Item 1.    Business.

Overview

MISONIX, INC. (“Misonix” or the "Company") is a New York corporation which, through its predecessors, was first organized in 1959. The Company designs, manufactures, markets and develops minimally invasive ultrasonic medical device products. The Company also develops and markets ultrasonic equipment for use in the scientific and laboratory markets and ductless fume enclosures for filtration of gaseous contaminates in the laboratory and forensic markets.

The Company’s operations outside the United States consist of a 100% ownership in Labcaire Systems, Ltd. (“Labcaire”), which is based in North Somerset, England. This business consists of designing, manufacturing, servicing and marketing the ISIS and Guardian endoscope disinfection systems and air-handling systems for the protection of personnel, products and the environment from airborne hazards. The Company also has a 60% ownership in UKHIFU Limited (“UKHIFU”), located in Bristol, England, which is the sales/marketing and service arm of the Company for the ablation of prostate cancer in the United Kingdom (“UK”). The Company has a 100% ownership in Misonix, Ltd. which is located in North Somerset, England. This business is the sales, marketing, distribution and servicing arm for the Company’s medical device products in Europe.

The Company's 95% owned subsidiary, Acoustic Marketing Research, Inc. doing business as Sonora Medical Systems (“Sonora”), located in Longmont, Colorado, is an ISO 9001 certified depot level repair facility for MRI and diagnostic ultrasound subsystems, as well as a factory level repair center for diagnostic ultrasound transducers. In addition, Sonora manufactures test equipment to appropriately diagnose failures with ultrasound systems and probes and to establish baseline performance and maintain quality assurance programs for ultrasound systems.

The Company’s 100% owned subsidiary, Hearing Innovations, Inc. (“Hearing Innovations”), is a development company with patented HiSonic ultrasonic technology for the treatment of profound deafness and tinnitus.

In fiscal 2008, approximately 46% of the Company's net sales were to foreign markets. Labcaire, which manufactures and sells the Company’s fume enclosure line as well as its own range of laboratory and medical environmental control products, represents approximately 64% of the Company’s net sales to foreign markets. Labcaire also distributes the Company’s ultrasonic equipment for use in scientific and industrial markets, predominately in the UK. Sales by the Company in other major industrial countries are made primarily through distributors. There were no additional risks for products sold by Labcaire as compared to other products marketed and sold by Misonix in the United States. Labcaire experiences minimal currency exposure since the major portion of its revenues are from the UK. Labcaire revenues outside the UK are predominately remitted in British Pounds.

Misonix represented approximately 19% of the net sales to foreign markets in fiscal 2008. These sales had no additional risks as most sales are secured by letters of credit and are remitted to Misonix in U.S. currency.

Sonora represented approximately 11% of the net sales to foreign markets in fiscal 2008. These sales had additional risks as most sales are not secured by letters of credit or do not involve a long term customer where credit risk is minimal. These sales are remitted to Sonora in U.S. currency.

Misonix, Ltd. sales represented approximately 1% of net sales to foreign markets in fiscal 2008 and were invoiced in Euros. These sales had the normal credit risks.

UKHIFU operates in the UK and invoices in British pounds, its sales represented 5% of net sales to foreign markets in fiscal 2008.

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Medical Devices

In October 1996, the Company entered into a twenty-year license agreement (the “USS License”) with United States Surgical, a unit of Covidien Ltd. (“USS”). The USS License covers the further development of the Company’s medical technology relating to ultrasonic cutting, which uses high frequency sound waves to coagulate and divide tissue for both open and laproscopic surgery. The USS License gives USS exclusive worldwide marketing and sales rights for this technology and device. Total sales of this device were approximately $3,629,000, $4,464,000 and $4,461,000 for the fiscal years ended June 30, 2008, 2007 and 2006, respectively. Total royalties from sales of this device were approximately $691,000, $827,000 and $810,000 for the fiscal years ended June 30, 2008, 2007 and 2006, respectively.

In June 2002, the Company entered into a ten-year worldwide, royalty-free, distribution agreement with Byron Medical, Inc. (“Byron”) for the sale, marketing and distribution of the Lysonix soft tissue aspirator used for cosmetic surgery. This agreement is a standard agreement for such distribution in that it specifies the product to be distributed, the terms of the agreement and the price to be paid for product covered under the agreement. Total sales of this device were approximately $1,596,000, $501,000 and $1,195,000 for the fiscal years ended June 30, 2008, 2007 and 2006, respectively.

Fibra Sonics, Inc.

On February 8, 2001, the Company acquired certain assets and liabilities of Fibra Sonics, Inc. (“Fibra Sonics”), a Chicago-based, privately held producer and marketer of ultrasonic medical devices for approximately $1,900,000. This acquisition gave the Company access to three important new medical markets, namely, neurology with its Neuro Aspirator product, urology with the Company’s lithotripsy product and ophthalmology. Subsequent to the acquisition, the Company relocated the assets of Fibra Sonics to the Company’s Farmingdale facility.

UKHIFU Limited

On March 27, 2006, the Company, through its wholly owned subsidiary Misonix, Ltd., acquired a 60% equity position in UKHIFU from Imaging Equipment which owns the remaining 40%. UKHIFU is in the business providing Sonablate 500® equipment to doctors, on a fee for service basis, to use for the ablation of cancerous tissue in the prostate and is the sales/marketing and service arm of the Company in the UK for Sonablate 500 equipment.

In addition to the original investment, the Company made payments of approximately $50,000 and $60,000 to Imaging Equipment during the years ended June 30, 2008 and June 30, 2007, respectively. The additional payments were recorded as goodwill.

Focus Surgery, Inc.

On May 3, 1999, the Company entered into an agreement with Focus Surgery, Inc. (“Focus”) to obtain a 20% equity position in Focus for $3,050,000 and representation on its Board of Directors. Additionally, the Company has options and warrants to purchase an additional 5% of the equity of Focus. Focus is located in Indianapolis, Indiana. The agreement provides for a series of development and manufacturing agreements whereby the Company would upgrade existing Focus products, currently the Sonablate 500, and create new products based on high intensity focused ultrasound (“HIFU”) technology for the non-invasive treatment of tissue for certain medical applications. The Company has the right to utilize HIFU technology for the treatment of both benign and cancerous tumors of the breast, liver and kidney and the right of first refusal to purchase 51% of the equity of Focus. In February 2001, the Company exercised its right to start research and development for the treatment of kidney and liver tumors utilizing HIFU technology. During fiscal 2005, Focus entered into an exclusive agreement with the Company to distribute the Sonablate 500 in the European market. On July 1, 2008, the Company closed the transaction with USHIFU, LLC (“USHIFU”) whereby the Company sold its equity portion in Focus to USHIFU and was paid one half of the amount of its outstanding debt plus interest owed to Misonix by Focus with the remaining amount to be paid in 18 months. On July 1, 2008, the Company received $679,366.34 which represents one half of the outstanding debt plus interest and $837,500 for the Company’s 2,500 shares of Series M Preferred Stock of Focus.

		Fiscal year ended June 30,
		2008			2007			2006
United Kingdom		$	14,107,027		$	11,536,440		$	9,392,592
Europe			2,842,250			3,713,012			2,210,668
Asia			1,856,016			1,673,480			1,268,799
Canada and Mexico			720,783			452,641			640,009
Middle East			342,524			115,020			307,810
Other			1,170,158			608,277			618,202
		$	21,038,758		$	18,098,870		$	14,438,080

Website Access Disclosure

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K are available free of charge on the Company’s website at www.MISONIX.COM as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”).

Also, copies of the Company’s annual report will be made available, free of charge, upon written request.

Item 1A.   Risk Factors.

In addition to the other information contained in this Annual Report on Form 10-K and the exhibits hereto, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements set forth immediately prior to the beginning of Item 1 of this Annual Report on Form 10-K. Additional risks not presently known to us or that we currently deem immaterial may also adversely affect our business, financial condition or results of operations.

Risks Related to Our Business

We are subject to extensive medical device regulation which may impede or hinder the approval process for our products and, in some cases, may not ultimately result in approval or may result in the recall or seizure of previously approved products.

Our products, development activities and manufacturing processes are subject to extensive and rigorous regulation by the FDA pursuant to the Federal Food, Drug, and Cosmetic Act (the “FDC Act”), by comparable agencies in foreign countries, and by other regulatory agencies and governing bodies. Under the FDC Act, medical devices must receive FDA clearance or approval before they can be commercially marketed in the U.S. In addition, most major markets for medical devices outside the U.S. require clearance, approval or compliance with certain standards before a product can be commercially marketed. The process of obtaining marketing approval or clearance from the FDA for new products, or with respect to enhancements or modifications to existing products, could:

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§	take a significant period of time;
§	require the expenditure of substantial resources;
§	involve rigorous pre-clinical and clinical testing;
§	require changes to the products; and
§	result in limitations on the indicated uses of the products.

Even after products have received marketing approval or clearance, product approvals and clearances by the FDA can be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial approval. There can be no assurance that we will receive the required clearances from the FDA for new products or modifications to existing products on a timely basis or that any FDA approval will not be subsequently withdrawn. Later discovery of previously unknown problems with a product or manufacturer could result in fines, delays or suspensions of regulatory clearances, seizures or recalls of products, operating restrictions and/or criminal prosecution. The failure to receive product approval clearance on a timely basis, suspensions of regulatory clearances, seizures or recalls of products or the withdrawal of product approval by the FDA could have a material adverse effect on our business, financial condition or results of operations.

We may not meet regulatory quality standards applicable to our manufacturing and quality processes, which could have an adverse effect on our business, financial condition or results of operations.

As a device manufacturer, we are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures. In addition, the Federal Medical Device Reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. In the European Community, we are required to maintain certain ISO certifications in order to sell our products and must undergo periodic inspections by notified bodies to obtain and maintain these certifications.

Future intellectual property litigation could be costly and disruptive to us.

We operate in an industry that is susceptible to significant intellectual property litigation and, in recent years, it has been common for companies in the medical device field to aggressively challenge the patent rights of other companies in order to prevent the marketing of new devices. Intellectual property litigation is expensive, complex and lengthy and its outcome is difficult to predict. Future patent litigation may result in significant royalty or other payments or injunctions that can prevent the sale of products and may significantly divert the attention of our technical and management personnel. In the event that our right to market any of our products is successfully challenged, and if we fail to obtain a required license or are unable to design around a patent, our business, financial condition or results of operations could be materially adversely affected.

We may not be able effectively to protect our intellectual property rights which could have an adverse effect on our business, financial condition or results of operations.

Patents and other proprietary rights are and will be essential to our business, and our ability to compete effectively with other companies will be dependent upon the proprietary nature of our technologies. We rely upon trade secrets, know-how, continuing technological innovations, strategic alliances and licensing opportunities to develop, maintain and strengthen our competitive position. We pursue a policy of generally obtaining patent protection in both the U.S. and abroad for patentable subject matter in our proprietary devices and also attempt to review third-party patents and patent applications to the extent publicly available to develop an effective patent strategy, avoid infringement of third-party patents, identify licensing opportunities and monitor the patent claims of others. We currently own numerous U.S. and foreign patents. We also are party to various license agreements pursuant to which patent rights have been obtained or granted in consideration for cash or royalty payments. No assurance can be made that any pending or future patent applications will result in issued patents, that any current or future patents issued to, or licensed by, us will not be challenged or circumvented by our competitors, or that our patents will not be found invalid.

 

In addition, we may have to take legal action in the future to protect our patents, trade secrets or know-how or to assert them against claimed infringement by others. Any legal action of that type could be costly and time consuming to us and no assurances can be made that any lawsuit will be successful.

 

The invalidation of key patents or proprietary rights that we own, or an unsuccessful outcome in lawsuits to protect our intellectual property, could have a material adverse effect on our business, financial condition or results of operations.

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Future product liability claims and other litigation, including private securities litigation and shareholder derivative suits, may adversely affect our business, reputation and ability to attract and retain customers.

The design, manufacture and marketing of medical device products of the types that we produce entail an inherent risk of product liability claims. A number of factors could results in an unsafe condition or injury to, or death of, a patient with respect to these or other products that we manufacture or sell, including component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information. These factors could result in product liability claims, a recall of one or more of our products or a safety alert relating to one or more of our products. Product liability claims may be brought by individuals or by groups seeking to represent a class.

We may not be successful in our strategic initiatives to become primarily a medical device company.

Our strategic initiatives intend to further expand our ability to offer customers effective, quality medical devices that satisfy their needs, as well as focus the Company on our medical device platform. If we are unsuccessful in our strategic initiatives, we may be unable to continue to grow our business significantly or may record asset impairment charges in the future.

Our future growth is dependent upon the development of new products, which requires significant research and development, clinical trials and regulatory approvals, all of which are very expensive and time-consuming and may not result in a commercially viable product.

In order to develop new products and improve current product offerings, we focus our research and development programs largely on the development of next-generation and novel technology offerings across multiple programs and opportunities. We are performing clinicals for kidney cancer treatment in Europe.

Further, we anticipate continuing our increased focus and spending on areas such as HIFU technologies for the kidney, liver and breast. However, given their early stage of development, there can be no assurance that these and other technologies will achieve technological feasibility, obtain regulatory approval or gain market acceptance. A delay in the development or approval of these technologies or our decision to reduce funding of these projects may adversely impact the contribution of these technologies to our future growth.

As a part of the regulatory process of obtaining marketing clearance from the FDA for new products, we conduct and participate in numerous clinical trials with a variety of study designs, patient populations and trial endpoints. Unfavorable or inconsistent clinical data from existing or future clinical trials conducted by us, by our competitors or by third parties, or the market’s perception of this clinical data, may adversely impact our ability to obtain product approvals from the FDA, our position in, and share of, the markets in which we participate and our business, financial condition, results of operations or future prospects.

New products may not be accepted in the market.

We are now, and will continue to be, developing new products and introducing them into the market.  There can be no assurance that any new product will be accepted by the market. New products are sometimes introduced into the market in a prototype format and may need later revisions or design changes before they operate in a manner to be accepted in the market.  As a result of the introduction of new products, there is some risk that revenue expectations may not be met and in some cases the product may not achieve market acceptance. 

We face intense competition and may not be able to keep pace with the rapid technological changes in the medical devices industry, which could have an adverse effect on our business, financial condition or results of operations.

 

 The medical device product market is highly competitive. We encounter significant competition across our product lines and in each market in which our products are sold from various medical device companies, some of which have greater financial and marketing resources than we do.

Additionally, the medical device product market is characterized by extensive research and development and rapid technological change. Developments by other companies of new or improved products, processes or technologies, in particular in the cancer treatment market, may make our products or proposed products obsolete or less competitive and may negatively impact our revenues. We are required to devote continued efforts and financial resources to develop or acquire scientifically advanced technologies and products, apply our technologies cost-effectively across product lines and markets, attract and retain skilled development personnel, obtain patent and other protection for our technologies and products, obtain required regulatory and reimbursement approvals and successfully manufacture and market our products. Failure to develop new products or enhance existing products could have a material adverse effect on our business, financial condition or results of operations.

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Because we derive a significant amount of our revenues from international operations and a significant percentage of our growth is expected to come from international operations, changes in international economic or regulatory conditions could have a material impact on our business, financial condition or results of operations.

Sales outside the U.S. accounted for approximately 46% of our net sales in fiscal 2008. Additionally, a significant percentage of our future growth is expected to come from international operations. As a result, profitability from our international operations may be limited by risks and uncertainties related to economic conditions in these regions, foreign currency fluctuations, regulatory and reimbursement approvals, competitive offerings, infrastructure development, rights to intellectual property and our ability to implement our overall business strategy. Further, international markets are also being affected by economic pressure to contain reimbursement levels and healthcare costs. The trend in countries around the world, including Japan, toward more stringent regulatory requirements for product clearance, changing reimbursement models and more rigorous inspection and enforcement activities has generally caused or may cause medical device manufacturers to experience more uncertainty, delay, risk and expense.

Consolidation in the healthcare industry could lead to demands for price concessions or the exclusion of some suppliers from certain of our significant market segments, which could have an adverse effect on our business, financial condition or results of operations.

The cost of healthcare has risen significantly over the past decade and numerous initiatives and reforms initiated by legislators, regulators and third-party payers to curb these costs have resulted in a consolidation trend in the healthcare industry, including hospitals. This in turn has resulted in greater pricing pressures and the exclusion of certain suppliers from important market segments as group purchasing organizations, independent delivery networks and large single accounts continue to consolidate purchasing decisions for some of our hospital customers. We expect that market demand, government regulation, third-party reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers and competitors, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, financial condition or results of operations.

 

We may experience disruption in supply due to our dependence on our suppliers to continue to ship product requirements and our inability to obtain suppliers of certain components for our products.

Our suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunctions, labor shortages or environmental factors. In addition, we purchase both raw materials used in our products and finished goods from various suppliers and can rely on a single source supplier for certain components of our products where there are no alternatives are available. Although we anticipate that we have adequate sources of supply and/or inventory of these components to handle our production needs for the foreseeable future, if we are unable to secure on a timely basis sufficient quantities of the materials we depend on to manufacture our products, if we encounter delays or contractual or other difficulties in our relationships with these suppliers, or if we cannot find suppliers at an acceptable cost, then the manufacture of our products may be disrupted, which could increase our costs and have a material adverse effect on our business.

If we fail to manage any expansion or acquisition, our business could be impaired.

We may in the future acquire one or more technologies, products or companies that complement our business. We may not be able to effectively integrate these into our business and any such acquisition could bring additional risks, exposures and challenges to our company. In addition, acquisitions may dilute our earnings per share, disrupt our ongoing business, distract our management and employees, increase our expenses, subject us to liabilities and increase our risk of litigation, all of which could harm our business. If we use cash to acquire technologies, products, or companies, it may divert resources otherwise available for other purposes. If we use our common stock to acquire technologies, products, or companies, our shareholders may experience substantial dilution. If we fail to manage any expansions or acquisition, our business could be impaired.

 

Our agreements and contracts entered into with partners and other third parties may not be successful.

We signed in the past and may pursue in the future contracts and agreements with third parties that would assist our marketing, manufacturing, selling, and distribution efforts. We cannot assure you that any agreements or arrangements entered into will be successful.

The current disruptions in the financial markets could affect our ability to obtain debt financing on favorable terms (or at all) and have other adverse effects on us.

The United States credit markets have recently experienced historic dislocations and liquidity disruptions which have caused financing to be unavailable in many cases and even if available caused spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the debt markets, making financing terms for borrowers able to find financing less attractive, and in many cases have resulted in the unavailability of certain types of debt financing. Continued uncertainty in the credit markets may negatively impact our ability to access debt financing on favorable terms or at all. The failure to renew our existing revolving credit facilities when such facilities expire in December 2009 would have a material adverse affect on our financial condition and results of operations. In addition, Federal legislation to deal with the current disruptions in the financial markets could have an adverse affect on our financial condition and results of operations.

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The fluctuation of our quarterly results may adversely affect the trading price of our common stock.

Our revenues and results of operations have in the past and will likely vary in the future from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. It is likely that in some future quarters, our results of operations may be below the expectations of public market analysts and investors. In this event, the price of our common stock may fall.

We may not be able to attract and retain additional key management, sales and marketing and technical personnel, or we may lose existing key management, sales and marketing or technical personnel, which may delay our development and marketing efforts.

We depend on a number of key management, sales and marketing and technical personnel. The loss of the services of one or more key employees could delay the achievement of our development and marketing objectives. Our success will also depend on our ability to attract and retain additional highly qualified management, sales and marketing and technical personnel to meet our growth goals. We face intense competition for qualified personnel, many of whom are often subject to competing employment offers, and we do not know whether we will be able to attract and retain such personnel.

Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse or unexpected revenue fluctuations and affect our reported results of operations.

A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

Item 1B. Unresolved Staff Comments.

Not Applicable.

Item 2.  Properties.

The Company occupies approximately 45,500 square feet at 1938 New Highway, Farmingdale, New York under a lease which expires on June 30, 2010. The rental amount, which is approximately $40,000 per month and includes a pro rata share of real estate taxes, water and sewer charges, and other charges which are assessed on the leased premises or the land upon which the leased premises are situated. Labcaire occupies a 20,000 square foot facility in North Somerset, England, under a lease expiring in June 2017. The rental amount is approximately $20,000 per month. Labcaire owned the building up until June 2007 when it was sold for $3,600,000. Sonora occupies approximately 29,000 square feet in Longmont, Colorado under a lease expiring in November 2011. The rental amount is approximately $21,000 per month and includes a pro rata share of real estate taxes, water and sewer charges, and other charges which are assessed on the leased premises or the land upon which the leased premises are situated. The Company believes that the leased facilities are adequate for its present needs.

Labcaire sold its building in the UK in June 2007 in a sale and leaseback transaction with TESCO Ltd. (“Tesco”). Tesco intends to utilize the property to expand its operations which will require Labcaire to relocate to another facility upon Tesco’s receiving permission to expand from the local authorities. Labcaire sold the building for $3.6 million and recorded a deferred gain of $1.6 million which will be amortized over the 10 year lease period. Upon Tesco’s receiving permission to expand its facilities, which is expected in the next 1 to 4 years, Tesco will cancel the lease. Upon Labcaire’s vacating the premises, Tesco will pay Labcaire an additional $1.5 million.

 

Item 3.  Legal Proceedings.

A jury in the District Court of Boulder County, Colorado returned a verdict against Sonora during the Company’s Fiscal 2005 fourth quarter in the amount of $419,000. During fiscal 2008, the judgment was decreased to $324,000 and the $95,000 reduction is included in other income. The case involved royalties claimed on recoating of transesophogeal probes, which is a process utilized by Sonora. Approximately 80% of the judgment was based on the jury’s estimate of royalties for potential sales of the product in the future. Sonora has moved for judgment notwithstanding the verdict based on, among other things, the award of damages for future royalties. Sonora has also moved for a new trial in the case.

 

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

No matters were submitted to a vote of the Company's security holders during the last quarter of the fiscal year ended June 30, 2008.

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PART II

 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a)	The Company's common stock, $.01 par value (“Common Stock”), is listed on the Nasdaq Global Market (“Nasdaq”) under the symbol "MSON".

The following table sets forth the high and low sales prices for the Common Stock during the periods indicated as reported by Nasdaq.

 

Fiscal 2008 :		High			Low
First Quarter		$	6.30		$	3.82
Second Quarter			7.00			4.25
Third Quarter			4.73			3.69
Fourth Quarter			4.41			3.09

Fiscal 2007 :		High			Low
First Quarter		$	5.58		$	3.50
Second Quarter			5.03			3.25
Third Quarter			7.29			3.80
Fourth Quarter			7.49			5.38

(b) As of September 24, 2008, the Company had 7,001,369 shares of Common Stock outstanding and 74 shareholders of record. This does not take into account shareholders whose shares are held in “street name” by brokerage houses.

 

(c) The Company has not paid any dividends since its inception. The Company does not intend to pay any cash dividends in the foreseeable future, but intends to retain all earnings, if any, for use in its business operations.

Share Performance Graph

The following graph compares the cumulative total return on the Company’s Common Stock during the last five fiscal years with the NASDAQ Total U.S. and Foreign Return Index and the NASDAQ Medical Devices, Instruments and Supplies Index during the same period. The graph shows the value, at the end of each of the last five fiscal years, of $100 invested in the Common Stock or the indices on June 30, 2004. The graph depicts the change in value of the Company’s Common Stock relative to the noted indices as of the end of each fiscal year and not for any interim period. Historical stock price performance is not necessarily indicative of future stock price performance.

		2004			2005			2006			2007			2008
MISONIX, INC.			100			80			78			79			42
NASDAQ Total U.S. Index			100			101			107			128			112
NASDAQ Medical Devices, Instruments and Supplies Index			100			104			109			130			123

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Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted average exercise price of outstanding options, warrants and rights			Number of securities remaining for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		(a)			(b)			(c)
I.   1991 Plan			30,000		$	7.38			-
II.   1996 Director’s Plan			175,000			5.34			-
III.   1996 Plan			266,278			5.47			-
IV.   1998 Plan			381,875			6.75			45,277
V.   2001 Plan			862,838			5.41			8,856
VI.   2005 Employee Equity Incentive Plan			31,850			4.48			468,150
VII.   2005 Non-Employee Director Stock Option Plan			75,000			5.42			125,000
Equity compensation plans not approved by security holders			-			-			-
Total			1,822,841		$	5.71			647,283

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Item 6.   Selected Financial Data.

Selected statement of operations data:

 

		Year Ended June 30,
		2008			2007			2006			2005			2004
Net sales		$	45,639,706		$	42,431,905		$	39,487,293		$	46,382,976		$	39,059,066
Net (loss) income			(2,887,811	)		(1,349,517	)		(3,759,437	)		935,705			1,718,945
Net (loss) income per share- Basic		$	(.41	)	$	(.19	)	$	(.55	)	$	.14		$	.26
Net (loss) income per share- Diluted		$	(.41	)	$	(.19	)	$	(.55	)	$	.13		$	.25

Selected balance sheet data:

 

		June 30,
		2008			2007			2006			2005			2004
Total assets		$	37,250,074		$	38,745,744		$	34,547,500		$	38,085,936		$	34,241,112
Long-term debt and capital lease obligations			225,909			177,059			1,145,279			1,240,324			1,264,480
Total stockholders’ equity			18,442,444			21,406,641			22,254,806			25,094,160			23,743,176

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		Medical Devices			Laboratory and Scientific Products			Corporate and Unallocated			Total
Net sales		$	24,273,450		$	21,366,256		$	-		$	45,639,706
Cost of goods sold			12,530,534			13,767,370			-			26,297,904
Gross profit			11,742,916			7,598,886			-			19,341,802
Selling expenses			5,031,208			2,695,701			-			7,726,909
Research and development			1,982,341			1,039,728			-			3,022,069
General and administrative			-			-			10,518,550			10,518,550
Total operating expenses			7,013,549			3,735,429			10,518,550			21,267,528
Income (loss) from operations		$	4,729,367		$	3,863,457		$	(10,518,550	)	$	(1,925,726	)

 

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For the year ended June 30, 2007:

		Medical Devices			Laboratory and Scientific Products			Corporate and Unallocated			Total
Net sales		$	23,540,628		$	18,891,277		$	-		$	42,431,905
Cost of goods sold			13,336,430			11,388,084			-			24,724,514
Gross profit			10,204,198			7,503,193			-			17,707,391
Selling expenses			5,002,878			2,593,276			-			7,596,154
Research and development			1,953,872			1,159,392			-			3,113,264
General and administrative			-			-			9,417,038			9,417,038
Total operating expenses			6,956,750			3,752,668			9,417,038			20,126,456
Income (loss) from operations		$	3,247,448		$	3,750,525		$	(9,417,038	)	$	(2,419,065	)

Net sales for the three months ended June 30, 2008 were $11,704,390 compared to $11,566,017 for the three months ended June 30, 2007. The increase of $138,373 is due to an increase in laboratory product sales of $177,467, primarily due to an increase in Labcaire and ultrasonic products sales. Therapeutic medical device products sales decreased approximately $238,000 and diagnostic medical device products sales increased approximately $199,000. The increase in diagnostic medical device products sales was primarily attributable to the sale of equipment to a probe repair lab in Europe and fees earned for training their personnel.

 Summarized financial information for each of the segments for the three months ended June 30, 2008 and 2007 are as follows:

 

For the three months ended June 30, 2008:

 

		Medical Devices			Laboratory and Scientific Products			Corporate and Unallocated			Total
Net sales		$	6,418,618		$	5,285,772		$	-		$	11,704,390
Cost of goods sold			3,477,492			3,597,911			-			7,075,403
Gross profit			2,941,126			1,687,861			-			4,628,987
Selling expenses			1,464,348			682,239			-			2,146,587
Research and development			412,858			239,528			-			652,386
General and administrative			-			-			2,922,327			2,922,327
Total operating expenses			1,877,206			921,767			2,922,327			5,721,300
Income (loss) from operations		$	1,063,920		$	766,094		$	(2,922,327	)	$	(1,092,313	)

For the three months ended June 30, 2007:

		Medical Devices			Laboratory and Scientific Products			Corporate and Unallocated			Total
Net sales		$	6,457,712		$	5,108,305		$	-		$	11,566,017
Cost of goods sold			3,740,441			3,296,803			-			7,037,244
Gross profit			2,717,271			1,811,502			-			4,528,773
Selling expenses			1,301,426			769,943			-			2,071,369
Research and development			450,019			279,342			-			729,361
General and administrative			-			-			2,095,369			2,095,369
Total operating expenses			1,751,445			1,049,285			2,095,369			4,896,099
Income (loss) from operations		$	965,826		$	762,217		$	(2,095,369	)	$	(367,326	)

Gross profit: Gross profit increased to 42.4% in fiscal 2008 from 41.7% in fiscal 2007. Gross profit for medical device products increased to 48.4% in fiscal 2008 from 43.3% in fiscal 2007. Gross profit for therapeutic medical device products was positively impacted by a favorable product mix due to increased sales of the Sonastar ultrasonic surgical aspirator product in the United States and foreign markets and increased sales of ultrasonic assisted liposuction products. Sales of the Company’s AutoSonix products to USS which have lower gross profits, decreased in fiscal 2008 as percentage of total sales. The fiscal 2008 period also benefited from a favorable mix of diagnostic medical device products sales. Gross profit for laboratory and scientific products decreased to 35.6% in fiscal 2008 from 39.7% in fiscal 2007 due to lower margins at Labcaire due to higher costs related to the ISIS units shipped. Gross profit for the three months ended June 30, 2008 increased to 39.5% from 39.2% in the three months ended June 30, 2007. Gross margins for medical device products sales increased to 45.8% in the 2008 period from 42.1% in the 2007 period. The increase was due to a favorable product mix in both therapeutic and diagnostic product sales. Gross profit for laboratory and scientific products decreased to 31.9% in the 2008 period from 35.5% in the 2007 period. The decrease in gross profit was primarily due to lower margins in Labcaire due to higher costs related to the ISIS units shipped and lower margins for fume enclosure product sales due to unfavorable product mix.

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Selling expenses: Selling expenses increased $130,755 to $7,726,909 (16.9% of net sales) in fiscal 2008 from $7,596,154 (17.9% of net sales) in fiscal 2007. Laboratory and scientific products selling expenses increased approximately $102,000, predominately due to increased selling and service expenses at Labcaire related to higher sales and the impact of the stronger English Pound of approximately $66,000. Selling expenses for therapeutic medical device products increased approximately $80,000, principally due to new hires in medical sales management and increased expenses in Europe related to the Company’s HIFU products, partially offset by reduced expenses related to trade shows and exhibitions. Selling expenses related to diagnostic medical device products decreased approximately $51,000, principally due to decreased costs associated with consignment equipment. Selling expenses for the three months ended June 30, 2008 increased $75,218 to $2,146,587 (18.3% of net sales) from $2,071,369 (17.9% of net sales) in the three months ended June 30, 2007. Selling expenses related to therapeutic medical device products sales increased approximately $163,000 principally due to increased staffing. Laboratory and scientific products selling expenses decreased approximately $88,000, principally due to lower costs associated with demo equipment.

General and administrative expenses: Total corporate and unallocated expenses increased $1,101,512 in fiscal 2008 to $10,518,550 from $9,417,038 in fiscal 2007. General and administrative expenses increased in fiscal 2008, principally due to increased employee related expense of approximately $763,000, increased depreciation expense, increased recruiting fees of approximately $100,000 related to adding personnel to the therapeutic medical group, increased bank fees and higher consulting fees, which were partially offset by decreased insurance expense and decreased bad debt expense. The higher consulting fees include approximately $200,000 related to the implementation of Section 404(a) of the Sarbanes-Oxley Act of 2002 (“Section 404(a)”). The Company entered into revolving credit facility with Wells Fargo Bank on December 29, 2006 and bank fees in the 2008 period are twelve months compared to six months in fiscal 2007. General and administrative expenses for the three months ended June 30, 2008 increased $826,958 to $2,922,327 from $2,095,369 for the three months ended June 30, 2007. The increase was due to increased employee related expense of approximately $467,000, consulting costs of approximately $115,000 related to the implementation of Section 404(a) and approximately $74,000 of higher costs related to the Company’s HIFU business in Europe. The increased salary expense includes bonus expense at Sonora which exceeded its profit objectives for fiscal 2008.

 

Research and development expenses: Research and development expenses decreased $91,195 to $3,022,069 in fiscal 2008 from $3,113,264 in fiscal 2007. Research and development expenses for medical device products increased approximately $28,000. Research and development expenses for diagnostic medical device products increased approximately $59,000 related to developing new products and services which were introduced during the current fiscal year. Research and development expenses for therapeutic medical devices decreased approximately $31,000. The decrease is primarily due to decreased salary and consulting fees of $241,000 which were partially offset by a milestone charge of $210,000 from Focus related to the HIFU kidney cancer research project. Laboratory and scientific products research and development expenses decreased approximately $120,000 due to reduced efforts on the Labcaire ISIS product which was introduced and launched in the fourth quarter of fiscal 2007 and completing the S-4000 digital Sonicator product introduced during the first quarter of fiscal 2008. Research and development expense for the three months ended June 30, 2008 decreased $76,975 to $652,386 from $729,361 in the three months ended June 30, 2007. In the three months ended June 30, 2008, approximately $50,000 of medical device products development expense related to improvements to existing therapeutic medical device products was deferred which was partially offset by increased expenses related to diagnostic medical products. Research and development expenses for laboratory and scientific products decreased in the three months ended June 30, 2008 due to reduced efforts related to the Labcaire ISIS product and the completion of the S-4000 digital Sonicator product.

 

Other Income: Other income decreased $258,235 in fiscal 2008 to $104,584 from $363,819 in fiscal 2007. The fiscal 2007 year included foreign currency exchange gains of approximately $149,000 which were primarily attributable to an exchange gain resulting from the payment of an intercompany loan denominated in British Pounds by Labcaire to the Company. Royalty and license fee income from USS decreased approximately $132,000 in fiscal 2008 due to decreased sales by USS of the Company’s Autosonix product. In addition, royalty expense in fiscal 2008 increased approximately $231,000, which increase was attributable to licensed probe repair technology, the sale of Acoustic Power tanks and increased sales of Lysonix medical device products. The decrease in other income in fiscal 2008 was partially offset by $150,000 from the realization of a previously impaired Secured Cumulative Convertible Debenture from Focus during the second quarter of fiscal 2008 which was used to reduce a milestone payment to Focus and reduced interest expense of $69,000. The fiscal 2007 period included a loss of $60,000 from the sale of equipment. Other income (expense) decreased $39,843 to $(32,366) for the three months ended June 30, 2008 from $7,477 for the three months ended June 30, 2007. The decrease is due to decreased foreign currency exchange gains partially offset by decreased interest expense and decreased royalty expense. The three months ended June 30, 2007 included an exchange gain of approximately $165,000 resulting from the payment of a loan denominated in British Pounds by Labcaire to the Company.

 

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Income taxes: In fiscal 2008 the Company increased the valuation allowance related to deferred tax assets by approximately $1,500,000 which increased income tax expense to an effective tax rate of 54.7%. In its assessment of whether it is more likely than not that some portion or all the deferred tax assets will be realized, management increased the valuation allowance for the deferred tax benefit related to U.S. federal loss carryforwards and unused tax credit carryforwards which are available to offset future taxable income. The effective tax rate in fiscal 2007 of 33.0% was favorably impacted by an additional $98,000 of Research and Experimentation Credits provided by the enactment of the Tax Relief and Healthcare Act of 2006 (HR6111) which retroactively extended the tax credit for Research and Experimentation expenditures. The fiscal 2008 effective income tax rate differs from the statutory rate due to the impact of permanent differences related to SFAS123R stock-based compensation and non-deductible entertainment expenses on taxable income. In addition, the $150,000 of income from the realization of a previously written off debt from Focus was not tax effected because the Company did not record an income tax benefit when the debt was originally written off.

Fiscal years ended June 30, 2007 and 2006

Net sales. Net sales of the Company's medical device products and laboratory and scientific products increased $2,944,612 to $42,431,905 in fiscal 2007 from $39,487,293 in fiscal 2006. This difference in net sales is due to an increase in sales of medical device products of $2,612,576 to $23,540,628 in fiscal 2007 from $20,928,052 in fiscal 2006. This difference in net sales is also due to an increase in laboratory and scientific product sales of $332,036 to $18,891,277 in fiscal 2007 from $18,559,241 in fiscal 2006. The increase in sales of medical device products is due to an increase in sales of therapeutic medical device products of $2,114,854 plus an increase of $497,722 in sale of diagnostic medical device products. The increase in sales of therapeutic medical device products was primarily attributable to the increased units of the Sonablate 500. In fiscal 2007, the Company sold 4 Sonablate 500 units compared to 1 unit in fiscal 2006. Additionally, the Company acquired 60% of UKHIFU at the end of the third quarter of fiscal 2006 and the Company had the benefit of the fee per use revenue of $903,000 for the entire fiscal 2007 year. The increase in sales of diagnostic medical device products was not attributable to a single customer, distributor or any other specific factor but an increase in customer demand for several products. The increase in sales of laboratory and scientific products is primarily due to a $1,404,151 increase in Labcaire products, partially offset by a $1,022,997 decrease in sales of wet scrubber products. The Company is being very selective in the opportunities it pursues for wet scrubber products. The increase in Labcaire sales of $1,404,151 is due to an increase in Guardian endoscope products and services of $540,222 and the strengthening of the British Pound versus the U.S. dollar of approximately $863,929. The increase in ductless fume enclosure product sales is due to an increase in customer demand for several products and not attributable to a single customer, distributor or any other specific factor. Export sales from the United States are remitted in U.S. dollars and export sales for Labcaire are remitted in British pounds.

UKHIFU sales are remitted in British Pounds and Misonix, Ltd. sales to date have been remitted in Euros. To the extent that the Company’s revenues are generated in British Pounds, its operating results were translated for reporting purposes into U.S. dollars using weighted average rates of 1.93 and 1.78 for the years ended June 30, 2007 and 2006, respectively. To the extent that the Company’s revenues are generated in Euros, its operating results were translated for reporting purposes into U.S dollars using a weighted average rate of 1.30 for the year ended June 30, 2007. A strengthening of the British Pound and Euro, in relation to the U.S. Dollar, will have the effect of increasing recorded revenues and profits, while a weakening of the British Pound and Euro will have the opposite effect. Since the Company’s operations in England generally set prices and bids for contracts in British Pounds, a strengthening of the British Pound, while increasing the value of its UK assets, might place the Company at a pricing disadvantage in bidding for work from manufacturers based overseas. The Company collects its receivables predominately in the currency of the country the subsidiary resides in. The Company has not engaged in foreign currency hedging transactions, which include forward exchange agreements.

The Company’s revenues are generated from various geographic regions. The following is an analysis of net sales by geographic region:

		2007			2006
United States		$	24,333,035		$	25,049,213
United Kingdom			11,536,440			9,392,592
Europe			3,713,012			2,210,668
Asia			1,673,480			1,268,799
Canada and Mexico			452,641			640,009
Middle East			115,020			307,810
Other			608,277			618,202
		$	42,431,905		$	39,487,293

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Summarized financial information for each of the segments for the years ended June 30, 2007 and 2006 are as follows:

 

For the year ended June 30, 2007:

 

		Medical Devices			Laboratory and Scientific Products			Corporate and Unallocated			Total
Net sales		$	23,540,628		$	18,891,277		$	-		$	42,431,905
Cost of goods sold			13,336,430			11,388,084			-			24,724,514
Gross profit			10,204,198			7,503,193			-			17,707,391
Selling expenses			5,002,878			2,593,276			-			7,596,154
Research and development			1,953,872			1,159,392			-			3,113,264
General and administrative			-			-			9,417,038			9,417,038
Total operating expenses			6,956,750			3,752,668			9,417,038			20,126,456
Income (loss) from operations		$	3,247,448		$	3,750,525		$	(9,417,038	)	$	(2,419,065	)

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For the year ended June 30, 2006:

 

		Medical Devices			Laboratory and Scientific Products			Corporate and Unallocated			Total
Net sales		$	20,928,052		$	18,559,241		$	-		$	39,487,293
Cost of goods sold			12,456,746			12,337,537			-			24,794,283
Gross profit			8,471,306			6,221,704			-			14,693,010
Selling expenses			4,739,079			2,689,076			-			7,428,155
Research and development			2,200,380			1,427,022			-			3,627,402
General and administrative			-			-			10,211,492			10,211,492
Total operating expenses			6,939,459			4,116,098			10,211,492			21,267,049
Income from operations		$	1,531,847		$	2,105,606		$	(10,211,492	)	$	(6,574,039	)

Net sales for the three months ended June 30, 2007 were $11,566,017 compared to $9,618,188 for the three months ended June 30, 2006. This increase of $1,947,829 for the three months ended June 30, 2007 is due to an increase in sales of medical device products of $1,199,212 and an increase in laboratory and scientific products sales of $748,617. The increase in sales of medical device products was due to an increase in sales of diagnostic medical devices products of $642,883 and an increase of $556,329 in sales of therapeutic medical device products. The increase in sales of diagnostic medical device products was not attributable to a single customer, distributor or any other specific factor. The increase in sales of therapeutic medical device products was mostly attributable to an increase in sales of the Company’s neuroaspirator of approximately $110,000, an increase in sales of the Company’s lithotripter product of approximately $123,000, an increase in sales of the Company’s ultrasonic assisted liposuction product of approximately $118,000 and an increase in sales of the Company’s Sonablate 500 product of approximately $171,000. The increase in laboratory and scientific products sales is due to an increase in Labcaire products sales of $662,093, the strengthening of the English Pound versus the U.S. dollar of $252,643, an increase in ultrasonic laboratory products sales of $31,195 and an increase in ductless fume enclosure product sales of $106,958, partially offset by a decrease in wet scrubber sales of $257,086.

Summarized financial information for each of the segments for the three months ended June 30, 2007 and 2006 are as follows:

For the three months ended June 30, 2007:

 

		Medical Devices			Laboratory and Scientific Products			Corporate and Unallocated			Total
Net sales		$	6,457,712		$	5,108,305		$	-		$	11,566,017
Cost of goods sold			3,740,441			3,296,803			-			7,037,244
Gross profit			2,717,271			1,811,502			-			4,528,773
Selling expenses			1,301,426			769,943			-			2,071,369
Research and development			450,019			279,342			-			729,361
General and administrative			-			-			2,095,369			2,095,369
Total operating expenses			1,751,445			1,049,285			2,095,369			4,896,099
Income (loss) from operations		$	965,826		$	762,217		$	(2,095,369	)	$	(367,326	)

For the three months ended June 30, 2006:

		Medical Devices			Laboratory and Scientific Products			Corporate and Unallocated			Total
Net sales		$	5,251,483		$	4,366,705		$	-		$	9,618,188
Cost of goods sold			3,489,264			3,008,337			-			6,497,601
Gross profit			1,762,219			1,358,368			-			3,120,587
Selling expenses			1,461,669			633,007			-			2,094,676
Research and development			513,847			374,512			-			888,359
General and administrative			-			-			2,683,324			2,683,324
Total operating expenses			1,975,516			1,007,519			2,683,324			5,566,359
Income from operations		$	(213,297	)	$	350,849		$	(2,683,324	)	$	(2,545,772	)

 

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Gross profit. Gross profit increased to 41.7% in fiscal 2007 from 37.2% in fiscal 2006. Gross profit for medical device products increased to 43.3% in fiscal 2007 from 40.5% in fiscal 2006. Gross profit for laboratory and scientific products increased to 39.7% in fiscal 2007 from 33.5% in fiscal 2006. Gross profit for medical device products was impacted by a favorable order sales mix of therapeutic medical device products, partially offset by lower gross margins on sales to USS and an unfavorable mix of diagnostic medical device products sales. The increase in gross profit for laboratory and scientific products was due to higher gross profit for wet scrubbers, fume enclosure products and Labcaire products. Gross profit increased to 39.2% of sales in the three months ended June 30, 2007 from 32.4% of sales in the three months ended June 30, 2006. Gross profit for laboratory and scientific products increased to 35.5% of sales in the three months ended June 30, 2007 from 31.1% in the three months ended June 30, 2006. Gross profit for medical device products increased from 33.6% of sales in the three months ended June 30, 2006 to 42.1% of sales in the three months ended June 30, 2007. The increase in gross profit for laboratory and scientific products was predominately due to increased service revenue at Labcaire. The increase in gross profit for medical device products was predominately due to a favorable order mix for sales of therapeutic medical device products. The Company manufactures and sells both medical device products and laboratory and scientific products with a wide range of product costs and gross margin dollars as a percentage of revenues.

Selling expenses. Selling expenses increased $167,999 or 2.3% to $7,596,154 (17.9% of net sales) in fiscal 2007 from $7,428,155 (18.8% of net sales) in fiscal 2006. Medical device products selling expenses increased $263,799 due both to additional sales and marketing efforts for therapeutic medical device products. Laboratory and scientific products selling expenses decreased $95,800. Selling expenses decreased $23,307 to $2,071,369 (17.9% of net sales) in the three months ended June 30, 2007 from $2,094,676 (21.8% of net sales) in the three months ended June 30, 2006. Medical device products selling expenses decreased $160,243 due to reduced sales and marketing efforts for therapeutic medical device products. Laboratory and scientific products selling expenses increased $136,936, predominantly due to an increase in sales and marketing efforts for Labcaire’s ISIS product. 

General and administrative expenses. Total corporate and unallocated expenses decreased $794,454 to $9,417,038 in fiscal year 2007 from $10,211,492 in fiscal 2006. The decrease is predominantly due to reduced stock-based compensation expense of approximately $324,000 related to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123R, and a reduction in corporate general and administrative expenses relating to corporate insurance, legal fees and other accrued corporate expenses. Total general and administrative expenses decreased $587,955 to $2,095,369 in the three months ended June 30, 2007 from $2,683,324 in the three months ended June 30, 2006.  The decrease is predominantly due to a decrease in legal fees spent at Sonora and other accrued corporate expenses.

Research and development expenses. Research and development expenses decreased $514,138 to $3,113,264 in fiscal 2007 from $3,627,402 in fiscal 2006. Research and development expenses related to medical device products decreased $246,508 and research and development expenses related to laboratory and scientific products deceased $267,630. Research and development expenses related to medical device products decreased predominately due to reduced efforts relating to the digital upgrade project for therapeutic medical device products, partially offset by efforts expended on the new laboratory and scientific digital sonicator product. The decrease in research and development expense relating to laboratory and scientific products is due to the reduced efforts on the Labcaire ISIS product which was introduced and launched during fiscal 2007 and the reduced efforts for wet scrubber products. The Company is not expanding efforts for research and development on wet scrubber products. Research and development expense decreased $158,998 for the three months ended June 30, 2007 to $729,361 from $888,359 for the three months ended June 30, 2006. Research and development expense related to medical device products decreased $63,828 and research and development expense related to laboratory scientific products decreased $95,170. Research and development expense related to medical device products decreased predominately due to reduced efforts relating to the digital project upgrade for therapeutic medical device products, partially offset by efforts expanded on the new laboratory and scientific digital sonicator product. The decrease in laboratory and scientific products research and development expenses is due to reduced effort on the Labcaire ISIS product, which was introduced and launched during fiscal 2007, and the reduced research and development efforts for wet scrubber products.

Other income (expense). Other income was $363,819 in fiscal 2007 as compared to $552,849 in fiscal 2006. The decrease of $189,030 for the fiscal year was primarily due to an increase in interest expense of $345,670, partially offset by increased foreign currency exchange gains of $163,651 and increased royalty income of $64,730. The increase in interest expense is principally attributable to increased borrowings in the United States.

Income taxes . The effective tax rate is 33.0% for the fiscal year ended June 30, 2007 as compared to an effective tax rate of 37.7% for the fiscal year ended June 30, 2006. The fiscal 2006 year tax rate includes the release of the valuation allowance of $629,560 related to bad debt expenses which was partially offset by adjustments to state tax rates and the impact of lower foreign tax rates.

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Critical Accounting Policies:

General: Financial Reporting Release No. 60, which was released by the SEC in December 2001, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of the financial statements. Note 1 of the Notes to Consolidated Financial Statements included in this Annual Report includes a summary of the Company’s significant accounting policies and methods used in the preparation of its financial statements. The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, goodwill, property, plant and equipment and income taxes. Management bases its estimates and judgments on historical experience and on 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 assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company considers certain accounting policies related to accounts receivable, inventories, property, plant and equipment, revenue recognition, goodwill, income taxes and stock-based compensation to be critical policies due to the estimation process involved in each.

Accounts Receivable : Accounts receivable, principally trade, are generally due within 30 to 90 days and are stated at amounts due from customers, net of an allowance for doubtful accounts. The Company performs ongoing credit evaluations and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by a review of their current credit information. The Company continuously monitors aging reports, collections and payments from customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within expectations and the provisions established, the Company cannot guarantee the same credit loss rates will be experienced in the future. The Company writes off accounts receivable when they become uncollectible.

Inventories : Inventories are stated at the lower of cost (first-in, first-out) or market and consist of raw materials, work-in-process and finished goods. Management evaluates the need to record adjustments for impairments of inventory on a quarterly basis. The Company’s policy is to assess the valuation of all inventories, including raw materials, work-in-process and finished goods. Inventory items used for demonstration purposes, rentals or on consignment are classified in property, plant and equipment.

Property, Plant and Equipment : Property, plant and equipment are recorded at cost. The Company capitalizes items in excess of $1,000. Minor replacements and maintenance and repair expenses are charged to expense as incurred. Depreciation of property and equipment is provided using the straight-line method over estimated useful lives ranging from 1 to 8 years. Depreciation of the Labcaire building was provided using the straight-line method over the estimated useful life of 50 years. Leasehold improvements are amortized over the life of the lease or the useful life of the related asset, whichever is shorter. The Company’s policy is to periodically evaluate the appropriateness of the lives assigned to property, plant and equipment and to make adjustments if necessary. Inventory items included in property, plant and equipment are depreciated using the straight line method over estimated useful lives of 3 to 8 years.

Labcaire sold its owned building in the United Kingdom in June 2007 in a sale and leaseback agreement with Tesco. Tesco intends to utilize the property to expand its operations which will require Labcaire to relocate to another facility upon Tesco’s receiving permission to expand from the local authorities. Labcaire sold the building for $3.6 million and recorded a deferred gain of $1.6 million which will be amortized over the 10 year lease period. Additionally, upon Tesco’s receiving permission to expand its facilities which is expected in the next 1 to 4 years, Tesco will cancel the lease. Upon Labcaire vacating the premises, Tesco will pay Labcaire an additional $1.5 million under the agreement.

Goodwill : Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in connection with the Company’s acquisitions of the common stock of Labcaire, 95% of the common stock of Sonora and the acquisitions of assets of Fibra Sonics, Sonic Technologies and CraMar and an equity interest in UKHIFU.

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS Nos. 141 (“SFAS 141”) and 142 (“SFAS 142”), "Business Combinations" and "Goodwill and Other Intangible Assets," respectively. SFAS 141 replaced Accounting Principles Board (“APB”) Opinion 16 “Business Combinations” and requires the use of the purchase method for all business combinations initiated after June 30, 2001.

 

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SFAS 142 requires goodwill and intangible assets with indefinite useful lives to no longer be amortized, but instead be tested for impairment at least annually and whenever events or circumstances occur that indicate goodwill might be impaired. With the adoption of SFAS 142, as of July 1, 2001, the Company reassessed the useful lives and residual values of all acquired intangible assets to make any necessary amortization period adjustments. Based on that assessment, only goodwill was determined to have an indefinite useful life and no adjustments were made to the amortization period or residual values of other intangible assets. The Company completed its annual goodwill impairment tests for fiscal 2008 and 2007 in the respective fourth quarter. There were no indicators that goodwill recorded was impaired.

Income Taxes : Income taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Stock-Based Compensation : Prior to July 1, 2005, the Company accounted for stock option plans SFAS No. 123. As permitted under this standard, compensation cost was recognized using the intrinsic value method described in APB No. 25 (“APB 25”). Effective July 1, 2005, the Company adopted the fair-value recognition provisions of SFAS No. 123R (revised 2004), “Share-Based Payment” (“SFAS No. 123R”) and SEC Staff Accounting Bulletin No. 107 using the modified-prospective transition method; therefore, prior periods have not been restated. See Note 8 of the Company’s consolidated financial statements for additional information regarding stock-based compensation.

Liquidity and Capital Resources:

Working capital at June 30, 2008 and June 30, 2007 was $8,841,000 and $11,165,090, respectively. For the twelve months ended June 30, 2008, cash provided by operations totaled $614,000. A major source of cash from operations was the receipt of $629,000 held by the Bank of America (“BOA”) to secure a standby letter of credit after the Company terminated its credit agreement with BOA. This amount was included in prepaid expenses and other current assets at June 30, 2007. The major use of cash from operations was related to increased accounts receivable and inventories of approximately $410,000 and $804,000, respectively, during the year ended June 30, 2008. The increases were attributable to the Company’s Labcaire subsidiary. For the fiscal year 2008, cash used in investing activities totaled $1,665,000, primarily consisting of the purchase of property, plant and equipment during the regular course of business and the purchase of shares of the common stock of Sonora increasing the Company’s ownership to 95%. For the fiscal year 2008, cash used in financing activities was $41,000, primarily consisting of net proceeds from short-term borrowings of $399,000, offset by principal payments of capital lease obligations of approximately $440,000.

 

Revolving Credit Facilities

 

On December 29, 2006, the Company and its subsidiaries, Sonora and Hearing Innovations (the Company, Sonora and Hearing Innovations collectively referred to as the “Borrowers”) and Wells Fargo Bank entered into a (i) Credit and Security Agreement and a (ii) Credit and Security Agreement Export-Import Subfacility (collectively referred to as the “Credit Agreements”). The aggregate credit limit under the Credit Agreements is $8,000,000 consisting of a revolving facility in the amount of up to $8,000,000. Up to $1,000,000 of the revolving facility is available under the Export-Import Agreement as a subfacility for Export-Import working capital financing. All credit facilities under the Credit Agreements mature on December 29, 2009. Payment of amounts outstanding under the Credit Agreements may be accelerated upon the occurrence of an Event of Default (as defined in the Credit Agreements). All loans and advances under the Credit Agreements are secured by a first priority security interest in all of the Borrowers’ accounts receivable, letter-of-credit rights, and all other business assets. The Borrowers have the right to terminate or reduce the credit facility prior to December 29, 2009 by paying a fee based on the aggregate credit limit (or reduction, as the case may be) as follows: (i) during year one of the Credit Agreements, 3%; (ii) during year two of the Credit Agreements, 2%; and (iii) during year three of the Credit Agreements, 1%.

The Credit Agreements, as amended, contain financial covenants requiring that the Borrowers (i) on a consolidated basis not have a Net Loss (as defined in the Credit Agreements) of more than (a) $40,000 for the fiscal quarter ended March 31, 2008 and (b) $175,000 for the fiscal quarter ending June 30, 2008 and (ii) not incur or contract to incur Capital Expenditures (as defined in the Credit Agreements) of more than $1,000,000 in the aggregate in any fiscal year or more than $1,000,000 in any one transaction. At June 30, 2008, the Borrowers were not in compliance with two of the covenants under the Credit Agreements. Wells Fargo Bank has given the Company a waiver of such non-compliance.

The available amount under the Credit Agreements is the lesser of $8,000,000 or the amount calculated under the Borrowing Base (as defined in the Credit Agreements). The Borrowers must maintain a minimum outstanding amount of $1,250,000 under the Credit Agreements at all times and pay a fee equal to the interest rate set forth on any such shortfall. Interest on amounts borrowed under the Credit Agreements is payable at Wells Fargo’s prime rate of interest plus 1% per annum floating, payable monthly in arrears. The default rate of interest is 3% higher than the rate otherwise payable. A fee of ½ % per annum on the Unused Amount (as defined in the Credit Agreements) is payable monthly in arrears. At June 30, 2008, the balance outstanding under the Credit Agreement was $2,745,000 and an additional $875,000 was available under this line of credit.

 

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Labcaire has a debt purchase agreement with Lloyds TSB Commercial Finance. The amount of this facility bears interest at the bank’s base rate (5.5% at June 30, 2008) plus 2% and fluctuates based upon the outstanding United Kingdom and European receivables. The agreement expires September 28, 2008. The agreement covers all United Kingdom and European sales. At June 30, 2008, the balance outstanding under this credit facility was $1,725,000 and Labcaire was in compliance with all financial covenants.

 

Commitments

The Company has commitments under a revolving credit facility, note payable and capital and operating leases that will be funded from operating sources. At June 30, 2008, the Company’s contractual cash obligations and commitments relating to the revolving credit facilities, note payable and capital and operating leases are as follows:

Commitment		Less than 1 year			1-3 years			4-5 years			After 5 years			Total
Revolving credit facilities		$	4,470,389		$	-		$	-		$	-		$	4,470,389
Note payable			246,888			-			-			-			246,888
Capital leases			307,325			225,909			-			-			533,234
Operating leases			1,146,724			1,736,181			633,094			957,792			4,473,791
		$	6,171,326		$	1,962,090		$	633,094		$	957,792		$	9,724,302

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to the Company.

Other

The Company believes that its existing capital resources will enable it to maintain its current and planned operations for at least 18 months from the date hereof.

In the opinion of management, inflation has not had a material effect on the operations of the Company.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Market Risk:

The principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) to which the Company is exposed are interest rates on short-term investments and foreign exchange rates, which generate translation gains and losses due to the English Pound to U.S. Dollar conversion of Labcaire.

Foreign Exchange Rates:

Approximately 46% of the Company’s revenues in fiscal 2008 were received in British Pounds. To the extent that the Company’s revenues are generated in British Pounds, its operating results are translated for reporting purposes into U.S. Dollars using weighted average rates of 2.00 and 1.93 for the fiscal year ended June 30, 2008 and 2007, respectively. A strengthening of the British Pound, in relation to the U.S. Dollar, will have the effect of increasing reported revenues and profits, while a weakening of the British Pound will have the opposite effect. Since the Company’s operations in England generally sets prices and bids for contracts in British Pounds, a strengthening of the British Pound, while increasing the value of its UK assets, might place the Company at a pricing disadvantage in bidding for work from manufacturers based overseas. The Company collects its receivables predominately in the currency of the country the subsidiary resides in. Misonix, Ltd. invoices certain customers in Euros and as a result there is an exchange rate exposure between the British Pound and the Euro. The Company has not engaged in foreign currency hedging transactions, which include forward exchange agreements.

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Item 8.  Financial Statements and Supplemental Data. 

The report of the independent registered public accounting firm and consolidated financial statements listed in the accompanying index is filed as part of this Report. See “Index to Consolidated Financial Statements” on page 49.

QUARTERLY RESULTS OF OPERATIONS

The following table presents selected financial data for each quarter of fiscal 2008, 2007 and 2006. Although unaudited, this information has been prepared on a basis consistent with the Company’s audited consolidated financial statements and, in the opinion of the Company’s management, reflects all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of this information in accordance with accounting principles generally accepted in the United States. Such quarterly results are not necessarily indicative of future results of operations and should be read in conjunction with the audited consolidated financial statements of the Company and the notes thereto.

 

QUARTERLY FINANCIAL DATA:

		FISCAL 2008
		Q1			Q2			Q3			Q4			YEAR
Net sales		$	10,532,237		$	11,600,053		$	11,803,026		$	$11,704,390		$	45,639,706
Gross profit			4,665,794			5,164,575			4,882,446			4,628,987			19,341,802
Operating expenses			4,904,507			5,454,306			5,187,415			5,721,300			21,267,528
Loss from operations			(238,713	)		(289,731	)		(304,969	)		(1,092,313	)		(1,925,726	)
Other income			(21,161	)		85,941			73,170			(32,366	)		105,584
Minority interest in net income (loss) of consolidated subsidiaries			9,444			13,867			24,269			(1,404	)		46,176
Income tax (benefit) expense			(43,054	)		(100,477	)		(62,031	)		1,227,055			1,021,493
Net income (loss)		$	(226,264	)	$	(117,180	)	$	(194,037	)	$	(2,350,330	)	$	(2,887,811	)
Net loss per share-Basic		$	(0.03	)	$	(0.02	)	$	(0.03	)	$	(0.34	)	$	(0.41	)
Net loss per share – Diluted		$	(0.03	)	$	(0.02	)	$	(0.03	)	$	(0.34	)	$	(0.41	)

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		FISCAL 2007
		Q1			Q2			Q3			Q4			YEAR
Net sales		$	9,642,878		$	10,639,086		$	10,583,924		$	11,566,017		$	42,431,905
Gross profit			3,931,866			4,786,755			4,459,997			4,528,773			17,707,391
Operating expenses			4,821,739			5,055,433			5,353,185			4,896,099			20,126,456
Loss from operations			(889,873	)		(268,678	)		(893,188	)		(367,326	)		(2,419,065	)
Other income			133,658			141,417			81,267			7,477			363,819
Minority interest in net income (loss) of consolidated subsidiaries			31,339			(5,840	)		(38,318	)		(28,115	)		(40,934	)
Income tax benefit			(245,138	)		(144,975	)		(244,567	)		(30,115	)		(664,795	)
Net loss		$	(542,416	)		23,554		$	(529,036	)	$	(301,619	)	$	(1,349,517	)
Net loss per share-Basic		$	(.08	)	$	-		$	(.08	)	$	(.04	)	$	(.19	)
Net loss per share -Diluted		$	(.08	)	$	-		$	(.08	)	$	(.04	)	$	(.19	)

 

		FISCAL 2006
		Q1			Q2			Q3			Q4			YEAR
Net sales		$	9,213,486		$	10,376,318		$	10,279,301		$	9,618,188		$	39,487,293
Gross profit			3,538,445			3,971,453			4,062,525			3,120,587			14,693,010
Operating expenses			5,315,150			4,932,445			5,353,095			5,666,359			21,267,049
Income (loss) from operations			(1,776,705	)		(960,992	)		(1,290,570	)		(2,545,772	)		(6,574,039	)
Other income			174,859			139,332			144,143			94,515			552,849
Minority interest in net income (loss) of consolidated subsidiaries			16,339			2,785			(6,465	)		(113	)		12,546
Income tax provision (benefit)			(312,822	)		(317,340	)		(310,844	)		(1,333,293	)		(2,274,299	)
Net income		$	(1,305,363	)	$	(507,105	)	$	(829,118	)	$	(1,117,851	)	$	(3,759,437	)
Net income per share-Basic		$	(.19	)	$	(.07	)	$	(.12	)	$	(.16	)	$	(.55	)
Net income per share -Diluted		$	(.19	)	$	(.07	)	$	(.12	)	$	(.16	)	$	(.55	)

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .

Not Applicable.

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Item 9A(T). Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)) that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. 

 

As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Annual Report, under the supervision and with the participation of our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of that date.

 

Management’s Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, the principal executive officer and principal financial officer, and effected by the board of directors and management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US Generally Accepted Accounting Principles (“GAAP”) including those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and the directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.

 

Management conducted an evaluation of the effectiveness of the internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that internal control over financial reporting was effective as of June 30, 2008.

 

This Annual Report does not include an attestation report of the Company’s current independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s current independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission (“SEC “) that permit the Company to provide only management’s report in this Annual Report.

 

There were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during our fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.

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PART III

Item 10. Directors and Executive Officers of the Registrant.

The Company currently has six Directors. Their term expires at the next Annual Meeting of Shareholders. The following table contains information regarding all Directors and executive officers of the Company:

 

Name		Age		Principal Occupation		Director Since
John Gildea		65		Director		2004
Howard Alliger		81		Director		1971
Dr. Charles Miner III		57		Director		2005
T. Guy Minetti		57		Director		2003
Thomas F. O’Neill		62		Director		2003
Michael A. McManus, Jr.		65		Director, President and		1998
				Chief Executive Officer
Richard Zaremba		53		Senior Vice President, Chief
				Financial Officer, Secretary and Treasurer		—
Michael C. Ryan		62		Senior Vice President, Medical Division
Dan Voic		46		Vice President of Research and Development and Engineering		—
Ronald Manna		54		Vice President of New Product Development and Regulatory Affairs		—
Frank Napoli		51		Vice President of Operations		—

The following is a brief account of the business experience for the past five years of the Company’s Directors and executive officers:

John W. Gildea is the founding principal of Gildea Management Co., a management company of special situations with middle market companies in the United States and Central Europe. From 2000 to 2003 Gildea Management Co. formed a joint venture with J.O. Hambro Capital Management Co. to manage accounts targeting high yield debt and small capitalization equities. From 1996 to 2000 Gildea Management Co. formed and founded Latona Europe, a joint venture between Latona U.S., Lazard Co., and Gildea Management Co. to restructure several Czech Republic companies. Before forming Gildea Management Co. in 1990, Mr. Gildea managed the Corporate Series Group at Donaldson, Lufkin and Jenrette, an investment banking firm. Mr. Gildea is a graduate of the University of Pittsburgh.

Howard Alliger founded the Company’s predecessor in 1955 and the Company was a sole proprietorship until 1960. The Company name then was Heat Systems-Ultrasonics. Mr. Alliger was President of the Company until 1982 and Chairman of the Board until 1996. In 1996 Mr. Alliger stepped down as Chairman and ceased to be a corporate officer. He has been awarded 23 patents and has published various papers on ultrasonic technology. For three years, ending in 1991, Mr. Alliger was the President of the Ultrasonic Industry Association. Mr. Alliger holds a B.A. degree in economics from Allegheny College and also attended Cornell University School of Engineering for four years. He has also established, and is President of, two privately held entities which are engaged in pharmaceutical research and development.

 

Dr. Charles Miner III currently practices internal medicine in Darien, Connecticut. Dr. Miner is on staff at Stamford and Newark Hospitals and since 1982 has held a teaching position at Columbia Presbyterian Hospital from 1982. Dr. Miner received his M.D. from the University Of Cincinnati College Of Medicine in 1979 and received a Bachelor of Science from Lehigh University in 1974.

 

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T. Guy Minetti is the founder and Managing Director of Senior Resource Advisors LLC. a management consulting firm. Prior to being Managing Director of Senior Resource Advisors LLC, Mr. Minetti served as the Vice Chairman of the Board of Directors of 1-800-Flowers.Com, a publicly-held specialty gift retailer based in Westbury, New York. Before joining 1-800-Flowers.Com in 2000, Mr. Minetti was the Managing Director of Bayberry Advisors, an investment-banking boutique he founded in 1989 to provide corporate finance advisory services to small-to-medium-sized businesses. From 1981 through 1989, Mr. Minetti was a Managing Director of the investment banking firm, Kidder, Peabody & Company. While at Kidder, Peabody, Mr. Minetti worked in the investment banking and high yield bond departments. Mr. Minetti is a graduate of St. Michael’s College.

Thomas F. O’Neill, a founding principal of Sandler O’Neill & Partners L.P., an investment banking firm, began his Wall Street career at L.F. Rothschild. Mr. O’Neill specialized in working with financial institutions in Rothschild’s Bank Service Group from 1972. He was appointed Managing Director of the Bank Service Group, a group consisting of fifty-five professionals, in 1984. In 1985, he became a Bear Stearns Managing Director and Co-Manager of the Group. Mr. O’Neill serves on the Board of Directors of Archer-Daniels-Midland Company and The Nasdaq Stock Market, Inc. Mr. O’Neill is a graduate of New York University and a veteran of the United States Air Force.

Michael A. McManus, Jr., became President and Chief Executive Officer of the Company in November 1999. From November 1991 to March 1999, Mr. McManus was President and Chief Executive Officer of New York Bancorp, Inc. Prior to New York Bancorp, Inc., Mr. McManus held senior positions with Jamcor Pharmaceutical, Inc., Pfizer, Inc. and Revlon Corp. Mr. McManus also spent several years as an Assistant to President Reagan. Mr. McManus serves on the Board of Directors of the following publicly traded companies: A. Schulman, Inc. and Novavax, Inc. Mr. McManus holds a B.A. degree in Economics from the University of Notre Dame and a Juris Doctorate from Georgetown University Law Center.

Richard Zaremba became Senior Vice President in 2004. He became Vice President and Chief Financial Officer in February 1999. From March 1995 to February 1999, he was the Vice President and Chief Financial Officer of Converse Information Systems, Inc., a manufacturer of digital voice recording systems. Previously, Mr. Zaremba was Vice President and Chief Financial Officer of Miltope Group, Inc., a manufacturer of electronic equipment. Mr. Zaremba is a licensed certified public accountant in the state of New York and holds BBA and MBA degrees in Accounting from Hofstra University.

Michael C. Ryan became Senior Vice President, Medical Division in October 2007. Prior thereto, he served as Senior Vice President and General Manager for Nomos Radiation Oncology from 2006 to October 2007. From 1992 to 2005, Mr. Ryan was Executive Vice President, Business Development for Inter V. Mr. Ryan holds a Bachelor of Arts in Economics from John F. Kennedy College.

Dan Voic became Vice President of Research and Development and Engineering in January 2002. Prior thereto, he served as Engineering Manager and Director of Engineering with the Company. Mr. Voic has approximately 15 years experience in both medical and laboratory and scientific products development. Mr. Voic holds an M.S. degree in mechanical engineering from Polytechnic University “Traian Vuia” of Timisoara, Romania and an MS degree in applied mechanics from Polytechnic University of New York.

Ronald Manna became Vice President of New Product Development and Regulatory Affairs of the Company in January 2002. Prior thereto, Mr. Manna served as Vice President of Research and Development and Engineering, Vice President of Operations and Director of Engineering of the Company. Mr. Manna holds a B.S. degree in mechanical engineering from Hofstra University.

 

Frank Napoli became Vice President of Operations in September 2004. From March 2004 to September 2004, Mr. Napoli was Vice President of Manufacturing for Spellman High Voltage Electronics Corp. Previously, Mr. Napoli was Director of Manufacturing for Telephonics Corporation. Mr. Napoli holds a B.S. degree in Mechanical Engineering from the New York Institute of Technology.

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Item 11. Executive Compensation.

Compensation Discussion and Analysis

Overview of Compensation Program and Philosophy

Our compensation program is intended to:

·

Attract, motivate, retain and reward employees of outstanding ability;

·

Link changes in employee compensation to individual and corporate performance;

·

Align employees’ interests with those of the shareholders.

The ultimate objective of our compensation program is to increase shareholder value. We seek to achieve these objectives with a total compensation approach which takes into account a competitive base salary, bonus pay based on the annual performance of the Company and individual goals and stock option awards.

Base Salaries

Base salaries paid to executives are intended to attract and retain highly talented individuals. In setting base salaries, individual experience, individual performance, the Company’s performance and job responsibilities during the year are considered. Executive salaries are reconciled by Human Resources and evaluated against local companies of similar size and nature.

Annual Bonus Plan Compensation

The Compensation Committee of the Board of Directors approves annual performance-based compensation. The purpose of the annual bonus-based compensation is to motivate executive officers and key employees. Target bonuses, based upon recommendations from the Chief Executive Officer are evaluated and approved by the Compensation Committee for all employees other than the Chief Executive Officer. The bonus recommendations are derived from individual and Company performance but not based on a specific formula and is discretionary. The Chief Executive Officer’s bonus compensation is derived from the Board of Directors’ recommendation to the Compensation Committee based upon the Chief Executive Officer’s performance and Company performance but is not based on a specific formula and is discretionary.

Stock Option Awards

Stock option awards are intended to attract and retain highly talented executives, to provide an opportunity for significant compensation when overall Company performance is reflected in the stock price, and to help align executives’ and shareholders’ interests. Stock options are typically granted at the time of hire to key new employees and annually to a broad group of existing key employees, including executive officers.

Annual option grants to executive officers are made in the form of incentive stock options (“ISO’s”) to the fullest extent permitted under tax rules, with the balance granted in the form of nonqualified stock options. ISO’s have potential income tax advantage for executives if the executive disposes of the acquired shares after satisfying certain holding periods. Tax laws provide that the aggregate grant at date of grant for market value of ISO’s that become exercisable for any employee in any year may not exceed $100,000.

Our current standard vesting schedule for all employees is 25% on the first anniversary of the date of grant, 50% on the second anniversary of the date of grant, 75% on the third anniversary of the date of grant and 100% on the fourth anniversary of the date of grant.

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401 (k) Plan

Change in Control benefits

Change in control benefits are intended to diminish the distinction that executives would face by virtue of the personal uncertainties created by a pending or threatened change in control and to assure that the Company will continue to have the executive’s full attention and services at all time. Our change in control benefits are designed to be competitive with similar benefits available at companies with which we compete for executives’ talent. These benefits, as one element of our total compensation program, help the Company attract, retain and motivate highly talented executives.

 

Mr. McManus’ employment agreement provides that after a change in control of the Company, he is entitled to a one-time additional compensation payment equal to two times his total compensation (annual salary plus bonuses) at the highest rate paid during his employment payable within 60 days of termination. Mr. Zaremba has an agreement for the payment of six months of annual base salary upon a change in control of the Company.

Tax deductibility of Executive Compensation

Section 162 (m) of the Code limits to $1,000,000 per person the amount that we may deduct for compensation paid to any of our most highly compensated officers in any year. In fiscal 2008, there was no executive officer’s compensation that exceeded $1,000,000.

Compensation Committee Report

The Compensation Committee has received and discussed the Compensation Discussion and Analysis section above with management and, based on such review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Report.

Howard Alliger

T. Guy Minetti

Thomas F. O’Neill

John W. Gildea

The following table sets forth information for the fiscal year ended June 30, 2008 concerning the compensation awarded to, earned by or paid to our named executive officers during fiscal 2008 for services rendered to the Company.

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SUMMARY COMPENSATION TABLE FOR THE 2008 FISCAL YEAR

Name and Principal   Position		Fiscal Year Ended June 30,			Salary ($)			Bonus ($)			Options Awards ($)			Total  ($)
Michael A. McManus, Jr.			2008			275,000			200,000			-			475,000
President and Chief			2007			275,000			−			-			275,000
Executive Officer			2006			275,000			-			-			275,000
Richard Zaremba			2008			189,303			24,000			23,430			236,733
Senior Vice President,			2007			183,790			23,000			23,640			230,430
Chief Financial Officer,			2006			178,437			28,000			45,680			252,117
Secretary and Treasurer
Dan Voic			2008			143,789			22,000			23,430			189,219
Vice President of			2007			126,915			18,000			15,760			160,675
Research and Development and			2006			123,224			20,000			28,550			171,774
Engineering
Ronald Manna			2008			114,683			7,000			11,715			133,398
Vice President- New Product			2007			111,342			5,000			5,910			122,252
Development and Regulation Affairs			2006			108,099			5,000			11,420			124,519
Frank Napoli			2008			125,341			6,000			9,372			140,713
Vice President- Operations			2007			121,690			7,000			7,880			136,570
			2006			118,146			7,000			7,200			132,846
Michael Ryan*			2008			152,677			-			43,500			196,177
Senior Vice President-Medical			-			-			-			-			-
Division			-			-			-			-			-

* Michael Ryan joined the Company during October 2007.

Employment Agreements

In June 2008, the Company amended and restated its employment agreement with its President and Chief Executive Officer. The agreement expires on June 30, 2009 and is automatically renewable for one-year periods unless notice is given by the Company or Mr. McManus that it or he declines to renew the agreement. The agreement provides for an annual base compensation of $275,000 and a Company-provided automobile. The agreement also provides for a bonus based upon achievement of his annual goals and objectives as determined by the Compensation Committee of the Board of Directors.

In conformity with the Company's policy, all of its directors, officers and employees execute confidentiality and nondisclosure agreements upon the commencement of employment with the Company. The agreements generally provide that all inventions or discoveries by the employee related to the Company's business and all confidential information developed or made known to the employee during the term of employment shall be the exclusive property of the Company and shall not be disclosed to third parties without the prior approval of the Company. Mr. Zaremba has an agreement for the payment of six months’ annual base salary upon a change in control of the Company. Mr. McManus is entitled in the event of a change of control to payment of two times his total compensation (annual base salary plus bonus) at the highest rate paid during the period of employment, payable in a lump sum written 60 days of termination of employment. The Company's employment agreement with Mr. McManus also contains non-competition provisions that preclude him from competing with the Company for a period of 18 months from the date of his termination of employment.

 

37

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GRANTS OF PLAN-BASED AWARDS FOR THE 2008 FISCAL YEAR

Name		Grant Date			All Other Option  Awards: Number of  Securities Underlying  Options (#)			Exercise or  Base Price of  Option Awards  ($/Sh)			Grant Date Fair  Value of Stock  and Option  Awards (a)
Michael A. McManus, Jr.			−			−			−			−
Richard Zaremba			9/5/2007			10,000			4.04			23,430
Dan Voic			9/5/2007			10,000			4.04			23,430
Ronald Manna			9/5/2007			5,000			4.04			11,715
Frank Napoli			9/5/2007			4,000			4.04			9,372
Michael Ryan			11/7/2007			15,000			4.98			43,500

(a) The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 4.3%; no dividend yield; volatility factor of the expected market price of the Common Stock of 54.7%, and a weighted-average expected life of the options of six and one half years.

38

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OUTSTANDING EQUITY AWARDS FOR THE 2008 FISCAL YEAR
Name		Number of Securities  Underlying Unexercised  Options (#) Exercisable			Number of Securities  Underlying Unexercised  Options (#) Unexercisable			Option Exercise Price ($)			Option Expiration  Date
Michael A. McManus, Jr.			250,000			-			5.06			10/07/08
			250,000			-			7.375			10/13/10
			150,000			-			6.07			10/17/11
			150,000			-			5.10			09/30/12
			125,000			-			4.66			11/01/13
			125,000			-			5.18			11/01/14
Richard Zaremba			7,500			-			7.3125			08/09/10
			7,500			-			6.12			05/08/11
			16,000			-			6.07			10/17/11
			20,000			-			5.10			09/30/12
			15,000			-			4.70			09/16/13
			12,000			-			8.00			09/15/14
			5,333			2,667	(1)		7.60			09/27/15
			2,000			2,000	(2)		5.82			02/07/16
			3,000			9,000	(3)		3.45			10/20/16
			-			10,000	(4)		4.04			09/04/17
Dan Voic			7,500			-			7.57			07/28/08
			7,500			-			7.3125			08/09/10
			2,210			-			6.07			10/17/11
			6,700			-			5.10			09/30/12
			15,000			-			4.70			09/16/13
			12,000			-			8.00			09/15/14
			3,333			1,667	(1)		7.60			09/26/15
			1,250			1,250	(2)		5.82			02/07/16
			2,000			6,000	(3)		3.45			10/20/16
			-			10,000	(4)		4.04			09/04/17
Ronald Manna			5,000			-			5.50			01/13/09
			15,000			-			3.09			03/31/09
			15,000			-			7.3125			08/09/10
			10,000			-			6.07			10/17/11
			5,000			-			5.10			09/30/12
			4,000			-			8.00			09/15/14
			1,333			667	(1)		7.60			09/15/15
			500			500	(2)		5.82			02/07/16
			750			2,250	(3)		3.45			10/20/16
			-			5,000	(4)		4.04			09/04/17
Frank Napoli			1,333			667	(1)		7.60			09/26/15
			500			500	(2)		5.82			02/07/16
			1,000			3,000	(3)		3.45			10/20/16
			-			4,000	(4)		4.04			09/04/17
Michael Ryan			-			15,000	(5)		4.98			11/06/17

(1) Options issued 09/26/05 and vest equally over 3 years

(2) Options issued 02/07/06 and vest equally over 4 years

(3) Options issued 10/20/06 and vest equally over 4 years

(4) Options issued 09/5/07 and vest equally over 4 years

(5) Options issued 11/7/07 and vest equally over 4 years

 

39

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Stock Options

In September 1991, in order to attract and retain persons necessary for the success of the Company, the Company adopted a stock option plan (the "1991 Plan") which covers up to 375,000 shares of Common Stock. Pursuant to the 1991 Plan, officers, directors, consultants and key employees of the Company are eligible to receive incentive and/or non-incentive stock options. At June 30, 2008, options to purchase 30,000 shares were outstanding under the 1991 Plan at an exercise price of $7.38 per share with a vesting period of two years, options to purchase 327,750 shares had been exercised and options to purchase 47,250 shares have been forfeited (of which options to purchase 30,000 shares have been reissued). There are no shares available for future grants.

In March 1996, the Board of Directors adopted and, in February 1997, the shareholders approved the 1996 Employee Incentive Stock Option Plan covering an aggregate of 450,000 shares (the “1996 Plan”) and the 1996 Non-Employee Director Stock Option Plan (the “1996 Directors Plan”) covering an aggregate of 1,125,000 shares of Common Stock. At June 30, 2008, options to purchase 266,278 shares were outstanding at exercise prices ranging from $3.07 to $7.60 per share with a vesting period of immediate to three years under the 1996 Plan and options to acquire 175,000 shares were outstanding at exercise prices ranging from $3.07 to $7.60 per share with a vesting period of immediate to three years under the 1996 Directors Plan. At June 30, 2008, options to purchase 138,295 shares under the 1996 Plan have been exercised and options to purchase 222,372 shares have been forfeited (of which options to purchase 182,945 shares have been reissued). At June 30, 2008, options to purchase 808,500 shares under the 1996 Directors Plan have been exercised options to purchase 90,000 shares have been forfeited (of which none have been reissued) and there are no shares available for future grants.

In October 1998, the Board of Directors adopted and, in January 1999, the shareholders approved the 1998 Employee Stock Option Plan (the “1998 Plan”) covering an aggregate of 500,000 shares of Common Stock. At June 30, 2008, options to purchase 381,875 shares were outstanding under the 1998 Plan at exercise prices ranging from $3.45 to $7.60 per share with a vesting period of immediate to three years. At June 30, 2008, options to purchase 72,848 shares under the 1998 Plan have been exercised and options to purchase 110,552 shares under the 1998 Plan have been forfeited (of which options to purchase 79,702 shares have been reissued). At June 30, 2008, there were 45, 277 shares available for future grants.

		June 30,
		2008			2007
Raw materials		$	6,234,467		$	6,593,458
Work-in-process			3,375,878			2,624,212
Finished goods			4,983,593			4,599,040
		$	14,593,938		$	13,816,710
Less: valuation reserve			1,942,374			1,913,416
		$	12,651,564		$	11,903,294

F-14

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MISONIX INC. and Subsidiaries

Notes to Consolidated Financial Statements

For the three years ended June 30, 2008

4. Property, Plant and Equipment

Property, plant and equipment consist of the following:

		June 30,
		2008			2007
Machinery and equipment			6,216,305			6,248,247
Furniture and fixtures			1,737,265			1,721,481
Automobiles			1,448,598			1,152,926
Leasehold improvements			802,500			789,390
Demonstration and consignment inventory			2,063,898			1,479,378
			12,268,566			11,391,422
Less: accumulated depreciation and amortization			7,869,699			6,663,055
		$	4,398,867		$	4,728,367

Included in machinery and equipment and furniture and fixtures at June 30, 2008 and 2007 are approximately $39,000 and $117,000, respectively, of data processing equipment and telephone equipment under capital leases with related accumulated amortization of approximately $36,000 and $107,000, respectively. Also, included in automobiles are approximately $749,000 and $781,000, respectively, of automobiles under capital leases with accumulated amortization of approximately $175,000 and $228,000, respectively. The Company leased approximately $448,000, $282,000 and $372,000 of automobiles and equipment under capital lease arrangements during the years ended June 30, 2008, 2007 and 2006, respectively.

Labcaire sold its building in the United Kingdom in June 2007 in a sale and leaseback agreement with Tesco. Tesco plans to utilize the property to expand its operations which will require Labcaire to relocate to another facility upon Tesco’s receiving permission to expand from the local authorities. Labcaire sold the building for $3.6 million and recorded a deferred gain of $1.6 million which will be amortized over the 10 year lease period. Additionally, upon Tesco’s receiving permission to expand its facilities which is expected in the next 1 to 4 years, Tesco will cancel the lease. Upon Labcaire’s vacating the premises, Tesco will pay Labcaire an additional $1.5 million.

Depreciation and amortization of property, plant and equipment totaled approximately $1,486,000, $1,407,000 and $1,284,000 for the years ended June 30, 2008, 2007 and 2006, respectively.

 

5. Revolving Credit Facilities

On December 29, 2006 the Company and its subsidiaries, Sonora and Hearing Innovations (collectively referred to as the “Borrowers”) and Wells Fargo Bank entered into a (i) Credit and Security Agreement and (ii) Credit and Security Agreement Export-Import Subfacility (collectively referred to as the “Credit Agreements”).

The aggregate credit limit under the Credit Agreements is $8,000,000 consisting of a revolving facility in the amount of up to $8,000,000. Up to $1,000,000 of the revolving facility is available under the Export-Import Agreements as a subfacility for Export-Import working capital financing. All credit facilities under the Credit Agreements mature on December 29, 2009. Payment of amounts outstanding under the Credit Agreements may be accelerated upon the occurrence of an Event of Default (as defined in the Credit Agreements). All loans and advances under the Credit Agreements are secured by a first priority security interest in all of the Borrowers’ accounts receivable, deposit accounts, property, plant and equipment, general intangibles, intellectual property, inventory, letter-of-credit rights, and all other business assets. The Borrowers have the right to terminate or reduce the credit facility prior to December 29, 2009 by paying a fee based on the aggregate credit limit (or reduction, as the case may be) as follows: (i) during year one of the Credit Agreements, 3%; (ii) during year two of the Credit Agreements, 2%; and (iii) during year three of the Credit Agreements, 1%.

The Credit Agreements contain financial covenants requiring that the Borrowers (i) on a consolidated basis not have a Net Loss (as defined in the Credit Agreements) of more than $175,000 for the fiscal quarter ending June 30, 2008; and (ii) not incur or contract to incur Capital Expenditures (as defined in the Credit Agreements) of more that $1,000,000 in the aggregate in any fiscal year or more than $1,000,000 in any one transaction. At June 30, 2008, the Borrowers were not in compliance with two of the covenants. Wells Fargo Bank has given the Company a waiver of such non-compliance.

F-15

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MISONIX INC. and Subsidiaries

Notes to Consolidated Financial Statements

For the three years ended June 30, 2008

The available amount under the Credit Agreements is the lesser of $8,000,000 or the amount calculated under the Borrowing Base (as defined in the Credit Agreement). The Borrowers must maintain a minimum outstanding amount of $1,250,000 under the Credit Agreements at all times and pay a fee equal to the interest rate set forth on any such shortfall. Interest on amounts borrowed under payable monthly in arrears. The default rate of interest is 3% higher than the rate otherwise payable. A fee of ½ % per annum on the Unused Amount (as defined in the Credit Agreements) is payable monthly in arrears. At June 30, 2008, the balance outstanding under the Credit Agreements was $2,745,000. Amounts available to be borrowed are determined based on specified percentages of the Borrowers’ eligible trade receivables and inventories. An additional $875,000 was available to be borrowed at June 30, 2008.

Labcaire has a debt purchase agreement with Lloyds TSB Commercial Finance (“Lloyds”). The amount of this facility bears interest at the bank’s base rate (5.5% at June 30, 2008 and 2007 respectively) plus 2%. The agreement expires on September 28, 2008 and covers all United Kingdom and European sales. At June 30, 2008, the balance outstanding under this credit facility was $1,725,000 and Labcaire was not in violation of financial covenants.

Labcaire had an overdraft facility with Lloyds which was secured by the Labcaire building. All amounts borrowed under this facility were paid when the Labcaire building was sold and the overdraft facility was cancelled.

6. Accrued Expenses and Other Current Liabilities

The following summarizes accrued expenses and other current liabilities:

		June 30,
		2008			2007
Accrued payroll and vacation		$	945,933		$	567,296
Accrued VAT and sales tax			359,172			118,176
Accrued VAT on sale of Labcaire building			-			631,229
Accrued commissions and bonuses			675,069			484,022
Customer deposits and current deferred contracts			1,765,827			1,084,412
Accrued professional and legal fees			43,352			47,413
Litigation expense			324,000			419,000
Other			646,762			606,095
		$	4,760,115		$	3,957,643

7. Leases

Misonix has entered into several noncancellable operating leases for the rental of certain manufacturing and office space, equipment and automobiles expiring in various years through 2017. The principal building leases provide for a monthly rental amount of approximately $84,000. The Company also leases certain office equipment and automobiles under capital leases expiring through fiscal 2012.

F-16

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MISONIX INC. and Subsidiaries

Notes to Consolidated Financial Statements

For the three years ended June 30, 2008

The following is a schedule of future minimum lease payments, by year and in the aggregate, under capital and operating leases with initial or remaining terms of one year or more at June 30, 2008:

		Capital			Operating
		Leases			Leases
2009		$	352,000		$	1,147,000
2010			204,000			1,139,000
2011			37,000			597,000
2012			16,000			394,000
2013			-			239,000
2014 and thereafter			-			958,000
Total minimum lease payments		$	609,000		$	4,474,000
Amounts representing interest			(76,000	)
Present value of net minimum lease payments			533,000
Less current maturities			(307,000	)
		$	226,000

Certain of the leases provide for escalation clauses, renewal options and the payment of real estate taxes and other occupancy costs. Rent expense for all operating leases was approximately $1,059,000, $1,050,000 and $1,148,000 for the years ended June 30, 2008, 2007 and 2006, respectively.

8. Stock-Based Compensation Plans

Prior to July 1, 2005, the Company accounted for stock option plans under SFAS No. 123. As permitted under this standard, compensation cost was recognized using the intrinsic value method described in APB 25. Effective July 1, 2005, the Company adopted the fair-value recognition provisions of SFAS No. 123R and SEC Staff Accounting Bulletin No. 107 using the modified-prospective transition method; therefore, prior periods have not been restated. Compensation cost recognized in the years ended June 30, 2007 and 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of, July 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R.

Stock options are granted with exercise prices not less than the fair market value of our common stock at the time of the grant, with an exercise term as determined by the Committee administering the applicable option plan (the “Committee”) not to exceed 10 years. The Committee determines the vesting period for the Company’s stock options. Generally, such stock options have vesting periods of immediate to four years. Certain option awards provide for accelerated vesting upon meeting specific retirement, death or disability criteria, and upon change of control. During the years ended June 30, 2008 and 2007, the Company granted options to purchase 61,850 and 127,400 shares of the Company’s common stock, respectively.

Compensation expense is recognized in the general and administrative expenses line item of the Company’s statements of operations on a straight-line basis over the vesting periods. There are no capitalized stock-based compensation costs at June 30, 2008 and 2007. As of June 30, 2008, there was approximately $338,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements to be recognized over a weighted-average period of 2 years.

  

The total cash received from the exercise of stock options was $0, $134,570 and $381,513 for the years ended June 30, 2008, 2007 and 2006, respectively, and are classified as financing cash flows. SFAS No. 123R requires that tax benefits attributable to tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) be classified as financing cash flows.

The weighted average fair value at date of grant for options granted during the years ended June 30, 2008, 2007 and 2006 was $2.51, $2.57 and $3.82 per option, respectively. The fair value of options at date of grant was estimated using the Black-Scholes option-pricing model utilizing the following assumptions:

F-17

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MISONIX INC. and Subsidiaries

Notes to Consolidated Financial Statements

For the three years ended June 30, 2008

		2008			2007			2006
Risk-free interest rates			4.3	%		4.7	%		4.43	%
Expected option life in years			6.5			6			5-7
Expected stock price volatility			54.7	%		53.8	%		54.7	%
Expected dividend yield			-0-			-0-			-0-

In September 1991, in order to attract and retain persons necessary for the success of the Company, the Company adopted a stock option plan (the "1991 Plan") which covers up to 375,000 shares of the Company’s Common Stock (“Common Stock”). Pursuant to the 1991 Plan, officers, directors, consultants and key employees of the Company are eligible to receive incentive and/or non-incentive stock options. At June 30, 2008, options to purchase 30,000 shares were outstanding under the 1991 Plan at an exercise price of $7.38 per share with a vesting period of two years, options to purchase 327,750 shares have been exercised and options to purchase 47,250 shares have been forfeited (of which options to purchase 30,000 shares were reissued) prior to July 1, 2005 and no shares remain available for future grants.

In March 1996, the Board of Directors adopted and, in February 1997, the shareholders approved the 1996 Employee Incentive Stock Option Plan covering an aggregate of 450,000 shares (the “1996 Plan”) and the 1996 Non-Employee Director Stock Option Plan (the “1996 Directors Plan”) covering an aggregate of 1,125,000 shares of Common Stock. At June 30, 2008, options to purchase 266,278 shares were outstanding at exercise prices ranging from $3.07 to $7.60 per share with a vesting period of immediate to two years under the 1996 Plan and options to acquire 175,000 shares were outstanding at exercise prices ranging from $3.07 to $7.60 per share with a vesting period of immediate to three years under the 1996 Directors Plan. At June 30, 2008, options to purchase 144,295 shares under the 1996 Plan have been exercised and 222,372 shares have been forfeited (of which options to purchase 182,945 shares have been reissued). At June 30, 2008, options to purchase 808,500 shares under the 1996 Directors Plan have been exercised, options to purchase 90,000 shares have been forfeited (of which none have been reissued) and no shares remain available for future grants.

In October 1998, the Board of Directors adopted and, in January 1999, the shareholders approved the 1998 Employee Stock Option Plan (the “1998 Plan”) covering an aggregate of 500,000 shares of Common Stock. At June 30, 2008, options to purchase 381,875 shares were outstanding under the 1998 Plan at exercise prices ranging from $3.45 to $7.60 per share with a vesting period of immediate to three years. At June 30, 2008, options to purchase 72,848 shares under the 1998 Plan have been exercised and options to purchase 79,702 shares under the 1998 Plan have been forfeited (of which options to purchase 79,702 shares have been reissued). At June 30, 2008 there were 45,277 shares available for future grants.

In October 2000, the Board of Directors adopted and, in February 2001, the shareholders approved the 2001 Employee Stock Option Plan (the “2001 Plan”) covering an aggregate of 1,000,000 shares of Common Stock. At June 30, 2008, options to purchase 862,838 shares were outstanding under the 2001 Plan at exercise prices ranging from $3.45 to $8.00 per share with a vesting period of one to four years. At June 30, 2008, options to purchase 128,306 shares under the 2001 Plan have been exercised and options to purchase 159,577 shares under the 2001 Plan have been forfeited (of which 159,577 options have been reissued). At June 30, 2008 there were 8,756 shares available for future grants.

In September 2005, the Board of Directors adopted and, in December, 2005, the shareholders approved the 2005 Employee Equity Incentive Plan covering an aggregate of 500,000 shares of Common Stock and the 2005 Non-Employee Director Option Plan covering an aggregate of 200,000 shares of Common Stock. At June 30, 2008, there were options to purchase 31,850 shares outstanding under the 2005 Employee Equity Incentive Plan. At June 30, 2008, 468,150 shares were available for future grants. There were options to purchase 75,000 shares outstanding under the 2005 Non-employee Director Plan and 125,000 shares were available for future grants.

The selection of participants, allotments of shares and determination of price and other conditions relating to options are determined by the Board of Directors or a committee thereof, depending on the Plan, and in accordance with Rule 4350(c) of the Qualitative Listing Requirements of the NASDAQ Global Market. Incentive stock options granted under the plans are exercisable for a period of up to ten years from the date of grant at an exercise price which is not less than the fair market value of the Common Stock on the date of the grant, except that the term of an incentive stock option granted under the plans to a shareholder owning more than 10% of the outstanding Common Stock may not exceed five years and its exercise price may not be less than 110% of the fair market value of the Common Stock on the date of grant. Options shall become exercisable at such time and in such installments as provided in the terms of each individual option agreement. At June 30, 2008 there were 468,150 shares available for future granting under the 2005 Employee Equity Incentive Plan and 125,000 shares available for future granting under the 2005 Non-Employee Director Option Plan.

F-18

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MISONIX INC. and Subsidiaries

Notes to Consolidated Financial Statements

For the three years ended June 30, 2008

The following table summarizes information about stock option activity during 2008, 2007 and 2006:

		Options
		Number of Shares			Weighted Average Exercise Price			Weighted Average Remaining Contractual Life Years			Aggregate Intrinsic Value
Outstanding as of June 30, 2005			1,908,075		$	5.66
Granted			89,560			7.19
Exercised			(75,417	)		5.06
Forfeited			(84,245	)		6.62
Outstanding as of June 30, 2006			1,837,973			5.72			5.7		$	1,111,000
Exercisable at June 30, 2006			1,694,869			5.63			4.9		$	1,081,000
Vested at June 30, 2006			1,694,869		$	5.63			4.9		$	1,081,000
Outstanding as of June 30, 2006			1,837,973		$	5.72
Granted			127,400			4.61
Exercised			(101,000	)		1.33
Forfeited			(61,807	)		6.01
Outstanding as of June 30, 2007			1,802,566		$	5.88			5.4		$	1,239,000
Exercisable at June 30, 2007			1,629,133		$	5.91			4.9		$	1,075,000
Vested at June 30, 2007			1,629,133		$	5.91			4.9		$	1,075,000
Outstanding as of June 30, 2007			1,802,566		$	5.88
Granted			61,850			4.33
Exercised			-			-
Forfeited			(16,575	)		5.66
Expired			(25,000	)		14.80
Outstanding as of June 30, 2008			1,822,841		$	5.71			4.9		$	43,325
Exercisable at June 30, 2008			1,663,717		$	5.79			4.4		$	36,031
Vested at June 30, 2008			1,663,717			5.79			4.4		$	36,031

F-19

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