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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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Form 10-Q



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QUARTERLY REPORT UNDER SECTION 13 OR
15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the Quarterly Period Ended March 31, 2004



Commission File No. 000-19495



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Embrex, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|North Carolina                                                 |  | 56-1469825                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                               | 
|1040 Swabia Court, Durham, NC                                  |  | 27703                            
|(Address of principal executive offices)                       |  | (Zip Code)                       



Registrants
telephone no. including area code: (919) 941-5185



---



Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 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 ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of
1934).    Yes  x    No ̈



The number of shares of Common Stock, $0.01 par value, outstanding as of April 28, 2004 was
7,993,200.



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##### Table of Contents

EMBREX, INC.



INDEX



|                                                                                              |  |         
|--------------------------------------------------------------------------------------------- |  | --------
|                                                                                              |  | Page    
|Part I    
Financial Information:                                                             |  |         
|                                                                                              | 
|Item 1:
Consolidated Financial Statements                                                     |  |         
|                                                                                              | 
|Consolidated Balance Sheets                                                                   |  | 3 of 21 
|                                                                                              | 
|Consolidated Statements of Operations                                                         |  | 4 of 21 
|                                                                                              | 
|Consolidated Statements of Cash Flows                                                         |  | 5 of 21 
|                                                                                              | 
|Notes to Consolidated Financial Statements                                                    |  | 6 of 21 
|                                                                                              | 
|Item 2:
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10 of 21
|                                                                                              | 
|Item 3:
Quantitative and Qualitative Disclosures About Market Risk                            |  | 17 of 21
|                                                                                              | 
|Item 4:
Controls and Procedures                                                               |  | 17 of 21
|                                                                                              | 
|Part II     
Other Information:                                                               |  |         
|                                                                                              | 
|Item 1:
Legal Proceedings                                                                     |  | 18 of 21
|                                                                                              | 
|Item 2:
Changes in Securities                                                                 |  | 18 of 21
|                                                                                              | 
|Item 3:
Defaults Upon Senior Securities                                                       |  | 18 of 21
|                                                                                              | 
|Item 4:
Submission of Matters to a Vote of Security Holders                                   |  | 18 of 21
|                                                                                              | 
|Item 5:
Other Information                                                                     |  | 18 of 21
|                                                                                              | 
|Item 6:
Exhibits and Reports on Form 8-K                                                      |  | 19 of 21
|                                                                                              | 
|Signatures                                                                                    |  | 20 of 21
|                                                                                              | 
|Exhibit Index                                                                                 |  | 21 of 21



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##### Table of Contents

PART I - FINANCIAL INFORMATION



Item 1 - Consolidated Financial Statements



Embrex, Inc.



Consolidated Balance Sheets

(Dollars in thousands)



|                                                                                                                                                                                                         |  |                            |         |   |                   |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                                         |  | March 31, 2004 (unaudited) |         |   | December 31, 2003 |  
|ASSETS                                                                                                                                                                                                   |  |                            |         |   |                   |   |         |  
|Current Assets                                                                                                                                                                                           |  |                            |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                                                |  | $                          | 9,454   |   |                   | $ | 9,629   |  
|Restricted cash                                                                                                                                                                                          |  |                            | 307     |   |                   |   | 373     |  
|Accounts receivable  trade, net                                                                                                                                                                         |  |                            | 7,532   |   |                   |   | 7,776   |  
|Inventories:                                                                                                                                                                                             |  |                            |         |   |                   |   |         |  
|Materials and supplies                                                                                                                                                                                   |  |                            | 1,908   |   |                   |   | 1,928   |  
|Product                                                                                                                                                                                                  |  |                            | 1,317   |   |                   |   | 1,406   |  
|Current deferred tax asset                                                                                                                                                                               |  |                            | 468     |   |                   |   | 468     |  
|Other current assets                                                                                                                                                                                     |  |                            | 1,221   |   |                   |   | 1,787   |  
|                                                                                                                                                                                                         |  |                            |         |   |                   |   |         |  
|Total Current Assets                                                                                                                                                                                     |  |                            | 22,207  |   |                   |   | 23,367  |  
|                                                                                                                                                                                                         |  |                           
|Land                                                                                                                                                                                                     |  |                            | 147     |   |                   |   | 147     |  
|                                                                                                                                                                                                         |  |                           
|Devices under construction                                                                                                                                                                               |  |                            | 2,478   |   |                   |   | 3,062   |  
|                                                                                                                                                                                                         |  |                           
|Devices                                                                                                                                                                                                  |  |                            | 41,627  |   |                   |   | 39,756  |  
|Less accumulated depreciation                                                                                                                                                                            |  |                            | (30,726 | ) |                   |   | (29,920 | )
|                                                                                                                                                                                                         |  |                            |         |   |                   |   |         |  
|                                                                                                                                                                                                         |  |                            | 10,901  |   |                   |   | 9,836   |  
|                                                                                                                                                                                                         |  |                           
|Equipment, Furniture and Fixtures                                                                                                                                                                        |  |                            | 26,932  |   |                   |   | 26,205  |  
|Less accumulated depreciation and amortization                                                                                                                                                           |  |                            | (8,272  | ) |                   |   | (7,803  | )
|                                                                                                                                                                                                         |  |                            |         |   |                   |   |         |  
|                                                                                                                                                                                                         |  |                            | 18,660  |   |                   |   | 18,402  |  
|Other Assets:                                                                                                                                                                                            |  |                            |         |   |                   |   |         |  
|Intangible assets (net of accumulated amortization of $447 in 2004 and $410 in 2003)                                                                                                                     |  |                            | 2,902   |   |                   |   | 2,746   |  
|Long-term deferred tax asset                                                                                                                                                                             |  |                            | 1,995   |   |                   |   | 2,155   |  
|Other long-term assets                                                                                                                                                                                   |  |                            | 9       |   |                   |   | 2       |  
|                                                                                                                                                                                                         |  |                            |         |   |                   |   |         |  
|Total Other Assets                                                                                                                                                                                       |  |                            | 4,906   |   |                   |   | 4,903   |  
|                                                                                                                                                                                                         |  |                            |         |   |                   |   |         |  
|Total Assets                                                                                                                                                                                             |  | $                          | 59,299  |   |                   | $ | 59,717  |  
|                                                                                                                                                                                                         |  |                            |         |   |                   |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                     |  |                            |         |   |                   |   |         |  
|Current Liabilities                                                                                                                                                                                      |  |                            |         |   |                   |   |         |  
|Accounts payable                                                                                                                                                                                         |  | $                          | 601     |   |                   | $ | 1,105   |  
|Accrued expenses                                                                                                                                                                                         |  |                            | 3,854   |   |                   |   | 4,507   |  
|Deferred revenue                                                                                                                                                                                         |  |                            | 594     |   |                   |   | 586     |  
|Product warranty accrual                                                                                                                                                                                 |  |                            | 293     |   |                   |   | 288     |  
|Notes payable  current portion                                                                                                                                                                          |  |                            | 80      |   |                   |   | 1,128   |  
|Current portion of capital lease obligations                                                                                                                                                             |  |                            | 5       |   |                   |   | 7       |  
|                                                                                                                                                                                                         |  |                            |         |   |                   |   |         |  
|Total Current Liabilities                                                                                                                                                                                |  |                            | 5,427   |   |                   |   | 7,621   |  
|Notes Payable, less current portion                                                                                                                                                                      |  |                            | 8,012   |   |                   |   | 6,350   |  
|Capital Lease Obligations, less current portion                                                                                                                                                          |  |                            | 9       |   |                   |   | 9       |  
|Long-term debt, less current portion                                                                                                                                                                     |  |                            | 43      |   |                   |   | 45      |  
|                                                                                                                                                                                                         |  |                            |         |   |                   |   |         |  
|                                                                                                                                                                                                         |  |                            |         |   |                   |   |         |  
|                                                                                                                                                                                                         |  |                            |         |   |                   |   |         |  
|                                                                                                                                                                                                         |  |                           
|Shareholders Equity                                                                                                                                                                                     |  |                            |         |   |                   |   |         |  
|Common Stock, $0.01 par value per share:                                                                                                                                                                 |  |                            |         |   |                   |   |         |  
|Authorized - 30,000,000 shares; Issued and outstanding - 7,997,722 net of 1,488,516 treasury shares and 8,152,974 net of 1,389,116 treasury
shares at March 31, 2004 and December 31, 2003, respectively |  |                            | 94      |   |                   |   | 94      |  
|Additional paid-in capital                                                                                                                                                                               |  |                            | 64,250  |   |                   |   | 63,572  |  
|Accumulated other comprehensive loss                                                                                                                                                                     |  |                            | (227    | ) |                   |   | (322    | )
|Deferred compensation                                                                                                                                                                                    |  |                            | (924    | ) |                   |   | (369    | )
|Retained earnings (accumulated deficit)                                                                                                                                                                  |  |                            | 161     |   |                   |   | (948    | )
|Treasury stock                                                                                                                                                                                           |  |                            | (17,546 | ) |                   |   | (16,335 | )
|                                                                                                                                                                                                         |  |                            |         |   |                   |   |         |  
|Total Shareholders Equity                                                                                                                                                                               |  |                            | 45,808  |   |                   |   | 45,692  |  
|                                                                                                                                                                                                         |  |                            |         |   |                   |   |         |  
|Total Liabilities and Shareholders Equity                                                                                                                                                               |  | $                          | 59,299  |   |                   | $ | 59,717  |  
|                                                                                                                                                                                                         |  |                            |         |   |                   |   |         |  



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Embrex, Inc.



Consolidated Statements of
Operations

(Unaudited)

(In thousands, except
per share amounts)



|                                                |  |                             |        |   |      |   |       
|----------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------
|                                                |  | Three Months Ended March 31
|                                                |  | 2004                        |        |   | 2003
|Revenues                                        |  |                             |        |   |      |   |       
|Device revenues                                 |  | $                           | 11,501 |   |      | $ | 10,111
|Product sales                                   |  |                             | 292    |   |      |   | 653   
|Other revenue                                   |  |                             | 163    |   |      |   | 134   
|                                                |  |                             |        |   |      |   |       
|Total Revenues                                  |  |                             | 11,956 |   |      |   | 10,898
|Cost of Device Revenues and Product Sales       |  |                             | 4,836  |   |      |   | 4,153 
|                                                |  |                             |        |   |      |   |       
|Gross Profit                                    |  |                             | 7,120  |   |      |   | 6,745 
|                                                |  |                            
|Operating Expenses                              |  |                             |        |   |      |   |       
|General and administrative                      |  |                             | 2,552  |   |      |   | 2,082 
|Sales and marketing                             |  |                             | 645    |   |      |   | 777   
|Research and development                        |  |                             | 2,199  |   |      |   | 2,303 
|                                                |  |                             |        |   |      |   |       
|Total Operating Expenses                        |  |                             | 5,396  |   |      |   | 5,162 
|                                                |  |                            
|Operating Income                                |  |                             | 1,724  |   |      |   | 1,583 
|                                                |  |                            
|Other Income / (Expense)                        |  |                             |        |   |      |   |       
|Interest income                                 |  |                             | 21     |   |      |   | 57    
|Interest expense                                |  |                             | (12    | ) |      |   | 4     
|Foreign currency gain                           |  |                             | 23     |   |      |   | 45    
|                                                |  |                             |        |   |      |   |       
|Total Other Income                              |  |                             | 32     |   |      |   | 106   
|                                                |  |                             |        |   |      |   |       
|Income Before Tax Expense                       |  |                             | 1,756  |   |      |   | 1,689 
|Income Tax Expense                              |  |                             | 647    |   |      |   | 414   
|                                                |  |                             |        |   |      |   |       
|Net Income                                      |  | $                           | 1,109  |   |      | $ | 1,275 
|                                                |  |                             |        |   |      |   |       
|Net Income per share of Common Stock:           |  |                             |        |   |      |   |       
|Basic                                           |  | $                           | 0.14   |   |      | $ | 0.16  
|Diluted                                         |  | $                           | 0.13   |   |      | $ | 0.15  
|Number of Shares Used in Per Share Calculation: |  |                             |        |   |      |   |       
|Basic                                           |  |                             | 8,034  |   |      |   | 8,154 
|Diluted                                         |  |                             | 8,346  |   |      |   | 8,383 



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Embrex, Inc.



Consolidated Statements of Cash
Flows

(Unaudited)

(In thousands)



|                                                                                  |  |                             |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                  |  | Three Months Ended March 31 |       
|                                                                                  |  | 2004                        |        |   | 2003 |  
|Operating Activities                                                              |  |                             |        |   |      |   |        |  
|                                                                                  |  |                            
|Net income                                                                        |  | $                           | 1,109  |   |      | $ | 1,275  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |        |   |      |   |        |  
|Depreciation and amortization                                                     |  |                             | 1,397  |   |      |   | 1,271  |  
|Loss on sale of fixed assets                                                      |  |                             | 1      |   |      |   | 7      |  
|Change in restricted cash                                                         |  |                             | 66     |   |      |   | -0-    |  
|Change in deferred tax asset                                                      |  |                             | 160    |   |      |   | 125    |  
|Changes in operating assets and liabilities:                                      |  |                             |        |   |      |   |        |  
|Accounts receivable, inventories and other current assets                         |  |                             | 919    |   |      |   | 1,150  |  
|Accounts payable, accrued expenses, deferred revenue and warranty accrual         |  |                             | (1,144 | ) |      |   | (1,643 | )
|                                                                                  |  |                             |        |   |      |   |        |  
|Net Cash Used In Operating Activities                                             |  |                             | 2,508  |   |      |   | 2,185  |  
|                                                                                  |  |                            
|Investing Activities                                                              |  |                             |        |   |      |   |        |  
|Land acquisition                                                                  |  |                             | -0-    |   |      |   | (18    | )
|Purchases of devices, equipment, furniture and fixtures                           |  |                             | (2,108 | ) |      |   | (2,686 | )
|Additions to patents and other non-current assets                                 |  |                             | (194   | ) |      |   | (437   | )
|                                                                                  |  |                             |        |   |      |   |        |  
|Net Cash Used In Investing Activities                                             |  |                             | (2,302 | ) |      |   | (3,141 | )
|                                                                                  |  |                            
|Financing Activities                                                              |  |                             |        |   |      |   |        |  
|Issuance of common stock                                                          |  |                             | 123    |   |      |   | 99     |  
|Payment of short-term debt                                                        |  |                             | (1,050 | ) |      |   | -0-    |  
|Issuance of long-term debt                                                        |  |                             | 1,662  |   |      |   | -0-    |  
|Repurchase of common stock                                                        |  |                             | (1,211 | ) |      |   | (401   | )
|                                                                                  |  |                             |        |   |      |   |        |  
|Net Cash Used In Financing Activities                                             |  |                             | (476   | ) |      |   | (302   | )
|                                                                                  |  |                             |        |   |      |   |        |  
|Decrease in cash and cash equivalents                                             |  |                             | (270   | ) |      |   | (1,258 | )
|Currency translation adjustments                                                  |  |                             | 95     |   |      |   | (31    | )
|Cash and cash equivalents at beginning of period                                  |  |                             | 9,629  |   |      |   | 8,039  |  
|                                                                                  |  |                             |        |   |      |   |        |  
|Cash And Cash Equivalents At End Of Period                                        |  | $                           | 9,454  |   |      | $ | 6,750  |  
|                                                                                  |  |                             |        |   |      |   |        |  



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EMBREX, INC.

FORM 10-Q

March 31, 2004



NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note
1 - Basis of Presentation



The accompanying unaudited consolidated financial
statements include the accounts of Embrex, Inc. and its wholly owned subsidiaries, Embrex Europe Limited, Embrex France s.a.s., Embrex Iberica, Embrex BioTech Trade (Shanghai) Co., Ltd., Inovoject do Brasil Ltda. and Embrex Poultry Health, LLC (the
Company) and have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
these consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of financial condition and results of operations have been included. Operating results for the three-month period ended March 31, 2004 are not necessarily indicative of the results that may be
attained for the entire year. For further information, refer to the consolidated financial statements and notes thereto included in the Companys Form 10-K for the year ended December 31, 2003.



Note 2 - Critical Accounting Policies



The preparation of these interim consolidated financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates including but not
limited to those related to:



| |  | Allowance for uncollectible accounts
| | - | ------------------------------------



| |  | Warranty accruals
| | - | -----------------



| |  | Inventory obsolescence
| | - | ----------------------



| |  | Deferred tax assets
| | - | -------------------



| |  | Self-insured employee health plan accrual
| | - | -----------------------------------------



The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which
form the basis of making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



The Company believes the following critical accounting policies are material to the
preparation of its consolidated financial statements.



Allowance for
Uncollectible Accounts



To date, the Company has not experienced any material
trade accounts receivable collection issues. However, based on a review of cumulative balances, industry experience and the current economic environment, the Company currently reserves from 2% to 4% of trade accounts receivable, depending on whether
the receivable is denominated in U.S. dollars or a foreign currency, as an allowance for uncollectible accounts. In addition, adjustments due to the financial stability of individual customers will affect the overall percentage reserved. The
consolidated balance reserved for uncollectible accounts as of March 31, 2004 was $0.4 million.



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Warranty Accruals



To date, the Company has not experienced nor does it expect to experience any material device or product warranty issues in excess of amounts reserved. Based on sales of
devices and products, the Company has established a reserve for future claims. The reserve is based on the estimated damages that a customer would experience if one of the Companys devices or biological products should fail to perform to
product specifications. The consolidated balance reserved for warranties as of March 31, 2004 was $0.3 million.



Inventory Obsolescence



To date, the Company has not experienced any material inventory obsolescence. However, based on a percentage of the current product and device parts inventory levels, the Company has established a reserve against
future device parts obsolescence due to technological improvements and limited shelf life of product inventories. The percentage used to calculate the reserve is based on a historical percentage rate adjusted for anticipated technological advances
on devices and shelf life of existing biological product inventories. The consolidated balance reserved for product and parts obsolescence as of March 31, 2004 was $0.3 million.



Deferred Tax Assets



The Company records deferred tax assets based upon amounts that are likely to be realized. Based on the Companys recent profitability and belief that 2004 will
result in an overall profit, the Company has recorded deferred tax assets of $2.5 million. In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax assets would increase income in the period such determination was made. However, in the event the Company was to determine that it would not be able to realize its net recorded deferred tax asset in the future, an
adjustment to the deferred tax asset would decrease income in the period such determination was made.



Self-Insured Employee Health Plan Accrual



The
Company has established a reserve related to Embrexs self-insured employee health plan. The amount of the reserve is based on managements estimate of future employee health claims. The reserve covers expected short-term claims and is
based on historical data adjusted for major events and anticipated changes in headcount or participation. The net balance reserved for the self-insured employee health plan as of March 31, 2004 was $0.4 million.



EFFECT OF INFLATION



Management expects cost of product sales and device revenues, operating expenses and capital equipment costs to change in line with periodic
inflationary changes in price levels. While management generally believes that the Company will be able to offset the effect of price level changes by adjusting selling/lease prices and improving operating efficiencies, any material unfavorable
changes in price levels could have a material adverse affect on its results of operations.



IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS



In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46), which requires a
new approach in determining if a reporting entity should consolidate certain legal entities, including partnerships, limited liability companies, or trusts, among others, collectively defined as variable interest entities, or VIEs. A legal
entity is considered a VIE if it does not have sufficient equity at risk to finance its



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own activities without relying on financial support from other parties. If the legal entity is a VIE, then the reporting
entity that is the primary beneficiary must consolidate it. Even if a reporting entity is not obligated to consolidate a VIE, then certain disclosures must be made about the VIE if the reporting entity has a significant variable interest. Certain
transition disclosures are required for all financial statements issued after January 31, 2003. The on-going disclosure and consolidation requirements are effective for all interim financial periods beginning after March 31, 2004. The Company
completed its evaluation and has not identified any VIEs. Therefore, the adoption of FIN 46 did not impact the Companys results of operations or financial position.



STOCK-BASED COMPENSATION



The Companys stock plans (the Plans) are designed to provide incentives to eligible employees, officers, and directors in the form of stock, incentive
stock options, and non-qualified stock options. The Company accounts for the Plans under the recognition and measurement principles of Accounting Principles Board Option No. 25, Accounting for Stock Issued to Employees (APB
25) and related Interpretations. No stock-based employee compensation cost is reflected in net income with respect to options granted under current plans, as all options granted under the Plans had an exercise price equal to the market value
of the underlying common stock on the date of grant. However, net income does reflect the cost of restricted stock awards granted. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123) (in thousands, except per share amounts):



The Company computes fair value for purposes of SFAS 123 using the Black-Scholes option pricing model. The weighted-average assumptions used
in this model to estimate fair value and resulting values are as follows:



|                                                                                                                                                       |  |                              |       |   |      |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ----- | - | ---- | - | ----- | -
|                                                                                                                                                       |  | Three Months Ended March 31, |      
|                                                                                                                                                       |  | 2004                         |       |   | 2003 |  
|Net income, as reported                                                                                                                                |  | $                            | 1,109 |   |      | $ | 1,275 |  
|Add: Non-cash stock-based compensation included in net income                                                                                          |  |                              | 34    |   |      |   | -0-   |  
|                                                                                                                                                       |  |                             
|Deduct: Total stock-based compensation expense for options granted determined under fair value based method for all awards, net of related tax
effects |  |                              | (350  | ) |      |   | (302  | )
|                                                                                                                                                       |  |                              |       |   |      |   |       |  
|Pro forma net income                                                                                                                                   |  | $                            | 793   |   |      | $ | 973   |  
|                                                                                                                                                       |  |                              |       |   |      |   |       |  
|Earnings per share:                                                                                                                                    |  |                              |       |   |      |   |       |  
|Basicas reported                                                                                                                                      |  | $                            | 0.14  |   |      | $ | 0.16  |  
|Basicpro forma                                                                                                                                        |  | $                            | 0.10  |   |      | $ | 0.12  |  
|                                                                                                                                                       |  |                             
|Dilutedas reported                                                                                                                                    |  | $                            | 0.13  |   |      | $ | 0.15  |  
|Dilutedpro forma                                                                                                                                      |  | $                            | 0.10  |   |      | $ | 0.12  |  



- 8 -



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Note 3 - Revenues



Device revenues include revenues derived from all or a combination of Embrex devices such as Inovoject®system fees, Inovoject®system sales, Egg Remover®fees, Egg Remover®sales, Vaccine Saver®fees and Vaccine Saver®sales. The item other revenue includes revenues derived from grants from federal agencies, miscellaneous but minor product sales and other miscellaneous sources.



Note 4 - Income Tax Expense



The effective tax rate for first quarter 2004 was 37% in comparison to the 25% effective tax
rate for first quarter 2003. The effective tax rate for first quarter 2004 increased over the same period of 2003 due to recognition of deferred tax assets in 2003. Profits in international operations subject to U.S. taxes are contributing to the
higher effective tax rate as well.



Note 5 - Net Income Per Share



Basic net income per share was determined by dividing net income available for common
shareholders by the weighted average number of common shares outstanding during each period presented. Diluted net income per share reflects the potential dilution that could occur assuming exercise of all in-the-money issued and unexercised stock
options.



The following table sets forth the computation of basic and diluted
net income per share (in thousands, except per share amounts):



|                                                                                                                |  |                              |       |      |   |      
|--------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                                                                                                                |  | Three Months Ended March 31,
|                                                                                                                |  | 2004                         |       | 2003
|Numerator:                                                                                                      |  |                              |       |      |   |      
|Net Income Available To Common Stockholders                                                                     |  | $                            | 1,109 |      | $ | 1,275
|Effect of dilutive securities:                                                                                  |  |                              |       |      |   |      
|                                                                                                                |  |                             
|Numerator for diluted earnings per share-income available to common stockholders after assumed option exercises |  | $                            | 1,109 |      | $ | 1,275
|                                                                                                                |  |                              |       |      |   |      
|Denominator:                                                                                                    |  |                              |       |      |   |      
|Denominator for basic net income per shareweighted-average                                                     |  |                              | 8,034 |      |   | 8,154
|                                                                                                                |  |                             
|Effect of Dilutive Securities:                                                                                  |  |                              |       |      |   |      
|Stock Options                                                                                                   |  |                              | 312   |      |   | 229  
|                                                                                                                |  |                              |       |      |   |      
|                                                                                                                |  |                             
|Denominator for diluted net income per shareadjusted weighted-average shares and assumed option exercises      |  |                              | 8,346 |      |   | 8,383
|                                                                                                                |  |                              |       |      |   |      
|Basic net income per share                                                                                      |  | $                            | 0.14  |      | $ | 0.16 
|                                                                                                                |  |                              |       |      |   |      
|Diluted net income per share                                                                                    |  | $                            | 0.13  |      | $ | 0.15 
|                                                                                                                |  |                              |       |      |   |      



Note 6 - Comprehensive Income



FASB Statement No. 130, Reporting Comprehensive Income
(SFAS 130) establishes standards for reporting and display of comprehensive income and its components in the financial statements. In accordance with SFAS 130, the Company has determined total comprehensive income, net of tax, to be



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$1.2 million for both the three months ended March 31, 2004 and 2003, respectively. Embrexs total comprehensive
income represents net income plus the after-tax effect of foreign currency translation adjustments for the periods presented as summarized below.



|                                 |  |                              |       |        |   |       |  
|-------------------------------- |  | ---------------------------- | ----- | ------ | - | ----- | -
|(In thousands) (*
Unaudited)     |  | Three Months Ended March 31, |      
|                                 |  | 2004 *                       |       | 2003 * |  
|Net Income                       |  | $                            | 1,109 |        | $ | 1,275 |  
|Currency Translation Adjustments |  |                              | 95    |        |   | (31   | )
|                                 |  |                              |       |        |   |       |  
|Comprehensive Income             |  | $                            | 1,204 |        | $ | 1,244 |  
|                                 |  |                              |       |        |   |       |  



Note 7 - Segments



The Company operates in a single segment. The table below presents the Companys
operations by geographic area:



|                             |  |                              |        |                   |   |       
|---------------------------- |  | ---------------------------- | ------ | ----------------- | - | ------
|(In thousands) (*
Unaudited) |  | Three Months Ended March 31,
|                             |  | 2004 *                       |        | 2003 *           
|Total Revenue:               |  |                              |        |                   |   |       
|United States                |  | $                            | 7,854  |                   | $ | 7,731 
|International                |  |                              | 4,102  |                   |   | 3,167 
|                             |  |                              |        |                   |   |       
|Total                        |  | $                            | 11,956 |                   | $ | 10,898
|                             |  |                              |        |                   |   |       
|                             |  |                             
|(In thousands) (*
Unaudited) |  |                              |        |                  
|                             |  | March 31, 2004 *             |        | December 31, 2003
|Total Assets:                |  |                              |        |                   |   |       
|United States                |  | $                            | 48,425 |                   | $ | 48,770
|International                |  |                              | 10,874 |                   |   | 10,947
|                             |  |                              |        |                   |   |       
|Total                        |  | $                            | 59,299 |                   | $ | 59,717
|                             |  |                              |        |                   |   |       



Note 8 - Debt



The Company obtained a $9.0 million construction/term loan from its bank, Branch Banking and
Trust Company (BB&T), in August 2003, to be used for construction and equipping of the Embrex Poultry Health biological manufacturing facility located in Scotland County, North Carolina. The interest rate of the loan is based on the
one-month LIBOR rate plus 1.65% with the option of entering into a swap agreement for a 10-year fixed interest rate effective 18 months after the closing date of the loan. The loan has a term of 138 months or 11.5 years with payments of interest
only for the first 18 months. Principal repayment on the loan begins at the end of the interest only period over the remaining term of the loan in equal monthly installments of principal plus interest. At March 31, 2004, $8.0 million of the
construction/term loan had been borrowed.



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



INTRODUCTION



Embrex is an international biotechnology company engaged in the development of innovative in ovo solutions that meet the needs of the global poultry industry. The Company derives most of its global



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revenues from fees for the number of eggs processed by its Inovoject® systems. Other revenue sources for the Company come from lease fees related its Egg
Remover® systems and Vaccine Saver® option installations. In addition to these sources, the
Company may sell each of these devices to distributors under special circumstances in selected countries and to human flu vaccine manufacturers. Revenues from these sources are categorized as device revenues in the Companys financial
statements. Another source of revenue for the Company is product sales, which currently consist of sales of an in ovo vaccine for infectious bursal disease. The Company also derives some revenues from grant sources and other minor products.
The Companys cost of revenues is primarily attributable to the costs of supporting the Companys devices at customer locations around the world. These costs include the labor, travel and parts necessary to ensure proper operation and
maintenance of Embrexs devices located at hatcheries of the Companys customers, as well as associated depreciation, sales and property tax expenses.



The following discussion and analysis should be read in conjunction with the Companys consolidated financial statements and related notes appearing elsewhere in
this report.



RESULTS OF OPERATIONS



Three Months Ended March 31, 2004 and 2003



CONSOLIDATED NET INCOME



(In Thousands Except Per Share Amounts)



|                             |  |                              |        |      |   |            |  |   |            |   |  |     |  
|---------------------------- |  | ---------------------------- | ------ | ---- | - | ---------- |  | - | ---------- | - |  | --- | -
|                             |  | Three Months Ended March 31, |       
|                             |  | 2004                         |        | 2003 |   | Change ($) |  |   | Change (%) |  
|Total Revenue                |  | $                            | 11,956 |      | $ | 10,898     |  | $ | 1,059      |   |  | 10  | %
|Operating Income             |  |                              | 1,725  |      |   | 1,583      |  |   | 142        |   |  | 9   | %
|Net Income                   |  | $                            | 1,109  |      | $ | 1,275      |  | $ | (165       | ) |  | -13 | %
|Earnings per share  basic   |  | $                            | 0.14   |      | $ | 0.16       |  | $ | (0.02      | ) |  | -12 | %
|Earnings per share  diluted |  | $                            | 0.13   |      | $ | 0.15       |  | $ | (0.02      | ) |  | -13 | %



Consolidated net income for the first
quarter of 2004 decreased to $1.1 million, 13% lower than 2003 net income of $1.3 million. Diluted earnings per share were $0.13 for first quarter 2004 and $0.15 for the same period in 2003. The decrease in first quarter 2004 net income compared to
2003 was primarily due to a higher effective tax rate following the recognition of a deferred tax asset in December 2003.



OUTSTANDING SHARES



|                                            |  |                              |  |       |  |            |   |  |            |  
|------------------------------------------- |  | ---------------------------- |  | ----- |  | ---------- | - |  | ---------- | -
|(In Thousands Except Per Share Amounts)     |  | Three Months Ended March 31, | 
|                                            |  | 2004                         |  | 2003  |  | Change ($) |   |  | Change (%) |  
|Basic Weighted Average Shares Outstanding   |  | 8,034                        |  | 8,154 |  | (120       | ) |  | -1.5       | %
|Diluted Weighted Average Shares Outstanding |  | 8,346                        |  | 8,383 |  | (37        | ) |  | -0.4       | %



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The weighted average shares outstanding decreased 120 thousand shares or approximately 1.5% from 2003 to 2004. The
decrease is primarily attributable to common stock repurchases by the Company during the fourth quarter of 2003 and first quarter of 2004.



The diluted weighted average shares outstanding decreased by 37 thousand shares, or less than 1%, in the first quarter of 2004 compared to the same period in 2003. This
decrease is primarily attributable to common stock repurchases by the Company in the last quarter of 2003 and the first quarter of 2004. The effect of repurchased shares on the diluted weighted average shares outstanding calculation was largely
offset by the effect of the Companys changing stock price. The average closing price of the Companys stock increased from $8.71 for the first quarter of 2003 to $11.96 for the same period of 2004. This increased the number of outstanding
stock options with exercise prices that were less than the market price of Embrexs stock (i.e., in-the-money stock options). Because only in-the-money stock options are counted in computing diluted weighted average shares
outstanding, the higher average closing price for the Companys common stock in 2004 as compared to 2003 resulted in more dilutive stock options being taken into account in 2004. Therefore, the impact of the Companys common stock
repurchases were generally offset by the impact of the increase in the number of in-the-money stock options considered in the diluted weighted average shares outstanding calculation.



CONSOLIDATED REVENUES

(In Thousands)



|                 |  |                              |        |      |   |            |  |   |            |   |  |     |  
|---------------- |  | ---------------------------- | ------ | ---- | - | ---------- |  | - | ---------- | - |  | --- | -
|                 |  | Three Months Ended March 31, |       
|                 |  | 2004                         |        | 2003 |   | Change ($) |  |   | Change (%) |  
|Device revenues  |  | $                            | 11,501 |      | $ | 10,111     |  | $ | 1,390      |   |  | 14  | %
|Product revenues |  |                              | 292    |      |   | 653        |  |   | (361       | ) |  | -55 | %
|Other revenues   |  |                              | 163    |      |   | 134        |  |   | 29         |   |  | 22  | %
|                 |  |                              |        |      |   |            |  |   |            |   |  |     |  
|Total revenues   |  | $                            | 11,956 |      | $ | 10,898     |  | $ | 1,058      |   |  | 10  | %
|                 |  |                              |        |      |   |            |  |   |            |   |  |     |  



Consolidated revenues for the first
quarter of 2004 totaled $12.0 million, representing an increase of 10% over revenues of $10.9 million for the same period in 2003.



The 2004 first quarter revenues include device lease fees derived from multi-year contracts and paid trials in the United States and foreign countries, and the sale of
Inovoject® and Egg Remover® systems to distributors and human flu vaccine
manufacturers. The sale of Inovoject® systems and
Egg Remover® systems to distributors and human flu
vaccine companies may cause variability in revenue and gross profit on an annual and quarterly basis. Embrex estimates that as of March 31, 2004, it was vaccinating in excess of 80% of the estimated nine billion broiler birds grown annually in the
United States and Canada. Given its market penetration, the Company expects only minor Inovoject® systems revenue and earnings growth in this market, most of which is anticipated to come from new Egg Remover® installations. In addition, disease outbreaks and the introduction of competitor machines could affect growth and/or
the maintenance of the Companys revenues.



Device revenues totaled $11.5
million for the first quarter of 2004 compared to $10.1 million for the same period in 2003, representing a 14% increase year over year. The increase in 2004 first quarter device revenues was attributable to a $0.7 million increase in revenue from
both device fees and device sales. The increase in device fees is primarily due to an increase in the Inovoject® system customer base, as well as new Egg Remover® installations. The device sales were generated from device sales to a human flu vaccine manufacturer, as well as the Companys distributor in Japan.



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Product revenues consist primarily of revenues from sales of Bursaplex®, the Companys proprietary vaccine for the treatment of avian infectious bursal
disease (IBD). Bursaplex® is a product which uses
the Companys AAC technology (antigen-antibody complex) to form an antibody-vaccine virus complex when combined with an infectious bursal disease (IBD) virus. Prior to 2004, Embrex referred to the AAC technology as virus neutralizing factor, or
VNF®. The Company believes AAC more accurately
describes the technology and plans to use that term going forward in lieu of VNF®. To date, regulatory approval for Bursaplex® has been received in 24 countries including the United States, and regulatory approval is temporary or pending in 10 additional countries.



Product revenues decreased 55% to $0.3 million in the 2004 first quarter as compared to $0.7 million for the same period in 2003. Overall
Bursaplex® sales decreased during the first quarter
of 2004 primarily due to the Companys Japanese distributors inventory buildup in 2002 and early 2003 and a weak market in Asia caused primarily by outbreaks of avian influenza throughout the region. The Company anticipates that
conditions in the Asian market for the remainder of 2004 will continue to be challenging since the current avian influenza outbreak may impact poultry production levels as consumption in, and exports from, the region are reduced. This may also
result in decreased injection activity. Embrex will continue to monitor developments and intends to take appropriate steps as necessary.



Other revenue, consisting mainly of miscellaneous revenues for minor products, refunds and miscellaneous grants, increased 22% or $29 thousand for first quarter 2004 from
the same period of 2003. The 2004 other revenues were primarily derived from Small Business Innovation Research funding for device development work and other miscellaneous grants. The 2003 other revenues were primarily derived from funding provided
by federal Advanced Technology Program funds supporting the Companys collaborative development project with Origen Therapeutics, Inc., which has since been discontinued by the Company as described in the Companys Form 10-K for the year
ended December 31, 2003, and Small Business Innovation Research funding for device development work.



Management anticipates only minor revenue and earnings growth from existing Inovoject® system operations in the United States and Canada, and modest revenue and earnings growth from new Inovoject® system leases in other countries and sales of Bursaplex® and Newplex products to poultry producers worldwide. However, the rate at which the marketplace
will accept the Inovoject® system technology
outside the United States and Canada, the degree of acceptance of our competitors machines within the United States and elsewhere, the timing of regulatory approvals of third-party vaccines for in ovo use outside the United States and
Canada, costs associated with market expansion, possible variability in United States hatchery bird production as a result of grain price fluctuations, and variability in the demand for, and pricing of, U.S. poultry and poultry products both inside
and outside the United States, will impact the pace of revenue growth, if any, and sustained profitability from the installation and operational throughputs of Inovoject® systems. In addition, avian disease outbreaks in markets where Embrex has device placements and sales also may affect
future revenues.



COST OF REVENUE



Cost of revenue was 40% of total revenues for first quarter 2004 as compared to 38% of total
revenues for the same period in 2003.



First-quarter gross margin decreased two
percentage points to 60% compared to first quarter 2003. This is primarily due to additional costs related to servicing the Companys devices as well as product mix, described in Consolidated Revenues above.



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OPERATING EXPENSES



|                         |  |                               |       |      |   |            |  |   |            |   |  |     |  
|------------------------ |  | ----------------------------- | ----- | ---- | - | ---------- |  | - | ---------- | - |  | --- | -
|                         |  | Three Months Ended, March 31, |      
|                         |  | 2004                          |       | 2003 |   | Change ($) |  |   | Change (%) |  
|General & Administrative |  | $                             | 2,552 |      | $ | 2,082      |  | $ | 470        |   |  | 23  | %
|Sales & Marketing        |  |                               | 645   |      |   | 777        |  |   | (132       | ) |  | -17 | %
|Research & Development   |  |                               | 2,199 |      |   | 2,303      |  |   | (104       | ) |  | -5  | %
|                         |  |                               |       |      |   |            |  |   |            |   |  |     |  
|Total Operating Expenses |  |                               | 5,396 |      |   | 5,162      |  |   | 234        |   |  | 5   | %
|                         |  |                               |       |      |   |            |  |   |            |   |  |     |  



Operating expenses totaled $5.4
million for the first quarter of 2004 compared to $5.2 million for the same period of 2003.



General and administrative (G&A) expenses were $2.6 million for the first quarter of 2004, up $0.5 million or 23% compared to the same period of 2003. The increase in G&A expenses from 2003 was
primarily due to increases in patent-related legal fees, accounting fees related primarily to internal controls for compliance with the Sarbanes-Oxley Act, and staff-related and software expenses in support of the business. Higher premiums due to
increased insurance coverage contributed to the increase as well.



First
quarter Sales & Marketing operating expenses decreased $0.1 million from $0.8 million in 2003 to $0.7 million in 2004. This decrease is mainly due to sales tax assessments that occurred in the first quarter of 2003 that did not recur in 2004.



Research & Development (R&D) expenses decreased $0.1
million from $2.3 million for the first quarter of 2003 to $2.2 million for the same period of 2004. The decrease is principally due to a change in the recording of patent-related legal fees from R&D to G&A and lower contract R&D
expenses. The Company continues to manage its research and development effort to leverage its know-how, patent position, market presence and expenditures.



The Companys overall research and development expenses reflect expenditures incurred in three distinct departments:



The first of these, R&D, is responsible for expenditures associated with the work on our
product portfolio and in particular the Newplex
vaccine and Inovocox, the in ovo
coccidiosis vaccine. Operating expenses for R&D in the first quarter of 2004 were $1.1 million, compared to 2003 expenses of $1.3 million. This decrease in R&D expenses is primarily due to legal fees related to patents that are now reflected
as a part of G&A expenses, but were reflected as R&D expense in 2003.



The second of these, Global Product Development & Supply (GPDS), is responsible for development and testing of commercial machine devices and supply of biological products. This group is currently responsible for development
and commercial testing related to the Gender Sort project and overseeing final setup of the Embrex Poultry Health manufacturing facility for the production of Inovocox. GPDS operating expenses for first quarter 2004 and 2003 were $0.6 million and $0.7 million, respectively. The decrease
from 2003 to 2004 is primarily due to a decrease in non-salary related staff expenses, as well as lower contract R&D expenses related to the Gender Sort project.



The third is Engineering and Manufacturing, which makes design modifications and improvements to the Inovoject® and Egg Remover® systems and the Vaccine Saver® option, as well as final assembly and testing prior to installation of a Company device
at a customers hatchery. Beginning in 2004 this category also includes start-up manufacturing costs associated with Embrex Poultry Health. Operating expenses for Engineering and Manufacturing increased from $0.4 million for first quarter 2003
to $0.5 million for first quarter 2004. This increase is primarily due to expenses associated with the new Embrex Poultry Health facility.



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##### Table of Contents

OTHER INCOME AND EXPENSE



Net other income decreased from $106 thousand for the first quarter of 2003 to $32 thousand for the same period of 2004. This decrease is primarily due to interest
income that was received from the Advanced Automation loan in the first quarter of 2003 that did not recur in 2004 due to the full repayment of the loan and the Companys purchase of the Gender Sort device from Advanced Automation in the fourth
quarter of 2003.



Interest income totaled $21 thousand and $57 thousand in the
first quarters of 2004 and 2003, respectively.



Interest expense totaled $12
thousand in the first quarter of 2004 compared to a credit of $4 thousand for the same period of 2003. The increase in interest expense was primarily due to interest charged as a result of filing amended state income tax returns for prior years.
Interest costs of $55 thousand related to the term loan for construction of the Embrex Poultry Health biological facility are not reflected in the 2004 interest expense totals as this amount is being capitalized as part of the construction cost of
the facility. Management expects to continue to rely principally on the use of internally generated funds to finance the cost of additional devices for the remainder of 2004, as was the case in 2003.



INCOME TAX EXPENSE



Income taxes totaled $0.6 million for first quarter 2004, a $0.2 million increase from $0.4 million for the same period in 2003. The
effective tax rate for 2004 first quarter was 37% in comparison to the 25% effective tax rate of first quarter 2003. The income tax expense for first quarter 2004 increased over the same period of 2003 due to the recognition of deferred tax assets
in 2003. In addition, profits in international operations subject to U.S. taxes are contributing to the higher effective tax rate.



For the rest of 2004, the goals of management are to maintain modest revenue growth and profitability, to continue efforts to achieve worldwide placements of its devices,
to obtain regulatory approvals and initiate marketing of Bursaplex® and Newplex in
these markets, to continue development of proprietary in ovo vaccines and to develop enhancements to the Inovoject® system and other devices. Growth in device and product revenues during 2004 will be dependent on the rate at which markets outside the United States
and Canada accept the Inovoject® system technology
and related devices, potential competition within the United States, disease outbreaks in domestic and/or global markets, the timing of regulatory approvals for Bursaplex® and Newplex and third-party vaccines for in ovo use outside the United States and Canada, start-up costs in new markets, possible variability in United
States bird production as a result of grain price fluctuations and other factors, and variability in demand for, and pricing of, U.S. poultry and poultry products both inside and outside the United States.



CHANGES IN FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES



At March 31, 2004, the Companys cash and cash equivalents amounted to $9.5 million,
down $0.1 million from $9.6 million on hand at year-end 2003.



Operating
activities generated $2.5 million in cash during the first three months of 2004. Cash was provided by net income of $1.1 million, depreciation of $1.4 million and decreases in accounts receivable, inventories and other current assets of $0.9
million. This was partially offset by decreases in accounts payable, accrued expenses and deferred revenue of $1.1 million.



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During the first three months of 2004, investing activities used a net $2.3 million of cash, primarily for the
manufacture of additional devices and other capital expenditures.



Financing
activities used $0.5 million of cash, primarily due to repurchases of Common Stock for $1.2 million, and repayment of $1.1 million in short-term financing during the first quarter. This was partially offset by $1.7 million which was received from
the Companys long-term bank loan used to finance construction of the Embrex Poultry Health biological manufacturing facility, as well as the $0.1 million received in connection with the exercise of stock options under the Companys stock
plans.



The Company obtained a $9.0 million construction/term loan from Branch
Banking and Trust (BB&T), in August 2003, to be used for construction and equipping of the Embrex Poultry Health biological manufacturing facility located in Scotland County, North Carolina. At March 31, 2004, $8.0 million of the
construction/term loan had been borrowed.



The Company has a $6.0 million
secured revolving line of credit with BB&T, which may be used for working capital purposes. In April 2004 the term of this line of credit was extended to May 2005. The line of credit carries an interest rate of the current LIBOR rate plus 1.60%.
At March 31, 2004, the Company had no outstanding borrowings under this credit facility.



In August 2002, the Company announced that the Board of Directors authorized a share repurchase program (the 2002 Repurchase Program) to purchase up to 6% of outstanding shares of Common Stock, or up to
approximately 500,000 shares over 17 months, in open market or privately negotiated transactions. In November 2003, the Board of Directors extended the term of the 2002 Repurchase Program to June 30, 2004. During the first quarter of 2004, the
Company purchased 99,400 shares of its Common Stock for $1.2 million at an average price of $12.18 per share. The Company has repurchased an aggregate of 313,300 shares of its Common Stock for $3.3 million at an average price of $10.67 per share
under the 2002 Repurchase Program through March 31, 2004. See Notes to Consolidated Financial Statements in the Companys Form 10-K for the year ended December 31, 2003.



Based on its current operations, management believes that the Companys available cash and cash equivalents, together with cash flow
from operations, its term loan for the construction of the Embrex Poultry Health facility and its bank line of credit, will be sufficient to meet its cash requirements as these currently exist, but may continue to explore additional alternative
funding opportunities with respect to collaborative ventures and new product development.



FORWARD-LOOKING STATEMENTS



Information set forth in this Quarterly Report on Form 10-Q contains various 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. These statements represent the Companys judgment concerning the future and are subject to risks and uncertainties that could cause the Companys actual operating results
and financial position to differ materially. Such forward looking statements can be identified by the use of forward looking terminology such as may, will, expect, plan, intend,
target, anticipate, estimate, believe, or continue, or the negative thereof or other variations thereof or comparable terminology.



The Company cautions that any such forward-looking statements include statements with respect
to future products, services, markets and financial results. These statements involve risks and uncertainties that could cause actual results to differ materially. Risks include without limitation the degree of growth in the poultry industry in the
United States and globally, competition arising within the United States, disease outbreaks in domestic and/or global markets, market acceptance and cost of expansion in new geographic markets and with new products, including the Companys
ability to penetrate new markets and



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the degree of market acceptance of new products, the complete commercial development of potential future products on a
cost effective basis and the ability to obtain regulatory approval of products. Such approval is dependent upon a number of factors, such as results of trials, the discretion of regulatory officials, and potential changes in regulations. Additional
information on these risks and other factors which could affect the Companys consolidated financial results are included in the Risk Factors described in Exhibit 99 to this report and in the Companys other filings with the Securities and
Exchange Commission, including the Companys Forms 10-Q, 10-K and 8-K.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



Market risk is the risk of potential loss arising from adverse changes in market rates and prices. The Companys primary market risk exposure is attributable to changes in foreign currency exchange rates.
Approximately 34% of revenues for the first quarter of 2004 and 32% of revenues for the year ended December 31, 2003 were derived from operations outside the United States. The Companys interim consolidated financial statements are denominated
in U.S. dollars and, accordingly, changes in exchange rates between foreign currencies and the U.S. dollar will affect the translation of subsidiaries financial results into U.S. dollars for purposes of reporting consolidated financial
results. During 2004, the British Pound and selected Latin American currencies strengthened against the U.S. dollar compared to the same period during 2003. If average exchange rates during the first three months of 2004 had remained the same as the
average exchange rates during the same period of 2003, the Companys 2004 revenues would have been higher than reported. The calculated change was $0.1 million, or 1% of the Companys 2004 first quarters revenues.



In addition to currency translation risk, the Company is subject to transaction risk.
Transaction risk is the risk of potential loss arising from adverse changes in exchange rates from the point invoices are issued until the receipts are collected. Most of Embrexs transaction risk resides in the Companys largest
subsidiary, Embrex Europe Ltd., where accrued revenues are recorded in British Pounds. However, most of Embrex Europe Ltd.s revenues are invoiced in U.S. Dollars or Euros. When revenues are collected, there is a risk that changes in the
respective exchange rates could cause the amount collected (when converted to British Pounds) to be less than originally accrued.



Accumulated currency translation adjustments recorded as a separate component (reduction) of shareholders equity were ($227 thousand) at March 31, 2004 as compared
with ($322 thousand) at December 31, 2003. This $95 thousand change was mainly attributable to exchange rate differences between the U.S. Dollar, Euro and Pound Sterling and relates to differences in invoice versus receipt of funds.



Item 4. Controls and Procedures



An evaluation was
carried out under the supervision and with the participation of the Companys management, including its Chief Executive Officer and Vice President, Finance and Administration, of the effectiveness of the design and operation of the
Registrants disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Vice
President, Finance and Administration (the Companys Chief Financial Officer) believe, as of the end of the period covered by this report, the Companys disclosure controls and procedures provide reasonable assurances that information
required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and forms.



Other than arising from the review described below, there have been no changes in internal
control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting. The Company continues to review and
evaluate its internal controls, including in its international offices, as part of a review



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process established in late 2001. In certain of the Companys smaller offices, it is impracticable to maintain a
number of personnel to establish separation of responsibilities for review and approval of transactions or other accounting or control functions. In order to address this, the Company has established greater supervision of these functions by
personnel in the corporate office and utilizes an internal audit program with respect to these offices. The Company may take further actions as it deems desirable based on its continuing reviews and evaluations, and to comply with Sarbanes-Oxley
internal control procedures during the remainder of 2004.



PART II. OTHER INFORMATION



Item 1. Legal Proceedings



For a
description of certain patent infringement proceedings initiated by the Company and related legal proceedings, see the Companys Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 15, 2004.



Item 2. Changes in Securities



Issuer
Purchases of Equity Securities. During the first quarter of 2004, the Company purchased certain shares pursuant to its current share repurchase program as set forth in the following table.



ISSUER PURCHASES OF EQUITY SECURITIES



|                     |  |                                   |  |                                |       |                                                                                       |         |                                                                                 |        
|-------------------- |  | --------------------------------- |  | ------------------------------ | ----- | ------------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------- | -------
|Period               |  | (a) TotalNumber ofSharesPurchased |  | (b) AveragePrice Paidper Share |       | (c) Total Number ofShares Purchased as Partof Publicly AnnouncedPlans or Programs (1) |         | (d) Maximum Number ofShares that May Yet BePurchased Under thePlans or Programs
|1/1/2004  1/31/2004 |  | 84,800                            |  | $                              | 12.42 |                                                                                       | 298,700 |                                                                                 | 201,300
|2/1/2004  2/29/2004 |  | -0-                               |  |                                | N/A   |                                                                                       | 298,700 |                                                                                 | 201,300
|3/1/2004  3/31/2004 |  | 14,600                            |  | $                              | 10.75 |                                                                                       | 313,300 |                                                                                 | 186,700
|Total                |  | 99,400                            |  | $                              | 12.18 |                                                                                       | 313,300 |                                                                                 | 186,700

---

|(1) | On August 5, 2002, the Company announced that the Board of Directors had authorized a share repurchase program (the 2002 Repurchase Program) to purchase up to 6% of
outstanding shares of Common Stock, or up to approximately 500,000 shares over 17 months, in open market or privately negotiated transactions. On November 24, 2003, the Company announced that the Board of Directors approved an extension of the
programs term to June 30, 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



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Item 6. Exhibits and Reports on Form 8-K



(a) Exhibits



|               |  |                                                                                                                                                                                                                                                                                                  
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Document                                                                                                                                                                                                                                                                          
|10.1           |  | BDA Production and Supply Agreement dated January 29, 2004 between Embrex and Charles River Laboratories, Inc. (asterisks located within the exhibit denote information that has been deleted
pursuant to a request for confidential treatment filed with the Securities and Exchange Commission)
|               | 
|31.1           |  | Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)                                                                                                                                                                                     
|               | 
|31.2           |  | Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)                                                                                                                                                                                     
|               | 
|32.1           |  | Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350                                                                                                                                                          
|               | 
|32.2           |  | Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350                                                                                                                                                          
|               | 
|99             |  | Risk Factors relating to the Company                                                                                                                                                                                                                                                             



(b) Reports on Form 8-K.



On March 15, 2004, the Company furnished a report under Item 12 of Form 8-K regarding a
press release issued by the Company on March 15, 2004, announcing results of operations for the period ended December 31, 2003.



Information furnished in such Form 8-K is not deemed filed with the Securities and Exchange Commission.



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SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Date: May 4, 2004



EMBREX, INC.By:

/s/ Randall L. MarcusonRandall L. MarcusonPresident and Chief Executive Officer




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EXHIBIT INDEX



|               |  |                                                                                                                                                                                                                                                                                                  
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Document                                                                                                                                                                                                                                                                          
|10.1           |  | BDA Production and Supply Agreement dated January 29, 2004 between Embrex and Charles River Laboratories, Inc. (asterisks located within the exhibit denote information that has been deleted
pursuant to a request for confidential treatment filed with the Securities and Exchange Commission)
|               | 
|31.1           |  | Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)                                                                                                                                                                                     
|               | 
|31.2           |  | Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)                                                                                                                                                                                     
|               | 
|32.1           |  | Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350                                                                                                                                                          
|               | 
|32.2           |  | Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350                                                                                                                                                          
|               | 
|99             |  | Risk Factors relating to the Company                                                                                                                                                                                                                                                             



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