Items that are not allocated to our operating segments are comprised primarily of corporate research and development expenses that do not align with one of our existing business or service categories, a portion of share-based compensation expense, interest income and expense, and income taxes. We allocate most of our share-based compensation expense to our operating segments. This allocation differs from the actual expense and consequently yields a difference between the total allocated share-based compensation expense and the actual expense for the total company. In our segment disclosure of gross profit, operating expenses and operating income, these amounts are shown under the caption "unallocated amounts."
Because the instrument consumables and rapid assay products in our CAG segment 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 in local currencies. Strengthening of the rate of exchange for 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 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 under the heading "Part 1, Item 3. Quantitative and Qualitative Disclosures About Market Risk." We believe that our financial results in the first and second quarters 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, preventive care and elective procedures. Reduced patient visits negatively impacted sales of rapid assay tests, instrument consumables and laboratory services in our CAG segment. In addition, we believe that sales of our instruments, which are larger capital purchases for veterinarians, have been negatively affected by increased caution among veterinarians regarding near-term economic prospects. 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 growth rates will improve as major world 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 six months ended June 30, 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 six months ended June 30, 2009 are consistent with those discussed in our Annual Report on Form 10-K for the year ended December 31, 2008 in the section under the heading "Part 2, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates."
• Results of Operations Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008 Revenue Total Company. The following table presents revenue by operating segment:

                                                                                                                                 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                      $ 217,289     $ 229,982     $ (12,693 )          (5.5 %)            (4.6 %)                 (6.2 %)               5.3 %
Water                       19,165        20,150          (985 )          (4.9 %)            (6.6 %)                    -                  1.7 %
PAS                         19,639        21,489        (1,850 )          (8.6 %)            (9.9 %)                    -                  1.3 %
Other                        9,630         8,949           681             7.6 %             (2.1 %)                    -                  9.7 %

Total                    $ 265,723     $ 280,570     $ (14,847 )          (5.3 %)            (5.1 %)                 (5.1 %)               4.9 %

(1) Represents the percentage change in revenue attributed to the effect of changes in currency rates from the three months ended June 30, 2009 to the three months ended June 30, 2008.

(2) Represents the percentage change in revenue during the three months ended June 30, 2009 compared to the three months ended June 30, 2008 attributed to incremental revenues from businesses acquired or revenues lost from businesses divested or discontinued subsequent to March 31, 2008.

The following revenue analysis reflects the results of operations net of the impact of currency exchange rates on sales outside the U.S.
Companion Animal Group. The following table presents revenue by product and service category for CAG:

                                                                                                                                      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                  $  83,732     $  80,777     $   2,955              3.7 %             (5.7 %)                    -                  9.4 %
Rapid assay products            41,567        41,618           (51 )           (0.1 %)            (1.8 %)                    -                  1.7 %
Laboratory and consulting
services                        77,876        79,341        (1,465 )           (1.8 %)            (6.4 %)                    -                  4.6 %
Practice information
management systems and
digital radiography             14,114        14,015            99              0.7 %             (1.8 %)                    -                  2.5 %
Pharmaceutical products              -        14,231       (14,231 )         (100.0 %)               -                  (100.0 %)                 -

Net CAG revenue              $ 217,289     $ 229,982     $ (12,693 )           (5.5 %)            (4.6 %)                 (6.2 %)               5.3 %

(1) Represents the percentage change in revenue attributed to the effect of changes in currency rates from the three months ended June 30, 2009 to the three months ended June 30, 2008.

(2) Represents the percentage change in revenue during the three months ended June 30, 2009 compared to the three months ended June 30, 2008 attributed to incremental revenues from businesses acquired or revenues lost from businesses divested or discontinued subsequent to March 31, 2008.

Instruments and consumables revenue increased due to higher instrument sales volumes and higher consumables sales volume, partly offset by lower average unit sales prices. Higher instrument sales volume was 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 efforts to our newer instruments and to economic factors. Lower average unit sales prices for instruments was primarily related to sales of our LaserCyte® hematology analyzers, resulting from discounts associated with customer purchase programs. Higher instrument service revenue was due to the increase in instruments covered under service contracts as our active installed base of instruments continued to increase. Changes in distributors' inventory levels did not have a meaningful impact on reported instruments and consumables revenue growth.
The increase in rapid assay revenue was due primarily to the favorable impact of a comparatively lower decrease in distributor inventories in the current quarter as compared to the decrease in the same quarter of the prior year. This impact was partly offset by lower practice-level sales due to higher purchases by clinics made in the first quarter of 2009 resulting from sales programs offering promotional discounting. The impact from changes in distributors' inventory levels increased reported rapid assay revenue growth by 2%.
The increase in revenue from laboratory and consulting services resulted primarily from the impact of price increases and, to a lesser extent, from higher testing volume. The higher testing volume was the result of growth in our customer base and the impact of new test offerings.
The increase in revenue from practice information management systems and digital radiography resulted primarily from higher sales volume of peripheral equipment and support services, including extended maintenance agreements and data storage. Higher sales volumes of companion animal radiography systems also contributed to the increase in sales. These favorable items were partly offset by lower sales volumes of equine radiography systems and lower average unit prices for companion animal radiography systems.
In the fourth quarter of 2008, we sold a substantial portion of our pharmaceutical assets and product lines, and therefore did not have pharmaceutical product revenue during the three months ended June 30, 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. In the second quarter of 2008, we announced that we would be discontinuing manufacturing of our PZI VET® product. This announcement resulted in unusually high sales in the second quarter of 2008. The absence of pharmaceutical revenue in the second quarter of 2009 unfavorably impacted CAG revenue for the three months ended June 30, 2009 by approximately $14 million as compared to the same period of the prior year.

Water. The increase in Water revenue resulted primarily from higher average unit sales prices, partly offset by lower sales volume of our Colilert® products. 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 price increases for certain products sold in the U.S. and other regions.
Production Animal Segment. The increase in PAS revenue resulted primarily from higher average unit sales prices for certain bovine tests due to price increases as well as higher relative sales in geographies where products are sold at higher average unit sales prices, partly offset by lower sales volume of certain bovine tests.
Other. The increase in Other operating units revenue was due primarily to higher sales volume of recently launched Dairy products, including a new instrument and a new Dairy SNAP®residue test for detection of melamine, and of OPTI Medical products. These impacts were partly offset by lower average unit sales prices for certain OPTI Medical products.
Gross Profit
Total Company. The following table presents gross profit and gross profit percentages by operating segment:

Gross Profit                           Percent of                    Percent of       Dollar        Percentage
(dollars in thousands)     2009          Revenue         2008          Revenue        Change          Change

CAG                      $ 108,334            49.9 %   $ 120,481            52.4 %   $ (12,147 )          (10.1 %)
Water                       12,554            65.5 %      12,433            61.7 %         121              1.0 %
PAS                         13,299            67.7 %      14,430            67.2 %      (1,131 )           (7.8 %)
Other                        4,193            43.5 %       3,820            42.7 %         373              9.8 %
Unallocated amounts             60             N/A            96             N/A           (36 )          (37.5 %)

Total Company            $ 138,440            52.1 %   $ 151,260            53.9 %   $ (12,820 )           (8.5 %)

Companion Animal Group. Gross profit for CAG decreased due to overall lower sales and a decrease in the gross profit percentage to 50% from 52%. The decrease in the gross profit percentage was due primarily to the absence of higher margin pharmaceutical product sales in 2009, to higher relative sales of lower margin IDEXX VetLab® instruments and laboratory and consulting services, and to higher overall manufacturing costs due, in part, to the impact of lower production volumes of most instruments and consumables, excluding recently launched instruments. These unfavorable impacts were partly offset by the impact of higher selling prices, primarily for laboratory and consulting services. Water. Gross profit for Water increased due to an increase in the gross profit percentage to 66% from 62%, partly offset by slightly lower sales. The increase in the gross profit percentage was due primarily to the impact of lower royalty costs, higher average unit sales prices and, to a lesser extent, the favorable impact of foreign currency hedge contracts and the favorable impact of exchange rates on foreign currency denominated expenses, net of the unfavorable impact that strengthening of the U.S. Dollar had on sales denominated in foreign currencies.
Production Animal Segment. Gross profit for PAS decreased due to lower sales, partly offset by an increase in the gross profit percentage to 68% from 67%. The increase in the gross profit percentage was due primarily to the favorable impact of foreign currency hedge contracts and the favorable impact of exchange rates on 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 average unit sales prices and to higher relative sales of higher margin products. These favorable items were partly offset by higher costs of production.
Other. Gross profit for Other operating units increased due to an increase in the gross profit percentage to 44% from 43% and higher sales. The increase in the gross profit percentage was due primarily to comparatively lower costs of production, partly offset by lower average unit sales prices and higher product shipping costs.

Operating Expenses and Operating Income
Total Company. The following tables present operating expenses and operating income by operating segment:

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

CAG                      $ 68,422            31.5 %   $ 72,993            31.7 %   $ (4,571 )          (6.3 %)
Water                       3,946            20.6 %      4,131            20.5 %       (185 )          (4.5 %)
PAS                         8,191            41.7 %      8,916            41.5 %       (725 )          (8.1 %)
Other                       4,223            43.9 %      3,555            39.7 %        668            18.8 %
Unallocated amounts         4,482             N/A        2,774             N/A        1,708            61.6 %

Total Company            $ 89,264            33.6 %   $ 92,369            32.9 %   $ (3,105 )          (3.4 %)




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

CAG                      $ 39,912            18.4 %    $ 47,488            20.6 %   $ (7,576 )          (16.0 %)
Water                       8,608            44.9 %       8,302            41.2 %        306              3.7 %
PAS                         5,108            26.0 %       5,514            25.7 %       (406 )           (7.4 %)
Other                         (30 )          (0.3 %)        265             3.0 %       (295 )         (111.3 %)
Unallocated amounts        (4,422 )           N/A        (2,678 )           N/A       (1,744 )          (65.1 %)

Total Company            $ 49,176            18.5 %    $ 58,891            21.0 %   $ (9,715 )          (16.5 %)

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

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

Sales and marketing           $ 35,371             16.3 %    $ 37,188             16.2 %    $ (1,817 )            (4.9 %)
General and administrative      22,609             10.4 %      23,700             10.3 %      (1,091 )            (4.6 %)
Research and development        10,442              4.8 %      12,105              5.3 %      (1,663 )           (13.7 %)

Total operating expenses      $ 68,422             31.5 %    $ 72,993             31.7 %    $ (4,571 )            (6.3 %)

As previously described, we sold a substantial portion of our pharmaceutical assets and product lines and restructured the remainder of this business in the fourth quarter of 2008. As a result, we did not incur meaningful expenses related to this business in the second 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." In relation to restructuring the remainder of the pharmaceutical business, certain research and development personnel were realigned to our corporate research and development team, for which expenses are not allocated to our operating segments. A portion of the decrease in spending explained within the CAG section is due to this restructuring. The decrease in sales and marketing expense resulted primarily from the favorable impact of exchange rates on foreign currency denominated expenses and from the pharmaceutical transaction. To a lesser extent, lower spending on sales commissions also reduced sales and marketing expense. These decreases were . . .