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 and headcount 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 ability to generate cash from operations 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 the substantial majority of 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 Asia, Australia, 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 medication dispensing and supply automation systems are installed. Installation generally takes place two weeks to twelve 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 our 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 September 30, 2009

Our business has experienced a decline in revenue year over year caused by general economic conditions which have driven a decline in our customers' demand for, and their ability to purchase, new automation solutions. Revenue declined 16.1% from $64.3 million during the three months ended September 30, 2008 to $54.0 million during the three months ended September 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 such as SinglePointe™, Tissue Center System, and Anywhere RN™; and

† The market environment of increased patient safety awareness and increased regulatory control has driven our solutions to be a high priority in customers' capital budgets.

During the first quarter of 2009, we instituted a restructuring plan whereby we reduced our headcount from 844 full-time employees at December 31, 2008 to 756 full-time employees at March 31, 2009 to balance our expenses with the reduced sales and installations volume. The restructuring plan accounted for a reduction of 103 regular and temporary employees, which was partially offset by hiring for newly created positions during that quarter. 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 and our flexibility in manpower allocations among customers to complete installations on a timely basis.

During the third quarter of 2009 we achieved similar performance levels compared to the second quarter of 2009. Both product and service revenues increased compared to the prior quarter, by 2.1% and 4.2% respectively. Although product gross margins declined by 1.0 margin point compared to the prior quarter, mainly due to a higher proportion of lower margin international business, service margins improved by 4.4 margin points due to a growth in service revenues while service costs remained relatively flat. Cash collections were relatively strong during the quarter as compared to the prior quarter, which contributed to a reduction in our trade accounts receivables of $8.9 million, reversing a trend from prior quarters and improving our cash position by $19.9 million compared to the prior quarter. Net cash provided by operating activities totaled $24.3 million during the nine months ended September 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 declined to 50.5% for the quarter ended September 30, 2009 as compared to 50.9% for the quarter ended September 30, 2008, primarily due to the absorption of fixed costs over a smaller revenue base and a higher mix of international business. International business carries lower gross margins because our international distributors bear the cost of installation, support and most of the sales effort, and therefore demand lower pricing. We believe that our gross margins will continue to fluctuate based on the mix of products installed, fluctuation in the percentage of revenues derived from our international business 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 that allows us to regularly deliver new innovations to the market. During the first quarter of 2009, we introduced the Omnicell Tissue Center system which is designed to enable surgical personnel to keep tissue specimens secure, including procurement, processing and preserving of the tissue and also to maintain detailed history records. During the third quarter of 2009, we introduced Omnicell 14.0, which we believe provides our customers enhanced operating room anesthesia solutions and introduces our new proprietary Anywhere RN technology, which is designed to allow Omnicell cabinet transactions to be managed by nurses from virtually any workstation in the hospital, and result in time savings and increased efficiency in medication management. We believe these new products coupled with enhancements to products we intend to deliver in the future, along with other patient safety and clinical workflow solutions, will continue to help 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 nine months ended September 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 Accounting Standards Codification (ASC) 820, "Fair Value Measurements and Disclosures," 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 ASC 320, "Investments-Debt and Equity Securities," in requirements for recognizing other-than-temporarily impaired debt securities and revises 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 ASC 825, "Financial Instruments," 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 ASC 805, "Business Combinations," for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. 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," which was codified as ASC 855, "Subsequent Events." ASC 855 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). ASC 855 is effective for interim reporting periods ending after June 15, 2009. Our adoption of ASC 855 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 ASC 860, "Transfers and Servicing," 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. Neither of these new standards has as yet been codified in the new ASC syntax. We do not expect the adoption of either of these financial accounting standards to have an impact on our consolidated financial statements.

In July 2009, the FASB released the final version of its new "Accounting Standards Codification" (Codification) as the single authoritative source for GAAP. While not intended to change GAAP, the Codification significantly changes the way in which the accounting literature is organized, combining all authoritative standards into a comprehensive, topically organized database. All existing accounting standard documents were superseded and all other accounting literature not included in the Codification is considered nonauthoritative, other than guidance issued by the SEC. The Codification is effective for interim and annual periods ending on or after September 15, 2009. We adopted the Codification in our interim financial statements for the third quarter of fiscal 2009, which had no impact on our financial position, results of operations or cash flows.

In October 2009, the FASB issued Accounting Standards Update, or ASU, 2009-13, which amends ASC Topic 605, "Revenue Recognition," to require companies to allocate revenue in multiple-element arrangements based on an element's estimated selling price if vendor-specific or other third-party evidence of value is not available. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. Earlier application is permitted. We are currently evaluating the impact of the adoption of the ASU on our consolidated financial statements.

Results of Operations



                            Three Months Ended September 30,               Nine Months Ended September 30,
                           (in thousands, except percentages)             (in thousands, except percentages)
                               2009                    2008                  2009                   2008
                                      % of                  % of                   % of                   % of
                           $         Revenue       $       Revenue        $       Revenue        $       Revenue
Revenues:
Product revenue        $   42,854       79.4 %  $ 54,294      84.4 %  $ 127,221      80.1 %  $ 159,580      84.1 %
Service and other
revenues                   11,103       20.6 %    10,051      15.6 %     31,583      19.9 %     30,230      15.9 %
Total revenues             53,957      100.0 %    64,345     100.0 %    158,804     100.0 %    189,810     100.0 %
Cost of revenues:
Cost of product
revenues                   20,087       37.2 %    24,940      38.8 %     59,542      37.5 %     73,259      38.6 %
Cost of service and
other revenues              6,621       12.3 %     6,642      10.3 %     20,055      12.6 %     19,083      10.0 %
Restructuring
charges                         -        0.0 %         -       0.0 %      1,209       0.8 %          -       0.0 %
Total cost of
revenues                   26,708       49.5 %    31,582      49.1 %     80,806      50.9 %     92,342      48.6 %
Gross profit               27,249       50.5 %    32,763      50.9 %     77,998      49.1 %     97,468      51.4 %
Operating expenses:
Research and
development                 4,981        9.3 %     4,685       7.3 %     13,532       8.5 %     13,939       7.3 %
Selling, general and
administrative             21,324       39.5 %    23,862      37.0 %     63,861      40.2 %     69,947      36.9 %
Restructuring
charges                         -        0.0 %         -       0.0 %      1,315       0.8 %          -       0.0 %
Total operating
expenses                   26,305       48.8 %    28,547      44.3 %     78,708      49.5 %     83,886      44.2 %
Income from
operations                    944        1.7 %     4,216       6.6 %       (710 )    (0.4 )%    13,582       7.2 %
Interest and other
income, net of other
expense                        56        0.2 %       673       1.0 %        433       0.2 %      2,804       1.5 %
Income before
provision for
(benefit from)
income taxes                1,000        1.9 %     4,889       7.6 %       (277 )    (0.2 )%    16,386       8.7 %
Provision for
(benefit from)
income taxes                  146        0.3 %     1,975       3.1 %       (165 )    (0.1 )%     6,985       3.7 %
Net income             $      854        1.6 %  $  2,914       4.5 %  $    (112 )    (0.1 )% $   9,401       5.0 %

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 nine months ended September 30, 2009 and 2008 and the
percentage change between those years:



                              Three Months Ended September 30,           Nine Months Ended September 30,
                              2009           2008        % Change         2009           2008      % Change
                                 (in thousands)                             (in thousands)
Product revenues           $    42,854    $    54,294       (21.1 )%  $    127,221    $  159,580      (20.3 )%
Cost of product revenues        20,087         24,940       (19.5 )%        59,542        73,259      (18.7 )%
Restructuring charges                -              -                        1,008             -
Gross profit               $    22,767    $    29,354       (22.4 )%  $     66,671    $   86,321      (22.8 )%

Product revenues decreased $11.4 million, or (21.1%) in the three months ended September 30, 2009 as compared to the same period in 2008. Product revenues decreased $32.3 million, or (20.3%) in the nine months ended September 30, 2009 as compared to the same period in 2008. The decrease in product revenue for the three and nine months ended September 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 in our U.S. domestic markets. This decrease was in part offset by an increase in revenues from our international business for the nine months ended September 30, 2009 compared to the same period in 2008. This net decrease in product revenue year over year reflects the current economic downturn and the resulting capital investment constraints and longer sales cycle by our customers.

Cost of product revenues decreased by $4.8 million, or (19.5%) in the three months ended September 30, 2009 as compared to the same period in 2008. The decrease was primarily due to the reduction in product revenue resulting in a $4.0 million decrease in direct material cost and a decrease in our spending of $0.8 million, primarily from lower headcount and associated headcount related expenses such as travel. Cost of product revenues decreased $13.7 million, or (18.7%), in the nine months ended September 30, 2009 compared to the corresponding period in 2008. The decrease was due to both a reduction in product revenue, resulting in a $11.0 million decrease in direct material cost, and a decrease in our spending of $2.7 million, primarily from lower headcount and associated headcount related expenses such as travel.

The cost reductions in the nine months ended September 30, 2009 were partially offset by restructuring charges of $1.0 million relating to our work force reduction during the first quarter of 2009, which lowered headcount by 50 employees, predominately in the manufacturing and field operations departments. Restructuring costs recorded in the first quarter of 2009 related primarily to severance pay, continuation of benefits and outplacement services.

Gross profit on product revenue decreased by $6.5 million, or (22.4%) in the three months ended September 30, 2009 as compared to the same period in 2008. Gross profit on product revenue decreased by $19.6 million, or (22.8%) in the nine months ended September 30, 2009 as compared to the same period in 2008. The decrease in gross profit on product revenues was primarily a result of lower product revenues and restructuring charges related to our work force reduction, offset by lower direct material costs and lower headcount and travel costs.

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 nine months ended September 30, 2009
and 2008 and the percentage change between those years:



                              Three Months Ended September 30,           Nine Months Ended September 30,
                              2009           2008        % Change        2009           2008       % Change
                                 (in thousands)                             (in thousands)
Service and other
revenues                   $    11,103    $    10,051        10.5 %   $    31,583    $    30,230        4.5 %
Cost of service and
other revenues                   6,621          6,642        (0.3 )%       20,055         19,083        5.1 %
Restructuring charges                -              -                         201              -
Gross profit               $     4,482    $     3,409        31.5 %   $    11,327    $    11,147        1.6 %

Service and other revenues include revenues from service and maintenance contracts and rentals of automation systems. Service and other revenues increased by $1.1 million, or 10.5% in the three months ended September 30, 2009 as compared to the same period in 2008. Service and other revenues increased by $1.4 million, or 4.5% in the nine months ended September 30, 2009 as compared to the same period in 2008. The increases in service and other revenues for the three and nine months ended September 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 $0.02 million, or (0.3%) in the three months ended September 30, 2009 as compared to the same period in 2008. . . .