All dollar amounts are presented in thousands, except for per share amounts.

Overview

We are a leading distributor of animal health products to veterinarians across the United States. We distribute more than 30,000 products sourced from over 500 vendors to approximately 19,000 veterinary practices nationwide. We currently operate out of twelve strategically located distribution centers. Products we sell include pharmaceuticals, vaccines, parasiticides, diagnostics, capital equipment, supplies, veterinary pet food and nutritional products. We market these products to veterinarians in both the companion animal and production animal markets. We operate within a single reporting segment and are primarily located within the United States.

Our Dallas, Texas distribution center moved from a 35,000 square foot facility to a 70,000 square foot facility in November 2008. In January 2009, we consolidated our distribution center in San Antonio, Texas into our Dallas, Texas distribution center.

Historically, we estimate that approximately two-thirds of our total revenues have been generated from sales to the companion animal market and one-third from sales to the production animal market. The state of the overall economy and consumer spending have impacted both markets, while volatile commodity prices in milk, grain, corn and feeder cattle and changes in weather patterns have also affected demand in the production animal market. Both markets have been integral to our financial results and we intend to continue supporting both markets.

We believe that growth in the companion animal market has slowed recently as a result of a decrease in consumer spending and a general slowdown in the economy. Historically, growth in the companion animal market has been due to the increasing number of households with companion animals, increased expenditures on animal health and preventative care, an aging pet population, advancements in pharmaceuticals and diagnostic testing and extensive marketing programs sponsored by companion animal nutrition and pharmaceutical companies. While the average order size for companion animal health products is often smaller than production animal health products, companion animal health products typically have higher margins. We intend to continue to penetrate this market through internal growth initiatives and selective acquisitions.

Product sales in the production animal market have been negatively impacted by increasing volatility in commodity prices such as milk, corn, grain and feeder cattle, changes in weather patterns that allow cattle to graze for longer periods and changes in the general economy. We intend to continue to support production animal veterinarians with a broad range of products and value added services. Historically, sales in this market have been largely driven by spending on animal health products to improve productivity, weight gain and disease prevention, as well as a growing focus on food safety.

Our quarterly sales and operating results have varied significantly in the past, and will likely continue to do so in the future. Historically, our total revenues have typically been higher during the spring and fall months due to increased sales of production animal products. Product use cycles for production animal products are directly related to medical procedures performed by veterinarians on production animals during the spring and fall months. These buying patterns can also be affected by vendors' and distributors' marketing programs launched during the summer months, particularly in June, which can cause veterinarians to purchase production animal health products earlier than those products are needed. This kind of early purchasing may reduce our sales in the months these purchases would have otherwise been made.

Sales

We sell products that we source from our vendors to our customers through either a "buy/sell" transaction or an agency relationship with our vendors. In a "buy/sell" transaction, we purchase or take inventory of products from our vendors. When a customer places an order, we pick, pack and ship products, and then invoice the customer for the order. We record sales from "buy/sell" transactions, which account for the majority of our business, as revenue in conformity with accounting principles generally accepted in the United States. In an agency relationship, we generally do not purchase and take inventory of products from vendors. When we receive an order from a customer, we transmit the order to the vendor, who picks, packs and ships the order to our customer. In some cases, the vendor invoices and collects payment from the customer, while in other cases we invoice and collect payment from the customer on behalf of the vendor. We receive a commission payment for soliciting the order from the customer and for providing other customer service activities. The aggregate revenue we receive in agency transactions constitutes the "commissions" line item on our statement of income and is recorded in conformity with accounting principles generally accepted in the United States. The vendor determines the method we use to sell the products. Historically, vendors have occasionally switched between the "buy/sell" and agency models for particular products in response to market conditions related to that particular product. A switch between models can impact our revenues, gross margin, gross margin percentage and operating income.

Our top ten vendors supplied products that accounted for approximately 74% and 72% of our revenues for the nine months ended June 30, 2009 and 2008, respectively, and 72% of our revenues for the fiscal year ended September 30, 2008. Pfizer supplied products that accounted for approximately 24% and 23% of our revenues during the nine months ended June 30, 2009 and 2008, respectively, and 23% of our revenues for our fiscal year ended September 30, 2008. Of the Pfizer supplied products, production animal products under a livestock agreement accounted for approximately 14% and 17% of our revenues during the nine months ended June 30, 2009 and 2008, respectively and approximately 17% of our revenues for our fiscal year ended September 30, 2008. Fort Dodge supplied products that accounted for approximately 11% and 12% of our revenues during the nine months ended June 30, 2009 and 2008, respectively, and 12% of our revenues for our fiscal year ended September 30, 2008. Intervet-Schering, a subsidiary of Schering Plough Corporation ("Schering Plough"), supplied products that accounted for approximately 11% and 9% of our revenues during the nine months ended June 30, 2009 and 2008, respectively, and 9% of our revenues for our fiscal year ended September 30, 2008. Merial Limited ("Merial"), a joint venture between Merck & Co., Inc. and Sanofi-Aventis S.A., supplies the majority of their products to us under an agency relationship. Commission revenue generated from Merial products accounted for approximately 55% and 62% of total commission revenues for the nine months ended June 30, 2009 and 2008, respectively, and 60% of total commission revenues for our fiscal year ended September 30, 2008.

On January 26, 2009, Pfizer and Wyeth announced that they had entered into a merger agreement under which Pfizer will acquire all of the outstanding stock of Wyeth. Pfizer and Fort Dodge, which is a division of Wyeth, are our two largest vendors as measured by our revenues. On March 9, 2009, Merck and Schering-Plough announced that they had entered into a merger agreement under which Merck will acquire all of the outstanding stock of Schering-Plough.

Vendor Rebates

We typically renegotiate vendor contracts annually. These vendor contracts may include terms defining rebates, commissions and exclusivity requirements. Vendor rebates based on sales are classified in our accompanying consolidated statements of income as a reduction to cost of product sales at the time the sales performance measures are achieved. Purchase rebates are measured against inventory purchases from the vendors and are a reduction of inventory until the product is sold. When the inventory is sold, purchase rebates are recognized as a reduction to cost of product sales. Many of our vendors' rebate programs are based on a calendar year.

On December 12, 2008, we entered into a 2009 Livestock Products Distribution Agreement (the "Agreement") with Pfizer, Inc. which was effective January 1, 2009. Under the Agreement, MWI is entitled to distribute Pfizer's livestock products to customers in the livestock field. The Agreement allows for a reduced fee for logistics and has eliminated incentive fees and rebates compared to the 2008 Livestock Products Agreement. MWI is required to maintain sufficient inventory levels to meet customer demand and to store products in accordance with their respective label instructions. The Agreement expires on December 31, 2009 and may be terminated by either party with or without cause upon 30 days prior written notice.

Acquisitions

In July 2008, we acquired substantially all of the assets of AAHA MARKETLink. Based near Denver, Colorado, AAHA MARKETLink was a distributor of animal health products to members of American Animal Hospital Association.

For more information on our business, see our Annual Report on Form 10-K filed with the SEC on November 24, 2008.

Results of Operations



The following table summarizes our results of operations for the three and nine
months ended June 30, 2009 and 2008, in dollars and as a percentage of total
revenues.



                            Three Months Ended June 30,                 Nine Months Ended June 30,
                        2009        %         2008        %         2009        %         2008        %
Revenues:
Product sales        $  231,743     93.6 % $  196,325     94.2 % $  647,979     93.4 % $  568,089     93.7 %
Product sales to
related party            12,075      4.9 %      8,689      4.2 %     35,542      5.1 %     28,728      4.7 %
Commissions               3,645      1.5 %      3,263      1.6 %     10,273      1.5 %      9,781      1.6 %
Total revenues          247,463    100.0 %    208,277    100.0 %    693,794    100.0 %    606,598    100.0 %

Cost of product
sales                   212,980     86.1 %    177,970     85.4 %    594,022     85.6 %    518,238     85.4 %
Gross profit             34,483     13.9 %     30,307     14.6 %     99,772     14.4 %     88,360     14.6 %

Selling, general
and administrative
expenses                 22,748      9.2 %     20,802     10.0 %     67,379      9.7 %     62,515     10.3 %
Depreciation and
amortization                844      0.3 %        757      0.4 %      2,546      0.4 %      2,250      0.4 %
Operating income         10,891      4.4 %      8,748      4.2 %     29,847      4.3 %     23,595      3.9 %

Other income
(expense):
Interest expense            (63 )    0.0 %        (53 )    0.0 %       (202 )    0.0 %       (218 )    0.0 %
Earnings of equity
method investees             53      0.0 %         37      0.0 %        174      0.0 %        129      0.0 %
Other                       130      0.1 %        115      0.0 %        406      0.0 %        467      0.1 %
Total other income
(expense), net              120      0.1 %         99      0.0 %        378      0.0 %        378      0.1 %

Income before
taxes                    11,011      4.5 %      8,847      4.2 %     30,225      4.3 %     23,973      4.0 %
Income tax expense       (4,395 )   -1.8 %     (3,429 )   -1.6 %    (11,873 )   -1.7 %     (9,477 )   -1.6 %
Net income           $    6,616      2.7 % $    5,418      2.6 % $   18,352      2.6 % $   14,496      2.4 %

Earnings per
common share:
Basic                $     0.55            $     0.45            $     1.52            $     1.20
Diluted              $     0.54            $     0.44            $     1.49            $     1.18

Weighted average
common shares
outstanding (in
thousands):
Basic                    12,079                12,051                12,075                12,049
Diluted                  12,303                12,298                12,298                12,297

Other Data:
Product sales from
Internet as a
percentage of
sales                        32 %                  28 %                  30 %                  26 %
Field sales
representatives
(at end of period)          187                   177                   187                   177
Telesales
representatives
(at end of period)          137                   134                   137                   134
Fill rate (1)                98 %                  98 %                  98 %                  98 %

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

Total Revenues. Total revenues increased 18.8% to $247,463 for the three months ended June 30, 2009, from $208,277 for the three months ended June 30, 2008. Revenues from new and existing customers both represented approximately 50% of the growth in total revenues during the three months ended June 30, 2009. For the purpose of calculating growth rates of new and existing customer revenue, we have defined a new customer as a customer that did not purchase product from us in the corresponding fiscal quarter of the prior year, with the remaining customer base being considered existing customers. Included in the new customer growth were approximately $3,678 of revenues attributable to new customers acquired as a result of the acquisition of substantially all of the assets of AAHA MARKETLink as of July 1, 2008. Additionally, we had approximately $6,886 of incremental revenues as a result of the acquisition of substantially all of the assets of AAHA MARKETLink from customers who had previously been purchasing product from both MWI and AAHA MARKETLink. Commissions on agency sales increased 11.7% to $3,645 for the three months ended June 30, 2009, from $3,263 for the three months ended June 30, 2008.

Gross Profit. Gross profit increased by 13.8% to $34,483 for the three months ended June 30, 2009, from $30,307 for the three months ended June 30, 2008. Gross profit as a percentage of total revenues was 13.9% and 14.6% for the three months ended June 30, 2009 and 2008, respectively. The decrease in gross profit as a percentage of total revenues was due to a decrease in vendor rebates, partially offset by an improvement in freight costs as a percentage of total revenues. Vendor rebates for the three months ended June 30, 2009 decreased by approximately $2,100 compared to the three months ended June 30, 2008. This decrease was primarily due to the elimination of rebates under the Agreement with Pfizer compared to the 2008 Livestock Products Agreement.

Selling, General and Administrative ("SG&A"). SG&A expenses increased 9.4% to $22,748 for the three months ended June 30, 2009, from $20,802 for the three months ended June 30, 2008. SG&A expenses as a percentage of total revenues improved to 9.2% and 10.0% for the three months ended June 30, 2009 and 2008, respectively, due to operating leverage and cost-control measures. The dollar increase in SG&A expenses was primarily due to increased compensation costs and an increase in our allowance for doubtful accounts, partially offset by a decrease in travel expenses. Our sales headcount increased by 13 employees as of June 30, 2009, compared to June 30, 2008 to 187 field sales representatives and 137 telesales representatives.

Depreciation and Amortization. Depreciation and amortization expense increased 11.5% to $844 for the three months ended June 30, 2009, from $757 for the three months ended June 30, 2008. This increase was primarily the result of amortization related to the acquisition of substantially all of the assets of AAHA MARKETLink. Depreciation expense also increased as a result of capital expenditures since June 30, 2008 related to improvements in our distribution centers and information technology systems.

Income Tax Expense. Our effective tax rate for the three months ended June 30, 2009 and 2008 was 39.9% and 38.8%, respectively. The change in our effective tax rate is due to a change in our estimates related to state taxes.

Nine Months Ended June 30, 2009 Compared to Nine Months Ended June 30, 2008

Total Revenues. Total revenues increased 14.4% to $693,794 for the nine months ended June 30, 2009, from $606,598 for the nine months ended June 30, 2008. Revenues from new and existing customers represented approximately 66% and 34%, respectively, of the growth in total revenues during the nine months ended June 30, 2009. Included in the new customer growth were approximately $8,937 of revenues attributable to new customers acquired as a result of the acquisition of substantially all of the assets of AAHA MARKETLink as of July 1, 2008. Additionally, we had approximately $17,628 of incremental revenues as a result of the acquisition of substantially all of the assets of AAHA MARKETLink from customers who had previously been purchasing product from both MWI and AAHA MARKETLink. Commissions on agency sales increased 5.0% to $10,273 for the nine months ended June 30, 2009, from $9,781 for the nine months ended June 30, 2008.

Gross Profit. Gross profit increased by 12.9% to $99,772 for the nine months ended June 30, 2009, from $88,360 for the nine months ended June 30, 2008. Gross profit as a percentage of total revenues was 14.4% and 14.6% for the nine months ended June 30, 2009 and 2008, respectively. Gross profit as a percentage of total revenues was lower due to a decrease in vendor rebates partially offset by an improvement in freight costs as a percentage of total revenues. Vendor rebates decreased by approximately $1,300 for the nine months ended June 30, 2009 compared to the nine months ended June 30, 2008. This decrease was primarily due to the elimination of rebates under the Agreement with Pfizer compared to the 2008 Livestock Products Agreement.

Selling, General and Administrative. SG&A expenses increased 7.8% to $67,379 for the nine months ended June 30, 2009, from $62,515 for the nine months ended June 30, 2008. SG&A expenses as a percentage of total revenues were 9.7% and 10.3% for the nine months ended June 30, 2009 and 2008, respectively, due to operating leverage and cost-control measures. The dollar increase in SG&A expenses was primarily due to increased compensation costs and an increase in our allowance for doubtful accounts.

Depreciation and Amortization. Depreciation and amortization expense increased 13.2% to $2,546 for the nine months ended June 30, 2009, from $2,250 for the nine months ended June 30, 2008. This increase was primarily the result of amortization related to the acquisition of substantially all of the assets of AAHA MARKETLink. Depreciation expense also increased as a result of capital expenditures since June 30, 2008 related to improvements in our distribution centers and information technology systems.

Income Tax Expense. Our effective tax rate for the nine months ended June 30, 2009 and 2008 was 39.3% and 39.5%, respectively.

Critical Accounting Policies

The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The accompanying condensed consolidated financial statements are prepared using the same critical accounting policies discussed in our Annual Report on Form 10-K filed with the SEC on November 24, 2008.

Liquidity and Capital Resources

Our principal sources of liquidity are cash flows generated from operations and borrowings on our revolving credit facility under our credit agreement. We use capital primarily to fund day-to-day operations and to maintain sufficient inventory levels in order to promptly fulfill customer orders and to expand our operations and sales growth. We believe our capital resources, including our ability to borrow funds from our revolving credit facility, will be sufficient to meet our anticipated cash needs for at least the next twelve months. Bank of America, N.A. and Wells Fargo, N.A. are the lenders under our revolving credit facility. The revolving credit facility allows for borrowings in the aggregate of $70,000, with the right to request an increase in the commitment to $100,000. The facility has a maturity date of December 1, 2011 and a variable interest rate equal to the Daily LIBOR Floating Rate or the LIBOR 1-month fixed rate plus a margin ranging from 0.7% to 1.25% or the Prime Rate (at our option). The lenders also receive an unused line fee and letter of credit fee equal to 0.125% of the unused amount of the facility. Our outstanding balance on the facility at June 30, 2009 was $0, and the interest rate for the facility was 1.0% as of June 30, 2009.

The facility allows for the issuance of up to $10,000 in letters of credit. The letters of credit typically act as guarantees of payment to certain third parties in accordance with specified terms and conditions. We had no letters of credit at June 30, 2009 and four letters of credit totaling $400 at September 30, 2008. There were no outstanding borrowings on these letters of credit at either June 30, 2009 or September 30, 2008.

Our lenders may have suffered losses related to their lending and other financial relationships, especially because of the general weakening of the national economy and increased financial instability of many borrowers. As a result, the lenders may become insolvent or tighten their lending standards, which could make it more difficult for us to borrow under our revolving credit facility, extend the terms of our revolving credit facility or obtain alternative financing on favorable terms or at all. Our financial condition and results of operations could be adversely affected if we were unable to draw funds under our revolving credit facility because of a lender default or if we fail to obtain other cost-effective financing.

We generally extend some level of credit to our customers. If customers' cash flow or operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain other sources of credit, they may not be able to pay or may delay payment to us, or in some cases may return products to us. Any inability of current and/or potential customers to pay us for our products and/or services due to their deteriorating financial condition or otherwise may adversely affect our results of operations and financial condition. Our allowance for doubtful accounts increased $1,558 to $2,436 as of June 30, 2009, compared to $878 as of September 30, 2008. This change was due to an increase in our bad debt expense of $2,132 offset by write-offs of $574.

Operating Activities. For the nine months ended June 30, 2009, cash provided by operations was $2,847 and was primarily attributable to net income of $18,352, partially offset an increase of receivables of $2,245 due to revenue growth partially offset by collection of receivables with extended payment terms that related to sales from prior periods, and a decrease in accounts payable of $16,282 due primarily to the timing of payment to vendors for strategic inventory purchases.

For the nine months ended June 30, 2008, cash provided by operations was $9,746 and was primarily attributable to net income of $14,496, a decrease of receivables of $4,716 due to collection of receivables with extended payment terms that were related to sales from prior periods, an increase in inventories of $24,300 due to inventory stocking of the Kansas City distribution center and opportunistic inventory purchases, and an increase in accounts payable of $12,223 due to the above mentioned inventory purchases.

Investing Activities. For the nine months ended June 30, 2009, net cash used in investing activities was $1,527 and was primarily due to capital expenditures of $1,649 related to distribution center infrastructure, including the relocation of the Dallas distribution center in November 2008 and technology investments.

For the nine months ended June 30, 2008, net cash used in investing activities was $5,708 and was primarily due to the acquisition of Tri V for $4,598 coupled with capital expenditures of $1,460, primarily related to distribution center infrastructure and technology.

Financing Activities. For the nine months ended June 30, 2009, net cash provided by financing activities was $331, which was primarily due to common stock issued under our employee stock purchase plan and the tax benefit of from stock option exercises.

For the nine months ended June 30, 2008, net cash provided by financing activities was $127, which was due to the proceeds and tax benefit of stock option exercises of $224 offset by a payment on our long-term debt of $97.

Contractual Obligations and Guarantees

For information on our contractual obligations and guarantees, see our Annual Report on Form 10-K filed on November 24, 2008 with the SEC. During the three and nine months ended June 30, 2009 there were no material changes to the contractual and other long-term obligations reported in our Form 10-K on November 24, 2008, except as follows:

The total liability for certain tax positions decreased by $264 to $244 at June 30, 2009 due to resolution of certain tax liabilities. We expect resolution of these tax positions to be finalized in the next twelve months.