##### Table of Contents





SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008

COMMISSION FILE NUMBER 0-13251





MEDICAL ACTION INDUSTRIES
INC.

(Exact name of Registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 11-2421849                          
|(State or other Jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

800 Prime Place, Hauppauge, New York 11788

(Address of Principal Executive Offices)

Registrants telephone number, including area code:

(631) 231-4600





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                                              |  |                            
|--------------------------------------------- |  | ---------------------------
|Large accelerated filer  ̈                     |  | Accelerated filer x        
|Non-accelerated filer  ̈                       |  | Smaller reporting company  ̈
|(Do not check if a smaller reporting company) |  |                            

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

Yes   ̈    No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the
latest practicable date. 16,028,161 shares of common stock as of November 7, 2008.









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FORM 10-Q

CONTENTS



|          |  |                                                                                                        |  |         
|--------- |  | ------------------------------------------------------------------------------------------------------ |  | --------
|          |  |                                                                                                        |  | Page No.
|PART I -  |  | FINANCIAL INFORMATION                                                                                  |  |         
|          |  |                                                                                                       
|Item 1.   |  | Condensed Consolidated Financial Statements                                                            |  |         
|          |  |                                                                                                       
|          |  | Consolidated Balance Sheets at September 30, 2008 (Unaudited) and March 31, 2008                       |  | 3-4     
|          |  |                                                                                                       
|          |  | Consolidated Statements of Earnings for the Three Months ended September 30, 2008 and 2007 (Unaudited) |  | 5       
|          |  |                                                                                                       
|          |  | Consolidated Statements of Earnings for the Six Months ended September 30, 2008 and 2007 (Unaudited)   |  | 6       
|          |  |                                                                                                       
|          |  | Consolidated Statements of Cash Flows for the Six Months ended September 30, 2008 and 2007 (Unaudited) |  | 7       
|          |  |                                                                                                       
|          |  | Notes to Consolidated Financial Statements (Unaudited)                                                 |  | 8-16    
|          |  |                                                                                                       
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                  |  | 17-30   
|          |  |                                                                                                       
|Item 3.   |  | Quantitative and Qualitative Disclosures about Market Risk                                             |  | 30-31   
|          |  |                                                                                                       
|Item 4.   |  | Controls and Procedures                                                                                |  | 31      
|          |  |                                                                                                       
|PART II - |  | OTHER INFORMATION                                                                                      |  |         



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Item 1.

MEDICAL ACTION INDUSTRIES INC.

CONSOLIDATED
BALANCE SHEETS

(dollars in thousands)

ASSETS



|                                                                                                                   |  |                   |         |               |   |        
|------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- | ------------- | - | -------
|                                                                                                                   |  | September 30,2008 |         | March 31,2008
|                                                                                                                   |  | (Unaudited)       |         |              
|Current Assets                                                                                                     |  |                   |         |               |   |        
|Cash and cash equivalents                                                                                          |  | $                 | 2,171   |               | $ | 2,104  
|Accounts receivable, less allowance for doubtful accounts of $628 at September 30, 2008 and $585 at March 31, 2008 |  |                   | 21,636  |               |   | 24,038 
|Inventories, net                                                                                                   |  |                   | 43,336  |               |   | 33,493 
|Prepaid expenses                                                                                                   |  |                   | 1,617   |               |   | 952    
|Deferred income taxes                                                                                              |  |                   | 1,384   |               |   | 1,663  
|Prepaid income taxes                                                                                               |  |                   | 37      |               |   | 1,662  
|Other current assets                                                                                               |  |                   | 822     |               |   | 341    
|                                                                                                                   |  |                   |         |               |   |        
|Total Current Assets                                                                                               |  |                   | 71,003  |               |   | 64,253 
|                                                                                                                   |  |                  
|Property, plant and equipment, net                                                                                 |  |                   | 38,159  |               |   | 33,681 
|Goodwill                                                                                                           |  |                   | 80,699  |               |   | 80,699 
|Trademarks                                                                                                         |  |                   | 1,266   |               |   | 1,266  
|Other intangible assets, net                                                                                       |  |                   | 15,369  |               |   | 16,159 
|Other assets, net                                                                                                  |  |                   | 2,630   |               |   | 2,978  
|                                                                                                                   |  |                   |         |               |   |        
|Total Assets                                                                                                       |  | $                 | 209,126 |               | $ | 199,036
|                                                                                                                   |  |                   |         |               |   |        

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



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Item 1.



MEDICAL ACTION INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

LIABILITIES AND SHAREHOLDERS EQUITY



|                                                                                                                                                                   |  |                   |         |   |               |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- | - | ------------- | - | -------
|                                                                                                                                                                   |  | September 30,2008 |         |   | March 31,2008
|                                                                                                                                                                   |  | (Unaudited)       |         |   |              
|Current Liabilities                                                                                                                                                |  |                   |         |   |               |   |        
|Accounts payable                                                                                                                                                   |  | $                 | 12,601  |   |               | $ | 14,112 
|Accrued expenses, payroll and payroll taxes                                                                                                                        |  |                   | 10,807  |   |               |   | 11,519 
|Current portion of capital lease obligations                                                                                                                       |  |                   | 99      |   |               |   | 125    
|Current portion of long-term debt                                                                                                                                  |  |                   | 4,110   |   |               |   | 13,360 
|                                                                                                                                                                   |  |                   |         |   |               |   |        
|Total Current Liabilities                                                                                                                                          |  |                   | 27,617  |   |               |   | 39,116 
|                                                                                                                                                                   |  |                  
|Deferred income taxes                                                                                                                                              |  |                   | 9,170   |   |               |   | 9,720  
|Capital lease obligations, less current portion                                                                                                                    |  |                   |        |   |               |   | 31     
|Long-term debt, less current portion                                                                                                                               |  |                   | 52,788  |   |               |   | 34,390 
|                                                                                                                                                                   |  |                   |         |   |               |   |        
|Total Liabilities                                                                                                                                                  |  |                   | 89,575  |   |               |   | 83,257 
|                                                                                                                                                                   |  |                   |         |   |               |   |        
|Commitments and Contingencies                                                                                                                                      |  |                   |         |   |               |   |        
|                                                                                                                                                                   |  |                  
|Shareholders Equity                                                                                                                                               |  |                   |         |   |               |   |        
|                                                                                                                                                                   |  |                  
|Common stock 40,000,000 shares authorized, $.001 par value; issued and outstanding 16,028,161 shares at September 30, 2008 and 16,020,661
shares at March 31, 2008 |  |                   | 16      |   |               |   | 16     
|Additional paid-in capital, net                                                                                                                                    |  |                   | 27,924  |   |               |   | 27,029 
|Accumulated other comprehensive (loss) income                                                                                                                      |  |                   | (113    | ) |               |   | 35     
|Retained earnings                                                                                                                                                  |  |                   | 91,724  |   |               |   | 88,699 
|                                                                                                                                                                   |  |                   |         |   |               |   |        
|Total Shareholders Equity                                                                                                                                         |  |                   | 119,551 |   |               |   | 115,779
|                                                                                                                                                                   |  |                   |         |   |               |   |        
|Total Liabilities and Shareholders Equity                                                                                                                         |  | $                 | 209,126 |   |               | $ | 199,036
|                                                                                                                                                                   |  |                   |         |   |               |   |        

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



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Item 1.



MEDICAL ACTION INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in thousands except per share data)

(Unaudited)



|                                             |  |                                  |        |   |      |   |        |  
|-------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | -
|                                             |  | Three Months Ended September 30, |       
|                                             |  | 2008                             |        |   | 2007 |  
|Net sales                                    |  | $                                | 73,824 |   |      | $ | 72,285 |  
|                                             |  |                                 
|Cost of sales                                |  |                                  | 62,552 |   |      |   | 55,843 |  
|                                             |  |                                  |        |   |      |   |        |  
|Gross profit                                 |  |                                  | 11,272 |   |      |   | 16,442 |  
|                                             |  |                                 
|Selling, general and administrative expenses |  |                                  | 9,923  |   |      |   | 10,229 |  
|Interest expense                             |  |                                  | 631    |   |      |   | 952    |  
|Interest income                              |  |                                  | (2     | ) |      |   | (27    | )
|                                             |  |                                  |        |   |      |   |        |  
|Income before income taxes                   |  |                                  | 720    |   |      |   | 5,288  |  
|Income tax expense                           |  |                                  | 240    |   |      |   | 2,020  |  
|                                             |  |                                  |        |   |      |   |        |  
|Net income                                   |  | $                                | 480    |   |      | $ | 3,268  |  
|                                             |  |                                  |        |   |      |   |        |  
|Net income per share basic                   |  | $                                | .03    |   |      | $ | .21    |  
|                                             |  |                                  |        |   |      |   |        |  
|Net income per share diluted                 |  | $                                | .03    |   |      | $ | .20    |  
|                                             |  |                                  |        |   |      |   |        |  

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



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Item 1.



MEDICAL ACTION INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in thousands except per share data)

(Unaudited)



|                                             |  |                                |         |   |      |   |         |  
|-------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                             |  | Six Months Ended September 30, |        
|                                             |  | 2008                           |         |   | 2007 |  
|Net sales                                    |  | $                              | 151,219 |   |      | $ | 142,531 |  
|                                             |  |                               
|Cost of sales                                |  |                                | 124,897 |   |      |   | 108,980 |  
|                                             |  |                                |         |   |      |   |         |  
|Gross profit                                 |  |                                | 26,322  |   |      |   | 33,551  |  
|                                             |  |                               
|Selling, general and administrative expenses |  |                                | 20,384  |   |      |   | 20,654  |  
|Interest expense                             |  |                                | 1,116   |   |      |   | 1,955   |  
|Interest income                              |  |                                | (3      | ) |      |   | (29     | )
|                                             |  |                                |         |   |      |   |         |  
|Income before income taxes                   |  |                                | 4,825   |   |      |   | 10,971  |  
|Income tax expense                           |  |                                | 1,799   |   |      |   | 4,191   |  
|                                             |  |                                |         |   |      |   |         |  
|Net income                                   |  | $                              | 3,026   |   |      | $ | 6,780   |  
|                                             |  |                                |         |   |      |   |         |  
|Net income per share basic                   |  | $                              | .19     |   |      | $ | .43     |  
|                                             |  |                                |         |   |      |   |         |  
|Net income per share diluted                 |  | $                              | .19     |   |      | $ | .42     |  
|                                             |  |                                |         |   |      |   |         |  

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



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Item 1.



MEDICAL ACTION INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)



|                                                                                             |  |                                |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                             |  | Six Months Ended September 30, |        
|                                                                                             |  | 2008                           |         |   | 2007 |  
|OPERATING ACTIVITIES                                                                         |  |                                |         |   |      |   |         |  
|Net income                                                                                   |  | $                              | 3,026   |   |      | $ | 6,780   |  
|Adjustments to reconcile net income to net cash provided by operating activities:            |  |                                |         |   |      |   |         |  
|Depreciation                                                                                 |  |                                | 1,943   |   |      |   | 1,967   |  
|Amortization                                                                                 |  |                                | 1,173   |   |      |   | 1,355   |  
|Provision for doubtful accounts                                                              |  |                                | 43      |   |      |   | 145     |  
|Stock-based compensation                                                                     |  |                                | 788     |   |      |   | 907     |  
|Excess tax benefit from stock-based compensation                                             |  |                                | (270    | ) |      |   | 123     |  
|Tax benefit from exercise of options                                                         |  |                                | 20      |   |      |   | 1,168   |  
|Changes in operating assets and liabilities, net of acquisition:                             |  |                                |         |   |      |   |         |  
|Accounts receivable                                                                          |  |                                | 2,359   |   |      |   | (2,127  | )
|Inventories                                                                                  |  |                                | (9,843  | ) |      |   | 4,216   |  
|Prepaid expenses and other current assets                                                    |  |                                | (1,147  | ) |      |   | (968    | )
|Other assets                                                                                 |  |                                | (35     | ) |      |   | (794    | )
|Accounts payable                                                                             |  |                                | (1,512  | ) |      |   | (1,876  | )
|Income taxes payable                                                                         |  |                                | 1,624   |   |      |   | (903    | )
|Accrued expenses, payroll and payroll taxes                                                  |  |                                | 547     |   |      |   | 402     |  
|                                                                                             |  |                                |         |   |      |   |         |  
|NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES                                          |  |                                | (1,284  | ) |      |   | 10,395  |  
|                                                                                             |  |                                |         |   |      |   |         |  
|INVESTING ACTIVITIES                                                                         |  |                                |         |   |      |   |         |  
|Purchase price and related acquisition costs                                                 |  |                                | (856    | ) |      |   | (345    | )
|Purchases of property, plant and equipment                                                   |  |                                | (6,972  | ) |      |   | (3,992  | )
|                                                                                             |  |                                |         |   |      |   |         |  
|NET CASH USED IN INVESTING ACTIVITIES                                                        |  |                                | (7,828  | ) |      |   | (4,337  | )
|                                                                                             |  |                                |         |   |      |   |         |  
|FINANCING ACTIVITIES                                                                         |  |                                |         |   |      |   |         |  
|Proceeds from revolving line of credit and long term borrowings                              |  |                                | 43,959  |   |      |   | 22,192  |  
|Principal payments on revolving line of credit, long term debt and capital lease obligations |  |                                | (34,868 | ) |      |   | (28,026 | )
|Proceeds from exercise of employee stock options                                             |  |                                | 88      |   |      |   | 921     |  
|                                                                                             |  |                                |         |   |      |   |         |  
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                          |  |                                | 9,179   |   |      |   | (4,913  | )
|                                                                                             |  |                                |         |   |      |   |         |  
|Increase in cash                                                                             |  |                                | 67      |   |      |   | 1,145   |  
|Cash at beginning of year                                                                    |  |                                | 2,104   |   |      |   | 827     |  
|                                                                                             |  |                                |         |   |      |   |         |  
|Cash at end of period                                                                        |  | $                              | 2,171   |   |      | $ | 1,972   |  
|                                                                                             |  |                                |         |   |      |   |         |  
|Supplemental Disclosures:                                                                    |  |                                |         |   |      |   |         |  
|Interest paid                                                                                |  | $                              | 1,170   |   |      | $ | 1,917   |  
|Income taxes paid                                                                            |  | $                              | 425     |   |      | $ | 3,820   |  

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



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Item 1.



MEDICAL ACTION INDUSTRIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|Note 1. | BASIS OF PRESENTATION
|------- | ---------------------

The accompanying unaudited interim condensed
consolidated financial statements of Medical Action Industries Inc. (Medical Action or the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (US
GAAP) for interim financial information and with the instructions to Form 10-Q for quarterly reports under section 13 or 15(d) of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes
required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six
month period ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ended March 31, 2009. For further information, refer to the financial statements and footnotes thereto included in the
Companys annual report for the year ended March 31, 2008.

The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those financial statements as well as the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimated. Significant estimates made by the Company include the allowance for doubtful accounts, inventory valuation, fair
value of stock based compensation, income taxes, valuation of long-lived assets, accrued sales incentives and rebate reserves. A summary of the Companys significant accounting policies is identified in Note 1 of the Consolidated Financial
Statements in the Companys Form 10-K for the fiscal year ended March 31, 2008. Users of financial information produced for interim periods are encouraged to refer to the notes contained in the 2008 Annual Report on Form 10-K when
reviewing interim financial results. Since March 31, 2008 there have been no changes to the Companys significant accounting policies or to the assumptions and estimates involved in applying these policies. The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.



|Note 2. | IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
|------- | ---------------------------------------------------

Fair Value
Measurements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it
applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively for fiscal years beginning after November 15, 2007, with



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Item 1.



Note 2. (continued)



any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. As of April 1, 2008, we adopted SFAS
157. The adoption of SFAS 157 did not impact our consolidated financial statements in any material respect.

In December 2007, the FASB issued FSP FAS
157-b to defer SFAS 157s effective date for all non-financial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until years beginning after November 15, 2008.
Derivatives measured at fair value under FAS 133 were not deferred under FSP FAS 157-b. We are assessing the impact, if any, which the adoption of FSP FAS 157-b will have on our consolidated financial position, results of operations and cash flows.

Fair Value Options for Financial Assets and Financial Liabilities

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159), including an amendment of FASB Statement No. 115. SFAS
159 permits an entity to measure certain financial assets and financial liabilities at fair value. The Statements objective is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the
measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent
reporting date.

The new Statement establishes presentation and disclosure requirements to help financial statement users understand the effect of the
entitys election on its earnings, but does not eliminate disclosure requirements of other accounting standards. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007, and is effective for
us as of April 1, 2008. The adoption of SFAS 159 did not impact our consolidated financial statements in any material respect.

Business
Combinations

In December 2006, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, (SFAS 141R) to improve
the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. This Statement applies to all transactions or other events in
which an entity obtains control of one or more businesses, and combinations achieved without the transfer of consideration. The standard is effective for fiscal years beginning after December 15, 2008. SFAS 141R will have a significant impact
on the manner in which we account for future acquisitions beginning in the fiscal year 2010.

Non-Controlling Interests in Consolidated Financial
Statements

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment
of ARB No. 51, (SFAS 160) to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. This Statement applies to all entities
that prepare consolidated



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Item 1.



Note 2. (continued)



financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding non-controlling interest in one or
more subsidiaries or that deconsolidate a subsidiary. This Statement is effective for fiscal years beginning after December 15, 2008, which for us is the fiscal year beginning April 1, 2009. We are assessing the impact, if any, which the
adoption of SFAS 160 will have on our consolidated financial position, results of operations and cash flows.

Disclosures About Derivative Instruments
and Hedging Activities

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities,
(SFAS 161). This Statement requires enhanced disclosures about an entitys derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, which for us is the fiscal year beginning April 1, 2009. We are assessing the impact, if any, which the adoption of SFAS 161 will have on our financial statement
disclosures.

Convertible Debt Instruments

In May
2008, the FASB issued FASB Staff Position APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (FSP APB 14-1) which requires issuers of convertible debt that may be settled wholly
or partly in cash to account for the debt and equity components separately. This FSP is effective or fiscal years beginning after December 15, 2008, which for us is the fiscal year beginning April 1, 2009 and must be applied
retrospectively to all periods presented. We are assessing the impact, if any, which the adoption of FSP APB 14-1 will have on our financial statements.



|Note 3. | STOCK-BASED COMPENSATION PLANS
|------- | ------------------------------

During fiscal 1990, the
Companys Board of Directors and stockholders approved a Non-Qualified Stock Option Plan (the Non-Qualified Option Plan). The Non-Qualified Option Plan, as amended, authorizes the granting to employees of the Company options to
purchase an aggregate of 3,975,000 shares of the Companys common stock. The options are granted with an exercise price equal to the fair market price of the common stock or at a value that is not less than 85% of the fair market value of the
common stock on the date of grant. The options are exercisable in two installments on the second and third anniversary of the date of grant. Options expire ten years from the date of grant unless the employment is terminated, in which event, subject
to certain exceptions; the options terminate two months subsequent to date of termination.

In 1994, the Companys Board of Directors and stockholders
approved the 1994 Stock Incentive Plan (the Incentive Plan), which, as amended, authorized 3,525,000 shares of the Companys common stock for awards under the Incentive Plan. The Incentive Plan, which expires in 2015, permits the
granting of incentive stock options, shares of restricted stock and non-qualified stock options. All officers and other .key employees of .the Company and its affiliates are eligible to



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Note 3. (continued)



participate in the Incentive Plan. The Incentive Plan is administered by the Compensation Committee of the Board of Directors, which determines the persons
to whom, and the time at which, awards will be granted. In addition, the Compensation Committee will decide the type of awards to be granted and all other related terms and conditions of the awards. The per share exercise price of any option may not
be less than the fair market value of a share of common stock at the time of grant. No incentive options have been issued under this plan.

The following
is a summary of restricted stock activity in our 1994 Stock Incentive Plan for the six months ended September 30, 2008:



|                                 |  |        |   |  |                             |      
|-------------------------------- |  | ------ | - |  | --------------------------- | -----
|                                 |  | Shares |   |  | Weighted AverageGrant Price
|Non-vested at April 1, 2008      |  | 39,374 |   |  | $                           | 14.42
|Granted                          |  |       |   |  | $                           |     
|Vested                           |  | (2,813 | ) |  | $                           | 14.85
|Cancelled                        |  |       |   |  | $                           |     
|                                 |  |        |   |  |                             |      
|Non-vested at September 30, 2008 |  | 36,561 |   |  | $                           | 14.87
|                                 |  |        |   |  |                             |      

Grants of restricted stock are common stock awards granted to recipients with specified vesting provisions. The
restricted stock issued vests based upon the recipients continued service over time (five-year vesting period). The Company estimates the fair value of restricted stock based on the Companys closing stock price on the date of grant.

In 1996, the Companys Board of Directors and stockholders approved the 1996 Non-Employee Director Stock Option Plan (the Director Plan).
The Director Plan which, as amended, authorized 750,000 shares of the Companys common stock for award under the Director Plan. Under the terms of the Director Plan, which expires in 2015, each non-employee director of the Company will be
granted each year an option to purchase 2,500 shares of the Companys common stock. These options vest immediately and have an exercise price equal to the fair market price of the common stock at the time of grant.

Effective April 1, 2006, we adopted SFAS No. 123R, Share-Based Payment, which prescribes the accounting for equity instruments exchanged for
employee and director services. Under SFAS No. 123R, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the grant, and is recognized as an expense over the service period applicable to the
grantee. The service period is the period of time that the grantee must provide services to the Company before the stock-based compensation is fully vested.

In accordance with the adoption of SFAS 123R, we recorded stock-based compensation expense for the cost of stock options granted under our stock plans. Stock-based compensation expense recognized under the provisions of SFAS 123R amounted
to approximately $380,000 ($253,000 after tax) or $.02 per basic and diluted share and $473,000 ($292,000 after tax) or $.02 per basic



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Item 1.



Note 3. (continued)



share and diluted share for the three months ended September 30, 2008 and 2007, respectively. Stock-based compensation expense recognized under the
provisions of SFAS 123R amounted to approximately $706,000 ($443,000 after tax) or $.03 per basic and diluted share and $861,000 ($532,000 after tax) or $.03 per basic and diluted share for the six months ended September 30, 2008 and 2007,
respectively.

The following is a summary of the changes in outstanding options for all of the Companys plans during the six months ended
September 30, 2008:



|                                          |  |           |   |  |                              |       |                                              |     |                         |   |           |  
|----------------------------------------- |  | --------- | - |  | ---------------------------- | ----- | -------------------------------------------- | --- | ----------------------- | - | --------- | -
|                                          |  | Shares    |   |  | Weightedaverageexerciseprice |       | RemainingWeightedaveragecontractlife (years) |     | AggregateIntrinsicvalue |  
|Outstanding at April 1, 2008              |  | 1,390,062 |   |  | $                            | 12.52 |                                              | 6.5 |                         | $ | 8,360,000 |  
|Granted                                   |  | 261,000   |   |  | $                            | 16.05 |                                              |    |                         |   | 1,639,000 |  
|Exercised                                 |  | (7,500    | ) |  | $                            | 11.67 |                                              |    |                         |   | (44,000   | )
|Forfeited                                 |  | (35,125   | ) |  | $                            | 16.70 |                                              |    |                         |   | (238,000  | )
|                                          |  |           |   |  |                              |       |                                              |     |                         |   |           |  
|Outstanding at September 30, 2008         |  | 1,608,437 |   |  | $                            | 13.02 |                                              | 6.6 |                         | $ | 9,717,000 |  
|                                          |  |           |   |  |                              |       |                                              |     |                         |   |           |  
|Options exercisable at September 30, 2008 |  | 1,125,887 |   |  | $                            | 10.85 |                                              | 5.4 |                         | $ | 6,256,000 |  
|                                          |  |           |   |  |                              |       |                                              |     |                         |   |           |  

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes options pricing
model. The following weighted average assumptions were used for grants in the six months ended September 30, 2008 and 2007, respectively: expected volatility of 35.7% and 34.7%; a risk-free interest rate of 3.9% and 4.8% and an expected life of
5.3 years. The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to
the life of the grant. The expected volatility is based on the historical volatility of the Companys stock.

The weighted average fair value of
options granted was $5.21 and $8.44 for the three months ended September 30, 2008 and 2007, respectively and $6.28 and $8.63 for the six months ended September 30, 2008 and 2007, respectively. As of September 30, 2008, there were
approximately $3,461,000 of total SFAS No. 123R unrecognized compensation costs related to nonvested share-based compensation arrangements granted under the Companys plans; that cost is expected to be recognized over a period of three
years.



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Item 1.



Note 3. (continued)



The following is a summary of the changes in non-vested stock options for the six months ended September 30,
2008:



|                                        |  |          |   |  |                                      |     
|--------------------------------------- |  | -------- | - |  | ------------------------------------ | ----
|                                        |  | Shares   |   |  | Weighted AverageGrant Date FairValue
|Non-vested shares at April 1, 2008      |  | 492,175  |   |  | $                                    | 6.70
|Granted                                 |  | 261,000  |   |  | $                                    | 6.28
|Forfeited                               |  | (35,125  | ) |  | $                                    | 6.77
|Vested                                  |  | (234,375 | ) |  | $                                    | 6.12
|                                        |  |          |   |  |                                      |     
|Non-vested shares at September 30, 2008 |  | 483,675  |   |  | $                                    | 7.16
|                                        |  |          |   |  |                                      |     



|Note 4. | INVENTORIES
|------- | -----------

Inventories, which are stated at the lower of cost
(first-in, first-out) or market, consist of the following:



|                     |  |                        |        |               |   |       
|-------------------- |  | ---------------------- | ------ | ------------- | - | ------
|                     |  | September 30,2008      |        | March 31,2008
|                     |  | (Unaudited)            |        |              
|                     |  | (dollars in thousands)
|Finished Goods, net  |  | $                      | 24,966 |               | $ | 19,399
|Work in Process, net |  |                        | 1,107  |               |   | 942   
|Raw Materials        |  |                        | 17,263 |               |   | 13,152
|                     |  |                        |        |               |   |       
|Total, net           |  | $                      | 43,336 |               | $ | 33,493
|                     |  |                        |        |               |   |       

On an ongoing basis, inventory quantities on hand are reviewed and an analysis of the provision for excess and
obsolete inventory is performed based primarily on the Companys sales history and anticipated future demand. Such provision for excess and obsolete inventory amounted to approximately $719,000 and $891,000 at September 30, 2008 and
March 31, 2008, respectively.



|Note 5. | NET INCOME PER SHARE
|------- | --------------------

Basic earnings per share are based on the
weighted average number of common shares outstanding without consideration of potential common shares. Diluted earnings per share are based on the weighted average number of common and potential common shares outstanding. The calculation takes into
account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average



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##### Table of Contents

Item 1.



Note. 5 (continued)



prices during the periods. Excluded from the calculation of earnings per share are options to purchase 694,500 and 646,500 shares for the three and six
months ended September 30, 2008 and 160,700 and 137,200 shares for the three and six months ended September 30, 2007, as their inclusion would not have been dilutive. The following table sets forth the computation of basic and diluted
earnings per share for the three and six months ended September 30, 2008 and 2007, respectively.

The following is a reconciliation of the numerator
and denominator of the basic and diluted net earnings per share computations for the six months ended September 30, 2008 and 2007, respectively.



|                                                                              |  |                                              |            |                                |   |            |  |      |            |  |   |           
|----------------------------------------------------------------------------- |  | -------------------------------------------- | ---------- | ------------------------------ | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                                                              |  | Three Months Ended September 30,             |            | Six Months Ended September 30,
|                                                                              |  | 2008                                         |            | 2007                           |   | 2008       |  | 2007
|                                                                              |  | (dollars in thousands except per share data)
|Numerator:                                                                    |  |                                              |            |                                |   |            |  |      |            |  |   |           
|Net income for basic and dilutive earnings per share                          |  | $                                            | 480        |                                | $ | 3,268      |  | $    | 3,026      |  | $ | 6,780     
|                                                                              |  |                                              |            |                                |   |            |  |      |            |  |   |           
|Denominator:                                                                  |  |                                              |            |                                |   |            |  |      |            |  |   |           
|Denominator for basic earnings per share - weighted average shares            |  |                                              | 16,024,494 |                                |   | 15,911,928 |  |      | 16,022,578 |  |   | 15,883,499
|                                                                              |  |                                              |            |                                |   |            |  |      |            |  |   |           
|Effect of dilutive securities:                                                |  |                                              |            |                                |   |            |  |      |            |  |   |           
|                                                                              |  |                                              |            |                               
|Employee and director stock options                                           |  |                                              | 175,585    |                                |   | 404,492    |  |      | 209,605    |  |   | 414,058   
|                                                                              |  |                                              |            |                                |   |            |  |      |            |  |   |           
|Denominator for diluted earnings per share - adjusted weighted average shares |  |                                              | 16,200,079 |                                |   | 16,316,420 |  |      | 16,232,183 |  |   | 16,297,557
|                                                                              |  |                                              |            |                                |   |            |  |      |            |  |   |           
|Basic earnings per share                                                      |  | $                                            | 0.03       |                                | $ | 0.21       |  | $    | 0.19       |  | $ | 0.43      
|                                                                              |  |                                              |            |                                |   |            |  |      |            |  |   |           
|Diluted earnings per share                                                    |  | $                                            | 0.03       |                                | $ | 0.20       |  | $    | 0.19       |  | $ | 0.42      
|                                                                              |  |                                              |            |                                |   |            |  |      |            |  |   |           



|Note 6. | SHAREHOLDERS EQUITY
|------- | --------------------

For the three and six months ended
September 30, 2008, 7,500 stock options were exercised by a board member of the Company in accordance with the Companys 1996 Non-Employee Director Stock Option Plan. The exercise price of the options exercised ranged from $10.89 per share
to $12.54 per share for the three and six months ended September 30, 2008. The net cash proceeds from these exercises amounted to $88,000 for the three and six months ended September 30, 2008.

For the three and six months ended September 30, 2007, 125,315 and 176,015 stock options were exercised by employees of the Company in accordance with the
Companys 1994 Stock Incentive



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##### Table of Contents

Item 1.



Note 6 (continued)



Plan. The exercise price of the options exercised ranged from $2.00 per share to $11.93 per share for the three months ended September 30, 2007 and
$1.92 per share to $11.93 per share for the six months ended September 30, 2007. The net cash proceeds from these exercises were $786,000 and $921,000 for the three and six months ended September 30, 2007, respectively.



|Note 7. | ACQUISITION
|------- | -----------

On October 17, 2006, the Company acquired,
through one of its subsidiaries, the membership interest of Medegen Medical Products (Medegen or MMP). MMP is in the business of manufacturing and distributing disposable plastic products for the medical and laboratory
markets. MMP markets its products primarily under the trade names Medegen and Vollrath. The purchase price for the assets acquired including related closing costs was approximately $80,497,000.

During the course of the Companys evaluation of the acquisition of MMP, the Company determined that it would shut down its Northglenn, Colorado manufacturing
facility and relocate the operations into its Gallaway, Tennessee manufacturing facility. The primary reasons for the plant consolidation was as follows: redundancy of operations; elimination of inter-plant freight costs; increase of manufacturing
efficiency and reduction of manufacturing costs. In connection with the consolidation, the Company expects to incur approximately $2,687,000 of restructuring costs of which $974,000 is related to severance and $1,713,000 is related to the shutdown
of its Northglenn, Colorado facility and relocation of machinery and equipment and certain employees. The $2,687,000 was recorded as goodwill and accrued liabilities. During the six months ended September 30, 2008 the Company incurred
approximately $1,485,000 of expenses in connection with this consolidation leaving a balance of $137,000 in accrued liabilities. The Company is no longer operating from the Northglenn, Colorado facility and all related operations have been relocated
to the Gallaway, Tennessee facility.



|Note 8. | LONG-TERM DEBT
|------- | --------------

On October 17, 2006, the Company entered into
a credit agreement with certain lenders and a bank acting as administration agent for the lenders (the Credit Agreement). The Credit Agreement, as most recently amended on September 30, 2008, provides for borrowing of $85,000,000
and is divided into two types of borrowing facilities, (i) a term loan with a principal amount of $65,000,000, and (ii) revolving credit loans, which amounts may be borrowed, repaid and re-borrowed up to $20,000,000. The term loan is
payable in quarterly installments as follows: $3,250,000 for each installment date from March 31, 2007 through June 30, 2008, $250,000 for each installment date from September 30, 2008 through March 31, 2009, $1,625,000 for each
installment date from June 30, 2009 through March 31, 2010, $3,250,000 for each installment date from June 30, 2010 through March 31, 2011, $5,325,000 for each installment date from June 30, 2011 through September 30,
2011 and the remaining principal amount outstanding is due on December 31, 2011. As of September 30, 2008, $41,250,000 is outstanding on the term loan and $13,748,000 is outstanding on the revolving credit loans. The Companys
availability under the revolving credit loans amounts to $6,252,000 as of September 30, 2008.



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##### Table of Contents

Item 1.



Note 8. (continued)



Both the term loan and revolving credit loans bear interest at
the alternate base rate plus the applicable margin or at the Companys option the LIBOR rate plus the applicable margin. The alternate base rate shall mean a rate per annum equal to the greater of
(a) the Prime rate or (b) the Base CD rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2of 1%. Applicable margin shall mean with respect to an adjusted LIBOR loan a range of 75 basis points to 150 basis points. With respect to an alternate base rate loan, the applicable margin shall range from 0 basis
points to 50 basis points. Effective September 30, 2008, applicable margin shall mean with respect to an adjusted LIBOR loan a range of 200 basis points to 300 basis points. With respect to an alternate base rate loan, the applicable margin
shall range from 25 basis points to 125 basis points. The rates for both LIBOR and alternate base rate loans are established quarterly based upon certain agreed upon financial ratios. During the six months ended September 30, 2008, the average
interest rate on the term loan approximated 3.7%. Borrowings under this agreement are collateralized by all the assets of the Company, and the agreement contains certain restrictive covenants, which, among other matters, impose limitations with
respect to the incurrence of liens, guarantees, merger, acquisitions, capital expenditures, specified sales of assets and prohibits the payment of dividends. The Company is also required to maintain various financial ratios which will be measured
quarterly. As of September 30, 2008, the Company is in compliance with all such covenants and financial ratios.



|Note 9. | OTHER MATTERS
|------- | -------------

The Company is involved in two (2) product
liability cases. While the results of these lawsuits cannot be predicted with certainty, management does not expect that the ultimate liabilities, if any, will have a material adverse effect on the financial position or results of operations of the
Company and are covered by insurance.



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##### Table of Contents

Item 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Forward-Looking Statement

This report on Form 10-Q contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include plans and objectives of management for future operations, including plans
and objectives relating to the future economic performance and financial results of the Company. The forward-looking statements relate to (i) the expansion of the Companys market share, (ii) the Companys growth into new
markets, (iii) the development of new products and product lines to appeal to the needs of the Companys customers, (iv) the retention of the Companys earnings for use in the operation and expansion of the Companys
business and (v) the ability of the Company to avoid information technology system failures which could disrupt the Companys ability to function in the normal course of business by potentially causing delays or cancellation of customer
orders, impeding the manufacture or shipment of products, or resulting in the unintentional disclosure of customer or Company information.

Important
factors and risks that could cause actual results to differ materially from those referred to in the forward-looking statements include, but are not limited to, the effect of economic and market conditions, the impact of the consolidation throughout
the healthcare supply chain, volatility of raw material costs, volatility in oil prices, foreign currency exchange rates, the impact of healthcare reform, opportunities for acquisitions and the Companys ability to effectively integrate
acquired companies, the ability of the Company to maintain its gross profit margins, the ability to obtain additional financing to expand the Companys business, the failure of the Company to successfully compete with the Companys
competitors that have greater financial resources, the loss of key management personnel or the inability of the Company to attract and retain qualified personnel, the impact of current or pending legislation and regulation, as well as the risks
described from time to time in the Companys filings with the Securities and Exchange Commission, which include this report on Form 10-Q and the Companys annual report on Form 10-K for the year ended March 31, 2008.

The forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results,
performance and/or achievements of the Company to differ materially from any future results, performance or achievements, express or implied, by the forward-looking statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, and that in light of the significant uncertainties inherent in forward-looking statements; the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives
or plans of the Company will be achieved.



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##### Table of Contents

Item 2.



Three Months ended September 30, 2008 compared to Three Months ended September 30, 2007

Overview

The following table sets forth
certain operational data and operational data as a percentage of net sales for the periods indicated:



|                                             |  |                                  |        |  |       |   |  |   |        |  |       |  
|-------------------------------------------- |  | -------------------------------- | ------ |  | ----- | - |  | - | ------ |  | ----- | -
|                                             |  | Three months ended September 30, |       
|                                             |  | 2008                             |        |  | 2007  |  
|                                             |  | (dollars in thousands)           |       
|Net sales                                    |  | $                                | 73,824 |  | 100.0 | % |  | $ | 72,285 |  | 100.0 | %
|Gross profit                                 |  | $                                | 11,272 |  | 15.3  | % |  | $ | 16,442 |  | 22.7  | %
|Selling, general and administrative expenses |  | $                                | 9,923  |  | 13.4  | % |  | $ | 10,229 |  | 14.2  | %
|Income before income taxes                   |  | $                                | 720    |  | 1.0   | % |  | $ | 5,288  |  | 7.2   | %
|Net income                                   |  | $                                | 480    |  | 0.7   | % |  | $ | 3,268  |  | 4.5   | %

The Companys revenue increased by $1,539,000 or 2% to $73,824,000 and its net income decreased by $2,788,000
or 85% to $480,000 for the quarter ended September 30, 2008 over the quarter ended September 30, 2007. The increase in revenue is comprised of net price/sales mix increases of $3,560,000, which was partially offset by net unit volume
decreases of $2,021,000.

The price/sales mix increases were primarily from increased average selling prices of our patient bedside utensils, containment
systems for medical waste and minor procedure kits and trays product lines. The increase in average selling prices of certain patient bedside utensils and containment systems for medical waste products was due primarily to price increases
implemented to recover a portion of the increases in plastic resin (the primary raw material utilized in the manufacture of these products). The increase in average selling prices of our minor procedure kits and trays products was the result of a
shift in sales mix and due to an increase in sales of kits containing enhanced components.

The net unit volume decreases were primarily from losses in
operating room disposables and sterilization products (predominantly patient aids, which are principally comprised of crutches, and disposable operating room towels), patient bedside utensils, containment systems for medical waste and laboratory
products (predominantly specimen containers). A significant component of the Companys net unit volume decreases resulted from managements decision to cease shipments of crutches to a major customer due to inadequate margins. This
resulted in a decline of approximately $1,219,000 in net sales with only a negligible impact on profitability for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. Other volume decreases were
the result of several factors, including the termination of certain supply contracts and back order positions in our patient bedside disposable product line which has arisen as a result of production inefficiencies incurred at our Gallaway,
Tennessee manufacturing facility. These net unit volume declines were partially offset by volume increases primarily from greater domestic penetration of our minor procedure kits and trays and protective apparel product lines.



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##### Table of Contents

Item 2.



Containment systems for medical waste and the product lines added as a result of the acquisition of the membership
interest of Medegen Medical Products (Medegen or MMP) on October 17, 2006, represents approximately 50% of the Companys revenue. The primary raw material utilized in the manufacture of these product lines is
plastic resin. In recent years, world events have caused the cost of plastic resin to increase and be extremely volatile. The Company anticipates that such volatility may continue in the future. A significant portion of the Companys remaining
revenue is derived from products sourced from foreign suppliers based in China. The costs associated with sourcing from these suppliers have increased as a result of inflationary trends, primarily on the cost of raw materials and labor, and the
effect of the weakening US dollar versus the Chinese Yuan. Although the US dollar has recently been stable against the Chinese Yuan, the Company anticipates a further weakening of the US dollar versus the Chinese Yuan and a continuation of
inflationary trends within China.

The Company has been able, from time to time, to increase selling prices for certain of these products to recover a
portion of the increased cost. However, the Company is unable to give any assurance that it will be able to pass along future cost increases to its customers, if necessary.

The Company has entered into agreements with many of the major group purchasing organizations (GPO). These agreements, which expire at various times over the next several years, in most cases, can be
terminated typically on ninety (90) days advance notice and do not contain minimum purchase requirements. The Company to date has been able to achieve significant compliance to their respective member hospitals. The termination of any of these
agreements may result in the significant loss of business.

During the quarter ended June 30, 2008, the Company elected to exercise the ninety
(90) day advanced notice termination provisions within one of its GPO agreements, under which the Company supplies disposable operating room towels and laparotomy sponges. The termination of the agreement with the aforementioned GPO amounts to
less than 3% of the Companys net sales and has resulted from the Companys inability to negotiate acceptable price increases with the GPO and the Companys unwillingness to continue to provide products to the GPO members at current
pricing levels. Although net sales have not been significantly impacted by this termination, the Company cannot predict the future effects on its financial results from such termination.

Gross profit decreased principally as a result of; increases in resin costs, increases in the cost of products sourced from foreign vendors, continued inefficiencies incurred at our Gallaway, Tennessee manufacturing
facility, a decline in sales volume, and higher freight costs which, in total, exceeded the increase in gross profit resulting from increased average selling prices and a change in the mix of products sold.



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##### Table of Contents

Item 2.



Results of Operations

The following table sets forth the major sales variance components for the quarter ended September 30, 2008 versus September 30, 2007:



|                                                |  |   |        |  
|----------------------------------------------- |  | - | ------ | -
|(dollars in thousands)                          | 
|Three months ended September 30, 2007 net sales |  | $ | 72,285 |  
|Volume of existing products, net                |  |   | (2,044 | )
|Price/sales mix, net                            |  |   | 3,583  |  
|                                                |  |   |        |  
|Three months ended September 30, 2008 net sales |  | $ | 73,824 |  
|                                                |  |   |        |  

Net sales for the three months ended September 30, 2008 increased $1,539,000 or 2% to $73,824,000 from
$72,285,000 for the three months ended September 30, 2007.

The following table sets forth the components of the increase in net sales as well as
percent increases or decreases in unit sales and average selling prices by significant product classes for the three months ended September 30, 2008 compared to the three months ended September 30, 2007:



|                                      |  |   |                               |   |  |                                |    |  |                                            |  
|------------------------------------- |  | - | ----------------------------- | - |  | ------------------------------ | -- |  | ------------------------------------------ | -
|                                      |  |   | Net Sales$
increase(decrease) |   |  | Unit Sales% increase(decrease) |    |  | Average SellingPrices/Sales Mix % increase |  
|Minor Procedure Kits and Trays        |  | $ | 3,140,000                     |   |  | 12                             | %  |  | 7                                          | %
|Protective Apparel                    |  |   | 529,000                       |   |  | 24                             | %  |  | 6                                          | %
|Patient Bedside Utensils              |  |   | 122,000                       |   |  | (6                             | )% |  | 6                                          | %
|Urology                               |  |   | 27,000                        |   |  | (7                             | )% |  | 6                                          | %
|Containment Systems for Medical Waste |  |   | (197,000                      | ) |  | (6                             | )% |  | 5                                          | %
|Operating Room Towels                 |  |   | (222,000                      | ) |  | (4                             | )% |  | 0                                          | %
|Laparotomy Sponges                    |  |   | (330,000                      | ) |  | (13                            | )% |  | 2                                          | %
|Patient Aids                          |  |   | (1,219,000                    | ) |  | (97                            | )% |  | 0                                          | %
|Other, net                            |  |   | (311,000                      | ) |  | not meaningful                 |    |  | not meaningful                             |  
|                                      |  |   |                               |   |  |                                |    |  |                                            |  
|Increase in Net Sales                 |  | $ | 1,539,000                     |   |  |                                |    |  |                                            |  
|                                      |  |   |                               |   |  |                                |    |  |                                            |  

Management believes that the fluctuations in units sold are predominantly the result of our ability, or inability,
to increase penetration within the domestic market, subject to the recent impact of back orders resulting from manufacturing inefficiencies in our Tennessee facility. The increases in average selling prices are primarily due to price increases
implemented to recover a portion of the increases in plastic resin and increases in acquisition costs from foreign suppliers.

Gross profit for the three
months ended September 30, 2008 decreased $5,170,000 or 31% to $11,272,000 from $16,442,000 for the three months ended September 30, 2007. Gross profit as a percentage of net sales for the three months ended September 30, 2008
decreased to 15.3% from 22.7% for the three months ended September 30, 2007. Gross profit decreased as a result of higher resin prices of approximately $2,402,000, inefficiencies incurred at our Tennessee manufacturing facility of approximately
$2,335,000, increased costs of products sourced from foreign suppliers, principally from China of approximately $1,841,000, increased operating expenses in our West Virginia and North Carolina manufacturing facilities and the transfer of certain
administrative



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##### Table of Contents

Item 2.



processes to manufacturing overhead of approximately $1,045,000, increased outbound freight costs to customers of approximately $666,000 and approximately
$464,000 as a result of declines in unit volume. These decreases were partially offset by an increase of approximately $3,583,000 resulting from higher average selling prices and changes in the mix of products sold.

Many of the Companys products are produced from petroleum derived raw materials such as plastic resin. The Company also bears the cost of both inbound and outbound
freight shipments of raw materials and finished products, which are significantly impacted by the cost of oil. The cost of crude oil has declined significantly from its peak levels reached during the month of July 2008. The cost of plastic resin has
begun to decline; however, such costs currently remain well above levels paid by the Company during the three month period ended March 31, 2008. Management believes that the cost of plastic resin and fuel may continue to decline in the near
term. The Company should experience a benefit during the three months ended December 31, 2008 from lower freight costs resulting from a reduction in fuel surcharges previously levied by freight carriers. However, the benefits to the Company
from lower plastic resin costs will not be experienced until the three months ended March 31, 2009 as much of the resin that will be used in production during the three months ended December 31, 2008 was purchased during the months of June
and July of 2008.

The volatility associated with resin costs and product acquisition costs from foreign suppliers may continue for the foreseeable future.
In the past, we have been able, from time to time, to increase selling prices for certain products subject to such cost volatility as a means to recover a portion of the increases. However, we are unable to give any assurance that we will be
successful in passing along future cost increases to our customers, if deemed necessary.

The major causes of the manufacturing inefficiencies were
equipment productivity issues in our Tennessee plant and other inefficiencies associated with the consolidation of the MMP manufacturing facilities. The inefficiencies have resulted in backorders and other fulfillment issues on certain products.
Additionally, freight expenses have increased due to the backorder and order fulfillment issues and freight carrier fuel surcharges. Management anticipates reductions in these inefficiencies during the 2009 fiscal year. However, no assurance can be
given that the backorders and order fulfillment issues will not result in the loss of business.

The following table sets forth sales, cost of sales and
selling, general and administrative expense data for the periods indicated:



|                                             |  |                                  |        |   |      |   |        |  
|-------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | -
|                                             |  | Three months ended September 30, |       
|                                             |  | 2008                             |        |   | 2007 |  
|                                             |  | (dollars in thousands)           |       
|Net sales                                    |  | $                                | 73,824 |   |      | $ | 72,285 |  
|Cost of sales                                |  | $                                | 62,552 |   |      | $ | 55,843 |  
|Gross profit                                 |  | $                                | 11,272 |   |      | $ | 16,442 |  
|Gross profit percentage                      |  |                                  | 15.3   | % |      |   | 22.7   | %
|Selling, general and administrative expenses |  | $                                | 9,923  |   |      | $ | 10,229 |  
|As a percentage of net sales                 |  |                                  | 13.4   | % |      |   | 14.2   | %



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Item 2.



Selling, general and administrative expenses for the three months ended September 30, 2008 decreased 3% to
$9,923,000 from $10,229,000 for the three months ended September 30, 2007. As a percentage of net sales, selling, general and administrative expenses decreased to 13.4% for the three months ended September 30, 2008 from 14.2% for the three
months ended September 30, 2007. Management believes the decrease in selling, general and administrative expenses was due to decreased salary and related expenses as a result of increased efficiencies due to the consolidation of certain
administrative functions from the Tennessee facility into its Hauppauge, New York corporate headquarters and transfer of certain administrative processes into cost of goods sold also as a result of the consolidation of the facilities. These
decreases were partially offset by an increase in personnel which management believes will facilitate future growth and efficiencies.

Distribution
expenses increased $500,000 to $2,019,000 for the three months ended September 30, 2008 compared to $1,519,000 for the three months ended September 30, 2007. Sales and Marketing expenses and General and Administrative expenses decreased
$806,000 to $7,904,000 for the three months ended September 30, 2008 compared to $8,710,000 for the three months ended September 30, 2007. Management believes the increase in distribution expenses was primarily attributable to increased
labor costs, primarily temporary labor and overtime expenses, caused by backorders resulting from the manufacturing inefficiencies, as explained above.

Interest expense for the three months ended September 30, 2008 decreased to $631,000 from $952,000 for the three months ended September 30, 2007. The decrease in interest expense was attributable to a net decrease in the average
principal loan balances outstanding and a decrease in interest rates during the quarter ended September 30, 2008 as compared to the quarter ended September 30, 2007.

Six Months ended September 30, 2008 compared to Six Months ended September 30, 2007

Overview

The following table sets forth certain operational data and operational data as a percentage of net sales for the periods indicated:



|                                             |  |                                |         |  |       |   |  |   |         |  |       |  
|-------------------------------------------- |  | ------------------------------ | ------- |  | ----- | - |  | - | ------- |  | ----- | -
|                                             |  | Six months ended September 30, |        
|                                             |  | 2008                           |         |  | 2007  |  
|                                             |  | (dollars in thousands)         |        
|Net sales                                    |  | $                              | 151,219 |  | 100.0 | % |  | $ | 142,531 |  | 100.0 | %
|Gross profit                                 |  | $                              | 26,322  |  | 17.4  | % |  | $ | 33,551  |  | 23.5  | %
|Selling, general and administrative expenses |  | $                              | 20,384  |  | 13.5  | % |  | $ | 20,654  |  | 14.5  | %
|Income before income taxes                   |  | $                              | 4,825   |  | 3.2   | % |  | $ | 10,971  |  | 7.7   | %
|Net income                                   |  | $                              | 3,026   |  | 2.0   | % |  | $ | 6,780   |  | 4.8   | %



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Item 2.



The Companys revenue increased by $8,688,000 or 6% to $151,219,000 and its net income decreased by $3,754,000
or 55% to $3,026,000 for the six months ended September 30, 2008 over the six months ended September 30, 2007. The increase in revenue is comprised of net price/sales mix increases of $7,240,000 and net unit volume increases of $1,448,000.

The price/sales mix increases were driven primarily by increased average selling prices of our patient bedside utensils, containment systems for medical
waste and minor procedure kits and trays product lines. The increase in average selling prices of certain patient bedside utensils and containment systems for medical waste products was due primarily to price increases implemented to recover a
portion of the increases in plastic resin (the primary raw material utilized in the manufacture of these products). The increase in average selling prices of our minor procedure kits and trays products was the result of a shift in sales mix and due
to an increase in sales of kits containing enhanced components.

The net unit volume increases were driven primarily by greater domestic market penetration
of our minor procedure kits and trays and protective apparel product lines. These volume increases were partially offset by managements decision to cease shipments of crutches to a major customer due to inadequate margins. This resulted in a
decline of approximately $1,131,000 in net sales with only a negligible impact on profitability for the six months ended September 30, 2008 compared to the six months ended September 30, 2007.

Containment systems for medical waste and the product lines added as a result of the acquisition of the membership interest of Medegen Medical Products
(Medegen or MMP) on October 17, 2006, represents approximately 50% of the Companys revenue. The primary raw material utilized in the manufacture of these product lines is plastic resin. In recent years, world
events have caused the cost of plastic resin to increase and be extremely volatile. The Company anticipates that such volatility may continue in the future. A significant portion of the Companys remaining revenue is derived from products
sourced from foreign suppliers based in China. The costs associated with sourcing from these suppliers have increased as a result of inflationary trends, primarily on the cost of raw materials and labor, and the effect of the weakening US dollar
versus the Chinese Yuan. Although the US dollar has recently been stable against the Chinese Yuan, the Company anticipates a further weakening of the US dollar versus the Chinese Yuan and a continuation of inflationary trends within China.

The Company has been able, from time to time, to increase selling prices for certain of these products to recover a portion of the increased cost.
However, the Company is unable to give any assurance that it will be able to pass along future cost increases to its customers, if necessary.

The Company
has entered into agreements with many of the major group purchasing organizations (GPO). These agreements, which expire at various times over the next several years, in most cases, can be terminated typically on ninety (90) days
advance notice and do not contain minimum purchase requirements. The Company to date has been able to achieve significant compliance to their respective member hospitals. The termination of any of these agreements may result in the significant loss
of business.

During the quarter ended June 30, 2008, the Company elected to exercise the ninety (90) day advanced notice termination provisions
within one of its GPO agreements, under which the



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Company supplies disposable operating room towels and laparotomy sponges. The termination of the agreement with the aforementioned GPO amounts to less than
3% of the Companys net sales and has resulted from the Companys inability to negotiate acceptable price increases with the GPO and the Companys unwillingness to continue to provide products to the GPO members at current pricing
levels. Although net sales have not been significantly impacted by this termination, the Company cannot predict the future effects on its financial results from such termination.

Gross profit decreased principally as a result of; increases in resin costs, increases in the cost of products sourced from foreign vendors, continued inefficiencies incurred at our Gallaway, Tennessee manufacturing
facility and higher freight costs which, in total exceeded the increase in gross profit resulting from higher unit sales, increased average selling prices and a change in the mix of products sold.

Results of Operations

The following table sets forth the
major sales variance components six months ended September 30, 2008 versus September 30, 2007:



|                                              |  |   |        
|--------------------------------------------- |  | - | -------
|(dollars in thousands)                       
|Six months ended September 30, 2007 net sales |  | $ | 142,531
|Volume of existing products, net              |  |   | 1,448  
|Price/sales mix, net                          |  |   | 7,240  
|                                              |  |   |        
|Six months ended September 30, 2008 net sales |  | $ | 151,219
|                                              |  |   |        

Net sales for the six months ended September 30, 2008 increased $8,688,000 or 6% to $151,219,000 from
$142,531,000 for the six months ended September 30, 2007.

The following table sets forth the components of the increase in net sales as well as
percent increases or decreases in unit sales and average selling prices by significant product classes for the six months ended September 30, 2008 compared to the six months ended September 30, 2007:



|                                      |  |                               |            |   |                                |                |    |                                           |                |  
|------------------------------------- |  | ----------------------------- | ---------- | - | ------------------------------ | -------------- | -- | ----------------------------------------- | -------------- | -
|                                      |  | Net Sales$ increase(decrease) |            |   | Unit Sales% increase(decrease) |                |    | Average SellingPrices/Sales Mix% increase |               
|Minor Procedure Kits and Trays        |  | $                             | 5,574,000  |   |                                | 11             | %  |                                           | 6              | %
|Protective Apparel                    |  |                               | 1,835,000  |   |                                | 47             | %  |                                           | 9              | %
|Patient Bedside Utensils              |  |                               | 1,823,000  |   |                                | (2             | )% |                                           | 7              | %
|Containment Systems for Medical Waste |  |                               | 1,048,000  |   |                                | (1             | )% |                                           | 5              | %
|Urology                               |  |                               | 236,000    |   |                                | 0              | %  |                                           | 5              | %
|Operating Room Towels                 |  |                               | 197,000    |   |                                | (2             | )% |                                           | 4              | %
|Laparotomy Sponges                    |  |                               | (153,000   | ) |                                | (5             | )% |                                           | 3              | %
|Patient Aids                          |  |                               | (1,131,000 | ) |                                | (61            | )% |                                           | 0              | %
|Other, net                            |  |                               | (741,000   | ) |                                | not meaningful |    |                                           | not meaningful |  
|                                      |  |                               |            |   |                                |                |    |                                           |                |  
|Increase in Net Sales                 |  | $                             | 8,688,000  |   |                                |                |    |                                           |                |  
|                                      |  |                               |            |   |                                |                |    |                                           |                |  



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Item 2.



Management believes that the fluctuations in units sold are predominantly the result of our ability, or inability, to
increase penetration within the domestic market, subject to the recent impact of back orders resulting from manufacturing inefficiencies in our Tennessee facility. The increases in average selling prices are primarily due to price increases
implemented to recover a portion of the increases in plastic resin and increases in acquisition costs from foreign suppliers.

Gross profit for the six
months ended September 30, 2008 decreased $7,229,000 or 22% to $26,322,000 from $33,551,000 for the six months ended September 30, 2007. Gross profit as a percentage of net sales for the six months ended September 30, 2008 decreased
to 17.4% from 23.5% for the six months ended September 30, 2007. Gross profit decreased as a result of higher resin prices of approximately $4,128,000, inefficiencies incurred at our Tennessee manufacturing facility of approximately $3,870,000,
increased costs of products sourced from foreign suppliers, principally from China of approximately $3,312,000, increased operating expenses in our West Virginia and North Carolina manufacturing facilities and the transfer of certain administrative
processes to manufacturing overhead of approximately $1,692,000, and increased outbound freight costs to customers of approximately $1,559,000. These decreases were partially offset by an increase of approximately $6,852,000 resulting from higher
average selling prices and changes in the mix of products sold and approximately $480,000 as a result of increases in unit volume.

Many of the
Companys products are produced from petroleum derived raw materials such as plastic resin. The Company also bears the cost of both inbound and outbound freight shipments of raw materials and finished products, which are significantly impacted
by the cost of oil. The cost of crude oil has declined significantly from its peak levels reached during the month of July 2008. The cost of plastic resin has begun to decline; however, such costs currently remain well above levels paid by the
Company during the three month period ended March 31, 2008. Management believes that the cost of plastic resin and fuel may continue to decline in the near term. The Company should experience a benefit during the three months ended
December 31, 2008 from lower freight costs resulting from a reduction in fuel surcharges previously levied by freight carriers. However, the benefits to the Company from lower plastic resin costs will not be experienced until the three months
ended March 31, 2009 as much of the resin that will be used in production during the three months ended December 31, 2008 was purchased during the months of June and July of 2008.

The volatility associated with resin costs and product acquisition costs from foreign suppliers may continue for the foreseeable future. In the past, we have been able,
from time to time, to increase selling prices for certain products subject to such cost volatility as a means to recover a portion of the increases. However, we are unable to give any assurance that we will be successful in passing along future cost
increases to our customers, if deemed necessary.

The major causes of the manufacturing inefficiencies were equipment productivity issues in our Tennessee
plant and other inefficiencies associated with the consolidation of the MMP manufacturing facilities. The inefficiencies have resulted in backorders and other fulfillment issues on certain products. Additionally, freight expenses have increased due
to the backorder and order fulfillment issues and freight carrier fuel surcharges. Management anticipates reductions in these inefficiencies during the 2009 fiscal year. However, no assurance can be given that the backorders and order fulfillment
issues will not result in the loss of business.



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Item 2.



The following table sets forth sales, cost of sales and selling, general and administrative expense data for the
periods indicated:



|                                             |  |                                |         |   |      |   |         |  
|-------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                             |  | Six months ended September 30, |        
|                                             |  | 2008                           |         |   | 2007 |  
|                                             |  | (dollars in thousands)         |        
|Net sales                                    |  | $                              | 151,219 |   |      | $ | 142,531 |  
|Cost of sales                                |  | $                              | 124,897 |   |      | $ | 108,980 |  
|Gross profit                                 |  | $                              | 26,322  |   |      | $ | 33,551  |  
|Gross profit percentage                      |  |                                | 17.4    | % |      |   | 23.5    | %
|Selling, general and administrative expenses |  | $                              | 20,384  |   |      | $ | 20,654  |  
|As a percentage of net sales                 |  |                                | 13.5    | % |      |   | 14.5    | %

Selling, general and administrative expenses for the six months ended September 30, 2008 decreased 1% to
$20,384,000 from $20,654,000 for the six months ended September 30, 2007. As a percentage of net sales, selling, general and administrative expenses decreased to 13.5% for the six months ended September 30, 2008 from 14.5% for the six
months ended September 30, 2007. Management believes the decrease in selling, general and administrative expenses was due to decreased salary and related expenses as a result of increased efficiencies due to the consolidation of certain
administrative functions from the Tennessee facility into its Hauppauge, New York corporate headquarters and transfer of certain administrative processes into cost of goods sold also as a result of the consolidation of the facilities. These
decreases were partially offset by an increase in personnel which management believes will facilitate future growth and efficiencies.

Distribution
expenses increased $1,008,000 to $4,037,000 for the six months ended September 30, 2008 compared to $3,029,000 for the six months ended September 30, 2007. Sales and Marketing expenses and General and Administrative expenses decreased
$1,278,000 to $16,347,000 for the six months ended September 30, 2008 compared to $17,625,000 for the six months ended September 30, 2007. Management believes the increase in distribution expenses was primarily attributable to increased
sales volume and increased labor costs, primarily temporary labor and overtime expenses, caused by backorders resulting from the manufacturing inefficiencies, as explained above.

Interest expense for the six months ended September 30, 2008 decreased to $1,116,000 from $1,955,000 for the six months ended September 30, 2007. The decrease in interest expense was attributable to a net
decrease in the average principal loan balances outstanding and a decrease in interest rates during the six months ended September 30, 2008 as compared to the six months ended September 30, 2007.



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Item 2.



Liquidity and Capital Resources

The following table sets forth certain liquidity and capital resources data for the periods indicated:



|                          |  |                        |         |               |   |        
|------------------------- |  | ---------------------- | ------- | ------------- | - | -------
|                          |  | September 30,2008      |         | March 31,2008
|                          |  | (Unaudited)            |         |              
|                          |  | (dollars in thousands)
|Cash and cash equivalents |  | $                      | 2,171   |               | $ | 2,104  
|Accounts Receivable, net  |  | $                      | 21,636  |               | $ | 24,038 
|Days Sales Outstanding    |  |                        | 27.8    |               |   | 27.7   
|Inventories, net          |  | $                      | 43,336  |               | $ | 33,493 
|Inventory Turnover        |  |                        | 6.5     |               |   | 6.7    
|Current Assets            |  | $                      | 71,003  |               | $ | 64,253 
|Working Capital           |  | $                      | 43,386  |               | $ | 25,137 
|Current Ratio             |  |                        | 2.6     |               |   | 1.6    
|Total Borrowings          |  | $                      | 56,997  |               | $ | 47,906 
|Shareholders Equity      |  | $                      | 119,551 |               | $ | 115,779
|Debt to Equity Ratio      |  |                        | 0.48    |               |   | 0.41   

The Company had working capital of $43,386,000 with a current ratio of 2.6 to 1.0 at September 30, 2008 as
compared to working capital of $25,137,000 with a current ratio of 1.6 to 1.0 at March 31, 2008. Total borrowings outstanding were $56,997,000 with a debt to equity ratio of 0.48 to 1.0 at September 30, 2008 as compared to $47,906,000 with
a debt to equity ratio of 0.41 to 1.0 at March 31, 2008.

The Company has used its cash and credit facilities during the six months ended
September 30, 2008 to fund; working capital requirements, the acquisition of capital equipment within its manufacturing facilities and the renovation of a building for use as its new corporate headquarters. As discussed, our operations, and in
turn our working capital, have been impacted by the rising costs of resin and products sourced from overseas suppliers as well as operating inefficiencies in our Gallaway, Tennessee manufacturing facility. Management determined that scheduled
payments to amortize our term loans would likely be affected by borrowings under our revolving credit agreement. It is managements intent to maintain as much borrowing capacity as practical under our revolving credit agreement to support
future working capital requirements. Accordingly, management amended the terms of the Companys credit agreements (as defined herein) on September 30, 2008. Prior to the amendment the current portion of long term debt as of March 31,
2008 and September 30, 2008 was $13,000,000. The amendment, which among other modifications, decreased our current portion of long term debt associated with our term loan to $3,750,000. This change in the current portion of long term debt
increased working capital by $9,250,000.

While management believes that the company has excellent relationships with its lenders, we believe that recent
volatility in global credit markets make it unlikely that the Company would be able to affect future amendments to its credit agreements relating to scheduled term loan amortization or increasing the availability under our revolving credit agreement
in the near term.



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Management further believes that the lenders which are participating in our credit facilities, while being negatively
impacted by the volatility in global credit markets, will be able to continue to meet their obligations under our credit facilities.

The Company has
financed its operations primarily through cash flows from operations and borrowings from its existing credit facilities. At September 30, 2008 the Company had a cash balance of $2,171,000 compared to $2,104,000 at March 31, 2008. The
Companys operating activities used cash of $1,284,000 for the six months ended September 30, 2008 as compared to $10,395,000 provided during the six months ended September 30, 2007.

Net cash used by operating activities during the six months ended September 30, 2008 consisted primarily of an increase in inventories, prepaid expenses and other
current assets and a decrease in accounts payable. This was partially offset by net income from operations, depreciation and amortization and decreases in accounts receivable and income taxes payable.

The increase in inventories was primarily due to increased costs and purchasing strategies of resin. Prior to the quarter ending June 30, 2008 and during the
quarter ended September 30, 2008, the Company made large purchases of resin to hedge against future price increases. This purchase was the primary catalyst behind the increase in inventories. The decrease in accounts receivable at
September 30, 2008 was due to a lower concentration of sales at the end of the quarter when compared to the quarter ended March 31, 2008. The increase in prepaid expenses and other current assets was due to payments for insurance policies
which commenced April 1, 2008. The decrease in accrued expenses, payroll and payroll taxes was a result of the payout of year-end bonuses and commission holdbacks.

Investing activities used net cash of $7,828,000 and $4,337,000 for the six months ended September 30, 2008 and September 30, 2007, respectively. Approximately $6,972,000 of total investing activities during
the six months ended September 30, 2008 was related to the Companys purchases of property, plant and equipment, in its Tennessee manufacturing facility and renovations to the Companys new corporate headquarters.

Financing activities provided net cash of $9,179,000 for the six months ended September 30, 2008 compared to $4,913,000 used during the six months ended
September 30, 2007. Financing activities during the six months ended September 30, 2008 consisted primarily of net borrowings under the Companys credit facilities.

During the course of the Companys evaluation of the acquisition of MMP, the Company determined that it would shut down its Northglenn, Colorado manufacturing facility and relocate the operations into its
Gallaway, Tennessee manufacturing facility. The primary reasons for the plant consolidation were as follows: redundancy of operations; elimination of inter-plant freight costs; increase of manufacturing efficiency and reduction of manufacturing
costs. In connection with the consolidation, the Company expects to incur approximately $2,687,000 of restructuring costs of which $974,000 is related to severance and $1,713,000 is related to the shutdown of its Northglenn, Colorado facility and
relocation of machinery and equipment and certain employees. The $2,687,000 was recorded as goodwill and accrued liabilities. During the six months ended September 30, 2008 the Company incurred approximately $1,485,000 of expenses in connection



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with this consolidation leaving a balance of $137,000 in accrued liabilities. The Company is no longer operating from the Northglenn, Colorado facility and
all related operations have been relocated to the Gallaway, Tennessee facility.

On October 17, 2006, the Company entered into a credit agreement with
certain lenders and a bank acting as administration agent for the lenders (the Credit Agreement). The Credit Agreement, as most recently amended on September 30, 2008, provides for borrowings of $85,000,000 and is divided into two
types of borrowing facilities, (i) a term loan with a principal amount of $65,000,000, and (ii) revolving credit loans, which amounts may be borrowed, repaid and re-borrowed up to $20,000,000. The term loan is payable in quarterly
installments as follows: $3,250,000 for each installment date from March 31, 2007 through June 30, 2008, $250,000 for each installment date from September 30, 2008 through March 31, 2009, $1,625,000 for each installment date from
June 30, 2009 through March 31, 2010, $3,250,000 for each installment date from June 30, 2010 through March 31, 2011, $5,325,000 for each installment date from June 30, 2011 through September 30, 2011 and the remaining
principal amount outstanding is due on December 31, 2011. As of September 30, 2008, $41,250,000 is outstanding on the term loan and $13,748,000 is outstanding on the revolving credit loans. The Companys availability under the
revolving credit loans amounts to $6,252,000 as of September 30, 2008 and $6,500,000 as of November 5, 2008.

Both the term loan and revolving credit loans bear interest at the alternate base rate plus the applicable margin or at the Companys option the LIBOR rate plus the applicable
margin. The alternate base rate shall mean a rate per annum equal to the greater of (a) the Prime rate or (b) the Base CD rate in effect on such day plus 1% and .(c) . the Federal Funds Effective Rate in effect on such day plus 1/2of 1%. Applicable margin shall mean with respect to an adjusted LIBOR loan a range of 75 basis points to 150 basis
points. With respect to an alternate base rate loan, the applicable margin shall range from 0 basis points to 50 basis points. Effective September 30, 2008, applicable margin shall mean with respect to an adjusted LIBOR loan a range
of 200 basis points to 300 basis points. With respect to an alternate base rate loan, the applicable margin shall range from 25 basis points to 125 basis points. The rates for both LIBOR and alternate base rate loans are established quarterly based
upon certain agreed upon financial ratios.

Borrowings under this agreement are collateralized by all the assets of the Company, and the agreement
contains certain restrictive covenants, which, among other matters, impose limitations with respect to the incurrence of liens, guarantees, merger, acquisitions, capital expenditures, specified sales of assets and prohibits the payment of dividends.
The Company is also required to maintain various financial ratios which will be measured quarterly. As of September 30, 2008, the Company is in compliance with all such covenants and financial ratios.

The Company has entered into an agreement to renovate a building purchased in February 2007 located in the Hauppauge, New York area. Renovations are expected to be
completed by the end of the third quarter of fiscal 2009 at an estimated cost of $7,000,000. Upon completion, the facility will function as the Companys corporate headquarters. The Company plans on financing the renovations with cash flow from
operations and revolving credit loans. To date, the Company has expended approximately $3,979,000 with respect to this project, of which $3,559,000 was expended during the six months ended September 30, 2008.



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The Company believes that the anticipated future cash flow from operations, coupled with its cash on hand and
available funds under its revolving credit agreement will be sufficient to meet working capital requirements. Although we have borrowing capacity on our revolving credit loans, cash on hand and anticipate future cash flows from operations, we may be
limited in our ability to allocate funds for purposes such as potential acquisitions, capital expenditures, marketing, development and other general corporate purposes. In addition, we may be limited in our flexibility in planning for, or responding
to, changing conditions in our business and our industry, making us more vulnerable to general economic downturns and adverse developments in our business.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to interest rate change market risk with respect to its credit facility which is priced
based on the alternate base rate of interest plus a spread of up to 1 1/4%, or at LIBOR rate plus a spread of up to 3 %. The
spread over the alternate base rate and LIBOR rates is determined based upon the Companys performance with regard to agreed-upon financial ratios. The Company decides at its sole discretion as to whether borrowings will be at the alternate
base rate or LIBOR. At September 30, 2008, $41,250,000 was outstanding under the credit facility. Changes in the alternate base rates or LIBOR rates during fiscal 2009 will have a positive or negative effect on the Companys interest
expense. During the six months ended September 30, 2008, the average interest rate on the term loan approximated 3.7%. Each 1% fluctuation in the interest rate will increase or decrease interest expense for the Company by approximately $413,000
on an annualized basis.

In April 2007, we entered into an interest rate swap agreement to manage our exposure to interest rate changes. The swap
effectively converts a portion of our variable rate debt under the credit agreement to a fixed rate, without exchanging the notional principal amounts. At September 30, 2008, we had an interest rate swap agreement. (in a notional principal
amount of $15,000,000), which is scheduled to mature in March 2010. Under this agreement, we receive a floating rate based on the LIBOR interest rate, and pay a fixed rate of 5.02% plus the applicable margin. If, at any time, the swap is determined
to be ineffective, in whole or in part, the fair value of the portion of the interest rate swap determined to be ineffective will be recognized as a gain or loss in the statement of operations for the applicable period.

The Company is exposed to interest rate change market risk with respect to the proceeds received from the issuance and sale by the Buncombe County Industrial and
Pollution Control Financing Authority Industrial Development Revenue Bonds. At September 30, 2008, $1,900,000 was outstanding for these Bonds. The Bonds bear interest at a variable rate determined weekly. During the six months ended
September 30, 2008, the average interest rate on the Bonds approximated 2.3%. Each 1% fluctuation in interest rates will increase or decrease the interest expense on the Bonds by approximately $19,000 on an annualized basis.

A significant portion of the Companys products which are not manufactured domestically are purchased from China. All such purchases are transacted in U.S. dollars.
The Companys financial results, therefore, could be impacted by factors such as changes in foreign currency exchange rates or uncertain economic conditions including the availability of material and the cost of such material.



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Item 3.



Beginning in fiscal 2006, the Chinese government began to revalue the Yuan against other currencies, including the
U.S. dollar. This ongoing revaluation of exchange rates and removal of certain tax incentives to exporters by the Chinese government has caused the price of many items that are sourced from China to increase, which has adversely impacted our cost of
goods sold and profitability. The Company has increased selling prices for certain of these products to recover a portion of the increased cost and will attempt to do so in the future. However, there can be no assurance that the Company will be able
to pass along future cost increases, if any, to its customers which could negatively impact our results of operations and financial condition.

Item 4.

Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As
indicated in the certifications in Exhibit 32.1 and 32.2 of this report, our Chief Executive Officer and our Chief Financial Officer, with the assistance of other members of our management, have evaluated our disclosure controls and procedures (as
defined in the Securities Exchange Act of 1934 Rules . 13a-15 (e) and 15d-15(e)). Based upon . the evaluation of .our disclosure controls and procedures required by Securities Exchange Act Rules 13a-15(b) or 15d-15(b), our Chief Executive
Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were .effective for the purpose of ensuring that material information required to be in this quarterly
report is made known to them by others on a timely basis.

Our management is responsible for establishing and maintaining adequate internal controls over
financial reporting. Our internal control system was designed to provide reasonable assurance to the Companys management and board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation.

Change to Internal Control over Financial Reporting

We are involved in ongoing evaluations of internal controls. In anticipation of the filing of this Form 10-Q, our Chief Executive Officer and Chief
Financial Officer, with the assistance of other members of our management, reviewed our internal controls and have determined, based on such review, that there have been no changes in internal controls over financial reporting during the six months
ended September 30, 2008 that has materially affected, or is reasonably likely to affect, the Companys internal control over financial reporting.



31



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##### Table of Contents

MEDICAL ACTION INDUSTRIES INC.

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

There are no material legal proceedings
against the Company or in which any of its property is subject.



|Item 1A. | Risk Factors
|-------- | ------------

Additional Risk Factors

There have been no material changes to the Risk Factors disclosed in Item 1A of our Annual Report on Form 10-K for the year ended March 31,
2008.



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

None



|Item 3. | Defaults upon Senior Securities
|------- | -------------------------------

None



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



| | A. | The Registrant held its Annual Meeting of Stockholders on August 14, 2008.
| | -- | --------------------------------------------------------------------------



| | B. | Three Directors were elected at the Annual Meeting to serve until the Annual Meeting of Stockholders in 2011. The names of the Directors and votes cast in favor of their election
and votes withheld are as follows:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                    |  |            |  |               
|------------------- |  | ---------- |  | --------------
|Name                |  | Votes for  |  | Votes Withheld
|William W. Burke    |  | 14,278,161 |  | 304,536       
|                    |  |           
|Kenneth W. Davidson |  | 14,351,411 |  | 231,281       



| | C. | The stockholders also approved a proposal to ratify the appointment of Grant Thornton LLP as independent certified public accountants of the Company for the fiscal year ended
March 31, 2009; 14,449,850 shares voted in favor of the proposal, 123,352 shares voted against and 9,496 shares abstaining from voting.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 5. | Other Information
|------- | -----------------

None



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##### Table of Contents

|Item 6. | Exhibits and Reports on Form 8-K
|------- | --------------------------------



| | (a) | Exhibits
| | --- | --------

31.1 and 31.2  Certifications pursuant to
18 U.S.C. §1350, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

32.1 and 32.2  Certifications
pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



| | (b) | Reports on Form 8-K
| | --- | -------------------

Current Report on Form 8-K dated
August 7, 2008, covering Item 7.01  Results of Operations and Financial Condition and Item 9.01  Financial Statements and Exhibits

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.



|                        |  |     |  |                                              
|----------------------- |  | --- |  | ---------------------------------------------
|Dated: November 7, 2008 |  | By: |  | /s/ Charles L. Kelly, Jr.                    
|                        |  |     |  | Charles L. Kelly, Jr. Chief Financial
Officer



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