Home Diagnostics, Inc.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark one)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 001-33027

HOME DIAGNOSTICS, INC.

(Exact name of registrant as specified in its charter)


DELAWARE		22-2594392
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification Number)

2400 NW 55^thCourt
Fort Lauderdale, Florida		33309
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 954-677-9201
Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Exchange on Which Registered
Common Stock, $0.01 par value		The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
	(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No þ

As of August 5, 2008, there were 17,628,220 shares of common stock, par value $0.01 per share, of the Registrant issued and outstanding.

Part I — FINANCIAL INFORMATION

Item 1 — Financial Statements

HOME DIAGNOSTICS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets


			(Unaudited)
	December 31,		June 30,
	2007		2008

Assets
Current assets:
Cash and cash equivalents	$	32,695,803	$	34,429,224
Accounts receivable, net		18,313,519		21,928,278
Inventory		12,379,668		15,045,205
Prepaid expenses and other current assets		1,013,025		1,910,419
Income taxes receivable		1,241,171		—
Deferred tax asset		4,669,774		4,657,213

Total current assets		70,312,960		77,970,339
Property and equipment, net		22,560,335		24,321,711
Goodwill		35,573,462		35,573,462
Other intangible assets, net		660,776		480,696
Deferred tax asset		1,004,638		1,078,018
Other assets, net		138,866		146,725

Total assets	$	130,251,037	$	139,570,951


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	6,103,535	$	9,013,475
Accrued liabilities		18,048,079		20,160,475
Income taxes payable		—		1,057,240

Total current liabilities		24,151,614		30,231,190

Contingencies (Note 11)		—		—

Stockholders’ equity:
Common stock, $.01 par value; 60,000,000 shares authorized; 17,878,691 and 17,763,739 shares issued and outstanding at December 31, 2007 and June 30, 2008, respectively		178,787		177,638
Additional paid-in capital		95,017,973		95,023,316
Retained earnings		10,858,415		13,560,906
Accumulated other comprehensive income		44,248		577,901

Total stockholders’ equity		106,099,423		109,339,761

Total liabilities and stockholders’ equity	$	130,251,037	$	139,570,951

The accompanying notes are an integral part of these condensed consolidated financial statements.

HOME DIAGNOSTICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2007			2008		2007		2008

Net sales	$	28,050,322		$	33,355,841	$	56,150,372	$	58,476,121
Cost of sales		11,951,257			13,469,076		23,155,594		24,001,009

Gross profit		16,099,065			19,886,765		32,994,778		34,475,112


Operating expenses
Selling, general and administrative (including stock-based compensation expense of $439,021 and $510,325 and $739,965 and $743,326 for the three and six months ended June 30, 2007 and 2008, respectively)		11,566,718			13,698,713		23,107,791		25,569,431
Research and development		2,257,017			2,426,666		4,269,187		4,783,514

Total operating expenses		13,823,735			16,125,379		27,376,978		30,352,945

Income from operations		2,275,330			3,761,386		5,617,800		4,122,167

Other income (expense)

Interest income		425,275			213,719		770,281		541,587
Other, net		(69,091	)		105,992		51,607		(420,589	)

Total other income (expense)		356,184			319,711		821,888		120,998

Income before provision for income taxes		2,631,514			4,081,097		6,439,688		4,243,165
Provision for income taxes		792,237			1,396,838		2,125,098		837,540

Net income	$	1,839,277		$	2,684,259	$	4,314,590	$	3,405,625


Earnings per common share:
Basic	$	0.10		$	0.15	$	0.24	$	0.19

Diluted	$	0.09		$	0.14	$	0.22	$	0.18

Weighted average shares used in computing earnings per common share:
Basic		18,012,483			17,841,219		17,871,000		17,869,996

Diluted		19,815,186			18,917,812		19,773,857		18,957,332

The accompanying notes are an integral part of these condensed consolidated financial statements.

HOME DIAGNOSTICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)


													Accumulated
	Common Stock						Additional						other		Total
	Number of						paid-in			Retained			comprehensive		stockholders’
	shares			Amount			capital			earnings			Income		equity
Balance at December 31, 2007		17,878,691		$	178,787		$	95,017,973		$	10,858,415		$	44,248	$	106,099,423
Stock-based compensation expense		—			—			743,326			—			—		743,326
Stock options exercised, including tax benefit of $123,143		186,240			1,863			877,854			—			—		879,717
Repurchased common stock		(301,192	)		(3,012	)		(1,615,837	)		(703,134	)		—		(2,321,983	)


Comprehensive income:
Foreign currency translation adjustment		—			—			—			—			533,653		533,653
Net income		—			—			—			3,405,625			—		3,405,625


Total comprehensive income		—			—			—			3,405,625			533,653		3,939,278


Balance at June 30, 2008		17,763,739		$	177,638		$	95,023,316		$	13,560,906		$	577,901	$	109,339,761

The accompanying notes are an integral part of these condensed consolidated financial statements.

HOME DIAGNOSTICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended
	June 30,
	2007			2008

Cash flows from operating activities:
Net income	$	4,314,590		$	3,405,625
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,995,746			1,748,347
Amortization of deferred financing and debt issuance costs		4,509			—
Loss on asset disposal		15,688			105,293
Bad debt expense		24,988			30,000
Deferred income taxes		(643,333	)		(60,819	)
Stock-based compensation expense		739,965			743,326
Changes in assets and liabilities:
Accounts receivable		353,094			(3,644,759	)
Inventories		127,294			(2,433,692	)
Prepaid expenses and other current and non-current assets		(407,846	)		(906,741	)
Income taxes receivable and income taxes payable		783,917			2,298,411
Accounts payable		1,973,093			2,909,940
Accrued liabilities		(132,931	)		2,020,616

Net cash provided by operating activities		9,148,774			6,215,547

Cash flows from investing activities:
Capital expenditures		(5,008,544	)		(3,322,207	)

Net cash used in investing activities		(5,008,544	)		(3,322,207	)

Cash flows from financing activities:
Payment of debt financing costs		(4,317	)		—
Proceeds from exercise of stock options		1,288,856			756,574
Excess tax benefits from stock-based compensation expense		668,502			123,143
Repurchases of common stock		—			(2,321,983	)

Net cash used in financing activities		1,953,041			(1,442,266	)

Effect of exchange rate changes on cash and cash equivalents		123,836			282,347

Net increase (decrease) in cash and cash equivalents		6,217,107			1,733,421
Cash and cash equivalents
Beginning of period		26,487,163			32,695,803

End of period	$	32,704,270		$	34,429,224

Supplemental cash flows disclosures:
Cash paid during the period for:
Income taxes	$	1,584,510		$	773,631

The accompanying notes are an integral part of these condensed consolidated financial statements.

HOME DIAGNOSTICS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2008

(Unaudited)

1. Basis of presentation

Home Diagnostics, Inc. was founded in 1985 and has focused exclusively on the diabetes market since inception. The Company is a developer, manufacturer and marketer of technologically advanced blood glucose monitoring systems and disposable supplies for diabetics worldwide.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes to the financial statements of Home Diagnostics, Inc. and its subsidiaries (the “Company”) included in the Company’s most recent Annual Report on Form 10-K. In the opinion of management, all adjustments consist of normal and recurring adjustments, necessary to present fairly the financial position and results of operations for the interim periods presented herein. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

The condensed consolidated financial statements include the accounts of Home Diagnostics, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the Company’s allowance for estimated sales returns, legal contingencies, assumptions used to evaluate the impairment of goodwill and long lived assets and income tax uncertainties. Actual amounts could differ from those estimates.

Property and equipment

Property and equipment, including leasehold improvements, is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided for using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized over the lesser of their estimated useful life or the life of the lease. Estimated useful lives are as follows:


Category		Useful lives

Machinery and equipment		1-8 years
Furniture, fixtures and office equipment		1-8 years
Computer software		3 years

Equipment not yet placed in service primarily consists of expenditures for custom manufacturing equipment for new product development which is expected to be placed into service during mid 2008, after obtaining FDA 510(k) clearance. The assets are expected to have an estimated useful life of 7 — 8 years. Depreciation expense on these assets will commence once the asset is substantially complete, ready for its intended use and the Company has begun to produce inventory ready for sale. Substantially complete and ready for use is at the point which the asset has been installed and validated and has received all required regulatory approvals, such as clearance by the FDA.

Maintenance and repairs are expensed as incurred. Expenditures for significant renewals or betterments are capitalized. Upon disposition, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in current operations.

Recent accounting pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations (SFAS 141(R)) which replaces SFAS No. 141, Business Combinations (SFAS 141). SFAS 141(R)’s scope is broader than that of SFAS 141, which applied only to business combinations in which control was obtained by transferring consideration. SFAS 141(R) applies to all transactions and other events in which one entity obtains control over one or more other businesses. The standard requires the fair value of the purchase price, including the issuance of equity securities, to be determined on the acquisition date. SFAS 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interests in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R) requires acquisition costs to be expensed as incurred and restructuring costs to be expensed in periods after the acquisition date. Earn-outs and other forms of contingent consideration are to be recorded at fair value on the acquisition date. Changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period will be recognized in earnings rather than as an adjustment to the cost of the acquisition. SFAS 141(R) generally applies prospectively to 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 with early adoption prohibited. The Company is currently evaluating the impact that the adoption of SFAS 141(R) will have on its future results of operations or financial position.

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (SFAS 160). SFAS 160 requires non-controlling interests or minority interests to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. Upon a loss of control, the interest sold, as well as any interest retained, is required to be measured at fair value, with any gain or loss recognized in earnings. Based on SFAS 160, assets and liabilities will not change for subsequent purchase or sale transactions with non-controlling interests as long as control is maintained. Differences between the fair value of consideration paid or received and the carrying value of non-controlling interests are to be recognized as an adjustment to the parent interest’s equity. SFAS 160 is effective for fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the impact that the adoption of SFAS 160 will have on its future results of operations or financial position.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — An Amendment of SFAS No. 133” (“SFAS 161”). SFAS 161 seeks to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures regarding the impact on financial position, financial performance, and cash flows. To achieve this increased transparency, SFAS 161 requires (1) the disclosure of the fair value of derivative instruments and gains and losses in a tabular format; (2) the disclosure of derivative features that are credit risk-related; and (3) cross-referencing within the footnotes. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact that the adoption of SFAS No. 161 will have on its future results of operations or financial position.

2. Stock option plans and warrants

In July 2006, the Company’s Board of Directors and stockholders approved the 2006 Equity Incentive Plan (the “2006 Plan”). Two million shares of common stock have been reserved for issuance under the 2006 Plan. The term of each option granted under the 2006 Plan cannot exceed ten years from the date of grant. The 2006 Plan authorizes a range of awards including, but not limited to the following: stock options; stock appreciation rights; and restricted stock. Under the 2006 Plan, there were 0.9 million options available for grant and 1.1 million options outstanding at June 30, 2008. These options generally become exercisable on a pro rata basis over a three-year period from the date of grant.

The Company also has two predecessor stock option plans under which options to purchase approximately 2.1 million shares are outstanding as of June 30, 2008. No additional stock options may be granted under either of these plans.

A summary of the Company’s stock option activity and related information for the three and six months ended June 30, 2008 is as follows:


						Weighted
				Range of		average
	Number of			exercise		Exercise
	options			prices		Prices

Outstanding at December 31, 2007		3,010,407		$	2.99 - 12.00	$	5.53
Granted		15,000		$	6.85	$	6.85
Exercised		(27,600	)	$	2.99 - 4.27	$	3.71
Forfeited/ Cancelled		(650	)	$	12.00	$	12.00


Outstanding at March 31, 2008		2,997,157		$	2.99 - 12.00	$	5.55
Granted		428,000		$	7.88	$	7.88
Exercised		(158,640	)	$	2.99 - 4.27	$	4.12
Forfeited/ Cancelled		(1,176	)	$	3.85 - 12.00	$	10.78



Outstanding at June 30, 2008		3,265,341		$	2.99 - 12.00	$	5.92


Exercisable at June 30, 2008		2,358,419		$	2.99 - 12.00	$	4.51

During the six months ended June 30, 2007 and 2008, the weighted average fair values of options granted were $3.77 and $2.72 respectively. The fair value of stock option grants during the six months ended June 30, 2007 and 2008 were estimated on the date of grant using the Black-Scholes option-pricing model with assumptions for expected volatility, expected life, risk-free interest rate and dividend yield. The assumptions were as follows:


	Six Months Ended
	June 30,			June 30,
	2007			2008
Weighted average expected term of options (using the simplified method in years)		4.60			4.45
Expected volatility factor (based on peer group volatility)		30	%		36	%
Expected dividend yield	none			none
Weighted average risk-free interest rate (based on applicable U.S. Treasury rates)		4.91	%		3.22	%

The Company’s estimated forfeiture rate during the three and six months ended June 30, 2007 and 2008 was approximately 8%.

The aggregate intrinsic value for the options outstanding and exercisable at June 30, 2008 was $12.0 million and $11.4 million, respectively. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the quoted market price of the Company’s common stock and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2008. This amount changes based on the quoted market price of the Company’s common stock.

At June 30, 2007 and 2008, there was $2.4 million and $1.7 million, respectively, of unrecognized share-based compensation expense associated with non-vested stock option grants subject to SFAS 123R. The Company has elected to recognize compensation expense for stock option awards using a graded vesting attribution methodology, whereby compensation expense is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in

substance, multiple awards. Stock-based compensation expense is expected to be recognized over a weighted-average period of 3 years.

The Company recognized stock-based compensation expense of $0.4 million and $0.5 million during the three months ended June 30, 2007 and 2008, respectively. During the three months ended June 30, 2007, the $0.4 million in expense was comprised of approximately $0.3 million related to compensation expense calculated in accordance with SFAS 123R for stock options and expense of approximately $0.1 million related to the mark-to-market accounting adjustment for variable stock options. The income tax benefit associated with SFAS 123R expense during the three months ended June 30, 2007 was approximately $0.1 million. During the three months ended June 30, 2008, the $0.5 million in expense was comprised of approximately $0.3 million related to compensation expense calculated in accordance with SFAS 123R for stock options and expense of approximately $0.2 million related to the mark-to-market accounting adjustment for variable stock options. The income tax benefit associated with SFAS 123R expense during the three months ended June 30, 2008 was approximately $0.1 million.

The Company recognized stock-based compensation expense of $0.7 million during each of the six months ended June 30, 2007 and 2008, respectively. During the six months ended June 30, 2007, the $0.7 million in expense was comprised of approximately $0.5 million related to compensation expense calculated in accordance with SFAS 123R for stock options and expense of approximately $0.2 million related to the mark-to-market accounting adjustment for variable stock options. The income tax benefit associated with SFAS 123R expense during the six months ended June 30, 2007 was approximately $0.2 million. During the six months ended June 30, 2008, the $0.7 million in expense was comprised of approximately $0.6 million related to compensation expense calculated in accordance with SFAS 123R for stock options and expense of approximately $0.1 million related to the mark-to-market accounting adjustment for variable stock options. The income tax benefit associated with SFAS 123R expense during the six months ended June 30, 2008 was approximately $0.1 million.

3. Inventories, net

Inventories, net consist of the following:


	December 31,		June 30,
	2007		2008

Raw materials	$	7,589,107	$	7,490,647
Work-in-process		2,780,096		5,423,153
Finished goods		2,010,465		2,131,405


	$	12,379,668	$	15,045,205

4. Property and equipment, net

Property and equipment, net consist of the following:


	December 31,			June 30,
	2007			2008

Machinery and equipment	$	15,931,806		$	16,823,617
Leasehold improvements		4,061,227			4,674,630
Furniture, fixtures, and office equipment		3,136,451			4,275,082
Computer software		1,912,733			1,962,105
Equipment not yet placed in service		15,272,616			15,858,822

		40,314,833			43,594,256
Less: Accumulated depreciation and amortization		(17,754,498	)		(19,272,545	)

	$	22,560,335		$	24,321,711

Depreciation expense was approximately $0.8 million for each of the three months ended June 30, 2007 and June 30, 2008. Amortization expense of computer software was approximately $0.1 million for each of the three months ended June 30, 2007 and June 30, 2008.

Depreciation expense was approximately $1.7 million and $1.5 million for each of the six months ended June 30, 2007 and 2008, respectively. Amortization expense of computer software was approximately $0.3 million for each of the six months ended June 30, 2007 and 2008.

Equipment not yet placed in service primarily consists of expenditures for custom manufacturing equipment necessary to manufacture the Company’s new TRUEtest test strips which utilize proprietary on-strip coding technology to automatically calibrate with the Company’s TRUEresult and TRUE2go meters. This equipment is expected to be placed into service in the second half of 2008 and is expected to have an estimated useful life of 7-8 years.

5. Accrued liabilities

Accrued liabilities consist of the following:


	December 31,		June 30,
	2007		2008

Accrued salaries and benefits	$	3,975,898	$	5,270,169
Sales returns reserve		5,385,361		5,565,061
Product warranty and customer liabilities		6,600,993		7,464,351
Other accrued liabilities		2,085,826		1,860,894


	$	18,048,079	$	20,160,475

6. Credit facility and long-term debt

In March 2008, the Company amended it’s credit facility by increasing the amount available under its unsecured revolving line of credit from $7.0 million to $10.0 million (“Amended Credit Facility”). The Amended Credit Facility matures on April 30, 2009. At June 30, 2008, there was no outstanding balance. Borrowings bear interest at LIBOR plus 0.5% (3.0% at June 30, 2008). The Amended Credit Facility contains a financial covenant and other covenants that restrict the Company’s ability to, among other things, incur liens, repurchase shares other than those authorized under the common stock repurchase program and participate in a change in control. The financial covenant requires the Company to maintain a ratio of total liabilities to tangible net worth of not more than 1.0 to 1.0. Failure to comply with this covenant and other restrictions would constitute an event of default. The Company believes that it was in compliance with the financial covenant and other restrictions at June 30, 2008.

7. Income taxes

The Company’s income tax provision for interim periods is determined using an estimate of the Company’s annual effective tax rate. The Company and its subsidiaries file income tax returns in the U.S. Federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in the United States, Taiwan, the United Kingdom, Australia and Canada. In March 2008, the Internal Revenue Service (IRS) completed an income tax audit of the Company’s 2003 and 2004 Federal tax returns. In the Company’s most significant jurisdiction, the United States, it is no longer subject to IRS examination for periods prior to 2003, although carry forward attributes that were generated between 1998 and 2002 may still be adjusted upon examination by the IRS if they either have been or will be used in future periods.

During the first quarter of 2008, the Company decreased its unrecognized tax benefits by approximately $1.0 million due to the completion of the IRS audits for 2003 and 2004. At June 30, 2008, the Company had gross unrecognized tax benefits of approximately $1.2 million. Of the total unrecognized tax benefits, $0.8 million, if recognized, would reduce our effective tax rate in the period of recognition. Interest did not change significantly during the three months ended June 30, 2008. The Company is currently under audit by the Internal Revenue Service for its 2005 tax year. It is likely that the examination phase of the audit will conclude in 2008, and it is reasonably possible a change in the unrecognized tax benefits may occur; however, quantification of an estimated range cannot be made at this time.

8. Earnings per common share

Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period presented. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period plus the effect of dilutive securities outstanding during the period.

The following summarizes the weighted average number of common shares outstanding during the three and six months ended June 30, 2007 and 2008 that were used to calculate the basic earnings per
common share as well as the dilutive impact of stock options using the treasury stock method, as included in the calculation of diluted weighted average shares:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2008		2007		2008

Weighted average number of common shares outstanding for basic earnings per share		18,012,483		17,841,219		17,871,000		17,869,996
Effect of dilutive securities: stock options and warrants		1,802,703		1,076,593		1,902,857		1,087,336

Weighted average number of common and common equivalent shares outstanding		19,815,186		18,917,812		19,773,857		18,957,332

For the three months ended June 30, 2007 and 2008, the Company had approximately 0.3 million and 1.2 million outstanding employee stock options, respectively, that have been excluded from the computation of diluted earnings per share because they are anti-dilutive.

For the six months ended June 30, 2007 and 2008, the Company had approximately 0.3 million and 1.0 million outstanding employee stock options, respectively, that have been excluded from the computation of diluted earnings per share because they are anti-dilutive.

9. Common stock repurchase program

In August 2007, the Company’s Board of Directors authorized the Company to repurchase up to $5 million of its common stock (the “Common Stock Repurchase Program”). In March 2008, the Company’s Board of Director’s authorized the repurchase of an additional $5.0 million of its common stock. As of June 30, 2008, the Company has repurchased approximately 806,000 shares at a cost of approximately $6.8 million. During the three and six months ended June 30, 2008, the Company repurchased approximately 283,000 shares and 301,000 shares at a cost of approximately $2.2 million and $2.3 million, respectively. All purchases under the Common Stock Repurchase Program were made in the open market, subject to market conditions and trading restrictions.

10. Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (“SFAS 157”) which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 became effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued Staff Position (FSP) No. 157-2, which delayed the effective date of SFAS No. 157 one year for all non-financial assets and non-financial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis.

SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

On January 1, 2008, the Company partially adopted the provisions of Statement No. 157. There was no impact to the Company’s financial position or results of operations upon adoption of SFAS 157. The Company has elected to partially defer adoption of SFAS No. 157 related to our goodwill and indefinite-lived intangible assets in accordance with FASB Staff Position 157-2.

As of June 30, 2008, the Company holds $34.4 million in cash equivalents invested primarily in overnight securities. These investments are valued using quoted prices in active markets for identical investments (Level 1).

In April 2008, the Company entered into a Non-Deliverable Forward (“NDF”) contract for a notional amount of $4.0 million to reduce exposure of foreign currency fluctuations on transactions with it’s foreign subsidiary in Taiwan. The NDF contract matures in February 2009. At June 30, 2008, the fair value of the NDF is estimated to be an amount of approximately $60,000. Fair value is estimated based upon Level 2 observable inputs for the current NDF forward rates for similar contracts. During the three months ended June 30, 2008, the Company recorded approximately $60,000 in market value gains on this contract in other income.

11. Contingencies

Litigation

The Company is involved in certain legal proceedings arising in the ordinary course of business. In the opinion of management, except as disclosed below, the outcome of such proceedings will not materially affect the Company’s consolidated financial position, results of operations or cash flows.

Roche Litigation

In February 2004, Roche Diagnostics Corporation filed suit against the Company and three other co-defendants in federal court in Indiana. The three co-defendants settled with Roche in January 2006. The suit alleged that the Company’s TrueTrack Smart System infringed claims in two Roche patents. These patents are related to Roche’s electrochemical biosensors and the methods they use to measure glucose levels in a blood sample. In its suit, Roche sought damages including its lost profits or a reasonable royalty, or both, and a permanent injunction against the accused products. Roche also alleged willful infringement, which, if proven, could result in an award of up to three times its actual damages, as well as its legal fees and expenses. On June 20, 2005, the Court ruled that one of the Roche patents was procured by inequitable conduct before the Patent Office and is unenforceable. On March 2, 2007, the Court granted the Company’s motion for summary judgment for non-infringement with respect to the second patent and denied the Roche motion for a summary judgment. These rulings were subject to appeal by Roche. On December 20, 2007, the Company settled the ongoing litigation, agreeing to pay Roche a lump sum payment of $3.5 million in exchange for a royalty-free, fully paid-up, world-wide license on both of the patents, as well as a covenant by Roche not to sue the Company on the licensed patents.

Brandt Litigation

In March 2007, a settlement was agreed by the parties to a lawsuit against the Company, MIT Development Corp. or MIT, George H. Holley and the Estate of Robert Salem, brought by Leonard Brandt. Mr. Brandt claimed that he was engaged in 1994 to provide financial consulting services for MIT, Mr. George Holley and Mr. Salem. Mr. Brandt claimed he was to receive at least $1,000 per month for consulting services plus 10% of the increase in the value of the assets of MIT, Holley or Robert Salem resulting from cash or other assets received from the Company in connection with any transaction with the Company. In November 1999, the Company acquired MIT from Messrs. Holley and Salem. The settlement provides for a total of $3.0 million of consideration to be paid by the defendants. The Company’s share of the settlement consideration was $0.6 million to be paid in cash, and the remaining $2.4 million was funded in November 2007 by George H. Holley and the Estate of Robert Salem in restricted common stock of the Company. The Company agreed to grant Mr. Brandt “piggy-back” registration rights with respect to such stock for a period of one year from the date of settlement. In December 2006, pursuant to Staff Accounting Bulletin No. 107, Topic 5T “Accounting for Expenses or Liabilities Paid by Principal Stockholders”, the Company recorded a charge of $3.0 million to operating expense and recorded the $2.4 million funded by the other two defendants as additional paid-in capital. On July 19, 2007 and October 31, 2007, the court decided several details concerning the precise quantity of restricted shares to be delivered as part of the final payment terms of the settlement consistent with the foregoing description and ordered the immediate exchange of mutual releases and payment of the escrowed cash and stock. The agreed settlement funds and restricted shares were delivered to an escrow agent in accordance with the court’s order of October 31, 2007; however, Mr. Brandt failed to comply with the court’s rulings. Instead, Mr. Brandt moved to vacate the settlement and sought a new trial, and the Company filed a motion with the court to uphold the settlement. At a hearing on February 28, 2008, the court indicated it would grant the Company’s motion to compel Mr. Brandt to perform the settlement and deny Mr. Brandt’s motion to vacate the settlement and obtain a new trial. In June 2008, Brandt agreed to settle and took delivery out of escrow of the funds and the shares. Brandt also withdrew with prejudice his appeal from the Court’s ruling compelling him to comply with the settlement and delivered releases to all defendants. The case is now fully concluded.

In July 2007, the Company reached a settlement agreement with its’ directors and officers insurance provider, whereby, the Company received $450,000 in insurance proceeds relating to a recovery of losses incurred as part of the Brandt matter. The Company’s share of the insurance proceeds was $150,000 and the remaining $300,000 was distributed to George H. Holley and the Estate of Robert Salem. During the year ended December 31, 2007, the Company recorded a reduction to operating expenses of $450,000 and a distribution of capital of $300,000.

Item 2. Management’s discussion and analysis of financial condition and results of operations

The following discussion highlights the principal factors that have affected our financial condition and results of operations, as well as our liquidity and capital resources for the periods described. This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report. In addition, reference is made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our most recent Annual Report on Form 10-K. As used in this Quarterly Report, the terms “Home Diagnostics”, the “Company”, “HDI”, “we”, “us” and “our” refer to Home Diagnostics, Inc. and its consolidated subsidiaries. The following discussion contains forward-looking statements. Please see our most recent Annual Report on Form 10-K, including the section entitled “Risk Factors,” for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. In addition, please see “Caution concerning forward-looking statements” below.

Company overview

We are a developer, manufacturer and marketer of technologically advanced blood glucose monitoring systems and disposable supplies for diabetics worldwide. We market our blood glucose monitoring systems both under our own HDI brands and through a unique co-branding strategy in partnership with the leading food and drug retailers, mass merchandisers, distributors, mail service providers and third-party payors in the United States and internationally.

Our co-branding distribution strategy allows our customers to leverage their brand strategy with ours and to deliver high quality, low cost blood glucose monitoring systems to their diabetic customers at attractive price points for the consumer and increased profit margins for the retailer or distributor.

We were founded in 1985 and have focused exclusively on the diabetes market since inception. We have two manufacturing facilities, one located in Fort Lauderdale, Florida, and the other in Hsinchu City, Taiwan. We manufacture, test and package our blood glucose test strips at our facility in Fort Lauderdale. Our blood glucose monitors are assembled in our Taiwan facility. Labeling, final assembly, quality control testing and shipment of our blood glucose monitoring systems are conducted in our Fort Lauderdale facility. We have a highly automated manufacturing process with sufficient capacity to continue to grow our business without significant incremental capital investments, other than for new product development.

			We sell our products in the following distribution channels:

	•		Retail — the retail channel generates the majority of sales of blood glucose monitoring products in the United States and includes chain drug stores, food stores and mass merchandisers. We sell our products into the retail channel on a direct basis or through domestic distributors. Our retail net sales include products we sell directly into the retail channel for the larger food and drug retailers.

	•		Domestic distribution — the domestic distribution channel includes sales to domestic wholesalers, including AmerisourceBergen, Cardinal Health, McKesson, and Invacare, who sell products to independent and chain food and drug retailers, primary and long-term care providers, durable medical equipment suppliers and mail service providers.

	•		Mail service — the mail service channel includes sales to leading mail service providers, who market their products primarily to the Medicare population.

	•		International — the international channel consists of sales on a direct basis in the United Kingdom and Canada and through distributors in Latin America, Europe, Australia, and China.

Our net sales by channel were as follows for the periods indicated:


	Three Months Ended June 30,								Six Months Ended June 30,
	2007 (1)				2008				2007 (1)				2008

Net sales by channel:
Retail	$	6,216,104	22.2	%	$	6,077,281	18.2	%	$	12,750,950	22.7	%	$	12,555,199	21.5	%
Domestic distribution		13,491,627	48.1	%		17,884,002	53.6	%		27,718,746	49.4	%		29,207,299	49.9	%
Mail service		4,296,483	15.3	%		5,254,149	15.8	%		8,700,440	15.5	%		9,590,904	16.4	%
International		4,046,108	14.4	%		4,140,409	12.4	%		6,980,236	12.4	%		7,122,719	12.2	%

Net sales	$	28,050,322	100.0	%	$	33,355,841	100.0	%	$	56,150,372	100.0	%	$	58,476,121	100.0	%


(1)		Certain prior year amounts have been reclassified to conform with current year presentation.

We strive to maximize our installed base of monitors to drive future sales of our test strips. Monitors, which are sold individually or in a starter kit with a sample of 10 test strips and other supplies, are typically sold at or below cost. It is also common for us to provide monitors free of charge in support of managed care initiatives and other market opportunities. Test strip sales are a significant driver of our overall gross margins. We measure our operating performance in many ways, including the ratio of test strips to monitors sold in a given period. Our gross margins are affected by several factors, including manufacturing cost increases or reductions, the ratio of test strips to monitors, free monitor distributions and product pricing.

Our selling, general and administrative expenses include sales and marketing expenses, legal and regulatory costs, customer and technical service, finance and administrative expenses and stock-based compensation expenses. In the past, we have been involved in patent related litigation concerning certain of our products. Our legal costs can be significant, and the timing difficult to predict.

We have made significant investments in our research and development initiatives. Our research and development costs include salaries and related costs for our scientists and staff as well as costs for clinical studies, materials, consulting and other third-party services. Our research and development team is working to develop new technologies that we believe will broaden our product portfolio and enhance our current products.

Results of operations

The following table sets forth, for the periods indicated, certain information related to our operations, expressed in dollars and as a percentage of sales:


	Three Months Ended June 30,									Six Months Ended June 30,
	2007					2008				2007				2008
Net sales	$	28,050,322		100.0	%	$	33,355,841	100.0	%	$	56,150,372	100.0	%	$	58,476,121		100.0	%
Cost of sales		11,951,257		42.6	%		13,469,076	40.4	%		23,155,594	41.2	%		24,001,009		41.0	%

Gross profit		16,099,065		57.4	%		19,886,765	59.6	%		32,994,778	58.8	%		34,475,112		59.0	%

Operating Expenses:
Selling, general and administrative		11,566,718		41.2	%		13,698,713	41.1	%		23,107,791	41.2	%		25,569,431		43.7	%
Research and development		2,257,017		8.1	%		2,426,666	7.3	%		4,269,187	7.6	%		4,783,514		8.2	%

Total operating expenses		13,823,735		49.3	%		16,125,379	48.4	%		27,376,978	48.8	%		30,352,945		51.9	%

Income from operations		2,275,330		8.1	%		3,761,386	11.2	%		5,617,800	10.0	%		4,122,167		7.1	%

Interest income		425,275		1.5	%		213,719	0.6	%		770,281	1.4	%		541,587		0.9	%

Other, net		(69,091	)	(0.2	%)		105,992	0.3	%		51,607	0.1	%		(420,589	)	(0.7	%)

Income before income taxes		2,631,514		9.4	%		4,081,097	12.1	%		6,439,688	11.5	%		4,243,165		7.3	%

Provision for income taxes		792,237		2.8	%		1,396,838	4.2	%		2,125,098	3.8	%		837,540		1.4	%

Net income	$	1,839,277		6.6	%	$	2,684,259	7.9	%	$	4,314,590	7.7	%	$	3,405,625		5.9	%

Three months ended June 30, 2007 as compared to three months ended June 30, 2008

Net sales increased $5.3 million, or 18.9%, to $33.4 million for the three months ended June 30, 2008, as compared to $28.1 million for the same period in 2007. The increase was due to higher sales volume of $6.8 million, partially offset by increased sales returns of $0.9 million and increased managed care rebates and other discounts of $0.6 million. The increased volume of $6.8 million reflects the continued trend of increased distribution of our biosensor systems totaling approximately $8.7 million, partially offset by a decrease in our photometric system and other sales of approximately $1.9 million. The $0.9 million increase in our provision for sales returns resulted primarily from a returns reserve adjustment in anticipation of the launch of the TRUEtest product platform following FDA clearance. The increase in managed care rebates was due primarily to increased awareness and acceptance within the third-party payor environment of our products.

Cost of sales increased $1.5 million, or 12.7%, to $13.5 million for the three months ended June 30, 2008, as compared to $12.0 million for the same period in 2007. This $1.5 million increase was driven primarily by increased sales volume of $2.1 million, partially offset by decreases in the distribution of free monitors of $0.2 million and product cost savings of $0.1 million related to reduced test strip manufacturing costs. As a percentage of net sales, cost of sales decreased to 40.4% for the three months ended June 30, 2008, as compared to 42.6% for the same period in 2007. This 2.2% decrease was due primarily to increases to the strip to meter ratio which contributed 1.9%, decreases in the distribution of free monitors which contributed 0.4% and product cost savings which contributed 0.2% of the decrease. Offsetting the decrease were net revenue decreases from increased managed care and other rebates.

Gross profit increased $3.8 million, or 23.5%, to $19.9 million for the three months ended June 30, 2008, as compared to

$16.1 million for the same period in 2007. The increase is due to higher sales volume of $4.7 million and $0.3 million associated with decreases in the distribution of free monitors and test strip cost savings. These increases were partially offset by increased managed care and other rebates of $0.6 million and increased sales returns of $0.5 million. As a percentage of net sales, gross profit increased to 59.6% for the three months ended June 30, 2008, as compared to 57.4% for the same period in 2007, due primarily to the items noted above.

Selling, general and administrative expenses increased $2.1 million, or 18.4%, to $13.7 million for the three months ended June 30, 2008, as compared to $11.6 million for the same period in 2007. The increase is primarily due to an increase of $1.1 million in salaries and benefits associated with additional sales and administrative personnel, higher sales and marketing costs of $1.3 million related to increased advertising and promotions, including new product launch costs for TRUEtest and $0.1 million in other general and administrative expenses associated with supporting the continued growth of our operations. These costs were partially offset by reduced overall legal costs of $0.4 million associated with the settlement of the Roche litigation and other corporate matters. As a percentage of net sales, selling, general and administrative expenses decreased slightly to 41.1% for the three months ended June 30, 2008, as compared to 41.2% for the same period in 2007.

Research and development expenses increased $0.2 million, or 7.5%, to $2.4 million for the three months ended June 30, 2008, as compared to $2.3 million for the same period in 2007, due primarily to increased salaries and benefits costs. As a percentage of net sales, research and development costs decreased to 7.3% of sales for the three months ended June 30, 2008, as compared to 8.1% for the same period in 2007. The decrease was due to increased net sales, noted above.

Operating income was $3.8 million, or 11.2% of net sales, for the three months ended June 30, 2008 as compared to $2.3 million, or 8.1% of net sales, for the same period in 2007. The increase was due to increased net sales and gross margins, partially offset by increased operating expenses, as noted above.

Interest income was $0.2 million for the three months ended June 30, 2008 as compared to $0.4 million for the same period in 2007. Interest income consists primarily of earnings on cash balances on hand during the period. The decrease is primarily due to interest rates decreasing resulting in reduced interest income in 2008 as compared to 2007. There were no borrowings or outstanding amounts under our revolving credit facility at June 30, 2008 and June 30, 2007, respectively.

Other income (expense), net was income of $0.1 million for the three months ended June 30, 2008, as compared to an expense of approximately ($0.1) million for the same period in 2007. The income (expense) during the three months ended June 30, 2008 and 2007 consists primarily of market adjustments on the non-deliverable forward contract entered into during 2008 as well as foreign exchange gains/losses incurred by the Company’s Taiwan subsidiary due to changes in the value of the U.S. dollar.

Our effective tax rate for the three months ended June 30, 2008 and 2007 was 34.2% and 30.1%, respectively. The effective rate in 2007 was lower due primarily to tax credits and disqualifying dispositions on incentive stock options in 2007.

Net income was $2.7 million for the three months ended June 30, 2008 as compared to $1.8 million for the same period in 2007. Diluted net income per common share was $0.14 on weighted average shares of 18.9 million for the three months ended June 30, 2008, as compared to $0.09 on weighted average shares of 19.8 million for the same period in 2007.

Six months ended June 30, 2007 as compared to six months ended June 30, 2008

Net sales increased $2.3 million, or 4.1%, to $58.5 million for the six months ended June 30, 2008, as compared to $56.2 million for the same period in 2007. The increase was due to higher sales volume of $5.4 million, partially offset lower average selling prices of $1.3 million, increased sales returns of $0.8 million and increased managed care rebates and other discounts of $1.0 million. The increased volume of $5.4 million reflects the continued trend of increased distribution of our biosensor systems totaling approximately $8.8 million, partially offset by a decrease in our photometric system and other sales of approximately $3.4 million. The decrease in our average selling price of $1.3 million was primarily due to a shift in our revenue mix driven by increased mail service volume as well as volume based test strip pricing incentives within our mail service channel.

The $0.8 million increase in our provision for sales returns resulted primarily from a return reserve adjustment in anticipation of the launch of the TRUEtest product platform following FDA clearance. The increase in managed care rebates was due primarily to increased awareness and acceptance within the third-party payor environment of our products.

Cost of sales increased $0.8 million, or 3.7%, to $24.0 million for the six months ended June 30, 2008, as compared to $23.2 million for the same period in 2007. This $0.8 million increase was driven primarily by increased sales volume of $1.8 million, partially offset by $0.5 million of product cost savings associated with reduced manufacturing costs primarily related to test strips. As a percentage of net sales, cost of sales decreased slightly to 41.0% for the six months ended June 30, 2008, as compared to 41.2% for the same period in 2007. This 0.2% decrease was due primarily to increases in the strip to meter ratio which contributed 1.1% and cost savings from test strip manufacturing process improvements which contributed 0.9% of the decrease, partially offset by the impact of lower average selling prices on cost of sales as a percentage of revenue contributing 0.9% and net revenue decreases from increased managed care and other rebates, contributing 1.1%.

Gross profit increased $1.5 million, or 4.5%, to $34.5 million for the six months ended June 30, 2008, as compared to $33.0 million for the same period in 2007. The increase is due to higher sales volume of $3.6 million and $0.5 million of product cost savings associated with reduced manufacturing costs primarily related to test strips, partially offset by lower average selling prices of $1.3 million, increased managed care and other rebates of $1.0 million and increased sales returns of $0.3 million. As a percentage of net sales, gross profit increased to 59.0% for the six months ended June 30, 2008, as compared to 58.8% for the same period in 2007, due primarily to the items noted above.

Selling, general and administrative expenses increased $2.5 million, or 10.7%, to $25.6 million for the six months ended June 30, 2008, as compared to $23.1 million for the same period in 2007. The increase is primarily due to an increase of $2.0 million in salaries and benefits associated with additional sales and administrative personnel, higher sales and marketing costs of $1.8 million related primarily to increased advertising and promotions, including new product launch costs for TRUEtest and $0.4 million in other general and administrative expenses associated with supporting the continued growth of our operations. These costs were partially offset by reduced overall legal costs of $1.1 million associated with the settlement of the Roche litigation and other corporate matters and a $0.6 million decrease associated with other professional fees. As a percentage of net sales, selling, general and administrative expenses increased to 43.7% for the six months ended June 30, 2008, as compared to 41.2% for the same period in 2007, primarily due to increased costs described above.

Research and development expenses increased $0.5 million, or 12.0%, to $4.8 million for the six months ended June 30, 2008, as compared to $4.3 million for the same period in 2007. As a percentage of net sales, research and development costs increased to 8.2% of sales for the six months ended June 30, 2008, as compared to 7.6% for the same period in 2007. The increase is primarily due to increased personnel and other related costs as we continue to expand our new product development and manufacturing process improvement efforts.

Operating income was $4.1 million, or 7.1% of net sales, for the six months ended June 30, 2008 as compared to $5.6 million, or 10.0% of net sales, for the same period in 2007. The decrease was due to increased operating expenses, partially offset by increased gross margins, as noted above.

Interest income was $0.5 million for the six months ended June 30, 2008 as compared to $0.8 million for the same period in 2007. Interest income consists primarily of earnings on cash balances on hand during the period. The decrease is primarily due to interest rates decreasing resulting in reduced interest income in 2008 as compared to 2007. There were no borrowings or outstanding amounts under our revolving credit facility at June 30, 2008 and June 30, 2007, respectively.

Other income (expense), net was an expense of ($0.4) million for the six months ended June 30, 2008, as compared to income of approximately $0.1 million for the same period in 2007. The expense during the six months ended June 30, 2008, is due primarily to foreign exchange losses incurred by the Company’s Taiwan subsidiary due to declines in the value of the U.S. dollar.

Our effective tax rate for the six months ended June 30, 2008 and 2007 was 19.7% and 33.0%, respectively. The effective rate in 2008 was favorably impacted by a $0.6 million tax benefit recorded in the first quarter of 2008 related to the settlement of tax uncertainties associated with the completion of audits of our 2003 and 2004 Federal income tax returns by the Internal Revenue Service.

Net income was $3.4 million for the six months ended June 30, 2008 as compared to $4.3 million for the same period in 2007. Diluted net income per common share was $0.18 on weighted average shares of 19.0 million for the six months ended June 30, 2008, as compared to $0.22 on weighted average shares of 19.8 million for the same period in 2007.

Liquidity and capital resources

At June 30, 2008, we had approximately $34.4 million of cash and cash equivalents on hand, no debt outstanding and $10.0 million of capacity under our revolving line of credit. Our primary capital requirements are to fund capital expenditures and to fund common stock repurchases under our board approved Common Stock Repurchase Program, as described below. Significant sources of liquidity are cash on hand, cash flows from operating activities, working capital and borrowings from our revolving line of credit.

In March 2008, we amended our credit facility by increasing the amount available under a unsecured revolving line of credit from $7.0 million to $10.0 million and extended the maturity date to April 30, 2009 (“Amended Credit Facility”). At June 30, 2008, there was no outstanding balance under the Amended Credit Facility. Borrowings under the Amended Credit Facility bear interest at the LIBOR plus 0.5%. Our Amended Credit Facility contains a financial covenant and other covenants that restrict our ability to, among other things, incur liens, repurchase shares other than those authorized under the common stock repurchase program and participate in a change in control. Our financial covenant requires us to maintain a ratio of total liabilities to total tangible net worth of not more than 1.0 to 1.0. Failure to comply with this covenant and other restrictions would constitute an event of default under our Amended Credit Facility. We believe we were in compliance with the financial covenant and other restrictions applicable to us under the Amended Credit Facility at June 30, 2008.

In August 2007, our Board of Directors authorized a Common Stock Repurchase Program, authorizing us to repurchase up to $5.0 million of our common stock. In March 2008, our Board of Director’s authorized the repurchase of an additional $5.0 million of our common stock. As of June 30, 2008, we have repurchased approximately 806,000 shares at a cost of approximately $6.8 million. During the three and six months ended June 30, 2008, we have repurchased approximately 283,000 shares and 301,000 shares at a cost of approximately $2.2 million and $3.3 million, respectively. All purchases under the Common Stock Repurchase Program were made in the open market, subject to market conditions and trading restrictions.

Cash flows provided by operating activities were $9.1 million and $6.2 million for the six months ended June 30, 2007 and June 30, 2008, respectively. The decrease in cash provided by operating activities was due primarily to increased accounts receivable associated with increased 2008 sales volumes and continued investment in inventory in preparation of the new product launch.

Cash flows used in investing activities were $5.0 million and $3.3 million for the six months ended June 30, 2007 and 2008, respectively. These amounts consist primarily of capital expenditures relating to manufacturing equipment for a new blood glucose monitoring system to be introduced in the second half of 2008, additional manufacturing equipment used on our existing biosensor test strip manufacturing line and expansions to our facility. We expect our full year 2008 capital expenditures to be in the range of $7.0 million to $8.0 million.

Cash flows provided by financing activities were $2.0 million for the six months ended June 30, 2007 and consisted primarily of proceeds received from the exercise of options. Cash flows (used in) financing activities were ($1.4) million for the six months ended June 30, 2008 and consisted primarily of $2.3 million used for purchases of common stock under our Common Stock Repurchase Program, noted above, partially offset by proceeds received from the exercise of options.

We expect that funds generated from operations, our current cash on hand and funds available under the Amended Credit Facility, will be sufficient to finance our working capital requirements, fund capital expenditures, repurchase common stock under our Common Stock Repurchase Program and meet our contractual obligations for at least the next twelve months.

Recent accounting pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations (SFAS 141(R)) which replaces SFAS No. 141, Business Combinations (SFAS 141). SFAS 141(R)’s scope is broader than that of SFAS 141, which applied only to business combinations in which control was obtained by transferring consideration. SFAS 141(R) applies to all transactions and other events in which one entity obtains control over one or more other businesses. The standard requires the fair value of the purchase price, including the issuance of equity securities, to be determined on the acquisition date. SFAS 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interests in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R) requires acquisition costs to be expensed as incurred and restructuring costs to be expensed in periods after the acquisition date. Earn-outs and other forms of contingent consideration are to be recorded at fair value on the acquisition date. Changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period will be recognized in earnings rather than as an adjustment to the cost of the acquisition. SFAS 141(R) generally applies prospectively to 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 with early adoption prohibited. We are currently evaluating the impact that the adoption of SFAS 141(R) will have on our results of operations or financial position.

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (SFAS 160). SFAS 160 requires non-controlling interests or minority interests to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. Upon a loss of control, the interest sold, as well as any interest retained, is required to be measured at fair value, with any gain or loss recognized in earnings. Based on SFAS 160, assets and liabilities will not change for subsequent purchase or sale transactions with non-controlling interests as long as control is maintained. Differences between the fair value of consideration paid or received and the carrying value of non-controlling interests are to be recognized as an adjustment to the parent interest’s equity. SFAS 160 is effective for fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited. We are currently evaluating the impact that the adoption of SFAS 160 will have on our results of operations or financial position.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — An Amendment of SFAS No. 133” (“SFAS 161”). SFAS 161 seeks to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures regarding the impact on financial position, financial performance, and cash flows. To achieve this increased transparency, SFAS 161 requires (1) the disclosure of the fair value of derivative instruments and gains and losses in a tabular format; (2) the disclosure of derivative features that are credit risk-related; and (3) cross-referencing within the footnotes. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the impact that the adoption of SFAS No. 161 will have on our results of operations or financial position.

Caution concerning forward-looking statements

Certain information included or incorporated by reference in this Quarterly Report may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, and all statements (other than statements of historical facts) that

address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These statements are often characterized by terminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” and similar expressions and are based on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Any forward-looking statements in this Quarterly Report are made as of the date hereof, and we undertake no duty to update or revise any such statements, whether as a result of new information, future events or otherwise. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the Company’s most recent Annual Report on Form 10-K, including the section entitled “Risk Factors.”

Item 3. Quantitative and qualitative disclosures about market risk

Our Amended Credit Facility is subject to market risk and interest rate changes. The borrowings under the Amended Credit Facility bear interest at LIBOR plus 0.5%. At June 30, 2008, we did not have any borrowings outstanding under the Credit Facility.

Certain of our operations are domiciled outside the U.S. and we translate the results of operations and financial condition of these operations from their local functional currencies into U.S. dollars. Therefore, our reported consolidated results of operations and consolidated financial condition are affected by changes in the exchange rates between these currencies and the U.S. dollar. Assets and liabilities of foreign operations have been translated from the functional currencies of our foreign operations into U.S. dollars at the exchange rates in effect at the relevant balance sheet date, and revenue and expenses of our foreign operations have been translated into U.S. dollars at the average exchange rates prevailing during the relevant period. Unrealized gains and losses on translation of these foreign operations into U.S. dollars are reported as a separate component of stockholders’ equity and are included in comprehensive income (loss). Monetary assets and liabilities denominated in U.S. dollars held by our foreign operations are re-measured from U.S. dollars into the functional currency of our foreign operations with the effect reported currently as a component of net income (loss). For the each of the three and six months ended June 30, 2008 and 2007,we estimate that a 10% increase or decrease in the relationship of the functional currencies of our foreign operations to the U.S. dollar would increase or decrease our net income by approximately $0.1 million, respectively.

In April 2008, the Company entered into a Non-Deliverable Forward (“NDF”) contract for a notional amount of $4.0 million to reduce exposure of foreign currency fluctuations on transactions with it’s foreign subsidiary in Taiwan. The NDF contract matures in February 2009. At June 30, 2008, the fair value of the NDF is estimated to be an amount of approximately $60,000. Fair value of the NDF is estimated based on observable inputs for the current NDF forward rates for similar contracts. We estimate that a 10.0% increase or decrease in the NDF forward rates would increase or decrease our net income by approximately $0.2 million, offsetting the impact of foreign currency market risk described above.

Item 4. Controls and procedures

Evaluation of Disclosure Controls and Procedures

We evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

Changes in Internal Control Over Financial Reporting

There were no changes in internal control over financial reporting that occurred during the quarter ended June 30 2008, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II — OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in litigation from time to time in the ordinary course of our business. Except for the litigation described below, we do not believe that any litigation in which we are currently involved, individually or in the aggregate, is material to our financial condition or results of operations.

Roche Litigation

In February 2004, Roche Diagnostics Corporation filed suit against us and three other co-defendants in federal court in Indiana. The three co-defendants settled with Roche in January 2006. The suit alleged that our TrueTrack Smart System infringed claims in two Roche patents. These patents are related to Roche’s electrochemical biosensors and the methods they use to measure glucose levels in a blood sample. In its suit, Roche sought damages including its lost profits or a reasonable royalty, or both, and a permanent injunction against the accused products. Roche also alleged willful infringement, which, if proven, could result in an award of up to three times its actual damages, as well as its legal fees and expenses. On June 20, 2005, the Court ruled that one of the Roche patents was procured by inequitable conduct before the Patent Office and is unenforceable. On March 2, 2007, the Court granted our motion for summary judgment for non-infringement with respect to the second patent and denied the Roche motion for a summary judgment. These rulings were subject to appeal by Roche. On December 20, 2007, we settled the ongoing litigation, agreeing to pay Roche a lump sum payment of $3.5 million in exchange for a royalty-free, fully paid-up, world-wide license on both of the patents, as well as a covenant by Roche not to sue us on the licensed patents.

Brandt Litigation

In March 2007, a settlement was agreed by the parties to a lawsuit against us, MIT Development Corp. or MIT, George H. Holley and the Estate of Robert Salem, brought by Leonard Brandt. Mr. Brandt claimed that he was engaged in 1994 to provide financial consulting services for MIT, Mr. George Holley and Mr. Salem. Mr. Brandt claimed he was to receive at least $1,000 per month for consulting services plus 10% of the increase in the value of the assets of MIT, Holley or Robert Salem resulting from cash or other assets received from us in connection with any transaction with us. In November 1999, we acquired MIT from Messrs. Holley and Salem. The settlement provides for a total of $3.0 million of consideration to be paid by the defendants. Our share of the settlement consideration was $0.6 million to be paid in cash, and the remaining $2.4 million was funded in November 2007 by George H. Holley and the Estate of Robert Salem in restricted common stock of the Company. We agreed to grant Mr. Brandt “piggy-back” registration rights with respect to such stock for a period of one year from the date of settlement. In December 2006, pursuant to Staff Accounting Bulletin No. 107, Topic 5T “Accounting for Expenses or Liabilities Paid by Principal Stockholders”, we recorded a charge of $3.0 million to operating expense and recorded the $2.4 million funded by the other two defendants as additional paid-in capital. On July 19, 2007 and October 31, 2007, the court decided several details concerning the precise quantity of restricted shares to be delivered as part of the final payment terms of the settlement consistent with the foregoing description and ordered the immediate exchange of mutual releases and payment of the escrowed cash and stock. The agreed settlement funds and restricted shares were delivered to an escrow agent in accordance with the court’s order of October 31, 2007; however, Mr. Brandt failed to comply with the court’s rulings. Instead, Mr. Brandt moved to vacate the settlement and sought a new trial, and we filed a motion with the court to uphold the settlement. At a hearing on February 28, 2008, the court indicated it would grant our motion to compel Mr. Brandt to perform the settlement and deny Mr. Brandt’s motion to vacate the settlement and obtain a new trial. In June 2008, Brandt agreed to settle and took delivery out of escrow of the funds and the shares. Brandt also withdrew with prejudice his appeal from the Court’s ruling compelling him to comply with the settlement and delivered releases to all defendants. The case is now fully concluded.

In July 2007, we reached a settlement agreement with our directors and officers insurance provider, whereby, we received $450,000 in insurance proceeds relating to a recovery of losses incurred as part of the Brandt matter. Our share of the insurance

proceeds was $150,000 and the remaining $300,000 was distributed to George H. Holley and the Estate of Robert Salem. During the year ended December 31, 2007, we recorded a reduction to operating expenses of $450,000 and a distribution of capital of $300,000.

Item 1A. Risk Factors

There have been no material changes, except as noted below, from the risk factors previously disclosed in the Company’s most recent Annual Report on Form 10-K for the period ending December 31, 2007.

Competitive bidding for durable medical equipment suppliers could negatively affect our business

On April 2, 2007, the Centers for Medicare & Medicaid Services (CMS) issued a final rule to implement a new competitive bidding program in Medicare. The new competitive bidding program, mandated by Congress in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), will replace the current Medicare fee schedule for certain durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) in ten of the largest Metropolitan Statistical Areas (MSAs) across the country and will apply initially to ten categories of medical equipment and supplies, including diabetic supplies obtained via mail order arrangements (i.e. test strips and lancets used with blood glucose monitors). On July 15, 2008, the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) was enacted. This new law has delayed the Medicare DMEPOS Competitive Bidding Program for 18 to 24 months. The new law also mandates a 9.5% reduction in Medicare reimbursement for DMEPOS, including diabetic supplies obtained via mail order arrangements, effective January 1, 2009. To the extent that the competitive bidding program exerts downward pressure on the prices our customers may be willing or able to pay for our products or imposes additional costs, our operating results could be negatively affected.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Use of Proceeds from Sales of Registered Securities

On September 26, 2006, we closed an initial public offering of 6,599,487 shares of our common stock. Of these shares, 3,300,000 were newly issued shares sold by us and 2,299,487 were existing shares sold by certain of our stockholders. On October 4, 2006, an additional 989,923 shares of existing common stock were sold by certain of such selling stockholders pursuant to the exercise by the underwriters of their over-allotment option. The offering was effected pursuant to a Registration Statement on Form S-1 (File No. 333-133713), which the SEC declared effective on September 20, 2006, and a final prospectus filed pursuant to Rule 424(b) under the Securities Act on September 22, 2006 (Reg. No. 333-133713).

We received approximately $35.1 million in net proceeds from the offering after underwriting discounts and offering expenses. These proceeds were used as follows:

	•		$10.4 million to redeem all outstanding shares of our Series F Preferred Stock;

	•		$2.0 million to repay outstanding indebtedness to Wachovia Bank N.A.; and

	•		$4.5 million through June 30, 2008 for manufacturing equipment for new product development ($0.3 million and $0.9 million during the three and six months ended June 30, 2008, respectively).

Of the remaining $18.2 million of the net proceeds to us from our initial public offering, we intend to use approximately $1.2 million to complete the purchase of such manufacturing equipment and the remainder for working capital and general corporate purposes. Pending such use, we have deposited such remaining net proceeds of our initial public offering in a money market fund.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On August 9, 2007, the Company announced that its Board of Directors had authorized the Company to repurchase up to $5 million of its common stock. On March 13, 2008, the Company announced that its Board of Directors had authorized an additional $5.0 million share repurchase program (collectively, the “Common Stock Repurchase Program”). As of June 30, 2008, the Company has repurchased approximately 806,000 shares of its common stock at a cost of approximately $6.8 million. During the three months ended June 30, 2008, the Company repurchased approximately 283,000 shares at a cost of approximately $2.2 million. All purchases under the Common Stock Repurchase Program were made in the open market, subject to market conditions and trading restrictions.

ISSUER PURCHASES OF EQUITY SECURITIES


							Appropriate Dollar
					Total Number of		Value of Shares
					Shares Purchased as		That May Yet Be
	Total Number of		Average Price Paid		Part of the		Purchased Under the
Period	Shares purchased		Per Share		Repurchase Program		Repurchase Program
April 1, 2008 to April 30, 2008		94,268		7.39		94,268	$	4,666,539
May 1, 2008 to May 31, 2008		74,288		7.91		74,288	$	4,076,560
June 1, 2008 to June 30, 2008		114,431	$	7.88		114,431	$	3,171,449

Total at June 30, 2008		282,987	$	7.72		282,987

Item 4. Submission of Matters to a Vote of Security Holders

At the Company’s annual meeting of shareholders held on June 3, 2008, the shareholders of the Company voted on the following matters:

	1)		To elect two Class II directors as members of the Board of Directors of the Company, each to serve for a term of three years or until his successor has been elected and qualified; and

	2)		To ratify the selection of PricewaterhouseCoopers LLP as independent auditors of the Company for the fiscal year ending December 31, 2008.

All of the director nominees were elected based on the following votes:


Director Nominees	Votes Cast For		Votes Withheld
G. Douglas Lindgren		16,248,885		287,316
Richard A. Upton		16,249,085		287,116

The appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2008 was ratified based on the following votes:


Votes Cast For	Votes Cast Against	Votes Abstained
16,510,668	19,995	5,538

Item 6. Exhibits

See exhibit index.


		Page
Part I	FINANCIAL SUMMARY

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of December 31, 2007 and June 30, 2008 (Unaudited)	3

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2008 (Unaudited)	4

	Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2008 (Unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2008 (Unaudited)	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	22

Part II	OTHER INFORMATION

Item 1.	Legal Proceedings	23

Item 1A.	Risk Factors	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24

Item 4.	Submission of Matters to a Vote of Security Holders	26

Item 6.	Exhibits	26

SIGNATURES

EXHIBIT INDEX

CERTIFICATIONS
Ex-31.1 Section 302 Certification of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32.1 Section 906 Certification of CEO
Ex-32.2 Section 906 Certification of CFO


	HOME DIAGNOSTICS, INC.
Date: August 8, 2008	By:	/s/ J. RICHARD DAMRON, JR.
	J. Richard Damron, Jr.
	President and Chief Executive Officer (principal executive officer) and Director


Date: August 8, 2008	By:	/s/ RONALD L. RUBIN
	Ronald L. Rubin
	Senior Vice President and Chief Financial Officer (principal financial and accounting officer)


Exhibit
Number		Description

31.1	—	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2	—	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1	—	Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350.

32.2	—	Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.

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