Overview

Mesa Laboratories, Inc. manufactures and distributes electronic measurement systems and disposables for various niche applications, including renal treatment, food processing, medical sterilization, pharmaceutical processing and other industrial applications. Our Company follows a philosophy of manufacturing a high quality product and providing a high level of on-going service for those products. In order to optimize the performance of our Company and to build the value of the Company for its shareholders, we continually follow the trend of various key financial indicators. A sample of some of the most important of these indicators is presented in the following table.

                            Key Financial Indicators

                        For The Quarters Ended June 30,



                                        2009             2008             2007             2006

Cash and Investments                $  10,759,000    $   6,390,000    $   3,907,000    $  3,695,000

Trade Receivables                   $   3,748,000    $   3,768,000    $   3,619,000    $  2,999,000
Days Sales Outstanding                         66               63               73              60

Inventory, Net                      $   4,749,000    $   4,498,000    $   3,737,000    $  3,061,000
Inventory Turns                               1.7              1.7              1.5             1.9

Working Capital                     $  18,005,000    $  13,571,000    $  10,086,000    $  8,849,000
Current Ratio                                13:1             11:1              9:1            10:1

Average Return On:
Stockholder Investments (1)                  14.7 %           16.8 %           19.3 %          18.7 %
Assets                                       13.7 %           15.7 %           18.0 %          17.3 %
Invested Capital (2)                         22.1 %           22.2 %           23.2 %          25.3 %

Net Sales                           $   4,977,000    $   5,054,000    $   4,286,000    $  3,674,000
Gross Profit                        $   2,983,000    $   3,204,000    $   2,901,000    $  2,387,000
Gross Margin                                   60 %             63 %             68 %            65 %
Operating Income                    $   1,608,000    $   1,536,000    $   1,513,000    $  1,195,000
Operating Margin                               32 %             30 %             35 %            33 %
Net Profit                          $   1,026,000    $   1,016,000    $   1,015,000    $    790,000
Net Profit Margin                              21 %             20 %             24 %            22 %
Earnings Per Diluted Share          $         .31    $         .31    $         .31    $        .25

Capital Expenditures, Net           $      29,000    $      63,000    $       6,000    $    211,000

Head Count                                  114.0            118.0            100.0            92.0

Sales Per Employee (Annualized)     $     175,000    $     171,000    $     171,000    $    160,000

(2) Average return on invested capital (invested capital = total assets - current liabilities - cash and short-term investments) is calculated by dividing total annualized net income by the average of end of period and beginning of year invested capital.

While we continually try to optimize the overall performance and trends, the table above does highlight various exceptions. These exceptions are usually influenced by a more important need. Most of the indicators above for the period ended June 30, 2009 are showing variation from the trends of the past years. Our balance sheet trends are improving due to cost reductions and only a small decline in sales. Our return trends are showing some decline due to the growth of assets. Factors currently impacting profitability include higher sales of Raven products, lower sales of Datatrace products, lower interest income on the Company's invested surplus cash, and a higher anticipated income tax rate for fiscal 2010.

Results of Operations

Net Sales

Net sales for the first quarter of fiscal 2010 decreased two percent from fiscal 2009. In real dollars, net sales of $4,977,000 in fiscal 2010 decreased $77,000 from $5,054,000 in 2009.

Our revenues come from two main sources, which include product revenues and parts and service revenues. Parts and service revenues are derived from on-going repair and recalibration or certification of our products. The certification or recalibration of product is usually a key component of the customer's own quality system and many of our customers operate in regulated industries, such as food processing or medical and pharmaceutical manufacturing. For this reason, these revenues tend to be fairly stable and grow slowly over time. Also, it is important to note that the Raven products are disposables and thus do not contribute to the Company's parts and service revenues. During the first quarter of fiscal years 2010 and 2009 our Company had parts and service revenue of $889,000 and $932,000, respectively. As a percentage of total revenue, parts and service revenues were 18% in 2010 and 18% in 2009.

The performance of new product sales is dependent on several factors, including general economic conditions in the United States and abroad, capital spending trends and the introduction of new products. Over the past three quarters, both general economic conditions and capital spending patterns have been declining. Although overall economic conditions have softened this year we have seen little impact in our sales performance in total so far. We attribute this to the industries we serve which include various medical related markets, food processing and pharmaceuticals. While the medical markets have continued to improve, we have seen a decline in sales to our food and pharmaceutical markets. For fiscal first quarter 2010 and 2009, product sales for our company were $4,088,000 and $4,122,000, respectively.

Over the fiscal first quarter, our medical revenues increased 12 percent compared to the prior period. This increase was due to higher sales of dialysis meters, calibration solutions and dialysis meter service.

During the fiscal first quarter, sales of the Datatrace brand of products decreased 26 percent from the prior year. The decrease in DataTrace sales during the quarter is the result of declining economic and capital spending trends which influenced some industrial customers to delay their capital equipment purchases. The first fiscal quarter saw declines through the various categories of Micropack III products which were only partially off-set by sales of the new Micropack RF products. We are cautiously optimistic and look forward to improving Datatrace sales trends in both new product shipments and service sales in both the domestic and international markets for the later part of fiscal 2010.

Raven sales for the first quarter increased 16 percent compared to the first quarter of the prior year. The Raven biological indicator products saw sales gains in its core biological indicator strip business. Sales of Prospore and Protest products continue to increase, and we have expanded our manufacturing capacity for these products during the past fiscal year to allow the company to pursue additional opportunities for growth of these products. We also saw a substantial increase in sales of our chemical indicator products during the first quarter.

Cost of Sales

Cost of sales as a percent of net sales during the first fiscal quarter increased 3.5 percent from fiscal 2009 to 40.1 percent. Over the past two years we have made significant strides in lowering the cost to manufacture our medical products and currently both Medical and Datatrace products enjoy margins higher than the Raven products. Therefore, shifts in product mix toward higher sales of Medical and Datatrace products will tend to produce lower cost of goods sold expense and higher gross margins while shifts toward higher sales of Raven products will normally produce the opposite effect on cost of goods sold expense and gross margins.

Higher Raven sales this quarter are a contributing factor to the lower gross margins. The Company continues to monitor and implement cost reduction programs, price increases and improvements in freight cost recovery to improve gross margins.

Selling, General and Administrative

General and administrative expenses tend to be fairly fixed and stable from year-to-year. To the greatest extent possible, we work at containing and minimizing these costs. In the first fiscal quarter of 2010, we have not incurred additional costs to address the regulatory requirements of the Sarbanes
- Oxley Act, although we do expect additional costs over the remainder of the year. For the fiscal first quarter, total administrative costs were $617,000 in the current quarter compared to $738,000 for the same quarter last year.

Our selling and marketing costs tend to be far more variable in relation to sales, although there are various exceptions. Some of these exceptions include the introduction of new products and the mix of international sales to domestic sales. For a product line experiencing introduction of a new product, costs will tend to be higher as a percent of sales due to higher advertising costs and sales training programs. Our Company's international sales are usually discounted and recorded at the net discounted price, so that a change

in mix between international and domestic sales may influence sales and marketing costs. In dollars, selling costs were $606,000 in the first fiscal quarter of 2010 and $757,000 in the same prior year quarter. As a percent of sales, selling cost was 12.2% in the current quarter and 15.0% in the prior year quarter.

Research and Development

Company sponsored research and development cost was $152,000 during the first fiscal quarter and $173,000 during the previous year period. We are currently executing a strategy of increasing the flow of internally developed products. Late in the first quarter of the previous fiscal year we introduced our new Datatrace Micropack RF product. Unlike previous versions of the Micropack line, this product allows real time radio transmission of data in addition to logging of data as the instrument moves through a process. Currently, we continue to experience some on-going development cost for the Micropack RF and are continuing work that expands this radio frequency technology into new markets.

Net Income

Net income remained stable at $1,026,000 or $.31 per share on a diluted basis during the quarter compared to $1,016,000 or $.31 per share on a diluted basis in the previous year period. As previously discussed, margins decreased during the quarter. Other factors impacting net income during the quarter included the decreases in general and administrative costs, sales and marketing costs, and research and development costs which we also discussed earlier in this report. A final factor impacting net income this quarter is lower interest income on the Company's surplus cash due to a softening of interest rates over the past three quarters, and an increase in the estimate of income tax expense as a percent of earnings before income tax.

Liquidity and Capital Resources

On June 30, 2009, we had cash and short term investments of $10,759,000. In addition, we had other current assets totaling $8,719,000 and total current assets of $19,478,000. Current liabilities of our Company were $1,473,000 which resulted in a current ratio of 13:1.

Our Company has made capital acquisitions during the first fiscal quarter of $29,000.

We have instituted a program to repurchase up to 300,000 shares of our outstanding common stock. Under the plan, the shares may be purchased from time to time in the open market at prevailing prices or in negotiated transactions off the market. Shares purchased will be canceled and repurchases will be made with existing cash reserves. We do not maintain a set policy or schedule for our buyback program.

On November 12, 2003 our Board of Directors instituted a policy of paying regular quarterly dividends. On June 15, 2009, a quarterly dividend of $.10 per common share was paid to shareholders of record on June 2, 2009.

Our Company invests its surplus capital in various interest bearing instruments, including money market funds. All investments are fixed dollar investments with variable rates in order to minimize the risk of principal loss.

The Company does not currently maintain a line of credit or any other form of debt. Nor does the Company guarantee the debt of any other entity. The Company has maintained a long history of surplus cash flow from operations. This surplus cash flow has been used in the past to fund acquisitions and stock buybacks and is currently being partially utilized to fund our on-going dividend. If interesting candidates come to our attention, we may choose to pursue new acquisitions.

Contractual Obligations

At June 30, 2009 we had contractual obligations for open purchase orders for routine purchases of supplies and inventory, which would be payable in less than one year. Additionally, the Company has committed to purchase approximately $140,000 of bottling equipment to automate the bottling of its dialysis solutions products, which is currently done by an outside vendor.

Forward Looking Statements

All statements other than statements of historical fact included in this annual report regarding our Company's financial position and operating and strategic initiatives and addressing industry developments are forward-looking statements. Where, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. Factors which could cause actual results to differ materially from those anticipated, include but are not limited to general economic, financial and business conditions; competition in the data logging market; competition in the kidney dialysis market; competition in the fluid measurement market; competition in the biological indicator market; the business abilities and judgment of personnel; the impacts of unusual items resulting from ongoing evaluations of business strategies; and changes in business strategy. We do not intend to update these forward looking statements. You are advised to review Item 1A. "Risk Factors" provided in our Company's most recent Form 10-K filing with the SEC for more information about risks that could affect the financial results of Mesa Laboratories, Inc.

Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates.

We believe that there are several accounting policies that are critical to understanding the Company's historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management's judgments and estimates. These significant accounting policies relate to revenue recognition, research and development costs, valuation of inventory, and valuation of long-lived assets. These policies, and the Company's procedures related to these policies, are described in detail below.

Revenue Recognition

We sell our products directly through our sales force and through distributors. Revenue from direct sales of our product is recognized upon shipment to the customer. Revenue from ongoing product service and repair is fully recognized upon completion and shipment of serviced product.

Accounts Receivable

At the time the accounts are originated, the Company considers a reserve for doubtful accounts based on the creditworthiness of the customer. The provision for uncollectible amounts is continually reviewed and adjusted to maintain the allowance at a level considered adequate to cover future losses. The allowance is management's best estimate of uncollectible amounts and is determined based on historical performance that is tracked by the Company on an ongoing basis. The losses ultimately incurred could differ materially in the near term from the amounts estimated in determining the allowance.

Research & Development Costs

Research and development activities consist primarily of new product development and continuing engineering on existing products. Costs related to research and development efforts on existing or potential products are expensed as incurred.

Valuation of Inventories

Inventories are stated at the lower of cost or market, using the first-in, first-out method (FIFO) to determine cost. The Company's policy is to periodically evaluate the market value of the inventory and the stage of product life cycle, and record a reserve for any inventory considered slow moving or obsolete.

Valuation of Long-Lived Assets, Goodwill and Intangibles

The Company assesses the realizable value of long-lived assets, goodwill and intangibles for potential impairment at least annually or when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated fair value is less than its carrying value. In assessing the recoverability of our long-lived assets, goodwill and intangibles, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. In addition, we must make assumptions regarding the useful lives of these assets.

Stock Based Compensation

The Company implemented the provisions of SFAS 123(R) effective April 1, 2006 using the modified prospective method. Under this transition method, stock based compensation expense for the year ended March 31, 2007 includes compensation expense for all stock based compensation awards granted subsequent to April 1, 2006 and previously granted awards not vested as of April 1, 2006. The Company uses the Black-Scholes valuation model to value option grants. We use historical data to estimate the expected price volatility, expected option life and expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield in effect at the time of the grant for the estimated life of the option. The dividend yield is estimated using the dividend payments made during the prior four quarters as a percent of average stock price for that period.

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles, generally accepted in the United States of America, with no need for management's judgment in their application. There are also areas in which management's judgment in selecting any viable alternative would not produce a materially different result. See our audited financial statements and notes thereto which begin at "Item 8. Financial Statements and Supplementary Data" of the Annual Report on Form 10-K which contain accounting policies and other disclosures required by accounting principles, generally accepted in the United States of America.