicon Valley Bank's prime rate (3.25% at March 31, 2009), but no less than 4.0% per annum. The Company did not have any borrowings under the line of credit facility during the three months ended March 31, 2009 and 2008. As of March 31, 2009 and 2008, the Company did not have an outstanding balance under the line of credit facility.
The Company's line of credit is collateralized by substantially all of the Company's assets and requires the Company to comply with covenants principally relating to the achievement of a minimum profitability level and satisfaction of a quick ratio test. As of March 31, 2009, the Company believes it was in compliance with all related covenants.
On February 26, 2008, the Company announced that its board of directors had authorized the repurchase of up to 1,000,000 shares of the Company's common stock under a new stock repurchase program, which would be in existence for 12 months, unless the program was terminated sooner by the board of directors. This new stock repurchase program superseded and replaced any other repurchase program that the Company previously announced. On August 12, 2008, the Company's board of directors authorized the repurchase of up to an additional 1,000,000 shares of the Company's common stock for a total of up to 2,000,000 shares authorized for repurchase under the program. On March 17, 2009, the Company's board of directors authorized the repurchase of up to an additional 2,000,000 shares of the Company's common stock for a total of up to 4,000,000 shares authorized for repurchase under the program. During the three months ended March 31, 2009, the Company repurchased approximately 129,000 shares with a weighted-average purchase price of $2.35 per share under this program. The stock repurchase program was also extended to February 28, 2010, unless terminated sooner by the board of directors.
Also, in connection with the 2001 Plan the Company may repurchase shares of common stock from employees for the satisfaction of their individual payroll tax withholdings upon vesting of restricted stock and restricted stock units. A total of approximately 192,000 shares with a weighted-average price of $4.32 per share were purchased in connection with the satisfaction of employee payroll tax withholdings during the three months ended March 31, 2009.
A summary of the Company's repurchase activity for the three months ended March 31, 2009 is as follows:

                                                                                          Total Number of                             Maximum Number of
                                                                                         Shares Purchased                            Shares That May Yet
                                             Total Number of                              Under the Stock                            Be Purchased Under
                                            Shares Repurchased          Average             Repurchase             Average                the Stock
                                                 For Tax               Price Paid             Program             Price Paid         Repurchase Program
2009                                         Withholding (1)           per Share                (2)               per Share                  (2)
January 1 - January 31                                 22,434         $     4.12                       -         $        -                   3,092,548
February 1 - February 28                              167,739               4.36                       -                  -                   3,092,548
March 1 - March 31                                      1,968               2.96                 128,863               2.35                   2,963,685
. . .