Forward-Looking Statements

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

† the extent and timing of future revenues;

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

† the opportunity presented by new products or emerging markets;

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

† our ability to align our cost structure with our current business expectations;

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

† our estimates regarding the sufficiency of our cash resources.

In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties. We discuss many of these risks in this Quarterly Report on Form 10-Q in greater detail in Part II - Section 1A. "Risk Factors" below. Given these

uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. You should also read our Annual Report on Form 10-K and the documents that we reference in the Annual Report on Form 10-K and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we expect. All references in this report to "Omnicell, Inc.," "Omnicell," "our," "us," "we" or the "Company" collectively refer to Omnicell, Inc., a Delaware corporation, and its subsidiaries.

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

Overview

We were incorporated in California in 1992 under the name Omnicell Technologies, Inc. and reincorporated in Delaware in 2001 as Omnicell, Inc. We are a leading provider of medication control and patient safety solutions for acute care health facilities. Over 1,300 hospitals have installed our automated hardware/software solutions for controlling, dispensing, acquiring, verifying and tracking medications and medical and surgical supplies. We have designed our products to enable healthcare professionals to improve patient safety through reduced medication errors, and improved administrative controls and medical safety, while simultaneously improving workflow and increasing operational efficiency. Our products are designed to allow nurses, pharmacists and other clinicians to spend more time on patient care while at the same time providing confirmation that the right patients are receiving the right medication, at the right time, in the right dose, via the right route.

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

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

Operating Environment During the Three Months Ended June 30, 2009

Our business has experienced a decline in revenue year over year caused by general economic conditions driving a decline in our customers' demand for and their ability to purchase new automation solutions. Revenue declined 16.9% from $63.3 million during the three months ended June 30, 2008 to $52.6 million during the three months ended June 30, 2009. Notwithstanding our recent revenue decline, we believe our solutions remain attractive relative to our competition. In particular:

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

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

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

During the second quarter of 2009, we returned to profitability following the net loss incurred in the first quarter of 2009. Total revenues increased slightly, up 0.8%, and gross margins improved for both product, up 3.6%, and service, up 36.7%, compared to the prior quarter. Although we were able to find financing for any credit worthy customers that needed credit, we did experience longer payment cycles from our leasing partners and administrative delays in our internal billing process, which resulted in an increase in our accounts receivable balance for the second quarter. We do not believe there is an increased risk to our receivables and we expect our trade receivable balances to return to historic levels by the end of 2009. Net cash provided by operating activities totaled $6.0 million during the six months ended June 30, 2009. Our ability to grow revenue and maintain positive cash flow is dependent on our ability to continue to receive orders from customers, the volume of installations we are able to complete, our ability to meet customers' needs and provide a quality installation experience, managing our cost structure and our flexibility in manpower allocations among customers to complete installations on a timely basis.

Our overall gross margin increased slightly to 51.2% for the quarter ended June 30, 2009 as compared to 51.1% for the quarter ended June 30, 2008, primarily due to the absorption of fixed costs over a smaller revenue base being more than offset by a reduction in manufacturing related spending. We believe that our gross margins will continue to fluctuate based on the mix of products sold and the related costs and changes in sales and installation headcount compared to our revenue level.

We maintain a development staff with expertise in hospital logistics and computerized automated solutions which allows us to regularly deliver new innovations to the market. In 2008, we began shipping our SinglePointe solution, which allows pharmacists to automate the distribution of specially handled medications, presents market opportunities to reduce errors and provides a more efficient workflow for clinicians. During the second quarter of 2009, we introduced two new products, the first of which is AnywhereRN, a labor-saving product that allows our systems to be managed from any workstation in the hospital. Second, we launched WorkflowRx, version 6 with enhanced intelligent order routing which optimizes order processing in the central pharmacy. We believe these new products, along with our other existing patient safety and clinical workflow solutions, will continue to differentiate us in the marketplace.

Critical Accounting Policies and Estimates

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

†          Revenue recognition;

†          Provision for reserves;

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

†          Inventory;

†          Valuation of share-based awards; and

†          Accounting for income taxes.

During the six months ended June 30, 2009, there were no significant changes in our critical accounting policies and estimates. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2008 for a more complete discussion of our critical accounting policies and estimates.

Recent Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board (FASB) issued three related Staff Positions (FSP): (i) FSP 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly," or FSP FAS 157-4,
(ii) FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," or FSP FAS 115-2, and (iii) FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," or FSP FAS 107-1, which will be effective for interim

and annual periods ending after June 15, 2009. FSP FAS 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS No. 157 in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP FAS 115-2 modifies the requirements for recognizing other-than-temporarily impaired debt securities and revise the existing impairment model for such securities, by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. FSP FAS 107-1 enhances the disclosure of instruments under the scope of SFAS No. 157 for both interim and annual periods. Our adoption of these Staff Positions did not have a material impact on our consolidated financial statements.

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

In May 2009, the FASB issued Statement of Financial Accounting Standard, or SFAS, No. 165, "Subsequent Events," or SFAS No. 165. SFAS No. 165 requires an entity to disclose the date through which the entity has evaluated subsequent events and whether that evaluation date is the date financial statements are issued (for public entities) or the date the financial statements were available to be issued (for nonpublic entities that do not widely distribute their financial statements). SFAS No. 165 is effective for interim reporting periods ending after June 15, 2009. Our adoption of SFAS No. 165 did not have an impact on our consolidated financial statements.

In June 2009, the FASB issued two SFAS which will become effective for annual reporting periods that begin after November 15, 2009. These are SFAS No. 166, "Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140," and SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)." SFAS No. 166 removes the concept of a qualifying special purpose entity from Statement No. 140 and requires that a transferor recognize and initially measure at fair value all assets obtained and all liabilities incurred as a result of a transfer of financial assets accounted for as a sale. SFAS No. 167 requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity and requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise's involvement in a variable interest entity. We do not expect the adoption of either of these financial accounting standards to have an impact on our consolidated financial statements.

Results of Operations



                                  Three Months Ended June 30,                        Six Months Ended June 30,
                                 2009                     2008                     2009                     2008
                            $ in        % of         $ in        % of         $ in        % of         $ in       % of
                          Thousands    Revenue     Thousands    Revenue     Thousands    Revenue    Thousands    Revenue
Revenues:
Product revenues         $    41,983      79.8 %  $    52,870      83.4 %  $    84,278      80.4 %  $  105,286      83.9 %
Services and other
revenues                      10,660      20.2 %       10,504      16.6 %       20,569      19.6 %      20,179      16.1 %
Total revenues                52,643     100.0 %       63,374     100.0 %      104,847     100.0 %     125,465     100.0 %

Cost of revenues:
Cost of product
revenues                      19,175      36.4 %       24,349      38.4 %       39,455      37.6 %      48,319      38.5 %
Cost of services and
other revenues                 6,539      12.4 %        6,665      10.5 %       13,434      12.8 %      12,440       9.9 %
Restructuring charges              -         - %            -         - %        1,209       1.2 %           -         - %
Total cost of revenues        25,714      48.8 %       31,014      48.9 %       54,098      51.6 %      60,759      48.4 %

Gross profit                  26,929      51.2 %       32,360      51.1 %       50,749      48.4 %      64,706      51.6 %
Operating expenses:
Research and
development                    4,574       8.7 %        4,978       7.9 %        8,551       8.2 %       9,255       7.4 %
Selling, general, and
administrative                21,038      40.0 %       22,878      36.1 %       42,537      40.6 %      46,085      36.7 %
Restructuring charges              -         - %            -         - %        1,315       1.3 %           -         - %
Total operating
expenses                      25,612      48.7 %       27,856      44.0 %       52,403      50.0 %      55,340      44.1 %
Income (loss) from
operations                     1,317       2.5 %        4,504       7.1 %       (1,654 )    (1.6 )%      9,366       7.5 %
Other income and
expense, net                     194       0.4 %          722       1.1 %          376       0.4 %       2,131       1.7 %
Income (loss) before
provision for (benefit
from) income taxes             1,511       2.9 %        5,226       8.2 %       (1,278 )    (1.2 )%     11,497       9.2 %
Provision for (benefit
from) income taxes               607       1.2 %        2,473       3.9 %         (311 )    (0.3 )%      5,011       4.0 %
Net income (loss)        $       904       1.7 %  $     2,753       4.3 %  $      (967 )    (0.9 )% $    6,486       5.2 %

Product Revenues, Cost of Product Revenues and Gross Profit



The table below shows our product revenues, cost of product revenues and gross
profit for the three and six months ended June 30, 2009 and 2008 and the
percentage change between those years:



                       Three Months Ended June 30,           Six Months Ended June 30,
                       2009         2008     % Change       2009       2008      % Change
                        (in thousands)                       (in thousands)
Product revenues    $   41,983    $ 52,870      (20.6 )%  $ 84,278   $ 105,286      (20.0 )%
Cost of product
revenues                19,175      24,349      (21.2 )%    39,455      48,319      (18.3 )%
Restructuring
charges                      -           -                   1,008           -
Gross profit        $   22,808    $ 28,521      (20.0 )%  $ 43,904   $  56,967      (22.9 )%

Product revenues decreased $10.9 million, or (20.6%) in the three months ended June 30, 2009 as compared to the corresponding period in 2008. Product revenues decreased $21.0 million, or (19.9%) in the six months ended June 30, 2009 as compared to the corresponding period in 2008. The decrease in product revenue for the three and six months ended June 30, 2009 was primarily due to a decrease in the number of installations of medication and supply automation systems and central pharmacy products, from both existing and new customers. This decrease in product volume year over year reflects the current global economic downturn and the resulting capital investment constraints and longer sales cycle by our customers.

Cost of product revenues decreased by $5.2 million, or (21.2%), in the three months ended June 30, 2009 as compared to the corresponding period in 2008. The decrease was due to both a reduction in product revenue, resulting in a $3.4 million decrease in direct material costs, and a decrease in our spending of $1.8 million, primarily from lower headcount and associated headcount related expenses such as travel. Cost of product revenues decreased $8.9 million, or (19.9%), in the six months ended June 30, 2009 compared to the corresponding period in 2009. The decrease was due to both a reduction in product revenue, resulting in a $7.0 million decrease in direct material cost, and a decrease in our spending of $1.9 million, primarily from lower headcount and associated headcount related expenses such as travel.

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

Gross profit on product revenue decreased by $5.7 million, or (20.0%) in the three months ended June 30, 2009 as compared to the corresponding period in 2008. This decrease is primarily due to the reduction in revenues and associated costs following the slowdown in our business. Product gross margins were 54.3% and 53.9% for the three months ended June 30, 2009 and June 30, 2008, respectively. The increase in product gross margins was due to the benefits of the restructuring in the first quarter of 2009. Gross profit on product revenue decreased by $12.1 million, or (21.3%) in the six months ended June 30, 2009 as compared to the corresponding period in 2008. The decrease in gross profit on product revenues was primarily a result of lower product revenues, lower direct material costs and lower headcount and travel costs, partially offset by the restructuring charges related to our work force reduction.

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



The table below shows our service and other revenues, cost of service and other
revenues and gross profit for the three and six month periods ended June 30,
2009 and 2008 and the percentage change between those years:



                           Three Months Ended June 30,          Six Months Ended June 30,
                           2009         2008     % Change      2009        2008     % Change
                            (in thousands)                      (in thousands)
Service and other
revenues                $   10,660    $ 10,504        1.5 %  $  20,569   $ 20,179        1.9 %
Cost of service and
other revenues               6,539       6,665       (1.9 )%    13,434     12,440        8.0 %
Restructuring charges            -           -                     201          -
Gross profit            $    4,121    $  3,839        7.3 %  $   6,845   $  7,739      (11.6 )%

Service and other revenues include revenues from service and maintenance contracts and rentals of automation systems. Service and other revenues increased by $0.2 million, or 1.5% in the three months ended June 30, 2009 as compared to the corresponding period in 2008. Service and other revenues increased by $0.4 million, or 1.9% in the six months ended June 30, 2009 as compared to the corresponding period in 2008. The increases in service and other revenues for the three and six months ended June 30, 2009 was primarily the result of an expansion in our installed base of automation systems and a resulting increase in the number of support service contracts.

Cost of service and other revenues decreased by $0.1 million, or (1.9%) in the three months ended June 30, 2009 as compared to the same period in 2008. The decrease was primarily due to $0.2 million increase in material costs and a $0.3 million decrease in labor and support costs. Cost of service and other revenues increased by $1.2 million, or 9.6% in the six months ended June 30, 2009 as compared to the corresponding period in 2008. The increase was primarily due to $0.3 million increase in labor costs in support of the expanded service base, $0.7 million increase in materials costs associated with increased volumes and restructuring charges of $0.2 million relating to our work force reduction during the first quarter of 2009. As part of the restructuring in the first quarter of 2009, we reduced headcount by 10 employees in field, customer and technical service departments. Restructuring costs recorded related primarily to severance pay, continuation of benefits and outplacement services.

Gross profit on service and other revenues increased by $0.3 million, or 7.3% in the three months ended June 30, 2009 as compared to the same period in 2008. Gross profit on service and other revenues decreased by $0.8 million, or (10.4%) in the six months ended June 30, 2009 as compared to the same period in 2008. The increase in gross profit on service and other revenues for the three months ended June 30, 2009 was due primarily to lower spending as a result of the first quarter restructuring. The decrease in gross profit for the six months ended June 30, 2009 was due to the restructuring charge in the first quarter of 2009 and higher materials costs and spending to support the expanded service base.

Operating Expenses



                           Three Months Ended June 30,          Six Months Ended June 30,
                           2009         2008     % Change      2009        2008     % Change
                            (in thousands)                      (in thousands)
Research and
development             $    4,574    $  4,978       (8.1 )% $   8,551   $  9,255       (7.6 )%
Selling, general and
administrative              21,038      22,878       (8.0 )%    42,537     46,085       (7.7 )%
Restructuring charges            -           -                   1,315          -
Total operating
expenses                $   25,612    $ 27,856       (8.1 )% $  52,403   $ 55,340       (5.3 )%

Research and Development. Research and development expenses decreased by $0.4 million, or (8.1%) in the three months ended June 30, 2009 as compared to the corresponding period in 2008. The decrease was due primarily to a $0.5 million increase in capitalized expenses relative to internally developed software under SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," or SFAS No. 86. During the three months ended June 30, . . .