UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended September 30, 2007

OR

For the transition period from             to

Commission File Number 0-33043

Omnicell, Inc.

(Exact name of registrant as specified in its charter)

1201 Charleston Road

Mountain View, CA 94043

(650) 251-6100

(Address, including zip code, of registrant’s principal executive
offices and registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

OMNICELL, INC.

FORM 10-Q

Table of Contents

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PART 1 — FINANCIAL INFORMATION

Item 1.  Financial Statements

OMNICELL, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands)

(1)  Information derived from our December 31, 2006 audited Consolidated Financial Statements.

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

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OMNICELL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except  per share data)

(Unaudited)

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

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OMNICELL, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands, unaudited)

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

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OMNICELL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Overview

Description of the Company.

Omnicell, Inc. (“Omnicell,” “our,” “us,” “we,” or the “Company”) was incorporated in California in 1992 under the name Omnicell Technologies, Inc. and reincorporated in Delaware in 2001 as Omnicell, Inc. Our major products are medication and supply dispensing systems which are sold in our principal market, which is the healthcare industry. Our market is primarily located in the United States.

Basis of Presentation and Summary of Significant Accounting Policies

These interim condensed consolidated financial statements are unaudited but reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the financial position of Omnicell and its subsidiaries as of September 30, 2007, and the results of operations for the three and nine month periods ended September 30, 2007 and 2006 and cash flows for the nine month periods ended September 30, 2007 and 2006. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or GAAP, have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K as of, and for, the year ended December 31, 2006. Certain prior period amounts in our Condensed Consolidated Statement of Cash Flows have been reclassified to conform to the current period presentation. Amounts reclassified include prepaid expenses, other current assets, investment in sales-type leases, other non-current assets, accrued compensation and advance payments from customers.

Our results of operations for the three and nine months ended September 30, 2007 and cash flows for the nine month period ended September 30, 2007 are not necessarily indicative of results that may be expected for the year ending December 31, 2007, or for any future period.

Use of estimates.   The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Principles of consolidation.   The consolidated financial statements include the accounts of our wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Sales of accounts receivable.   We offer our customers multi-year, non-cancelable payment terms. For the three and nine months ended September 30, 2007, sales of medication and supply dispensing systems sold with multi-year payment terms totaled approximately $17.7 million and $45.9 million, respectively.  Sales of medication and supply dispensing systems sold with multi-year payment terms totaled approximately $8.7 million and $31.5 million, respectively, for comparable periods in 2006. Generally we sell non-U.S. government receivables to third-party leasing companies on a non-recourse basis. We reflect the financing costs on the sale of these receivables as a component of our revenue. We record our revenue at the net present value of the multi-year payment stream using the contractual interest rate charged to us by the third-party leasing company. We record the sale of the accounts receivables as “true sales” in accordance with Statement of Financial Accounting Standards, or SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” During the nine months ended September 30, 2007 and 2006, we transferred non-recourse accounts receivable totaling $41.5 million and $25.9 million, respectively, which approximated fair value, to leasing companies on a non-recourse basis.  At September 30, 2007 and December 31, 2006, accounts receivable included $2.0 million and $3.7 million, respectively, from leasing companies for transferred non-recourse accounts receivable.  Due to the nature of the recourse clauses in certain of our sales arrangements, we recorded $0.7 million as of September 30, 2007 and $1.8 million as of December 31, 2006 as receivables subject to a sales agreement and obligation resulting from sale of receivables due to recourse clauses in those certain sale arrangements.

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Dependence on key suppliers.   We have a supply agreement with a supplier for construction and supply of several sub-assemblies and inventory management of sub-assemblies used in our hardware products. There are no minimum purchase requirements. The sub-section of the contract for construction and supply of assemblies may be terminated by either the supplier or by us without cause and at any time upon giving approximately four months’ notice. The sub-section of the contract for inventory management of assemblies may be terminated by either the supplier or by us without cause and at any time upon giving approximately six months’ notice. Purchases from this supplier for the three and nine months ended September 30, 2007 were approximately $4.9 million and $10.6 million, respectively.  We expect our third-party manufacturing supplier to build a substantial portion of the sub-assemblies which we previously built at our manufacturing facility in California. We anticipate reducing our risk of dependence on a single-source supplier by establishing additional supplier manufacturing relationships and by securing single-source supplier secondary manufacturing sites.

Income Taxes.   For the nine months ended September 30, 2007, we recorded an income tax benefit of $12.0 million as compared with an income tax expense of  $0.5 million for the corresponding period in fiscal 2006.  The tax benefit for the nine months ended September 30, 2007 primarily resulted from a partial release of the valuation allowance carried against our deferred tax assets.  The tax expense for the period ended September 30, 2006 was recorded for taxes due on minimum and alternative minimum state taxes and alternative minimum federal taxes.

During the nine months ended September 30, 2007, we determined that it was more likely than not that we would have sufficient future taxable income to utilize a portion of our deferred tax assets and, as a result, we released approximately $12.8 million of valuation allowance against these assets during the second quarter of 2007. For interim reporting, the effect of a change in judgment about the realizability of deferred tax assets should be recognized as of the date of the change.  The effective tax rate for subsequent interim periods for the remainder of the year should not be affected by this change in judgment.  We will continue to evaluate our ability to realize our deferred tax asset on a quarterly basis and adjust the valuation allowance against these deferred tax assets accordingly.

We believe there is a risk associated with our ability to utilize net operating losses, or NOLs, and have retained a valuation allowance of $24.9 million offsetting net deferred tax assets as of September 30, 2007.  SFAS No. 109, “Accounting for Income Taxes”, or SFAS No.109 requires us to evaluate the realization of our deferred tax assets.  Circumstances leading to a change in judgment about our deferred tax assets included a secondary stock offering in May 2007 which provided funding for additional growth opportunities, utilization of NOLs, recent cumulative history of profitability and a favorable near term business forecast.  These items, taken collectively lead us to believe a portion of our deferred tax assets will be realized.  The remaining portion of the deferred tax assets will remain subject to a valuation allowance until future circumstances indicate they may be realized. The remaining deferred tax assets subject to a valuation allowance include temporary book-tax differences and NOLs related to stock options. These NOLs are approximately $9.9 million and the valuation allowance will be released when the NOLs are utilized to reduce cash taxes and an associated benefit will be to additional paid-in capital. Approximately $2.2 million of operating losses are fully offset by a valuation allowance due to limitations imposed by Internal Revenue Code Section 382.

Other comprehensive income.   Other comprehensive income is the same as net income for the three and nine months ended September 30, 2007 and 2006.

Segment Information.   We manage our business on the basis of one reportable segment.  Our products and technologies share similar distribution channels and customers and are sold primarily to hospitals and healthcare facilities to improve patient safety and care and enhance operational efficiency.  Our sole operating segment is medication and supply dispensing systems.  Substantially all of our long-lived assets are located in the United States. For the three and nine months ended September 30, 2007 and 2006, substantially all of our total revenues and gross profits were generated by the medication and supply dispensing systems operating segment from customers in the United States.

Newly Issued Accounting Standards.   In February 2007, the Financial Accounting Standards Board, or FASB, issued SFAS No. 159,  “The Fair Value Option for Financial Assets and Financial Liabilities,” or SFAS No. 159, which includes an amendment of FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” SFAS No.159 expands the scope of what companies may carry at fair value and permits entities to choose, at specified election dates, to measure financial assets and financial liabilities at their fair value with related unrealized gains or losses recorded in earnings. SFAS No.159 is effective for fiscal years beginning after November 15, 2007; however, in certain circumstances, earlier adoption is permitted. We are currently evaluating the impact of SFAS No. 159 on our consolidated statements of financial position, results of operations or cash flows.

In September 2006, FASB issued SFAS No. 157,  “Fair Value Measurements,” or SFAS No. 157, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various

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prior accounting pronouncements. SFAS No.157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year.  We are currently evaluating the impact of SFAS No. 157 on our consolidated statements of financial position, results of operations and cash flows.

Note 2. Net Income Per Share

Basic net income per share is computed by dividing net income for the period by the weighted-average number of shares outstanding during the period, less shares subject to repurchase. Diluted net income per share is computed by dividing net income for the period by the weighted-average number of shares less shares subject to repurchase plus, if dilutive, common stock equivalent shares outstanding during the period. Common stock equivalents include the effect of outstanding dilutive stock options and restricted stock units computed using the treasury stock method.  The calculation of basic and diluted net income per share is as follows (in thousands, except per share amounts):

Note 3. Stockholders’ Equity and Stock Option Plans

Share Purchase Rights Plan

On February 6, 2003, our board of directors approved the adoption of a Share Purchase Rights Plan,  or the Rights Plan. Terms of the Rights Plan provide for a dividend distribution of one preferred share purchase right, or a Right, for each outstanding share of our common stock, par value $0.001 per share. The dividend was payable on February 27, 2003 to the stockholders of record on that date.

The Rights are not exercisable until the distribution date, which is the earlier of the date of a public announcement that a person, entity or group of affiliated or associated persons have acquired beneficial ownership of 15% or more of the outstanding share of our common stock (an “Acquiring Person”) or (ii) 10 business days (or such later date as may be determined by action of the board of directors prior to such time as any person or entity becomes an Acquiring Person) following the commencement of, or announcement of an intention to commence, a tender offer or exchange offer the consummation of which would result in any person or entity becoming an Acquiring Person. In the event that any person or group of affiliated or associated persons becomes an Acquiring Person or a tender offer is commenced or announced to commence, each stockholder holding a Right will thereafter have the right to receive upon exercise of the Right that number of shares of Common Stock having a market value of two times the exercise price of the Right. The description and terms of the Rights are set forth in a Rights Agreement, dated as of February 6, 2003 entered into between us and EquiServe Trust Company, N.A., as rights agent. Sutter Hill Ventures and ABS Capital Partners and their respective affiliated entities will be exempt from the Rights Plan, unless they acquire beneficial ownership of 17.5% or 22.5% or more, respectively, of the Company’s common stock. At no time will the Rights have any voting power. The Rights will expire on February 27, 2013, unless the Rights are earlier redeemed or exchanged by Omnicell.

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Description of Share-Based Plans

Stock Option Plans.   Our 1999 Equity Incentive Plan, or the 1999 Plan, was adopted in September 1999 for the granting of incentive and nonqualified stock options, restricted stock units, or RSUs, and rights to purchase common stock and common stock units to employees, directors and consultants. RSUs give the recipients the right to receive shares of our stock upon the lapse of their related restrictions. Restrictions on RSUs lapse in various increments beginning from date of grant. Under the 1999 Plan, 4,262,745 shares of common stock were initially authorized for issuance. Further, all unissued shares under our 1992 Stock Plan and 1995 Management Stock Option Plan were added to the 4,262,745 shares reserved under the 1999 Plan. Under all of the option plans, incentive and nonqualified stock options or rights to purchase common stock may be granted to employees, directors and consultants. Incentive options, nonqualified options and stock purchase rights must be priced to be at least 100%, 85% and 85%, respectively, of the common stock’s fair market value at the date of grant. Options shall become exercisable as determined by our board of directors. Options granted under the 1999 Plan generally become exercisable over periods of up to four years, generally with one-fourth of the shares vesting one year from the vesting commencement date with respect to initial grants, and the remaining shares vesting in 36 equal monthly installments thereafter; however our board of directors may impose different vesting terms at its discretion on any award.  Options under the 1999 Plan generally expire ten years from the date of grant.  Sales of stock under stock purchase rights are made pursuant to restricted stock purchase agreements.

In October 2006, the 1999 Plan was amended to permit grants of restricted stock and restricted stock units to participants under the 1999 plan. The board of directors determines the price, which is equal to the market price of the stock on the date of the grant, the award amount, the vesting provisions and the expiration period (not to exceed ten years) for each grant.  We consider the dilutive impact of this program in our diluted net income per share calculation.

The fair value of restricted stock under the 1999 Plan is the product of the number of shares granted and the grant date market price of our common stock on the grant date.  Expected future compensation expense relating to restricted shares outstanding is $0.2 million.  A summary of activity of restricted stock granted under the 1999 Plan as of September 30, 2007 is presented below:

RSUs granted to employees generally vest over a period of four years and are expensed ratably on a straight-line basis over the vesting period.  RSUs granted to non-employee directors are granted on the date Omnicell’s annual meeting of stockholders and vest in full on the date of Omnicell’s next annual meeting of stockholders and are expensed ratably on a straight-line basis over the vesting period.  The fair value of RSUs under the 1999 plan is the product of the number of shares granted and the grant date market price of our common stock on the grant date.  Expected future compensation expense relating to RSUs outstanding on September 30, 2007 is $2.7 million over a weighted-average period of four years.  A summary of activity of restricted stock units granted under the 1999 Plan as of September 30, 2007 is presented below:

On January 1 of each year, the number of shares reserved for issuance under the 1999 Plan increases automatically by the lesser of (i) 5.5% of the total number of shares of our common stock outstanding,  (ii) 3,000,000 shares, or (iii) such other lesser amount as may be determined by our board of directors.  As of September 30, 2007, there were a total of 1,590,083 shares reserved for future issuance under the 1999 Plan.

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In April 2003, our board of directors adopted the 2003 Equity Incentive Plan, or the 2003 Plan. A total of 500,000 shares of common stock has been reserved for issuance under the 2003 Plan.  As of September 30, 2007, 343,073 shares were subject to outstanding options under the 2003 Plan.  As of September 30, 2007, there were a total of 140,070 shares reserved for future issuance under the 2003 Plan.  The 2003 Plan provides for the issuance of non-qualified options, stock bonuses and rights to acquire restricted stock to our employees, directors and consultants. Options granted under the 2003 Plan shall have an exercise price not less than 70% of the fair market value of the stock on the date of grant and are generally intended to become exercisable over periods of up to four years, generally with one-fourth of the shares vesting one year from the vesting commencement date with respect to initial grants, and the remaining shares vesting in 36 equal monthly installments thereafter, however our board of directors may impose different vesting at its discretion on any award. Options granted under the 2003 Plan will expire ten years from the date of grant.

In February 2004, our board of directors adopted the 2004 Equity Incentive Plan, or the 2004 Plan and, together with the 1999 Plan and the 2003 Plan, the Plans. A total of 200,000 shares of common stock has been reserved for issuance under the 2004 Plan. No options are currently issued or outstanding under the 2004 Plan. The 2004 Plan provides for the issuance of non-qualified options to new employees as an inducement material to the individual’s entering into employment with us. Options granted under the 2004 Plan have an exercise price not less than the fair market value of the stock on the date of grant and generally become exercisable over periods of up to four years, generally with one-fourth of the shares vesting one year from the vesting commencement date with respect to initial grants, and the remaining shares vesting in 36 equal monthly installments thereafter; however our board of directors may impose different vesting terms at its discretion on any award. Options under the 2004 Plan generally expire ten years from the date of grant.

The board of directors shall administer the Plans unless and until the board of directors delegates administration to a committee. The Board has delegated administration of the Plans to the Compensation Committee of the Board and the Plans are generally administered by such committee.  The board of directors may suspend or terminate the Plans at any time. The board of directors may also amend any of the Plans at any time or from time to time. However, no amendment will be effective unless approved by our stockholders after its adoption by the board of directors to the extent stockholder approval is necessary to satisfy the requirements of The NASDAQ Stock Market listing requirements.

If we sell, lease or dispose of all or substantially all assets or we are acquired pursuant to a merger or consolidation, then the surviving entity may assume or substitute all outstanding awards under the Plans. If the surviving entity does not assume or substitute these awards, then generally the vesting and exercisability of the stock awards will accelerate.

A summary of option activity under the Plans as of September 30, 2007 is presented below:

(1)   Exercisable options are fully vested as of September 30, 2007.

Outstanding options at September 30, 2007 had a weighted-average remaining contractual life of 6.7 years and an aggregate intrinsic value of $76.3 million.  Exercisable options at September 30, 2007 had an aggregate intrinsic value of $52.2 million.  At September 30, 2007, there was $10.6 million of total unrecognized compensation cost related to non-vested stock options.

For the nine months ended September 30, 2007, the aggregate intrinsic value of options exercised was $16.8 million and the weighted-average fair value of options exercised was $8.97.

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At September 30, 2007, the total number of shares available for future issuance under all Plans was as follows (in thousands):

1997 Employee Stock Purchase Plan.   We have an Employee Stock Purchase Plan, or ESPP, under which employees can purchase shares of our common stock based on a percentage of their compensation, but not greater than 15% of their earnings, up to a maximum of $25,000 of fair value per year. The purchase price per share must be equal to the lower of 85% of the fair value of the common stock at the beginning of a 24-month offering period or the end of each six-month purchasing period. As of September 30, 2007, 1,876,968 shares had been issued under the ESPP.  On January 1 of each year, the number of shares reserved for issuance under the ESPP increases automatically by the lesser of (i) 1.5% of the total number of shares of our common stock outstanding, (ii) 750,000 shares, or (iii) such other lesser amount as may be determined by our board of directors.  As of September 30, 2007, there were a total of 832,161 shares reserved for future issuance under the ESPP.

Secondary Offering

In May 2007, we issued 4,485,000 shares of our common stock in a public offering at an offering price of $21.50 per share. The net proceeds to us were $90.2 million, which is net of both underwriting discounts and offering expenses of $6.2 million.

Note 4. Share-Based Compensation

We follow the provisions of SFAS 123(R), “Share-Based Payment,” or SFAS No. 123(R), for share-based awards granted to employees and directors including employee stock option awards, restricted stock and RSUs and employee stock purchases made under our ESPP using the estimated grant date fair value method of accounting in accordance with  SFAS No. 123(R).

The impact on our results for share-based compensation was as follows (in thousands, except per share data): 

Share-based compensation capitalized in inventory at September 30, 2007 and 2006 was $61,000 and $11,000, respectively.

Note 5. Inventories

Inventories consist of the following (in thousands):

During the three and nine months ended September 30, 2007, we increased our provision for excess and obsolete inventories by $0.2 million and $1.4 million, respectively.

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Note 6. Net Investment in Sales-Type Leases

Our sales-type leases are for terms generally ranging up to five years. Sales-type lease receivables are collateralized by the underlying equipment. The components of our net investment in sales-type leases are as follows (in thousands):

The minimum lease payments under sales-type leases as of September 30, 2007:

(1)             A component of other current assets

(2)             Net of allowance for doubtful accounts of $0.3 million as of September 30, 2007 and December 31, 2006.

Note 7. Other Assets

Other assets consist of the following (in thousands):

Note 8. Goodwill and Net Purchased Intangibles

Intangible assets consist of the following (in thousands):

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Intangible assets increased by $0.2 million for the nine months ended September 30, 2007 as a result of additional investment in patents and patent filing costs.  Amortization expense totaled $0.2 million and $0.7 million for the three and nine months ended September 30, 2007, respectively. Amortization expense was $0.2 million and $0.8 million for the same periods during  2006. Estimated annual expected amortization expense of intangible assets at September 30, 2007 is as follows (in thousands):

Note 9. Deferred Gross Profit

Deferred gross profit consists of the following (in thousands):

Note 10. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

Note 11. Commitments and Contingencies

Contractual Obligations

The following table summarizes our contractual obligations at September 30, 2007 (in thousands):

(1)           Commitments under operating leases relate primarily to leasehold property.

(2)           We purchase components from a variety of suppliers and use contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue purchase orders with estimates of our requirements several months ahead of the delivery dates. We record a liability for firm, non-cancelable, and unconditional purchase commitments.

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(3)           As part of the December 2002 acquisition of substantially all of the intellectual properties of Medisafe, we agreed to pay $0.5 million in guaranteed minimum royalties due over four years in equal annual installments of $125,000 beginning January 2005.  Also included is a lease deposit of $50,000.

Indemnification Arrangements and Guarantees.   As permitted under Delaware law and our amended and restated bylaws and amended and restated certificate of incorporation, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments they could be required to make under these indemnification agreements is unlimited; however, we have a directors’ and officers’ insurance policy that may enable us to recover a portion of any future amounts paid. Assuming the applicability of coverage and the willingness of the insurer to assume coverage and subject to certain retention, loss limits and other policy  provisions, we believe it is unlikely that we will be required to pay any material amounts pursuant to this indemnification obligation. However, no assurances can be given that the insurers will not attempt to dispute the validity, applicability or amount of coverage without expensive and time-consuming litigation against the insurers.

Additionally, we undertake indemnification obligations in the ordinary course of business in connection with, among other things, the licensing of our products and the provision of our technical services. Pursuant to these agreements, we may indemnify the other party for certain losses suffered or incurred by the indemnified party, generally our business affiliates or customers, in connection with various types of claims, which may include, without limitation, claims of intellectual property infringement, certain tax liabilities, negligence and intentional acts in the performance of services and violations of laws. The term of these indemnification obligations is generally perpetual. In general, we attempt to limit the maximum potential amount of future payments which we may be required to make under these indemnification obligations to the purchase price paid, but in some cases the obligation may not be so limited. In addition, we may, in certain situations, warrant that, for a certain period of time from the date of delivery, our software products will be free from defects in media or workmanship. From time to time, it may also warrant that our professional services will be performed in a good and workmanlike manner. In addition, it is our standard policy to seek to disclaim most warranties, including any implied or statutory warranties such as warranties of merchantability, fitness for a particular purpose, quality and non-infringement, as well as any liability with respect to incidental, consequential, special, exemplary, punitive or similar damages. In some states, such disclaimers may not be enforceable. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history. However, in the recent past, we have not been subject to any significant claims for such losses and have not incurred any material costs in defending or settling claims related to these indemnification obligations. Accordingly, we believe it is unlikely that we will be required to pay any material amounts pursuant to this indemnification obligation.

Legal Proceedings

On February 20, 2007, we were served with the third amended petition in a lawsuit entitled Alcala, et al. v. Cardinal Health, Inc., et al., case number 2006 09-4487-G, which named us as a defendant. This lawsuit was filed in the District Court of Cameron County, Texas. The lawsuit alleges claims against us for strict products liability, negligence and gross negligence arising from the use of our product by defendant Cardinal Health 109, Inc. in connection with the treatment of a patient who died after receiving treatment. The petition, which was filed by the family and estate of the deceased patient, alleges that defects in the design of our product contributed to the patient’s death which was allegedly caused by the administration of the wrong medication. We deny any liability, have engaged our insurance carrier on this matter and intend to vigorously defend against these claims.

Note 12.  Accounting Changes

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of SFAS No. 109,” or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes and interprets the provision of FASB Statement No. 109. FIN 48 is effective prospectively for fiscal years beginning after December 15, 2006.  We adopted the provisions of FIN 48 beginning on January 1, 2007.  We recorded a $0.1 million cumulative effect of adopting FIN 48 as a charge to the opening balance of retained earnings as of January 1, 2007. The non-current liability for uncertain tax positions includes: a) a reclassification of our FASB No. 5, “Accounting for Contingencies,” or SFAS No. 5, reserves, which meet recognition and measurement requirements of FIN 48; b) a tax reserve resulting from adoption of FIN 48 and c) an increase for interest expense and penalties on the uncertain tax positions. At September 30, 2007, current accruals with respect to tax reserves, interest and penalties on uncertain tax positions were not significant.  Interest and penalties were recorded as other income and expense in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2007, in accordance with our election under FIN 48. Effects on our income tax provision as a result of the resolution of tax uncertainties were not significant. We expect further changes in our tax reserve balance in the next 12 months as a result of expiration of the statute of limitations related to foreign tax filings.  These changes may result in decrease in the total amount of unrecognized tax liability of less than $0.1 million.

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Our tax years 1995 to 2006 remain open to audit by the Internal Revenue Service. A tax reserve of $0.1 million will impact our effective tax rate upon resolution of the uncertainties, which is not expected to be material.  No material impact is expected to other comprehensive income, goodwill, or additional paid-in capital upon release of the liability.

In June 2006, the FASB issued Emerging Issues Task Force No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43,” or EITF No. 06-2, which requires measurement of compensation costs associated with a sabbatical or other similar benefit arrangement over the requisite service period if the obligation relates to rights that vest or accumulate.

We adopted the provisions of EITF No. 06-2 beginning on January 1, 2007, which allows for adoption under the retrospective method or as a change in accounting principle through a cumulative-effect adjustment to retained earnings. We presented the change in accounting principle through a cumulative-effect adjustment of $0.5 million to the opening balance of retained earnings as of January 1, 2007.  As required by EITF No. 06-2, compensation costs associated with sabbatical leave is recorded for all employees after the adoption of the provisions of EITF No. 06-2 on a straight-line basis over the four year accumulation period. These expenses totaled $0.1 million and $0.5 million for the three and nine months ended September 30, 2007, respectively.

ITEM 2.              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

•       the extent and timing of future revenues;

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

•       the opportunity presented by new products or emerging markets;

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

•       our ability to manage our growth;

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

•       our estimates regarding the sufficiency of our cash resources.

In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties. We discuss many of these risks in this Quarterly Report on Form 10-Q in greater detail in Part II — Section 1A. “Risk Factors” below. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q.

You should also read our Annual Report on Form 10-K and the documents that we reference in the Annual Report on Form 10-K and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we expect.

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Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes included elsewhere in this report.

Overview

We were incorporated in California in 1992 under the name Omnicell Technologies, Inc. and reincorporated in Delaware in 2001 as Omnicell, Inc. Our healthcare automation solutions are designed to enable healthcare facilities to acquire, manage, dispense and administer medications and medical-surgical supplies, and are intended to enhance patient safety, reduce medication errors, improve workflow and increase operational efficiency. When used in combination, our products and services provide healthcare facilities with a comprehensive solution designed to enhance patient safety and improve operational efficiency.

We sell our medication dispensing and supply automation systems, and generate substantially all our revenue, in the United States.  Our sales force is organized by geographic region in the United States and Canada. We also sell through distributors in Asia, Australia, Europe, the Middle East and South America.  In 2006, we manufactured the majority of our systems in our California facility and refurbishment and spare parts activities were conducted in our Illinois facility. In November 2006, we began manufacturing sub-assemblies at a single-source manufacturing supplier to provide increased manufacturing capacity. We also increased our inventory levels in 2006, allowing for greater levels of installations. In 2005, we established a subsidiary in India, Omnicell Corporation (India) Private Limited. This subsidiary is focused on software product development and customer support. A substantial number of our U.S. employees involved in sales, customer support and installation work remotely.

In general, we recognize revenue when our medication dispensing and supply automation systems are installed. Installation generally takes place six to nine months after our systems are ordered. The installation process at our customers’ sites includes internal procedures associated with large capital expenditures and additional time associated with adopting new technologies. Given the length of time necessary for our customers to plan for and complete their acceptance of the installation of our systems, our focus is on shipping products based on the installation dates requested by our customers and working at the customer’s pace. The amount of revenue recognized in future periods may depend on, among other things, the terms and timing of lease contract renewals, additional product sales and the size of such transactions. We believe that future revenue will be affected by the competitiveness of our products and services.

Trends in Our Business

Revenues for the three months ended September 30, 2007 increased to $55.2 million, up from $41.2 million for the same period in 2006. Revenues for the nine months ended September 30, 2007 increased to $155.1 million, up from $111.6 million for the same period in 2006. We believe that three factors were primarily responsible for this growth:

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

•                  We have delivered products with differentiated features that are designed to appeal to nurses and pharmacists; and

•                  The market environment of increased patient safety awareness and increased regulatory control has driven automation to be a priority in healthcare facilities’ capital budgets.

Our product backlog grew to $140.6 million at September 30, 2007 from $113.8 million at December 31, 2006, as customer orders for our products continued to grow at a faster pace than we installed customer orders. Our customers require well-planned installations that provide them with a minimal amount of disruption. Installations, which coincide with full delivery of our obligations to our customers and therefore represent our point of revenue recognition, can take place anywhere from one week to 12 months or longer after an order is received for our products.  Given our customers’ often lengthy installation schedules, we believe our current backlog level is appropriate for our industry.

In the nine months ended September 30, 2007, operating activities provided $16.2 million of cash.  This increase is due to our expenses growing slower than the rate of our revenue growth combined with working capital from operations.  We also used $5.0 million in cash in investing activities for purchases of property and equipment and investments in intellectual property. Proceeds from financing consisted of $13.5 million of cash from issuances of common stock pursuant to our equity incentive plans and employee stock purchase plan, and net proceeds of $90.2 million from the sale and issuance of 4,485,000 shares of our common stock in a public offering. As a result, for the nine months ended September 30, 2007, cash and cash

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equivalents increased from $60.9 million at December 31, 2006 to $175.7 million at September 30, 2007. For the nine months ended September 30, 2006, net cash generated from operations was $10.4 million and we had a cash equivalents balance of $50.1 million.

Our ability to grow revenue is dependent on our ability to continue to attract orders from customers, the volume of installations we are able to complete, our ability to access customer installation sites on a timely basis and our flexibility in manpower allocations among customers to complete installations on a timely basis.  The revenue growth we have experienced has required a continued growth in our headcount. During the three month period ended September 30, 2007, we hired new staff members at all of our sites and in our field-based organizations, comprising mainly installation, service and support staff.  Our full-time employee headcount grew 16.5% to 729 at September 30, 2007 from 626 at December 31, 2006.

Gross profit as a percentage of revenues for the three months ended September 30, 2007 declined 0.5% from the same period in 2006.  Gross profit as a percentage of revenues for the nine months ended September 30, 2007 declined 1.9% compared to the same period in 2006.  For the three and nine months ended September 30, 2007, the decreases in gross profit were primarily due to a larger allocation of shared operating expenses absorbed by cost of revenues, and higher infrastructure costs, such as information technology equipment and services to support our future growth.  The increased allocation of shared operating expenses absorbed by cost of services and other revenues was based on our annual assessment of the allocation of shared operating expenses between various departments completed in the first fiscal quarter of 2007. As our departments associated with service and other revenues grow, an increased allocation of shared operating costs may decrease gross margin.

We do not anticipate that the decline in our gross profit represents a trend or pattern in our business.  However, our gross profit could continue to decline in 2007 as compared to 2006 due to changes in the product mix sold and the continuing effect of a larger allocation of shared operating expenses absorbed by cost of revenues, as well as a result of market price reductions, additional costs to expand our business and expenses from share-based compensation expenses. This decrease in our gross profit may be wholly or partially offset by revenue growth in the fourth quarter of 2007 as compared to 2006.

We have invested in customer-facing portions of our business, in research and development and in infrastructure, but at a slower pace than demand for our products has grown. We anticipate that we will continue to invest in our business to support future growth generated by increased market demand.

We operate in one business segment, the design, manufacturing, selling and servicing of medication and supply dispensing systems. Our management team evaluates our performance based on company-wide, consolidated results.

Critical Accounting Policies and Estimates

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

•                  revenue recognition,

•                  estimating doubtful account for receivable reserves,

•                  valuation and impairment of goodwill, purchased intangible assets and other long lived assets,

•                  inventory valuation,

•                  deferred tax asset valuation allowance in the accounting for taxes on income, and

•                  share-based compensation expense.

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Beginning in the first quarter of 2007, we adopted the provisions of  EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43,” or EITF No. 06-2, which requires measurement of compensation costs associated with sabbatical costs.  We had previously expensed sabbatical costs as incurred. We recorded a cumulative-effect adjustment of $0.5 million to the opening balance of retained earnings as of January 1, 2007. We recognized compensation expenses associated with sabbatical leave for all employees of $0.1 million and $0.5 million during the three months and nine months ended September 30, 2007.

Beginning in the first quarter of 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of SFAS No.109,” or FIN 48, which requires recognition of a tax position in our financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position.  We recorded a cumulative-effect adjustment of $0.1 million to the opening balance of retained earnings as of January 1, 2007.  We recognized income tax benefit associated with a reduction of our FIN 48 liability of $8,000 and $0.1 million for the three months and nine months ended September 30, 2007.

Newly Issued Accounting Standards

In February 2007, the FASB issued SFAS No. 159,  “The Fair Value Option for Financial Assets and Financial Liabilities,” or SFAS No. 159, which permits entities to voluntarily choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective, for Omnicell, beginning January 1, 2008. We are currently evaluating the impact of SFAS No. 159 on our consolidated statements of financial position, results of operations and cash flows.

In September 2006, FASB issued SFAS No. 157,  “Fair Value Measurements,” or SFAS No. 157, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements.  We are currently evaluating the impact of SFAS No. 157 on our consolidated statements of financial position, results of operations and cash flows.

Results of Operations

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Product Revenues and Gross Profit

The table below shows our product revenues, cost of product revenues and gross profit for the three and nine months ended September 30, 2007 and 2006 and the percentage change between those periods: