e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

Universal Biosensors, Inc.

(Exact name of registrant as specified in its charter)


Delaware		98-0424072
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

Universal Biosensors, Inc.
1 Corporate Avenue,
Rowville, 3178, Victoria
Australia		Not Applicable
(Address of principal executive offices)		(Zip Code)

Telephone: +61 3 9213 9000
(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 þ No o

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


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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 156,976,936 shares of Common Stock, $0.0001 par value, outstanding as of October 27, 2008.

PART I

Item 1 Financial Statements

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)


	September 30,			December 31,
	2008			2007
	US$			US$
ASSETS

Current assets:
Cash	$	25,989,653		$	36,990,423
Short-term investments (held-to-maturity)		—			2,753,679
Inventory — raw materials		1,171,675			429,016
Accrued income		94,596			70,361
Receivables		1,302,447			485,902
Financial instruments		84,975			—
Other current assets		3,629,358			796,782

Total current assets		32,272,704			41,526,163

Property, plant and equipment		18,955,612			15,828,321
Less accumulated depreciation		(2,537,731	)		(1,386,070	)

Property, plant and equipment — net		16,417,881			14,442,251
Spare parts		—			23,907

Total assets	$	48,690,585		$	55,992,321


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	271,929		$	786,296
Income taxes payable		—			15,869
Accrued expenses		453,756			808,210
Other liability		182,215			—
Employee entitlements provision		361,223			236,070

Total current liabilities		1,269,123			1,846,445

Non-current liabilities:
Asset retirement obligations		1,332,187			1,381,372
Employee entitlements provision		138,163			89,239
Other liability		1,607,850			—

Total non-current liabilities		3,078,200			1,470,611

Total liabilities		4,347,323			3,317,056


Stockholders’ equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; issued and outstanding nil in 2008 (2007: nil)
Common stock, $0.0001 par value. Authorized 300,000,000 shares; issued and outstanding 156,976,936 shares in 2008 (2007: 156,958,812)		15,698			15,696
Additional paid-in capital		59,554,553			58,920,901
Accumulated deficit		(14,439,806	)		(9,759,926	)
Accumulated other comprehensive income		(787,183	)		3,498,594

Total stockholders’ equity		44,343,262			52,675,265

Total liabilities and stockholders’ equity	$	48,690,585		$	55,992,321

See notes to consolidated condensed financial statements which are an integral part of these statements

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)


	Period from
	inception to			Three Months Ended						Nine Months Ended September
	September 30,			September 30,						30,
	2008			2008			2007			2008			2007
	US$			US$			US$			US$			US$
Revenue
Revenue from products	$	—		$	—		$	—		$	—		$	—
Revenue from services		2,861,626			1,682,983			—			2,861,626			—

Total revenue from ordinary activities		2,861,626			1,682,983			—			2,861,626			—
Costs of revenues
Cost of goods sold		—			—			—			—			—
Cost of services		(2,861,626	)		(1,682,983	)		—			(2,861,626	)		—

Gross profit		—			—			—			—			—
Operating expenses:
Research and development (1 and 2)		17,828,605			819,714			1,523,030			4,565,533			3,998,043
General and administrative (3)		10,874,375			1,140,108			666,754			3,784,431			2,376,790

Total operating expenses		28,702,980			1,959,822			2,189,784			8,349,964			6,374,833

Research and development income		9,402,807			250,000			249,996			750,000			749,988
Loss from operations		(19,300,173	)		(1,709,822	)		(1,939,788	)		(7,599,964	)		(5,624,845	)
Other income/(expense):
Interest income		3,863,528			565,249			215,284			1,929,043			822,281
Interest expense		(9,022	)		—			—			(9,022	)		—
Other		1,000,000			—			—			1,000,000			—

Total other income/(expense):		4,854,506			565,249			215,284			2,920,021			822,281
Net loss before tax		(14,445,667	)		(1,144,573	)		(1,724,504	)		(4,679,943	)		(4,802,564	)
Income tax benefit/(expense)		5,861			—			—			63			—

Net loss	$	(14,439,806	)	$	(1,144,573	)	$	(1,724,504	)	$	(4,679,880	)	$	(4,802,564	)


Basic and diluted net loss per share	$	(0.21	)	$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.04	)


Number of shares used to compute per share data		67,433,642			156,976,936			128,191,651			156,958,812			128,113,543


Notes:
1 Net of research grant income in these amounts		1,911,603			—			202,654			275,061			525,873
2 Includes non-cash compensation expense (research and development)		835,482			135,171			100,987			443,892			137,103
3 Includes non-cash compensation expense (general & administrative)		630,669			59,722			38,011			199,878			112,074

See notes to consolidated condensed financial statements which are an integral part of these statements

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)


	Period from
	inception to			Nine Months Ended
	September 30,			September 30,
	2008			2008			2007
	US$			US$			US$
Cash flows from operating activities provided by/(used in):
Net loss		(14,439,806	)		(4,679,880	)		(4,802,564	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and impairment of plant & equipment		2,905,137			1,420,159			290,256
Share based payments expense		1,466,151			643,770			249,177
Loss on fixed assets disposal		97,715			—			—
Translation (gain)/loss		250,049			—			(375,938	)
Change in assets and liabilities:
Inventory — Raw materials		(1,687,984	)		(1,258,968	)		—
Receivables		(1,264,099	)		(778,197	)		—
Prepaid expenses and other current assets		(922,823	)		(123,513	)		(170,220	)
Grants receivable		(117,583	)		(47,221	)		(177,916	)
Income tax payable		(973	)		(16,842	)		—
Employee entitlements		660,176			214,614			146,680
Accounts payable and accrued expenses		282,055			(685,428	)		(165,942	)

Net cash provided by/(used in) operating activities		(12,771,985	)		(5,311,506	)		(5,006,467	)

Cash flows from investing activities:
Proceeds from sale of investment securities		168,914			2,922,593			—
Installment payments to acquire plant and equipment		(2,957,408	)		(2,957,408	)		—
Purchases of property, plant and equipment		(14,927,541	)		(3,197,803	)		(6,044,022	)

Net cash provided by/(used in) investing activities		(17,716,035	)		(3,232,618	)		(6,044,022	)

Cash flows from financing activities:
Gross proceeds from share issue		60,347,421			—			—
Transaction costs on share issue		(3,402,288	)		(14,800	)		—
Proceeds from stock options exercised		158,996			4,713			62,455

Net cash provided by/(used in) financing activities		57,104,129			(10,087	)		62,455

Net increase in cash and cash equivalents		26,616,109			(8,554,211	)		(10,988,034	)
Cash and cash equivalent at beginning of period		—			36,990,423			23,885,198
Effect of exchange rate fluctuations on the balances of cash held in foreign currencies		(626,456	)		(2,446,559	)		1,917,683

Cash and cash equivalents at end of period		25,989,653			25,989,653			14,814,847

See notes to consolidated condensed financial statements which are an integral part of these statements

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Unaudited)


									Additional						Other			Total
	Preference Shares				Ordinary shares				Paid-in			Accumulated			Comprehensive			stockholders’
	Shares		Amount		Shares		Amount		Capital			deficit			income			equity
			US$				US$		US$			US$			US$			US$
Balances at December 31, 2007						156,958,812		15,696		58,920,901			(9,759,926	)		3,498,594			52,675,265

Transaction costs on shares issued in 2007		—		—				—		(14,829	)		—			—			(14,829	)

Comprehensive Income

Net loss		—		—		—		—		—			(4,679,880	)		—			(4,679,880	)

Gains on derivatives and hedges		—		—		—		—		—			—			84,975			84,975

Foreign currency translation reserve		—		—		—		—		—			—			(4,370,752	)		(4,370,752	)


Total Comprehensive Income																			(8,965,657	)

Exercise of stock options issued to employees		—		—		18,124		2		4,711			—			—			4,713

Stock option expense		—		—		—		—		643,770			—			—			643,770

Balances at September 30, 2008		—		—		156,976,936		15,698		59,554,553			(14,439,806	)		(787,183	)		44,343,262

See notes to consolidated condensed financial statements which are an integral part of these statements

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Basis of Presentation and Summary of Significant Accounting Policies

Organization of the Company

Universal Biosensors, Inc. (the “Company”) was incorporated on September 14, 2001 in the United States, and its wholly owned subsidiary and operating vehicle, Universal Biosensors Pty Ltd, was incorporated in Australia on September 21, 2001. Collectively, the Company and its wholly owned subsidiary Universal Biosensors Pty Ltd are referred to as “Universal Biosensors” or the “Group”. The Company’s shares of common stock in the form of CHESS Depositary Interests (“CDIs”) were quoted on the Australian Securities Exchange (“ASX”) on December 13, 2006 following the initial public offering in Australia of the Company’s shares of common stock. Our securities are not currently traded on any other public market.

The Company is a specialist medical diagnostics company focused on the development, manufacture and commercialization of a range of in vitro diagnostic tests for point-of-care use. In vitro diagnostic testing involves the testing of a body fluid or tissue sample outside the body. The Company’s diagnostic tests comprise a novel disposable test strip and a reusable meter and are small, portable and easy-to-use.

Universal Biosensors has rights to an extensive patent portfolio comprising certain patent applications owned by our wholly owned Australian subsidiary, Universal Biosensors Pty Ltd, and a large number of patents and patent applications licensed to us by LifeScan, Inc. (“LifeScan”), an affiliate of Johnson & Johnson Corporation.

The Group has a range of point-of-care blood tests in development including an immunoassay point-of-care test to measure the amount of C-reactive protein in the blood which may be used to assist in the diagnosis and management of inflammatory conditions and a prothrombin time test which may be used for monitoring the therapeutic range of the anticoagulant, warfarin. The Group has developed a working prototypes of the immunoassay C-reactive protein test and the prothrombin time test. The Group has also started work on a second point-of-care dry immunoassay to measure the amount of D-Dimer in the blood. D- Dimer is a well established marker currently being used as point-of-care test for the detection and monitoring of several conditions associated with thrombotic disease, particularly deep venous thrombosis (clots in the leg) and pulmonary embolism (clots in the lung). Universal Biosensors also intends to develop additional immunoassay based point-of-care test devices by taking selected disease biomarkers currently measured in the central laboratory environment and creating tests using those biomarkers for the point-of-care setting using our novel platform of electrochemical cell technologies. Universal Biosensors proposes to focus on the development of products which do not rely on the discovery of new medicines, treatments or biomarkers, but instead proposes to focus on areas where existing therapies or practice can be enhanced significantly by simple and accurate diagnostic tools incorporating well known biomarkers.

On October 29, 2007, Universal Biosensors entered into a Master Services and Supply Agreement with LifeScan which contains the terms pursuant to which Universal Biosensors Pty Ltd will provide certain services in the field of blood glucose monitoring to LifeScan and will act as a non exclusive manufacturer of blood glucose test strips for LifeScan (“Master Services and Supply Agreement”). The Master Services and Supply Agreement contemplates that Universal Biosensors will manufacture the blood glucose test strips in its Rowville facility on a non exclusive basis, should the blood glucose product receive clearance from Food and Drug Administration and other regulatory agencies to sell and should the blood glucose product be launched by LifeScan. LifeScan is solely responsible for registration strategy and commercial efforts with regard to the blood glucose sensor. Additionally, the Group will continue to provide research and development services to LifeScan in the area of diabetes management to extend and develop the glucose sensor technology owned by LifeScan under a development and research agreement (“Development and Research Agreement”).

All business operations and research and development activities are undertaken in Melbourne, Australia by the Company’s wholly owned subsidiary, Universal Biosensors Pty Ltd, under the Master Services and Supply Agreement and a research and development sub-contract and sub-license agreement between Universal Biosensors Pty Ltd and the Company.

The Group is considered a development stage enterprise as its planned commercial manufacturing operations have not yet commenced.

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Interim Financial Statements

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, refer to the financial statements and footnotes thereto as of and for the year ended December 31, 2007, included in the Form 10-K of Universal Biosensors, Inc.

The year-end condensed balance sheet data as at December 31, 2007 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

Basis of Presentation

These financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All amounts are expressed in United States dollars unless otherwise stated.

The Company’s financial statements have been prepared assuming the Company will continue as a going concern. Other than a small profit in the Company’s first year of operations, the Company has sustained operating losses since inception. The Company expects to continue to incur losses as it continues the development of its point-of-care tests and expands the organization and commercial manufacturing capability until the Company is able to generate sufficient revenues under the Master Services and Supply Agreement and/ or from the sale of any of its own products.

Principles of Consolidation

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary Universal Biosensors Pty Ltd. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of property, plant and equipment, deferred income taxes, asset retirement obligations and obligations related to employee benefits. Actual results could differ from those estimates.

Cash & Cash Equivalents

The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. For cash and cash equivalents, the carrying amount approximates fair value due to the short maturity of those instruments.

Short-Term Investments (Held-to-maturity)

Short-term investments constitute all highly liquid investments with term to maturity from three months to twelve months. The carrying amount of short-term investments is equivalent to its fair value.

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Concentration of Credit Risk and Other Risks and Uncertainties

Cash and cash equivalents consists of financial instruments that potentially subject the Company to concentration of credit risk to the extent of the amount recorded on the balance sheet. The Company’s cash and cash equivalents are invested with two of Australia’s four largest banks. The Company is exposed to credit risk in the event of default by the banks holding the cash or cash equivalents to the extent of the amount recorded on the balance sheets. The Company has not experienced any losses on its deposits of cash and cash equivalents.

The blood glucose test being developed with LifeScan and the Company’s own product candidates require approvals or clearances from regulatory authorities including the U.S. Food and Drug Administration or other international regulatory agencies prior to commercialized sales. There can be no assurance that the blood glucose test or the Company’s own product candidates will receive any of the required approvals or clearances. If any such approval or clearances were denied or delayed, it may have a material adverse impact on the Company.

Derivative Instruments and Hedging Activities

Derivative financial instruments

The Company uses derivative financial instruments to hedge its exposure to foreign exchange arising from operating, investing and financing activities. The Company does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments.

Derivative financial instruments are recognized initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognized immediately in the income statement. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged.

Cash flow hedges

Exposure to foreign exchange risks arises in the normal course of the Company’s business and it is the Company’s policy to use forward exchange contracts to hedge anticipated sales and purchases in foreign currencies. The amount of forward cover taken is in accordance with approved policy and internal forecasts.

Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognized asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognized directly in equity. When the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial asset or liability. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, then the associated gains and losses that were recognized directly in equity are reclassified into the income statement in the same period or periods during which the asset acquired or liability assumed affects the income statement.

For cash flow hedges, other than those covered by the preceding statement, the associated cumulative gain or loss is removed from equity and recognized in the income statement in the same period or periods during which the hedged forecast transaction affects the income statement and on the same line item as that hedged forecast transaction. The ineffective part of any gain or loss is recognized immediately in the income statement.

When a hedging instrument expires or is sold, terminated or exercised, or the Company revokes designation of the hedge relationship but the hedged forecast transaction still is expected to occur, the cumulative gain or loss at that point remains in equity and is recognized in accordance with the above policy when the transaction occurs. If the hedged

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

transaction is no longer expected to take place, then the cumulative unrealized gain or loss recognized in equity is recognized immediately in the income statement.

Inventory

Raw materials are stated at the lower of cost and net realizable value. Costs of purchased inventory are determined after deducting rebates and discounts.

Receivables

Receivables are recognized initially at fair value and subsequently measured at amortized cost, less provision for doubtful debts. Receivables are generally due for settlement no more than 45 days from the receipt of the invoice by the customer.

Collectibility of receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for doubtful receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The amount of the provision is recognized in the income statement.

Property, Plant and Equipment

Property, plant and equipment are recorded at acquisition cost, less accumulated depreciation.

Depreciation on plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful life of machinery and equipment is 4 to 10 years. Leasehold improvements are amortized on the straight-line method over the shorter of the remaining lease term or estimated useful life of the asset. Maintenance and repairs are charged to operations as incurred and include minor corrections and normal services and does not include items of capital nature.


	September			December
	30, 2008			31, 2007
	$			$
Plant and equipment		12,552,501			3,349,905
Leasehold improvements		6,403,111			5,548,792
Capital work in process		—			6,929,624

		18,955,612			15,828,321
Accumulated depreciation		(2,537,731	)		(1,386,070	)

Property, plant & equipment, net		16,417,881			14,442,251

Capital work in process relates to assets under construction and comprises primarily of specialized manufacturing equipment. Legal right to the assets under construction rests with the Company. The amounts capitalized for capital work in process represents the percentage of expenditure that has been completed, and once the assets are placed into service the Company begins depreciating the respective assets. The accumulated amortization of capitalized leasehold improvements for the fiscal year ended December 31, 2007 and for the nine month period ended September 30, 2008 was $264,668 and $943,440, respectively.

The Company receives Victorian government grant monies under a grant agreement to support the establishment of a medical diagnostic manufacturing facility in Victoria through the purchase of plant and equipment. Plant and equipment is presented net of the government grant of $132,240 and $103,948 for the year ended December 31, 2007 and for the nine month period ended September 30, 2008, respectively. The grant monies are recognized against the acquisition costs of the

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

related plant and equipment as and when the related assets are purchased. Grant monies received in advance of the relevant expenditure are treated as deferred income and included in “Current Liabilities” on the balance sheet as the Company does not control the monies until the relevant expenditure has been incurred. Grants due to the Company under the grant agreement are recorded as “Currents Assets” on the balance sheet.

Depreciation expense was $2,905,137 for the period from inception to September 30, 2008 and $595,067 and $132,651 for the three months ended September 30, 2008 and 2007, respectively and $1,420,159 and $290,256 for the nine months ended September 30, 2008 and 2007, respectively.

The movement in accumulated depreciation is agreed to depreciation expense as follows:


	Nine month ended		Year ended
	September 30, 2008		December 31, 2007
	$		$
Movement in accumulated depreciation		1,151,661		351,325
Written down value of fixed assets disposed/written off		—		391,542
Difference in exchange rates		268,498		(148,340	)

Depreciation expense		1,420,159		594,527

The Company receives certain manufacturing equipment from LifeScan at their expense. Legal title of these assets remains with LifeScan. LifeScan has no substantial continuing involvement in the assets while the Company retains all the risks and benefits associated with the assets. In exchange for the assets, the Company has incurred a liability of commensurate value and is represented as “Other Liability” in the balance sheets. The non-monetary assets relinquished are measured at the fair value of the exchanged assets. For the nine month period ended September 30, 2008, the non-monetary assets and the liability were recorded at $2,038,401 at the time of the initial exchange. No gains or losses have been recognized on the exchange.

Research and Development

Research and development expenses consists of costs incurred to further the Group’s research and development activities and include salaries and related employee benefits, costs associated with clinical trial and preclinical development, regulatory activities, research-related overhead expenses, costs associated with the manufacture of clinical trial material, costs associated with developing a commercial manufacturing process, costs for consultants and related contract research, facility costs and depreciation. Research and development costs are expensed as incurred.

The Group receives Australian Commonwealth government grant funding under an R&D Start Grant Agreement as compensation for expenses incurred in respect of certain research activities into dry chemistry immunosensors. Such grants reduce the related research and development expenses as and when the relevant research expenses are incurred. Grants received in advance of incurring the relevant expenditure are treated as deferred research grants and included in current liabilities on the balance sheet as the Group has not earned these amounts until the relevant expenditure has been incurred. Grants due to the Group under research agreements are included in current assets on the balance sheet.

Research and development expenses for the period from inception to September 30, 2008 and for the three months ended September 30, 2008 and 2007 and for the nine months ended September 30, 2008 and 2007 are as follows:

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)


	Period
	from
	inception
	to
	September		Three Months Ended				Nine Months Ended
	30,		September 30,				September 30,
	2008		2008		2007		2008		2007
	$		$		$		$		$
Research and development expenses		19,740,208		819,714		1,725,684		4,840,594		4,523,916
Research grants received recognized against related research and development expenses		1,911,603		—		202,654		275,061		525,873

Research and development expenses as reported		17,828,605		819,714		1,523,030		4,565,533		3,998,043

Income Taxes

The Company applies Statement of Financial Accounting Standards No. 109 — Accounting for Income Taxes (“SFAS 109”) which establishes financial accounting and reporting standards for the effects of income taxes that result from a company’s activities during the current and preceding years. 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 carry forwards. 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.

Where it is more likely than not that some portion or all of the deferred tax assets will not be realized the deferred tax assets are reduced by a valuation allowance. The valuation allowance is sufficient to reduce the deferred tax assets to the amount that is more likely than not to be realized.

The Company adopted FASB Interpretation FIN No. 48, “Accounting for Uncertainty in Income Taxes” effective January 1, 2007 which has not had a material impact on the Company’s consolidated financial statements. The Company classifies interest expense and penalties related to unrecognized tax benefits as income tax expense.

We are subject to income taxes in the United States and Australia. U.S. federal income tax returns through the 2007 financial year have been filed. Internationally, consolidated income tax returns through the 2007 financial year have been filed.

Asset Retirement Obligations

Asset retirement obligations (“ARO”) are legal obligations associated with the retirement and removal of long-lived assets. SFAS No. 143 “Accounting for Asset Retirement Obligations” requires entities to record the fair value of a liability for an asset retirement obligation when it is incurred. When the liability is initially recorded, the Company capitalizes the cost by increasing the carrying amounts of the related property, plant and equipment. Over time, the liability increases for the change in its present value, while the capitalized cost depreciates over the useful life of the asset. The Company derecognizes ARO liabilities when the related obligations are settled.

The ARO is in relation to our premises wherein in accordance with the terms of the lease, the lessee has to restore part of the building upon vacating the premises.

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Our overall ARO changed as follows:


	Nine month ended			Year ended
	September 30, 2008			December 31, 2007
	$			$
Opening balance		1,381,372			—
New obligations		—			1,344,925
Accretion expense		90,497			34,682
Foreign currency translation		(139,682	)		1,765

Ending balance		1,332,187			1,381,372

Fair Value of Financial Instruments

The carrying value of all current assets and current liabilities approximates fair value because of their short-term nature. The estimated fair value of all other amounts has been determined by using available market information and appropriate valuation methodologies.

Impairment of Long-Lived Assets

The Company reviews its capital assets, including patents and licenses, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. In performing the review, the Company estimates undiscounted cash flows from products under development that are covered by these patents and licenses. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount of the asset. Impairment, if any, is measured as the amount by which the carrying amount of the assets exceeds its fair value. Impairment, if any, is assessed using discounted cash flows.

Australian Goods and Services Tax (GST)

Revenues, expenses and assets are recognized net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognized as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. Cash flows are presented on a gross basis.

Revenue Recognition

Revenue from services

We provide certain services to LifeScan. We recognize revenue from these services (production development for scale up of our blood glucose sensor strips) as we perform the services.

Research and development revenue

The Company receives research and development revenue under a Development and Research Agreement with LifeScan. The Development and Research Agreement provides details of the amount to be charged to LifeScan each year for the provision of research and development services. For fiscal 2008, LifeScan is paying the Company approximately $250,000 per quarter under the Development and Research Agreement. The revenue derived from the Development and

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Research Agreement is recognized over the period in which the agreed upon research services are completed. Under the Development and Research Agreement, we are not matching the revenue to a specific expenditure but to a specified period of research. The annual research and development revenue received from LifeScan is agreed with LifeScan from time to time and is subject to the Company continuing its research and development activities in the blood glucose area, the provision of quarterly reports and other obligations under the Development and Research Agreement. We have satisfied and continue to satisfy the requirements of the Development and Research Agreement.

This Development and Research Agreement has been in place since soon after the Company’s inception. There are no claw backs or repayment obligations relating to any funds received under the Development and Research Agreement.

Fee Income

Under the terms of the Master Services and Supply Agreement, in January 2008 the Company received an initial non-refundable fee of $1,000,000 in consideration for the grant of certain rights to LifeScan. The Company recorded the fee income as revenue upon receipt. This revenue is recorded under the caption “Other income” in the consolidated statements of operations as it is not indicative of the core operating activities or revenue producing goals of the Company.

Interest revenue

Interest revenue is recognized as it accrues, taking into account the effective yield on the financial asset.

Foreign Currency

Functional and reporting currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The functional currency of the Company and Universal Biosensors Pty Ltd is Australian dollars for all years presented.

The consolidated financial statements are presented using a reporting currency of U.S. dollars. As a consequence of presenting the financial statements in other than the functional currency, movements in the A$/US$ exchange rates from period to period give rise to differences on translation that are presented as translation adjustments in other comprehensive income. To the extent that differences arise from translating cash balances and cash transactions, they are recognized separately in the statement of cash flows. These adjustments only arise due to the presentation process and do not reflect translation gains or losses recorded in the underlying functional currency financial statements.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the Statement of Operations.

The Company has recorded foreign currency transaction gains/(losses) of $299,926 for the period from inception to September 30, 2008, and $189,254 and ($141,674) for the nine month period ended September 30, 2008 and 2007, respectively.

Group companies

The results and financial position of all the Group entities that have a functional currency different from the reporting currency are translated into the reporting currency as follows:

•

assets and liabilities for each balance sheet item reported are translated at the closing rate at the date of that balance sheet;

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

	•		income and expenses for each income statement are translated at average exchange rates (unless this is not a reasonable approximation of the effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and

	•		all resulting exchange differences are recognized as a separate component of equity.

On consolidation, exchange differences arising from the translation of any net investment in foreign entities are taken to the Foreign Currency Translation Reserve (“FCTR”).

Commitments and Contingencies

Liabilities for loss contingencies, arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

Patent and License Costs

Legal fees incurred for patent application costs have been charged to expense and reported in research and development expense.

Clinical Trial Expenses

Clinical trial costs are a component of research and development expenses. These expenses include fees paid to participating hospitals and other service providers, which conduct certain product development activities on behalf of the Company. Depending on the timing of payments to the service providers and the level of service provided, the Company records prepaid or accrued expenses relating to these costs.

These prepaid or accrued expenses are based on estimates of the work performed under service agreements.

Leased Assets

All of the Group’s leases are considered operating leases. The costs of operating leases are charged to the statement of operations on a straight-line basis over the lease term.

Stock-based Compensation

Prior to January 1, 2006, the Company applied Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations, in accounting for its fixed-plan stock options. For periods prior to January 1, 2006, the Company complied with the disclosure only provisions of FASB Statement No.123, “Accounting for Stock-Based Compensation”, or SFAS 123. No stock-based employee compensation cost was reflected in net income, as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant (or within permitted discounted prices as it pertains to the ESPP). Results for periods before January 1, 2006 have not been restated to reflect, and do not include the impact of, FASB Statement No. 123(R), “Share Based Payment”, or SFAS 123(R).

As of January 1, 2006, the Company adopted SFAS 123(R), using the modified prospective method, which requires measurement of compensation expense of all stock-based awards at fair value on the date of grant and amortization of the fair value over the vesting period of the award. The Company has elected to use the straight-line method of amortization. Under the modified prospective method, the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the original provisions of SFAS No. 123 shall be recognized in net income in the periods after adoption. The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with valuation techniques previously

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

utilized for options in footnote disclosures required under SFAS No. 123, as amended by SFAS No. 148 “Accounting for Stock-Based Compensation Transition and Disclosure”.

Such value is recognized as an expense over the service period, net of estimated forfeitures, using the straight-line method under SFAS 123(R). There were no transitional adjustments on adoption of SFAS 123 (R).

The total share-based compensation expense recorded by the Company for the period from inception to September 30, 2008 and for the three months ended September 30, 2008 and 2007 and for the nine months ended September 30, 2008 and 2007 is allocated among the following expense categories:



	Period from
	inception to		Three Months Ended				Nine Months Ended
	September 30,		September 30,				September 30,
	2008		2008		2007		2008		2007
	$		$		$		$		$
Research and development		835,482		135,171		100,987		443,892		137,103
General and administrative		630,669		59,722		38,011		199,878		112,074

Total share-based compensation expense		1,466,151		194,893		138,998		643,770		249,177

The above charges had no impact on the Company’s cash flows.

The assumptions for the option grants computed using the Black-Scholes option pricing model for options issued subsequent to January 1, 2007 were:


	Grant Date
	August 2008			March 2008			October 2007			September 2007			March 2007
Exercise Price	$	0.61		$	0.82		$	1.04		$	1.02		$	0.95
Share Price at Grant Date	$	0.62		$	0.84		$	1.10		$	1.04		$	0.98
Volatility		71	%		76	%		76	%		72	%		74	%
Expected Life	10 years			10 years			10 years			10 years			10 years
Risk Free Interest Rate		5.85	%		5.87	%		6.13	%		5.99	%		5.86	%
Fair Value of Option	$	0.40		$	0.55		$	0.72		$	0.66		$	0.64

A summary of activity in the Employee Option Plan for the nine-month period ended September 30, 2008 is as follows:


	Number of
	Options Over			Weighted -Average
	Shares			Exercise Price
Outstanding Balance, December 31, 2007		4,946,395		$	0.55
Granted		1,553,000			0.77
Exercised		(18,124	)		0.26
Lapsed		(107,987	)		1.03

Outstanding Balance, September 30, 2008		6,373,284			0.55


Exercisable shares as of September 30, 2008		3,247,547			0.35

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

As of September 30, 2008, there was $715,226 of unrecognized compensation expense related to unvested share-based compensation arrangements under the Option Plan. This expense is expected to be recognized as follows:


Fiscal Year
2008 - remaining periods	$	201,650
2009		387,931
2010		118,284
2011		7,361

		715,226

Pension Costs

As required by Australian law, Universal Biosensors Pty Ltd contributes to standard defined contribution superannuation funds on behalf of all employees at nine percent of each such employee’s salary. Superannuation is a compulsory savings program whereby employers are required to pay a portion of an employee’s remuneration to an approved superannuation fund that the employee is typically not able to access until they are retired. The Company permits employees to choose an approved and registered superannuation fund into which the contributions are paid. Contributions are charged to the statement of operations as they become payable.

Net Loss per Share and Anti-dilutive Securities

Basic and diluted net loss per share is presented in conformity with Statement of Financial Accounting Standards No. 128 — Earnings Per Share (“SFAS 128”). Basic and diluted net loss per share has been computed using the weighted-average number of common shares outstanding during the period. All periods present in these financial statements have been retroactively adjusted to give effect to the stock split in December 2006. The potentially dilutive options issued under the Universal Biosensors Employee Option Plan were not considered in the computation of diluted net loss per share because they would be anti-dilutive given the Group’s loss making position in this and previous years.

Total Comprehensive Income

The Company follows SFAS No. 130, “Reporting Comprehensive Income (Loss)” (“SFAS 130”). Comprehensive income is defined as the total change in shareholders’ equity during the period other than from transactions with shareholders, and for the Company, includes net income and cumulative translation adjustments.

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities using different measurement techniques. SFAS 159 requires additional disclosures related to the fair value measurements included in the entity’s financial statements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company adopted SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” effective January 1, 2008 which has not had a material impact on the Company’s consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”) and expands disclosure related to

UNIVERSAL BIOSENSORS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

the use of fair value measures in financial statements. SFAS 157 does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in GAAP. The Standard emphasizes that fair value is a market-based measurement and not an entity-specific measurement based on an exchange transaction in which the entity sells an asset or transfers a liability (exit price). SFAS 157 establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entity’s own fair value assumptions as the lowest level. The Company adopted SFAS 157 effective January 1, 2008 which has not had a material impact on the Company’s consolidated financial statements.

Subsequent Events

There has not arisen in the interval between the end of the third quarter and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect significantly the operations of the Company, the results of those operations, or the state of affairs of the Company in future financial years.

UNIVERSAL BIOSENSORS, INC.

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

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations and financial condition. You should read this analysis in conjunction with our audited consolidated financial statements and related footnotes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K filed with the United States Securities and Exchange Commission (“SEC”). This Form 10-Q contains, including this discussion and analysis, certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by such acts. For this purpose, any statements that are not statements of historical fact may be deemed to be forward looking statements, including statements relating to future events and our future financial performance. Those statements in this Form 10-Q containing the words “believes”, “anticipates”, “plans”, “expects”, and similar expressions constitute forward looking statements, although not all forward looking statements contain such identifying words.

The forward looking statements contained in this Form 10-Q are based on our current expectations, assumptions, estimates and projections about the Company and its businesses. All such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from those results expressed or implied by these forward-looking statements, including those set forth in this Quarterly Report.

Overview

We are a specialist medical diagnostics company focused on the development, manufacture and commercialization of in vitro diagnostic test devices for point-of-care use. In vitro diagnostic testing involves the testing outside of the body of a body fluid (e.g. blood or saliva) or tissue sample (biopsies or swabs). The diagnostic blood test devices we are developing comprise a novel disposable test strip and a reusable meter. The devices are designed to be used near to or at the site of the patient (at the “point-of-care”) to provide accurate and quick results to enable treatment to be immediately reviewed. We have rights to an extensive patent portfolio comprising of certain patent applications owned by our wholly owned Australian subsidiary, Universal Biosensors Pty Ltd, and a large number of patents and patent applications licensed to us by LifeScan, an affiliate of Johnson & Johnson.

We are developing an immunoassay point-of-care test to measure the amount of C-reactive protein in the blood. A C-reactive protein test may be used to assist in the diagnosis and management of inflammatory conditions. We are also developing a prothrombin time test for monitoring the therapeutic range of the anticoagulant, warfarin and have also started work on a second point-of-care dry immunoassay to measure the amount of D-Dimer in the blood. D- Dimer is a well established marker currently being used as a point-of-care test for the detection and monitoring of several potentially life threatening conditions associated with thrombotic disease, particularly deep venous thrombosis (clots in the leg) and pulmonary embolism (clots in the lung). We also intend to leverage our intellectual property platform to develop additional immunoassay based point-of-care test devices by taking proven disease biomarkers currently used in the central laboratory environment and adapting those diagnostic tests to the point-of-care setting.

In October 2007, we entered into a Master Services and Supply Agreement which contains the terms pursuant to which Universal Biosensors Pty Ltd will provide certain services in the field of blood glucose monitoring to LifeScan and under which Universal Biosensors Pty Ltd will act as a non exclusive manufacturer of blood glucose test strips for LifeScan. Additionally, we will continue to provide contract research and development services to LifeScan in the in the field of blood glucose monitoring pursuant to a Development & Research Agreement. With the exception of the first year of our operations when we made a small profit of $110,670, we have incurred net losses since our inception. Our accumulated losses from inception to September 30, 2008 are $14,439,806. We expect to continue to incur losses as we continue the development of our point-of-care tests and expand our organization and commercial manufacturing capability until we are able to generate sufficient revenues under the Master Services and Supply Agreement and/ or from the sale of any of our own products. LifeScan will have control over the commercialization of the blood glucose test strips (which are not currently approved for marketing and sale), including sole discretion to decide where and how to market and sell the test strips.

Pursuant to the terms of the Master Services and Supply Agreement, Universal Biosensors Pty Ltd will provide a range of services to LifeScan, including continued development activities with respect to the initial test strips and services in support of the regulatory approval of the blood glucose monitoring product and the manufacture of the initial blood glucose

UNIVERSAL BIOSENSORS, INC.

tests strips. In January 2008, LifeScan paid Universal Biosensors Pty Ltd a one-time initial fee of $1,000,000 in connection with the services, and will pay Universal Biosensors Pty Ltd a total of up to three milestone amounts upon the achievement of regulatory approval of the initial blood glucose monitoring product in three specified jurisdictions. In addition, Universal Biosensors Pty Ltd will receive a quarterly service fee which will be calculated with reference to the number of relevant strips sold by LifeScan irrespective of who manufactures such strips. The service fee is capable of being paid out as a lump sum fee in certain circumstances.

After an initial costing phase, LifeScan will pay Universal Biosensors Pty Ltd an annually agreed transfer price per test strip manufactured and supplied by Universal Biosensors Pty Ltd, with such transfer price not to exceed a maximum amount specified in the Master Services and Supply Agreement.

Results of Operations

Gross Profit on Services Performed

Under the terms of our arrangement with LifeScan, we will provide certain services relating to the development and scale up of the production of our blood glucose sensor strip. Production scale up includes activities such as producing strips and testing strips. Under this arrangement, no margin was earned as the costs of providing the services were equal to the revenue recognized.

Amounts billed to LifeScan have been recorded under the caption “Revenue from services” in the consolidated statements of operations.

Research and Development Expenses

Our operating expenses to date have substantially been for research and development activities. Research and development expenses consist of costs associated with research activities, as well as costs associated with our product development efforts, including pilot manufacturing costs. All research and development costs, including those funded by an Australian research and development grant program, are expensed as incurred. Research and development expenses include:

	•		consultant and employee related expenses, which include salary and benefits;

	•		materials and consumables acquired for the research and development activities;

	•		external research and development expenses incurred under agreements with third party organizations and universities; and

	•		facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment and laboratory and other supplies.

			Research and development expenses for the respective periods are as follows:


	Period
	from
	inception
	to
	September		Three Months Ended				Nine Months Ended
	30,		September 30,				September 30,
	2008		2008		2007		2008		2007
	$		$		$		$		$
Research and development expenses		19,740,208		819,714		1,725,684		4,840,594		4,523,916
Research grants received recognized against related research and development expenses		1,911,603		—		202,654		275,061		525,873

Research and development expenses as reported		17,828,605		819,714		1,523,030		4,565,533		3,998,043

UNIVERSAL BIOSENSORS, INC.

These expenses are related to developing our electrochemical cell platform technologies and producing and testing strips. Research and development expenditure attributable to services performed on behalf of LifeScan have been recorded separately under the caption “Cost of services” in the consolidated condensed statements of operations (refer section on “Gross Profit on Services Performed”). Our aggregate expenses (cost of services and operating expenses) have increased significantly during the three and nine months ended September 30, 2008 compared to the same period last year. These expenses are expected to continue to increase significantly throughout the balance of 2008 as we expand our research and development programs; expand our organization; and work on our commercial manufacturing capability for the first glucose sensor strip. We currently have three non glucose development programs, including two programs to develop immunoassay based tests (one immunoassay test being a test for C-reactive protein and the other being a test for D-Dimer) and a prothrombin time test. While the C-reactive protein, D-Dimer and the prothrombin time test still have a high degree of technical development risk, if the research and development efforts progress as anticipated, we expect to be in a position to commence the formal validation phase in 2009 for C-reactive protein and prothrombin time test and 2010 for D-Dimer, a process requiring approximately one year, following which, we will commence the process of seeking regulatory clearance for the tests.

We have not reported our internal historical research and development costs or our personnel and personnel-related costs on a project-by-project basis. Our programs share a substantial amount of our common fixed costs such as facilities, depreciation, utilities and maintenance. Accordingly, we do not track our research and development costs by individual research and development program.

In addition, we expect research and development expenditures to grow as we advance our development programs and explore other commercial opportunities our technology platform can be applied to. We cannot predict what it will cost to complete our research and development programs or when or if they will be completed and commercialized. The timing and cost of any program is dependent upon achieving technical objectives, which are inherently uncertain. In addition, our business strategy contemplates that if appropriate we may enter into collaborative arrangements with third parties for one or more of our programs. In the event that third parties assume responsibility for certain research or development activities, the estimated completion dates of those activities will be under the control of the third party rather than with us. We cannot forecast with any certainty, which programs if any, will be subject to future collaborative arrangements, in whole, or in part, and how such arrangements would affect our research and development plans or capital requirements.

As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development programs or when and to what extent we will receive cash inflows from the commercialization and sale of products. Our inability to complete our research and development programs in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our strategy. Our inability to raise additional capital on terms reasonably acceptable to us would jeopardize the future success of our business.

General and Administrative Expenses

General and administrative expenses increased by 71% and 59% during the three and nine months ended September 30, 2008 compared to the same period last year. General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, accounting, information technology and human resources functions. Other general and administrative expenses include facility costs not otherwise included in research and development expenses, insurance expense, consultancy fees and professional fees for legal and accounting services. This increase in expenses reflects growth in the size and complexity of our operations, as well as the incremental costs of having our shares in the form of CDIs quoted on the ASX and compliance costs associated with being a United States domestic filer. We expect that our general and administrative expenses will increase as we expand our legal and accounting staff, add infrastructure and incur additional costs related to operating as a company whose shares in the form of CDIs are quoted on the ASX, including directors’ and officers’ insurance, investor relations programs, increased director fees and increased professional fees.

Research and Development Income

Our research and development income for the three and nine months ended September 30, 2008 and 2007 was $250,000, $750,000, $249,996 and $749,988 respectively, recognized pursuant to the Development and Research Agreement with LifeScan.

UNIVERSAL BIOSENSORS, INC.

Fee Income

The Company received an initial non-refundable fee of $1,000,000 in January 2008 in consideration for the grant of certain rights to LifeScan pursuant to the Master Services and Supply Agreement. This revenue is recorded under the caption “Other income” in the consolidated statements of operations.

Interest Income

Interest income increased by 163% and 135% during the three and nine months ended September 30, 2008, respectively, compared to the same periods last year. The increase in interest income is attributable to the greater level of funds invested during the year and increased returns on the funds invested.

Interest Expense

In the second quarter of 2008, interest was charged on the Company’s income taxes due for the 2002 financial year. The 2002 income tax returns were filed in 2007. All income taxes due have now been paid.

Income Tax Benefit

Income tax benefit during the 2008 year relates to the reversal of over-provision for income tax.

Liquidity and Capital Resources

Since inception, our operations have mainly been financed through the issuance of equity securities. Additional funding has come through payments received from LifeScan under the Development and Research Agreement, revenue from services, an initial one time payment under the Master Services and Supply Agreement and research grants and interest on investments. Through to September 30, 2008, we had received aggregate net cash proceeds from the following: (a) $28,130,694 from the renounceable rights issue; (b) $29,983,522 from the issuance of equity securities other than those issued under the renounceable rights offer; (c) $9,402,807 from LifeScan under our Development and Research Agreement; (d) $2,861,626 from LifeScan as revenue from services performed; (e) $2,238,650 as contributions from government and state grants; (f) $1,000,000 from LifeScan as an initial fee under our Master Services and Supply Agreement and (g) $3,863,528 from interest on investments. As of September 30, 2008, we had $25,989,653 in cash, cash equivalents and short-term investments. Our cash and investment balances are held in money market accounts and short-term instruments. Cash in excess of immediate requirements is invested in short-term instruments with regard to liquidity and capital preservation.

For the nine months ended September 30, 2008, we used net cash of $5,311,506 for operating activities. This consisted of a net loss for the period of $4,679,880, which included $1,420,159 of non-cash depreciation and amortization and non-cash stock option expense of $643,770. Net cash used in investing activities during the nine months ended September 30, 2008 was $3,232,618, which included additional fit out of our new facilities and purchase of plant and equipment of $3,197,803, transfer of term investments with initial maturity between four to six months to term investments having a maturity of less than three months and deposits towards manufacturing equipment. The term investments had a face value of $2,922,593. We also made deposits towards manufacturing equipment of $2,957,408. These deposits have not been treated as “Property, plant and equipment” in the balance sheet but as “Other current assets” as title has not yet passed to us. Net cash used in financing activities during the nine months ended September 30, 2008 was $10,087.

As at September 30, 2008, we had cash and cash equivalents of $25,989,653 as compared to $14,814,847 as of September 30, 2007. This increase was primarily due to the net cash proceeds of $28,130,694 raised from the renounceable rights issue we undertook which closed in December 2007. This increase was partially offset by the funds required for our ongoing operations including capital expenditure outlay.

In October 2007, we entered into a Master Services and Supply Agreement with LifeScan. In January 2008 we received an initial one time payment of $1,000,000. The receipt and timing of any further revenue under the Master Services and Supply Agreement is uncertain.

UNIVERSAL BIOSENSORS, INC.

Since May 2008, we have also been receiving payments from LifeScan for services related to production development and scale up. Payments received for services performed to date are $1,766,559. These services are for a short duration of time and any extension of the services to be performed by us is at the discretion of LifeScan.

Choice and timing of market entry(ies) for the initial blood glucose test covered by the Master Services and Supply Agreement are at LifeScan’s discretion. If at any time LifeScan indicates that it will not proceed with commercialization of the initial blood glucose test covered by the Master Services and Supply Agreement, or if the product does not obtain regulatory approval, we will use the installed manufacturing equipment for the immunoassay and prothrombin time tests we are developing, contingent on those tests reaching the point of manufacture. To reach that point, development efforts will need to continue to be successful. If development efforts continue to be successful, we expect to be in a position to commence formal validation of the C-reactive protein test, D-Dimer test and the prothrombin time test in 2009, following which, we will seek regulatory clearance for these tests. As appropriate, we will likely seek partners to assist in the development, sales and distribution of these tests. We also intend to develop additional immunoassay based point-of-care test devices by taking selected disease biomarkers currently measured in the central laboratory environment and creating tests using those biomarkers for the point-of-care setting using our novel platform of electrochemical cell technologies.

The total cost of the projects which we are undertaking is subject to a range of factors. As a result, we consider that at this stage of our development we are unable to provide investors with reliable details in relation to the potential cost of our project to us. We believe that our cash, cash equivalents and short-term marketable securities balances, and the interest we earn on these balances, will allow the Group to perform under the Master Services and Supply Agreement and to progress the Group’s other development programs. In the event we do not receive the milestone payments as described under the Master Services and Supply Agreement and we are not able to generate revenue for the manufacturing and supply of the blood glucose test in 2008, we believe that our current cash and cash equivalents will be sufficient to fund our ongoing operations until the end of 2009. In order to achieve our objectives, we will likely require additional funding. The amount and timing of these future funding requirements is uncertain. To meet these financing requirements, we may raise funds through public or private equity offerings, debt financings, and through other means, including collaborations and license agreements or other means determined by the Directors at that time.

We note our forecasted ability to maintain our financial resources to support our operations for this period is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue one or more of our planned research, development and commercialization activities.

Operating Capital and Capital Expenditure Requirements

The sale of additional equity securities, if undertaken, may result in dilution to our stockholders. If we raise additional funds in the future through the issuance of debt securities or preferred stock, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. Any such required additional capital may not be available on reasonable terms, if at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could materially harm our business.

As a result of the numerous risks and uncertainties associated with our business strategy, we are unable to estimate the exact amounts of our capital and working capital requirements. We have expended approximately $3,197,803 on capital expenditures for the nine months ended September 30, 2008. We estimate our total capital expenditures in 2008 to be in the range of $6,500,000 to $8,000,000 for the purchase of equipment to support our activities, such as mobilization to meet our obligations under the Master Services and Supply Agreement, capacity expansion, final product validation activities, for ongoing development of our existing products, and for other ongoing research and development activities. We have also funded the majority of the fit out cost of our new facilities at Corporate Avenue from our existing cash. Our capital expenditure in connection with the fit out in 2008 is likely to total approximately $1,500,000. Our future funding requirements will depend on many factors, including, but not limited to:

•

expenses we incur in manufacturing, developing, marketing and selling products;

UNIVERSAL BIOSENSORS, INC.

	•		any need to scale our manufacturing operations to meet demand for blood glucose strips under the Master Services and Supply Agreement, or for our point-of-care tests, including additional costs related to the fit out of our manufacturing facility in Melbourne, Australia and the acquisition of additional manufacturing equipment;

	•		changes to our operations to enable us to perform services required under the Master Services and Supply Agreement;

	•		the timing and amount of receipts of revenue from LifeScan under the Master Services and Supply Agreement through: (i) milestone payments upon the achievement of regulatory milestones; (ii) services fees calculated with reference to blood glucoses tests strips sold by LifeScan; and (iii) income from the manufacture of blood glucose tests strips by Universal Biosensors for LifeScan is sufficient to offset our costs in total or in part;

	•		the success of our research and development efforts, and whether or not additional funds are required to support these;

	•		the rate of progress and cost of our product development activities;

	•		the timing and amount of revenue generated by sales of our point-of-care tests;

	•		costs and timing of regulatory approvals;

	•		costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

	•		the terms and timing of any collaborative, licensing and other arrangements that we may establish; and

	•		the acquisition of businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

Off-Balance Sheet Arrangement

The future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of September 30, 2008 are:


Less than 1 year	$	399,896
1 – 3 years		841,645
3 – 5 years		898,790
More than 5 years		233,981

Total minimum lease payments	$	2,374,312

The above relates to our operating lease obligations in relation to the lease of our premises.

UNIVERSAL BIOSENSORS, INC.

Contractual Obligations

Our future contractual obligations primarily for future rental payment obligations on the current office and manufacturing space, including financing costs, at September 30, 2008 were as follows:


	Payments Due By Period
			Less than 1						More than 5
	Total		year		1 – 3 years		3 – 5 years		years
Long-Term Debt Obligations		—		—		—		—		—
Capital Lease Obligations (1)		1,332,187		—		—		—		1,332,187
Operating Lease Obligations (2)		2,374,312		399,896		841,645		898,790		233,981
Purchase Obligations		—		—		—		—		—
Other Long-Term Liabilities on Balance Sheet under GAAP (3)		138,163		—		—		—		138,163
Total		3,844,662		399,896		841,645		898,790		1,704,331


(1)		Represents legal obligations associated with the retirement and removal of long-lived assets.

(2)		Our operating lease obligations relate primarily to the lease of our premises.

(3)		Represents long service leave owing to the employees

Segments

We operate in one segment. Our principal activities are the research, development, manufacture and commercialization of in vitro diagnostic test devices for point-of-care use. We operate predominantly in one geographical area, Australia.

UNIVERSAL BIOSENSORS, INC.

Item 3 Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Market Risk

We transact business in various foreign currencies, including U.S. dollars and Euros. We have established a foreign currency hedging program using forward contracts to hedge the net projected exposure for each currency and the anticipated sales and purchases in U.S. dollars and Euros. The goal of this hedging program is to economically guarantee or lock-in the exchange rates on our foreign exchange exposures. The Company does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments.

As at balance date, there were no anticipated transactions and related derivatives which extended beyond the current financial year.

Interest Rate Risk

Our exposure to interest income sensitivity, which is affected by changes in the general level of Australian interest rates, particularly because the majority of our investments are in Australian dollars in cash and cash equivalents. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. Our investment portfolio is subject to interest rate risk and will fall in value in the event market interest rates increase. Due to the short duration of our investment portfolio, we believe an immediate 10% change in interest rates would not be material to our financial condition or results of operations.

UNIVERSAL BIOSENSORS, INC.

Item 4 Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the required time periods and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. The effectiveness of any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing, and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate improper conduct completely. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. As a result, there can be no assurance that our disclosure controls and procedures will detect all errors or fraud.

We carried out an evaluation, under the supervision and with the participation of our management including our Chief Executive Officer, and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of September 30, 2008. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures as of September 30, 2008 were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Controls

There were no changes in these controls or procedures identified in connection with the evaluation of such controls or procedures that occurred during the last fiscal quarter, on in other factors that have materially affected or are reasonably likely to materially affect these controls or procedures.


	Page
PART I FINANCIAL INFORMATION

Item 1 Financial Statements

1) Consolidated condensed balance sheets at September 30, 2008 and December 31, 2007 (unaudited)		3

2) Consolidated condensed statements of operations for the three months and nine months ended September 30, 2008 and 2007 (unaudited)		4

3) Consolidated condensed statements of cash flows for the nine months ended September 30, 2008 and 2007 (unaudited)		5

4) Consolidated condensed statements of changes in stockholder’s equity and comprehensive income for the period ended September 30, 2008 (unaudited)		6

5) Notes to consolidated condensed financial statements (unaudited)		7

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3 Quantitative and Qualitative Disclosures About Market Risk		26

Item 4 Controls and Procedures		27

PART II OTHER INFORMATION

Item 1 Legal Proceedings		Not Applicable

Item 1A Risk Factors		Not Applicable

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		Not Applicable

Item 3 Defaults Upon Senior Securities		Not Applicable

Item 4 Submission of Matters to a Vote of Security Holders		Not Applicable

Item 5 Other Information		Not Applicable

Item 6 Exhibits		28

Exhibit 31.1
Exhibit 31.2
Exhibit 32.0

SIGNATURES		29


Exhibit No	Description	Location
31.1	Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)	Filed herewith

31.2	Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)	Filed herewith

32.0*	Section 1350 Certificate	Filed herewith


		UNIVERSAL BIOSENSORS, INC.
		(Registrant)

Date: October 27, 2008	By:	/s/ MARK MORRISSON Mark Morrisson
		Chief Executive Officer and Executive Director

Date: October 27, 2008	By:	/s/ SALESH BALAK Salesh Balak
		Chief Financial Officer


Exhibit No	Description	Location
31.1	Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)	Filed herewith

31.2	Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)	Filed herewith

32.0	Section 1350 Certificate	Filed herewith

1.		I have reviewed this report on Form 10-Q of Universal Biosensors, Inc.;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:


*		This exhibit is furnished rather than filed, and shall not be incorporated by reference into any filing of the registrant in accordance with Item 601 of Registration S-K

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Not applicable

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


/s/ Mark Morrisson
Mark Morrisson
Chief Executive Officer and Executive Director
Universal Biosensors, Inc.

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Not applicable;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


/s/ Salesh Balak
Salesh Balak
Chief Financial Officer
Universal Biosensors, Inc.

	(1)		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. The undersigned have executed this Certificate as of the 27th day of October 2008.

			The undersigned have executed this Certificate as of the27th day of October 2008.