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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

For the fiscal year ended July 31, 2008

or

For the transition period from                    to                  

Commission File No. 001-31337

CANTEL MEDICAL CORP.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (973) 890-7220

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o    No  x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter, as quoted by the New York Stock Exchange on that date: $142,266,947.

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the close of business on September 19, 2008: 16,372,531

Documents incorporated by reference:  Definitive proxy statement to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 in connection with the 2008 Annual Meeting of Stockholders of Registrant.

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Forward Looking Statements

This Annual Report on Form 10-K contains “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 and releases issued by the Securities and Exchange Commission (the “SEC”) and within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are based on current expectations, estimates, or forecasts about our businesses, the industries in which we operate, and the beliefs and assumptions of management; they do not relate strictly to historical or current facts. We have tried, wherever possible, to identify such statements by using words such as “expect,” “anticipate,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,”  “may,” “could,” and variations of such words and similar expressions. In addition, any statements that refer to predictions or projections of our future financial performance, anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions about future events, activities or developments and are subject to numerous risks, uncertainties, and assumptions that are difficult to predict including, among other things, the following:

·                   the adverse impact of consolidation of dialysis providers and our dependence on a concentrated number of dialysis customers

·                   the adverse impact of consolidation of dental product distributors and our dependence on a concentrated number of such distributors

·                   the adverse impact of rising fuel and oil prices on our raw materials and transportation costs

·                   the acquisition of new businesses and successfully integrating and operating such businesses

·                   the increasing market share of single-use dialyzers relative to reuse dialyzers in the United States

·                   the adverse impact of increased competition on selling prices and our ability to compete effectively

·                   foreign currency exchange rate and interest rate fluctuations

·                   the impact of significant government regulation on our businesses

You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the foregoing items to be a complete list of all potential risks or uncertainties. See “Risk Factors” below for a discussion of the above risk factors and certain additional risk factors that you should consider before investing in the shares of our common stock.

All forward-looking statements herein speak only as of the date of this Report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act.

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PART I

Item 1.                   BUSINESS .

General

We are a leading provider of infection prevention and control products in the healthcare market, specializing in the following operating segments:

·                   Water Purification and Filtration : Water purification equipment and services, filtration and separation products, and disinfectants for the medical, pharmaceutical, biotech, beverage and commercial industrial markets.

·                   Dialysis : Medical device reprocessing systems, sterilants/disinfectants, dialysate concentrates and other supplies for renal dialysis.

·                   Healthcare Disposables : Single-use, infection control products used principally in the dental market including face masks, towels and bibs, tray covers, saliva ejectors, germicidal wipes, plastic cups, sterilization pouches and disinfectants.

·                   Endoscope Reprocessing : Medical device reprocessing systems and sterilants/disinfectants for endoscopy.

·                   Therapeutic Filtration : Hollow fiber membrane filtration and separation technologies for medical applications. (Included in All Other reporting segment).

·                   Specialty Packaging : Specialty packaging and thermal control products, as well as related compliance training, for the transport of infectious and biological specimens and temperature sensitive pharmaceutical, medical and other products. (Included in All Other reporting segment).

Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread of infections.

Throughout this document, references to “Cantel,” “us,” “we,” “our,” and the “Company” are references to Cantel Medical Corp. and its subsidiaries, except where the context makes it clear the reference is to Cantel itself and not its subsidiaries.

Fiscal 2008 Acquisitions

Acquisition of Strong Dental Products, Inc.

                On September 26, 2007, we expanded our Healthcare Disposables segment by purchasing all of the issued and outstanding stock of privately-held Strong Dental Products, Inc. (“Strong Dental”) for $4,017,000, including transaction costs and assumption of debt. Under the terms of the purchase agreement, we agreed to pay additional purchase price up to $700,000 contingent upon the achievement of a specified revenue target over a three year period. Strong Dental designs and markets comfort cushioning and infection control covers for x-ray film and digital x-ray sensors. As a result of this acquisition, Strong Dental products are now sold exclusively through Crosstex’ network of distributors. The acquired business had pre-acquisition annual revenues of approximately $1 million. The results of operations of Strong Dental are included in our results of operations in fiscal 2008 subsequent to September 26, 2007 and are not included in any prior periods. The principal reasons for the acquisition were to (i) leverage the sales and marketing infrastructure of Crosstex by adding a branded, technologically differentiated, and patent-protected product line, (ii) expand into the rapidly growing area of digital radiography as dentists convert from film to digital x-rays, and (iii) add a new product line that focuses on the dental hygienist community, which product will aid in cross-selling the recently launched Patient’s Choice™ line of Crosstex products.

Acquisition of Verimetrix, LLC

                On September 17, 2007, we expanded our Endoscope Reprocessing (Medivators) segment by purchasing certain net assets from Verimetrix, LLC (“Verimetrix”) for $4,906,000, including transaction costs. Under the terms of the purchase agreement, we agreed to pay additional purchase price up to $4,025,000 contingent upon the achievement of a specified cumulative revenue target over a six year period. Verimetrix designs, markets and sells the Veriscan ™  System, a state-of-the-art endoscope leak detection device that provides customers with superior accuracy, complete automation, and

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comprehensive electronic record keeping. The acquired business had pre-acquisition annual revenues of approximately $2,000,000. The results of operations of Verimetrix are included in our results of operations in fiscal 2008 subsequent to September 17, 2007 and are not included in any prior periods. The principal reasons for the acquisition were to (i) add a technologically advanced product that fits squarely in our existing customer call pattern for Medivators products; (ii) leverage our national, direct hospital field sales force and their in-depth knowledge of the endoscopy market; and (iii) equip our sales force with a broad and comprehensive product line ranging from pre-cleaning detergents, flushing aids and leak testing equipment, to automated disinfection equipment and chemistries.

Acquisition of Dialysis Services, Inc.

On August 1, 2007, we purchased the water-related assets of Dialysis Services, Inc. (“DSI”) for $1,250,000, including transaction costs. DSI, based in Springfield, Tennessee, designs, installs and services high quality water and bicarbonate systems for use in dialysis clinics, hospitals and university settings. The acquired business had pre-acquisition revenues of approximately $1,200,000. The results of operations of DSI are included in our results of operations for the entire fiscal 2008 and are not included in any prior periods. The principal reason for the acquisition was the strengthening of our sales and service presence and base of business in a region with a significant concentration of dialysis clinics and healthcare institutions. The operating results of DSI are included in our Water Purification and Filtration segment.

Reporting Segments

The following table gives information as to the percentage of consolidated net sales from continuing operations accounted for by each of our reporting segments:

The table above does not include information related to the operations of our subsidiary Carsen Group, Inc., which closed the sale of substantially all of its assets to Olympus America Inc. and certain of its affiliates (collectively, “Olympus”) on July 31, 2006. The operations of Carsen, which has not had any active business operations since July 31, 2006, are reflected as a discontinued operation in our Consolidated Financial Statements.

For a presentation of net sales, operating income and total assets by reporting segment, see Note 17 to the Consolidated Financial Statements.

Water Purification and Filtration

General

We design, develop, manufacture, sell, and service water purification systems and accessories for dialysis and other specific healthcare applications, research laboratories and for pharmaceutical, beverage and commercial industrial customers. These systems provide total purification solutions specific to our customers’ needs and site conditions, ranging from low-volume, reverse osmosis and deionization systems, to high-volume, complete turnkey purification systems. We generally sell the equipment directly to our customers in the United States, Puerto Rico, and Canada and through various third-party distributors in international markets.

Purification systems can include combinations of proven treatment methods such as (i) carbon filtration, which removes chlorine and dissolved organic contamination by adsorption; (ii) reverse osmosis (RO), which is a filtration process that forces liquid through non-porous or semi-porous membranes to remove particles, microorganisms and dissolved minerals and organics; (iii) ultra-filtration, which removes bacteria, viruses and other ultrafine impurities from water using a membrane similar in design to a reverse osmosis membrane; (iv) deionization, which is an ion exchange platform that requires resin regeneration (see “Resin Regeneration” below); and (v) electro-deionization, which is a form of deionization

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that is based on the conductance of electrical charges. We have significant expertise in packaging these technologies to meet specific requirements of life science customers requiring high purity water that is free of biological contamination.

Our March 30, 2007 acquisition of GE Water’s dialysis business established us as the market leader in the supply of United States Food and Drug Administration (“FDA”) 510(k) cleared water purification systems to the dialysis industry worldwide. During fiscal 2008 over 50% of our sales in this segment were derived from sales and service to dialysis clinics.

Water Purification Equipment

Our product line of water purification systems has been designed to produce “biologically pure” water targeted for use in the healthcare, life sciences, food and beverage, and commercial industrial markets. We have significant expertise in the design and manufacture of water treatment systems designed to meet specific water requirements of the healthcare, life sciences and beverage industries. Such expertise includes “Water for Hemodialysis” and all grades of US Pharmacopeia (USP)  water (i.e., water meeting the FDA enforced standards of the United States Pharmacopeia) including “USP Purified Water” which is an FDA requirement for the labeling of “purified” bottled water. We also package these same technologies and expertise in industrial designs to meet the requirements for high purity water in the commercial industrial markets such as boiler feedwater production or high quality rinsewater production.

Our Biolab ™ equipment line includes systems that utilize either chemical or heat disinfection to sanitize the equipment. Our HX product line, introduced in 2007, provides total heat disinfection of the entire water purification system and water distribution loop. Heat disinfection is especially attractive to the life science marketplace as it requires the highest levels of biological purity. Heat sanitization is environmentally friendly and prevents the formation of dangerous biofilms. Heat disinfection has been used in the pharmaceutical industry for years and has been recently introduced in the dialysis market.

The Biolab equipment line of reverse osmosis (RO) machines includes various designs and sizes to meet our customers’ specific requirements. Our standard line of equipment includes the 2200, 3300, 4400, 8400, RODI ®  combination RO and electro-deionization system, and various heat disinfecting configurations. These product lines are now complemented by the product lines acquired with the GE medical business including the 23G, Zyzatech V and Z series, and the Millenium, the leading medical portable reverse osmosis unit. The combined businesses have a wide product offering that can be configured to serve all of our target markets.

We also offer pretreatment equipment, lab water equipment, a full range of service deionization tanks and specific equipment designed to support the life sciences and industrial markets including peripheral equipment such as carts, bicarbonate and acid delivery systems with central and single mix distribution units, and concentrate systems with central concentrate holding tanks.

Our systems meet water quality and good manufacturing practice standards of the Association for the Advancement of Medical Instrumentation (“AAMI”). We have received 510(k) clearances from the FDA for our Biolab purification equipment and the acquired GE product lines for healthcare applications, our dialysis water purification systems, bicarbonate mix and distribution systems and the Semper Pure portable RO machine.

Service & Maintenance; Resin Regeneration

We provide service and maintenance for water purification systems in the United States and Canada through sixteen regional offices (fourteen in the United States and two in Canada). These service centers are staffed with sales and service personnel to support both scheduled and emergency customer requirements. Each office provides 24-hour emergency service for our customers through a fleet of stocked service vehicles. Six of the offices (Toronto, Montreal, Philadelphia, Boston, Chicago, and Atlanta) are equipped with resin regeneration plants (described below).

Resin regeneration (also known as service deionization and carbon exchange) is the process in which cylinders (pressure vessels with an inlet connection and an outlet connection) are assembled, sanitized, and filled with ion exchange resin, which is processed using hydrochloric acid and caustic soda. These cylinders are connected to a customer’s water supply. As the water passes through the ion exchange resin beads, minerals are removed. When the electrical charge placed on the resin beads during the regeneration process is exhausted, the cylinders are exchanged for identical cylinders with regenerated resin. The cylinders with exhausted resin are returned by service personnel to our regeneration plants and the resin is regenerated for use by the same or another customer. Customers are invoiced for each cylinder replacement.

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Filtration

We offer a full line of filters utilizing hollow fiber membrane technology. The filters, sold under the FiberFlo ®  Capsule Filters and FiberFlo ®  Cartridge Filters names, are utilized to remove impurities from liquid streams for a wide range of applications. Such applications include the filtering of ultrapure water to remove bacteria and endotoxins in medical environments to provide protection for patients undergoing treatments that use ultrapure water. Our cartridge filters are validated to remove endotoxins in dialysis water, which is included in our registration of the filters as Medical Devices under FDA 510(k) regulations. The filters are also used in medical device reprocessing systems to help meet reprocessing water quality guidelines outlined by the AAMI. In industrial applications, the filters are used to protect systems from contamination from particulates and microorganisms.

Our FiberFlo filters are also being used in a variety of industries including pharmaceutical manufacturing, food and beverage processing, cosmetic manufacturing and electronics manufacturing. The filters are being used increasingly for the removal of bacteria, pyrogens and other contaminants from aqueous solutions. These filters are engineered for point-of-use applications that require very fine filtration. Their hollow fiber design provides a surface area that is up to four times larger than traditional pleated filters that are used in the same markets. The large surface area provides greater capacity and longer filter life for the customer. FiberFlo Capsule Filters and Cartridge Filters are available in a variety of styles, sizes, and configurations to meet a comprehensive range of customer needs and applications.

Other products include microfiber and flat sheet membrane prefiltration products designed to protect the FiberFlo filter products and prolong their life in their intended applications.

FiberFlo filter products are sold directly and through various third-party distributors in the United States, Puerto Rico, Canada, and other international markets.

Sterilants

Minncare ®  Cold Sterilant is a liquid sterilant product used to sanitize and disinfect high-purity water systems. Minncare Cold Sterilant is based on our proprietary peracetic acid sterilant technology, and is engineered to clean and disinfect reverse osmosis (RO) membranes and associated water distribution systems. Minncare Cold Sterilant is widely used in the dialysis, medical, pharmaceutical and other industries to disinfect ultrapure water systems as part of overall procedures to control the contamination of systems by microorganisms and spores. Actril ®  Cold Sterilant is a ready-to-use formulation of our proprietary peracetic acid based sterilant technology. It is used for surface disinfection in a variety of industries, including the medical and pharmaceutical industries. We also have private label agreements for both Minncare and Actril sterilants with companies in the infection control industry.

Dialysis

General

We design, develop, manufacture and sell reprocessing systems and sterilants for dialyzers (a device serving as an artificial kidney), as well as dialysate concentrates and supplies utilized for renal dialysis. Our products are sold in the United States and, to a significantly lesser extent, throughout the world. Our customer base is comprised of large and small dialysis chains as well as independent dialysis clinics. We sell the products in the United States primarily through our own direct distribution network, and in many international markets either directly or under various third-party distribution agreements.

Dialyzer Reprocessing Products and Services

During dialysis, a dialyzer is used to filter fluids and wastes from a dialysis patient’s blood. Our dialyzer reprocessing products are limited to use by centers that choose to clean, disinfect and reuse dialyzers, known as “dialyzer reuse,” rather than discard the dialyzers after a single-use. Our products meet rigorous sterility assurance standards and regulations, thereby providing for the safe and effective reuse of dialyzers used in dialysis clinics.

Dialysis centers in the United States that reuse dialyzers derive an economic benefit since the per-procedure cost is less when utilizing dialyzer reuse compared with single-use. Dialysis clinics generally receive a capitated payment for providing hemodialysis treatment. Additionally, dialyzer reuse significantly reduces the negative environmental consequences of single-use dialyzers since it dramatically reduces the amount of medical waste in landfills. Although public information is not available to accurately quantify the number of dialysis centers currently employing dialyzer reuse versus single-use, it is apparent that, despite the cost effectiveness and environmental advantages of dialyzer reuse, the market share of single-use dialyzers has been increasing during the past five years relative to reuse dialyzers.

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We believe that approximately one-third of all dialysis procedures in the United States currently reuse dialyzers. This compares to approximately three-fourths reuse reported by the Centers for Disease Control in 2001. We believe that the shift from reuse to single-use dialyzers is principally due to the commitment of Fresenius Medical Care (“Fresenius”), the largest dialysis chain in the United States and a manufacturer of single-use dialyzers, to convert all of its reuse dialysis clinics (including newly acquired clinics) to single-use facilities. Sales to our principal dialysis customer, DaVita, Inc. (“DaVita”), the second largest dialysis chain in the United States and a proponent of reuse, have increased during fiscal 2008. However, a continued decrease in dialyzer reuse in the United States in favor of single-use dialyzers would have an adverse effect on our business. See “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Our dialyzer reprocessing products include the Renatron ®  II Automated Dialyzer Reprocessing System, the Renalog ®  RM Data Management System and Renalin ®  Cold 100 Sterilant, a peracetic acid based sterilant.

The Renatron system provides an automated method of rinsing, cleaning, sterilizing and testing dialyzers for reuse. The Renatron II Automated Dialyzer Reprocessing System, the most current version of the product, includes a bar-code reader, a computer and the Renalog RM Data Management System, a software accessory that provides dialysis centers with automated record keeping and data analysis capabilities. We believe our Renatron systems are faster, easier to use, and more efficient than competitive automated systems. We also believe that the Renatron systems are the top selling automated dialyzer reprocessing systems in the world.

Our Renalin 100 sterilant is a proprietary peracetic acid-based formula that, when used with our Renatron system, effectively cleans, disinfects and sterilizes dialyzers without the hazardous fumes and potential disposal issues related to glutaraldehyde and formaldehyde reprocessing solutions. We believe Renalin sterilant is the leading dialyzer reprocessing solution in the United States.

We also manufacture a comprehensive product line of test strips to measure concentration levels of the peracetic acid chemistries we produce. These test strips ensure that the appropriate concentration of sterilant is maintained throughout the required contact period, in addition to verifying that all sterilant has been removed from the dialyzer prior to patient use. We also sell a variety of dialysis supplies manufactured by third parties.

Our Dialysis segment offers various preventative maintenance programs and repair services to support the effective operation of reprocessing systems over their lifetime. Our field service personnel, dialysis center technicians and international third-party distributors install, maintain, upgrade, repair and troubleshoot equipment.

Dialysate Concentrates

Our renal dialysis treatment products include a line of acid and bicarbonate concentrates, referred to as dialysate concentrates, used by kidney dialysis centers to prepare dialysate, a chemical solution that draws waste products from the patient’s blood through a dialyzer membrane during the hemodialysis treatment. Dialysate concentrates are used in the dialysis process, whether single-use or reuse dialyzers are being utilized. These concentrates are freight sensitive and due to the competitive landscape carry overall lower gross margins in our product portfolio.

Healthcare Disposables

We are a leading manufacturer and reseller of single-use, infection control products used principally in the dental market. We offer a broad selection of core disposable dental products, comprising over 60 categories of dental merchandise, including face masks, towels and bibs, tray covers, saliva ejectors and evacuators, germicidal wipes, plastic cups, sterilization pouches, surface barriers, eyewear, disinfectants and cleaners, hand care products, gloves, prophy angles, cotton products, needles and syringes, scalpels and blades, prophy pastes, and fluoride foams and gels. We believe that we maintain a leading market position in the United States for face masks, towels and bibs, tray covers, saliva ejectors, germicidal wipes, sterilization pouches and plastic cups used in the dental market. Part of our strategy is to continue developing, licensing and/or acquiring branded products with a differentiated feature set, ideally patent protected. Examples of this are evidenced by our recent acquisitions. In July 2007, we acquired all rights to the unique, patented, disposable Twist Ò   prophy angle, which cleans and polishes teeth and aids dentists, hygienists and veterinarians in not only eliminating oral splatter, but also improving patient safety and comfort by avoiding frictional heat. In September 2007, we further expanded our Healthcare Disposables segment by purchasing Strong Dental, a designer and marketer of comfort cushioning and infection control covers for x-ray film and digital x-ray sensors, which include solutions for traditional film and phosphor plates (sold under the brand name Edge-Ease ® ) and a series of patent-protected “all-in-one” comfort cushion, barrier sleeve and positioning aids for the digital radiography environment (sold under the brand names Wrap-Ease ™ , Sensor Slippers ™ , BiteWing-Ease ™  and

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Slip-Ease ™ ). The Twist prophy angle and Strong Dental infection control covers complement the full line of our Crosstex’ Patient’s Choice™ products that include prophy pastes, fluoride foams and gels, and trays, as well as topical anesthetics, which we started selling in February 2007.

We manufacture products accounting for approximately two-thirds of our net sales in this segment. We source the balance of our products from third-party suppliers, certain of which are sold under exclusive distributorship agreements with the suppliers. Overall, approximately 90% of our net sales in this segment relate to products manufactured in the United States. The majority of our healthcare disposable products are sold under the Crosstex ®  brand name. For certain of our customers, we also produce private label products.

Our healthcare disposable products are sold to approximately 350 wholesale customers in over 90 countries, comprising a significant number of ship-to locations in the United States and, to a lesser extent, in Europe, Japan and elsewhere. The wholesalers generally include major healthcare distributors, group purchasing organizations and co-operatives that sell our products to dental practices as well as medical, veterinary, and educational institutions. In fiscal 2008, we invested in additional field sales and marketing support to work at the national distributor level as well as more closely with the regional and local field sales forces of our distributors.

Endoscope Reprocessing

General

We design, develop, manufacture and sell endoscope reprocessing systems, sterilants and related supplies. Although endoscopes generally can be manually disinfected, there are many problems associated with such methods including the lack of uniform disinfection procedures, personnel exposure to disinfectant fumes and incomplete rinsing that could result in disinfectant residue remaining in or on the endoscope. We believe our endoscope reprocessing equipment offers several advantages over manual immersion in disinfectants. Our products, which meet rigorous high-level disinfection assurance standards and regulations, allow the safe and effective reuse of endoscopes in healthcare facilities throughout the world.

Our automated endoscope reprocessing equipment is designed to pre-rinse the device, then continuously pump disinfectant through all internal working channels of the endoscope, thus exposing all internal and external areas of the endoscope to the disinfectant, resulting in thorough and consistent disinfection. After disinfection, all internal channels and external surfaces are thoroughly rinsed to completely remove disinfectant residue. This automated process inhibits the build up of biofilms in the working channels and renders the endoscope safe for the next patient use. In addition, the entire disinfection process can be completed with minimal participation by the operator, freeing the operator for other tasks, reducing the exposure of personnel to the chemicals used in the disinfection process and reducing the risk of infectious diseases. Our reprocessing equipment also reduces the risks associated with inconsistent manual disinfecting.

Endoscope Reprocessing Products and Services

Our Medivators ®  product portfolio represents the most comprehensive offerings of capital equipment, chemistries, consumables and services that are used to leak test, clean, and disinfect flexible endoscopes from the point of removal from a patient through to utilization in the next patient procedure.

Our Medivators line of endoscope reprocessing systems includes several automated systems, such as the Advantage ™ , Advantage Plus ™ and DSD-201 systems, which are microprocessor-controlled, dual-basin, asynchronous endoscope disinfection systems, and the SSD-102, which is a single basin version of the DSD-201 system. Our Advantage and Advantage Plus endoscope reprocessing systems represent technologically advanced automated systems designed to be compliant with European standards and to compete against the newest systems both in Europe and North America. We commenced sales of the Advantage platform in Europe in 2004 and in the United States in August 2007 following FDA clearance. All of the automated disinfection machines can be used on a broad variety of endoscopes and are programmable by the user. The dual-basin system can disinfect two endoscopes at a time. We also manufacture the Medivators CER series of countertop semi-automated endoscope reprocessors. These products are more compact, less expensive single and dual endoscope disinfection units.

Our Medivators product line also includes the Scope Buddy ™  Endoscope Flushing Aid, a machine that minimizes the risk of worker repetitive motion injury associated with manual cleaning of endoscopes, while increasing the consistency of cleaning results through standardization of the pre-cleaning process. As a result of the September 17, 2007 Verimetrix acquisition, we expanded our Medivators Endoscope Reprocessing product offerings with a state-of-the-art endoscope leak

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detection device that provides customers with superior accuracy, complete automation, and comprehensive electronic record keeping.

In connection with our endoscope reprocessing business, we manufacture Rapicide ®  glutaraldehyde-based high-level disinfectant and sterilant, which has FDA 510(k) clearance for a high-level disinfection claim of five minutes at 35 degrees Celsius. This disinfection contact time is currently one of the fastest available of any high-level disinfectant product sold in the United States. Rapicide has superior rinsibility which gives us a competitive market advantage. We also sell Adaspor ®  peracetic-acid based high-level disinfectant, packaged by a third party in Europe, for the European and Asian markets that can be utilized in a wide variety of single-use or multiple-use systems.

Our product offerings also include Intercept ™  Detergent and Wipes which are formulated especially for the cleaning and removal of biological and organic soils from medical device surfaces, including flexible endoscopes. When used regularly, Intercept and Intercept Wipes progressively remove built up layers of biofilm from endoscope channels and exterior surfaces. Biofilms are an acknowledged concern in health care as potential sources of nosocomial infection agents (environmentally sourced microorganisms that can be transmitted to patients during procedures or treatment).

Our Endoscope Reprocessing segment offers various preventative maintenance programs, repair services and user training programs to support the effective operation of reprocessing systems over their lifetime. Medivators field service personnel and international third-party distributors install, maintain, upgrade, repair and troubleshoot equipment.

Marketing and Sales

On August 2, 2006, we commenced the sale and service of our Medivators brand endoscope reprocessing equipment, high-level disinfectants, cleaners and consumables through our own United States field sales and service organization. Our direct sale of these products is the result of our decision that it is in our best long-term interest to control and further develop our own direct hospital-based United States distribution network and, as such, not to renew Olympus’ exclusive United States distribution agreement when it expired on August 1, 2006.

Throughout the former distribution arrangement with Olympus, we employed our own personnel to provide clinical sales support activities as well as an internal technical and customer service function, depot maintenance and service and all logistics and distribution services for the Medivators/Olympus customer base. This existing and fully developed infrastructure has continued to be a critical factor in the success of our new direct sales and service strategy. Outside of the United States, the Medivators group has direct sales, marketing, and service capabilities in the Netherlands, and sells through independent distribution partners in the rest of Europe, Canada, Asia, Australia, and Latin America.

All Other

We also operate other businesses, including the Specialty Packaging operating segment, which includes specialty packaging products and compliance training services for the transport of infectious and biological specimens, and the Therapeutic Filtration operating segment, which includes hemofilters, hemoconcentrators and other hollow fiber filters manufactured and sold for medical applications. Due to the relatively small size of these businesses, they are combined in the All Other reporting segment.

Specialty Packaging

We provide specialty packaging and temperature control products for the transport of infectious and biological specimens as well as thermally sensitive pharmaceutical and medical products. Additionally, we provide compliance training services for the safe and proper transport of infectious and biological specimens, as defined by various international and national regulatory organizations.

We believe that the increasing concern over the potential spread of infectious agents, such as avian flu, E. coli and mad cow disease, as well as potential acts of bio-terrorism using agents such as anthrax, have significantly increased awareness of the proper shipping of diagnostic substances such as blood and tissues. We believe that we are particularly well qualified to meet the global need for compliant, secure, cost-effective packaging solutions for the shipping of infectious and biological specimens.

Throughout fiscal 2008, we continued the development, production and sales of the Saf-T-Temp ™  brand line of phase change materials (PCM) using licensed proprietary thermal technology for temperature-controlled shipments. These phase change materials help maintain thermally sensitive specimens and products, such as vaccines, pharmaceuticals, and

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diagnostic reagents within a discrete temperature range during shipment. The discipline of “Cold Chain Management” continues to grow as manufacturers of temperature sensitive pharmaceuticals and medical products, as well as clinical laboratories, search for more efficient and cost-effective methods to ensure the viability of their products and/or specimens in accordance with quality control standards.

In addition, to meet regulatory requirements that require shippers of infectious and biological substances to be trained and certified at least every two years or as often as regulations change, we offer a variety of training options, allowing the customer to choose the method that best meets its needs. We provide open enrollment symposium-style training seminars in various cities, private seminar training at customers’ on-site locations, as well as self-paced internet, CD and network software.

Our customer base consists of medical research companies, diagnostic, clinical and university laboratories, pharmaceutical and biotechnical companies, United States and Canadian government agencies, hospitals and state public health departments. Our packaging, thermal and training products are distributed world wide both directly and through third-party distributors.

Therapeutic Filtration

Our therapeutic filtration products are extracorporeal filters utilizing our proprietary hollow fiber technology. These filters include hemoconcentrators, hemofilters and specialty filters utilized for therapeutic medical applications. We also offer a line of ancillary products, including blood pumps, air detectors, and pressure monitors.

We manufacture, market and sell a comprehensive line of hemoconcentrators. A hemoconcentrator is a device used by a perfusionist (a health care professional who operates heart-lung bypass equipment) to concentrate red blood cells and remove excess fluid from the bloodstream during open-heart surgery. Because the entire blood volume of the patient passes through the hemoconcentrator during an open-heart procedure, the biocompatibility of the blood-contact components of the device is critical.

Our hemoconcentrators are designed to meet the clinical requirements of neonatal through adult patients. Our principal products are the Hemocor HPH® hemoconcentrators, which contain our proprietary polysulfone hollow fiber. The Hemocor HPH line also features a unique “no-rinse” design that allows it to be quickly and efficiently inserted into the bypass circuit at any time during an open-heart procedure.

We also manufacture, market and sell a line of Renaflo ®  II hemofilters. A hemofilter is a device that performs hemofiltration in a slow, continuous blood filtration therapy used to control fluid overload and acute renal failure in unstable, critically ill patients who cannot tolerate the rapid filtration rates of conventional hemodialysis. The hemofilter removes water, waste products and toxins from the circulating blood of patients while conserving the cellular and protein content of the patient’s blood. Our hemofilter line features no-rinse, polysulfone hollow fiber filters that requires minimal set-up time for healthcare professionals. The hemofilter is available in six different models to meet the clinical needs of neonatal through adult patients.

Historically, one of our most successful specialty filters has been sold on a private label basis to a manufacturer of a respiratory therapy device that incorporates our filter in their product, particularly for pediatric applications. Sales of this filter were a significant source of growth in our Therapeutic Filtration segment.

Our therapeutic products are sold to biotech manufacturers and through third-party distributors.

Government Regulation

Many of our products are subject to regulation by the FDA, which regulates the testing, manufacturing, packaging, distribution and marketing of our medical devices and water purification devices in the United States. Delays in FDA review can significantly delay new product introduction and may result in a product becoming “dated” or losing its market opportunity before it can be introduced. Certain of our products may also be regulated by other governmental or private agencies, including the Environmental Protection Agency, Underwriters Lab, Inc. (“UL”), and comparable agencies in certain foreign countries. The FDA and other agency clearances generally are required before we can market such new or significantly changed existing products in the United States or internationally. The FDA and certain other international governmental agencies also have the authority to require a recall or modification of products in the event of a defect.

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The Food, Drug and Cosmetic Act of 1938 and Safe Medical Device Act of 1990 require compliance with specific manufacturing and quality assurance standards for certain of our products. The regulations also require manufacturers to establish a quality assurance program to monitor the design and manufacturing process and maintain records that show compliance with FDA regulations and the manufacturer’s written specifications and procedures relating to its medical devices. The FDA inspects medical device manufacturers for compliance with the current Quality Systems Regulations (“QSR’s”). Manufacturers that fail to meet the QSR’s may be issued reports or citations for non-compliance.

In addition, many of our infection prevention and control products sold in Canada, Europe and Japan are subject to comparable regulations and requirements as those described above. International regulatory bodies often establish varying regulations governing product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties, and tax requirements. For example, as a result of our sales in Europe, we were required to be certified as having a Quality System that meets the ISO 13485-2003 standard.

Many of our products must also meet the requirements of the European Medical Device Directive (“MDD”) for their sale into the European Union. This certification allows us, upon completion of a comprehensive technical file, to affix the CE mark to our products and to freely distribute such products throughout the European Union. Failure to maintain CE mark certification could have a material adverse effect on our business.

Our endoscope and dialyzer reprocessing products, as well as our Canadian water purification equipment manufacturing facility and many of our products manufactured in Canada, are subject to regulation by Health Canada — Therapeutic Products Directorate (“TPD”), which regulates the distribution and marketing of medical devices in Canada. Certain of such products may be regulated by other governmental or private agencies, including Canadian Standards Agency (“CSA”). TPD and other agency clearances generally are required before we can market new medical products in Canada. The Health Products and Food Branch Inspectorate (“HPFBI”) governs problem reporting, modification and recalls. HPFBI also has the authority to require a recall or modification in the event of defect. In order to market our medical products in Canada, we are required to hold a Medical Device Establishment License, as well as certain medical device licenses by product, as provided by HPFBI.

Certain of our specialty packaging products have been independently tested by a third-party laboratory and certified by Transport Canada. These certified packaging products as well as our other specialty packaging products have been designed to meet all applicable national and international standards for the safe transport of infectious and biological substances. Such standards include those issued by Canadian General Standards Board, Transport of Dangerous Goods Regulations Canada, International Civil Aviation Organization, International Air Transport Association, and the United States Code of Federal Regulations Title 49.

Federal, state and foreign regulations regarding the manufacture and sale of our products are subject to change. We cannot predict what impact, if any, such changes might have on our business.

Sources and Availability of Raw Materials

We purchase raw materials, sub-assemblies, components, and other supplies essential to our operations from numerous suppliers in the United States and abroad. The principal raw materials that we use to conduct operations include chemicals, paper pulp, resin, stainless steel and plastic components. These raw materials are obtainable from several sources and are generally available within the lead times specified to vendors.

From time to time we experience price increases for raw materials, with no guarantee that such increases can be passed along to our customers. During fiscal 2008, we experienced unprecedented price increases in certain raw materials, including chemicals, paper pulp, and plastics (resins and bottles). In addition, we experienced significant difficulty in obtaining certain chemicals in fiscal 2008 due to apparent shortages by certain suppliers. Although we do not currently foresee extraordinary difficulty in obtaining the materials, sub-assemblies, components, or other supplies necessary for our business operations, we cannot predict if similar difficulties will occur in the future, including further price increases, that may adversely affect our business.

Intellectual Property

We protect our technology and products by, among other means, filing United States and foreign patent applications. There can be no assurance, however, that any patent will provide adequate protection for the technology, system, product, service, or process it covers. In addition, the process of obtaining and protecting patents can be long and expensive. We also rely upon trade secrets, technical know-how, and continuing technological innovation to develop and maintain our proprietary position.

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As of September 19, 2008, we held 51 United States patents and 46 foreign patents and had 14 United States patents and 28 foreign patents pending.  The majority of our United States and foreign patents, for individual products, are effective for twenty years from the filing date. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage, and the availability of legal remedies in the country. We believe that the patents in each of our segments are important. In addition, we license from independent third parties under certain patents, trade secrets and other intellectual property, the right to manufacture and sell our Rapicide disinfectant and sterilant (see “—Reporting Segments-Endoscope Reprocessing”) and our phase change material products (see “—Reporting Segments-Other-Specialty Packaging”). These licenses, both of which are long-term, are critical to our commercialization of those products.

Our products and services are sold around the world under various trade names, trademarks and brand names. We consider our trade names, trademarks and brand names to be valuable in the marketing of our products in each segment. As of September 19, 2008, we had a total of 401 trademark registrations in the United States and in various foreign countries in which we conduct business, as well as 57 trademark applications pending world-wide.

Seasonality

Our businesses generally are not seasonal in nature.

Principal Customers

None of our customers accounted for 10% or more of our consolidated net sales from continuing operations during fiscal 2008. However, Fresenius and DaVita each accounted for approximately 9% of our consolidated net sales. Olympus America Inc., which was formerly our exclusive distributor of Medivators endoscope reprocessors and related accessories and supplies, accounted for approximately 4%, 5% and 10% of our consolidated net sales from continuing operations during fiscal 2008, 2007 and 2006, respectively.

Except as described below, none of our segments are reliant upon a single customer, or a few customers, the loss of any one or more of which could have a material adverse effect on the segment.

In our Water Purification and Filtration segment, one customer, Fresenius, accounts for approximately 23% of our segment net sales. The loss of a significant amount of business from this customer could have a material adverse effect on our Water Purification and Filtration segment.

Our Healthcare Disposables segment is reliant on five customers who collectively accounted for approximately 70% of Healthcare Disposables segment net sales and 16% of our consolidated net sales from continuing operations during fiscal 2008. Each of these five customers, Henry Schein, Benco Dental, Patterson Dental, Darby Dental Supply and National Distributing and Contracting (and their members), accounted for approximately 10% or more of this segment’s net sales during that period. The loss of a significant amount of business from any of these customers or a further consolidation of such customers could have a material adverse effect on our Healthcare Disposables segment.

During fiscal 2008, two of our customers, DaVita and Fresenius, accounted for approximately 32% and 12%, respectively, of the Dialysis segment net sales. The 12% figure with respect to Fresenius includes sales to dialysis centers formerly owned by RCG, a dialysis chain acquired by Fresenius in March 2006. Due to Fresenius’ conversion of its reuse dialysis clinics (including newly acquired clinics) to single-use facilities, our “RCG-related” sales to Fresenius decreased substantially as clinics were converted. The loss of a significant amount of business from DaVita or Fresenius could have a material adverse effect on our Dialysis segment. See “—Competition” and “Risk Factors.”

Backlog

On September 19, 2008, our consolidated backlog was approximately $13,147,000 compared with approximately $14,880,000 on September 17, 2007. All of the backlog is expected to be recognized as revenue within one year of such date.

Competition

General

The markets in which our business is conducted are highly competitive. Competition is intense in all of our business segments and includes many large and small competitors. Important competitive factors generally include product design and

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quality, safety, ease of use, product service, and price. We believe that the long-term competitive position for all of our segments depends principally on our success in developing, manufacturing and marketing innovative, cost-effective products and services.

Many of our competitors have greater financial, technical and human resources than us, are well-established with reputations for success in the sale and service of their products and may have certain other competitive advantages over us. However, we believe that the world-wide reputation for the quality and innovation of our products among customers and our reputation for providing quality product service give us a competitive advantage with respect to many of our products.

In addition, certain companies have developed or may be expected to develop new technologies or products that directly or indirectly compete with our products. We anticipate that we may face increased competition in the future as new infection prevention and control products and services enter the market. Numerous organizations are believed to be working with a variety of technologies and sterilizing agents. In addition, a number of companies have developed or are developing disposable medical instruments and other devices designed to address the risks of infection and contamination. There can be no assurance that new products or services developed by our competitors will not be more commercially successful than those provided or developed by us in the future.

Segments

Information with respect to competition within our most significant individual segments is as follows:

The Water Purification and Filtration segment has been experiencing increased competition due to a consolidation of suppliers during the past few years. This consolidation has resulted principally from the acquisition by large industrial manufacturers of many of the leading manufacturers of water purification equipment and filtration products. The resulting entities such as GE Water & Process Technologies and Siemens Water Technologies, which are the market leaders in this industry, are significantly larger and have greater financial and other resources available than the smaller companies in the industry such as our Mar Cor Purification business. It remains difficult to assess the long term impact of such consolidation on our business and to project such impact in the future. In addition, this segment has experienced increased pricing pressures in its resin regeneration business. We believe that our ability to successfully compete in the water purification, filtration and disinfectant market derives from our broad product offerings especially after our acquisition of the water dialysis business from GE Water, our combination in fiscal 2005 of the sales and marketing efforts of our two water purification businesses with our related filtration business to form our Mar Cor Purification business, and the high value and quality of our products and services. We believe that by focusing our efforts principally on the dialysis, pharmaceutical, biotech, medical and commercial industrial markets, providing a high level of customer service, and making selective acquisitions, we can continue to grow this segment, despite the continued industry consolidation and pricing pressures.

In our Dialysis segment, our most significant competition comes from manufacturers of single-use dialyzers, particularly Fresenius, the largest dialysis chain in the United States and a manufacturer of single-use dialyzers. In connection with its acquisition of RCG in March 2006, Fresenius has converted substantially all of its dialysis clinics (including newly acquired clinics) to single-use, which has adversely affected sales of our dialysis products and reprocessing equipment. See “—Reporting Segments–Dialysis,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

In our Healthcare Disposables segment, our principal competitors are Kimberly-Clark, 3M ESPE, Tidi Products, Sultan Healthcare, Medicom, Danaher, Dentsply, Alcan, and more generically less expensive imported products from Asia. We believe that our product quality, excellent customer service, and breadth of product line are competitive advantages and are the basis for our success in this segment.

In our Endoscope Reprocessing segment, our principal competitors are Steris, Custom Ultrasonics, Olympus, ASP division of Johnson & Johnson, Metrex, Ruhoff and Ecolab. During the past twelve months, ASP and Steris introduced new model endoscope reprocessors that directly compete with our reprocessors and may adversely impact our ability to maintain our current market share.

Research and Development

Research and development expenses (which include continuing engineering costs) were $4,010,000 and $4,848,000 in fiscal 2008 and 2007, respectively. The majority of our research and development expenses related to our MDS endoscope reprocessor and specialty filtration products. The decrease in research and development expense in fiscal 2008, compared with fiscal 2007, is due to less development work on the European version of our MDS endoscope reprocessor.

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Environmental Matters

We anticipate that our compliance with federal, state and local laws and regulations relating to the discharge of materials into the environment or otherwise relating to the protection of the environment, will not have any material effect on our capital expenditures, earnings or competitive position.

Employees

As of September 19, 2008, we employed 838 persons of whom 712 are located in the United States, 80 are located in Canada, 28 are located in Europe, Africa and the Middle East, and 18 are located in the Far East. None of our employees are represented by labor unions. We consider our relations with our employees to be satisfactory.

Financial Information about Geographic Areas

We have operations in Canada, Europe, Asia and other areas outside of the United States. These operations involve the same business segments as our domestic operations. For a geographic presentation of revenues and other financial data for the three years ended July 31, 2008, see Note 17 to the Consolidated Financial Statements.

Our foreign operations are subject, in varying degrees, to a number of inherent risks. These risks include, among other things, foreign currency exchange rate fluctuations, exchange controls and currency restrictions, changes in local economic conditions and tax regulations, unsettled political, regulatory or business conditions, and government-sponsored boycotts and tariffs on the Company’s products or services.

Depending on the direction of change relative to the U.S. dollar, foreign currency exchange rate fluctuations can increase or reduce the reported dollar amounts of the Company’s net assets and results of operations. Net income during fiscal 2008 was impacted as a result of foreign currency movements relative to the U.S. dollar. See “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We cannot predict future changes in foreign currency exchange rates or the effect they will have on our operations.

Available Information

We make available to the public, free of charge, on or through the Investor Relations section of our internet website, copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file such materials with the SEC. Our filings are available to the public from commercial document retrieval services, our website and at the SEC’s website at www.sec.gov. Our website address is www.cantelmedical.com. Also available on our website are our Corporate Governance Guidelines, Charters of the Nominating and Governance Committee, Compensation and Stock Option Committee, and Audit Committee, and Code of Business Conduct and Ethics. Information contained on our website is not incorporated by reference into this Report.

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Item 1A.                  RISK FACTORS .

We are subject to various risks and uncertainties relating to or arising out of the nature of our businesses and general business, economic, financing, legal and other factors or conditions that may affect us. We provide the following cautionary discussion of risks and uncertainties relevant to our businesses, which we believe are factors that, individually or in the aggregate, could have a material and adverse impact on our business, results of operations and financial condition, or could cause our actual results to differ materially from expected or historical results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.

The consolidation of dialysis providers has resulted in greater buying power by certain of our customers, which has caused us to reduce the average selling prices of our dialysis products, thereby reducing net sales and profit margins. Such consolidation has also resulted in the loss of dialysate concentrate sales.

During the past several years, there has been an increasing consolidation in the dialysis industry, marked by the acquisition by certain major dialysis chains of other major chains, as well as small chains and independents. Such consolidation of dialysis providers has resulted in greater buying power by certain of our customers, which has caused us to reduce or maintain the average selling prices of our dialysis products, thereby reducing net sales and profit margins. The acquisition by DaVita, the second largest dialysis chain in the United States, of Gambro US in October 2005 has had the most significant adverse effect in this regard. During fiscal 2008, DaVita accounted for approximately 32% of net sales of our dialysis segment. In addition, the decrease in sales of low margin dialysate concentrate business continued during fiscal 2008 since Fresenius manufactures dialysate concentrate themselves and therefore provides dialysate concentrate to dialysis centers that they have acquired including RCG dialysis centers, our former major customer. DaVita and certain international customers have also continued their reduction of dialysate concentrate purchases from us due to competitive pricing. Sales in our Dialysis segment were adversely impacted during our fourth quarter of fiscal 2008 and will continue to be adversely impacted during fiscal 2009 due to the loss of some low margin dialysate concentrate business primarily as a result of the highly competitive and price sensitive market for such product.

Because a significant portion of our Water Purification and Filtration, Dialysis and Healthcare Disposables segments net sales comes from a few large customers, any significant decrease in sales to these customers, due to industry consolidation or otherwise, could harm our operating results.

In our Water Purification and Filtration segment, one customer, Fresenius, accounts for approximately 23% of our net sales. The loss of a significant amount of business from this customer could have a material adverse effect on our Water Purification and Filtration segment.

During fiscal 2008, DaVita accounted for approximately 32% of the Dialysis segment net sales. Any shift by this customer away from reuse could have a material adverse effect on our Dialysis segment net sales.

The distribution network in the United States dental industry is concentrated, with relatively few distributors of consumables accounting for a significant share of the sales volume to dentists. Accordingly, net sales and profitability of our Healthcare Disposables segment are highly dependent on our relationships with a limited number of large distributors. During fiscal 2008, the top five customers of our Healthcare Disposables segment accounted for approximately 70% of its net sales, with each of the customers accounting for approximately 10% or more of such segment’s net sales. We are likely to continue to experience a high degree of customer concentration in this segment. Although we do not anticipate that any customers of the Healthcare Disposables segment will account for more than 10% of our net sales on a consolidated basis, the loss or a significant reduction of business from any of the major customers of the Healthcare Disposables segment could adversely affect our results of operations. In addition, because our Healthcare Disposables segment products are sold through third-party distributors, and not directly to end users, we may not be able to control the amount and timing of resources that our distributors devote to our products.

There is no assurance that there will not be a further or continued loss or reduction in business from one or more of our major customers. In addition, we cannot assure that net sales from customers that have accounted for significant net sales in the past, either individually or as a group, will reach or exceed historical levels in any future period.

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The consolidation of distributors in the dental industry could result in a reduction in our net sales due to reduced average selling prices of our healthcare disposable products and the loss of private label business.

There has been an increasing consolidation of distributors that sell products in the dental industry. Such consolidation of distributors may result in greater buying power by certain of our customers, which would cause us to reduce the average selling prices of our healthcare disposable products, thereby reducing net sales and profit margins. Additionally, depending on which distributors are acquired by whom, such distributor consolidations may result in the consolidated entity no longer purchasing certain products from us such as private label products manufactured by us but associated with the acquired distributor.

Our businesses are adversely impacted by rising fuel and oil prices and are heavily reliant on certain raw materials.

We purchase raw materials, sub-assemblies, components, and other supplies essential to our operations from numerous suppliers in the United States and abroad. The principal raw materials that we use to conduct operations include chemicals, paper pulp, resin, stainless steel and plastic components.

From time to time we experience price increases for raw materials, with no guarantee that such increases can be passed along to our customers. During fiscal 2008, we experienced unprecedented price increases in certain raw materials due in large part to the rising price of fuel and oil, including chemicals, paper pulp, and plastics (resins and bottles) which had a significant adverse impact on our gross margins. In addition, we experienced significant difficulty in obtaining certain chemicals in fiscal 2008 due to apparent shortages by certain suppliers. Although we do not currently foresee extraordinary difficulty in obtaining the materials, sub-assemblies, components, or other supplies necessary for our business operations, we cannot predict if similar difficulties will occur in the future, including further price increases, that may adversely affect our business.

In addition, rising fuel and oil prices can also have a significant adverse impact on transportation costs related to both the purchasing and delivery of products.  During fiscal 2008, increasing transportation costs had an adverse impact upon our gross margins.

The acquisition of new businesses and product lines, which has inherent risks, is an important part of our growth strategy.

We intend to grow, in part, by acquiring businesses. The success of this strategy depends upon several factors, including:

·                   our ability to identify and acquire businesses;

·                   financing for our acquisitions may not be available on terms we find acceptable or, if acceptable financing is obtained, such financing may result in significant charges associated with the potential write-off of existing deferred financing costs;

·                   our ability to integrate acquired operations, personnel, products and technologies into our organization effectively;

·                   our ability to retain and motivate key personnel and to retain the customers of acquired companies; and

·                   our ability to successful promote and increase sales of acquired product lines.

In addition, we have occasionally used our stock as partial consideration for acquisitions. Our common stock may not remain at a price at which it can be used as consideration for acquisitions without diluting our existing stockholders, and potential acquisition candidates may not view our stock attractively. We also may not be able to sustain the rates of growth that we have experienced in the past, whether by acquiring businesses or otherwise.

We also have a significant amount of goodwill and intangible assets on our balance sheet related to acquisitions. If future operating results of the acquired business are significantly less than the results anticipated at the time of the acquisition, we may be required to incur impairment charges. At July 31, 2008, our reporting units that are potentially at risk for impairment are Healthcare Disposables and Specialty Packaging, which had average fair values that exceeded book value by modest amounts. For all of our remaining reporting units, average fair value exceeded book value by substantial amounts.

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Our market for dialysis reprocessing products is limited to dialysis centers that reuse dialyzers, which market has been decreasing in the United States.

Our dialyzer reprocessing products are limited to use by centers that choose to clean, sterilize and reuse dialyzers, rather then discard the dialyzers after a single use. Dialysis centers in the United States that reuse dialyzers derive an economic benefit since the per-procedure cost is less when utilizing dialyzer reuse compared with single-use and such dialysis clinics generally receive a capitated payment for providing hemodialysis treatment. Although current public information is not available to accurately quantify the number of dialysis centers currently employing dialyzer reuse versus single-use, it is apparent that the market share of single-use dialyzers has been increasing during the past five years relative to reuse dialyzers. We believe that approximately one-third of all dialysis procedures in the United States currently reuse dialyzers. This compares to approximately three-fourths reuse reported by the Centers for Disease Control in 2001.

The shift from reuse to single-use dialyzers is due in large part to the commitment of Fresenius, the largest dialysis chain in the United States and a manufacturer of single-use dialyzers, to convert all of its reuse dialysis clinics (including newly acquired clinics) to single-use facilities. On March 31, 2006, Fresenius acquired RCG, a significant customer of our dialysis reuse products. As Fresenius converts all or substantially all of the dialysis clinics of RCG into single-use facilities, our customer base for dialysis products will continue to decrease. This downward trend has resulted in, and may continue to result in, a decrease in revenues and operating income in our dialysis segment. The continued decrease in dialyzer reuse in the United States in favor of single-use dialyzers could have a material adverse effect on our business. See “Principal Customers,” “—Competition” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Results of Operations.”

Competition from manufacturing facilities located in China could result in a reduction in our net sales of healthcare disposable products due to reduced average selling prices or our customers no longer purchasing certain products from us.

Despite expensive shipping costs, some of our competitors manufacture certain healthcare disposable products in China due to the very low labor costs in that country. Although we believe the quality of our healthcare disposable products, which are produced in the United States, are superior, our sales in the future may be adversely affected by either loss of sales or reductions in the price of our products as a result of this low cost competition.

We are subject to extensive government regulation. Government regulation may delay or prevent new product introduction.

Many of our products are subject to regulation by governmental and private agencies in the United States and abroad, which regulate the testing, manufacturing, storage, packaging, labeling, distribution and marketing of medical supplies and devices. Certain international regulatory bodies also impose import restrictions, tariff regulations, duties, and tax requirements. Delays in agency review can significantly delay new product introduction and may result in a product becoming “dated” or losing its market opportunity before it can be introduced. The FDA and other agency clearances generally are required before we can market new products in the United States or make significant changes to existing products. The FDA also has the authority to require a recall or modification of products in the event of a defect. The process of obtaining marketing clearances and approvals from regulatory agencies for new products can be time consuming and expensive. There is no assurance that clearances or approvals will be granted or that agency review will not involve delays that would adversely affect our ability to commercialize our products.

During the past several years, the FDA, in accordance with its standard practice, has conducted a number of inspections of our manufacturing facilities to ensure compliance with regulatory standards relating to our testing, manufacturing, storage and packaging of products. On occasion, following an inspection, the FDA has called our attention to certain “Good Manufacturing Practices” compliance deficiencies. Failure to adequately correct violations or otherwise comply with requests made by the FDA can result in regulatory action being initiated by the FDA including seizure, injunction, and civil monetary penalties.

Federal, state and foreign regulations regarding the manufacture and sale of our products are subject to change. We cannot predict what impact, if any, such changes might have on our business. In addition, there can be no assurance that regulation of our products will not become more restrictive in the future and that any such development would not have a material adverse effect on our business. For a more detailed discussion on government regulation and related risks, see “Business - Government Regulation.”

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Customer acceptance of our products is dependent on our ability to meet changing requirements.

Customer acceptance of our products is significantly dependent on our ability to offer products that meet the changing requirements of our customers, including hospitals, industrial laboratories, doctors, dentists, clinics, government agencies and industrial corporations. Any decrease in the level of customer acceptance of our products could have a material adverse effect on our business.

We distribute our products in highly competitive markets.

We distribute substantially all of our products in highly competitive markets that contain many products available from nationally and internationally recognized competitors. Many of these competitors have significantly greater financial, technical and human resources than us and are well-established. In addition, some companies have developed or may be expected to develop technologies or products that could compete with the products we manufacture and distribute or that would render our products obsolete or noncompetitive. In addition, our competitors may achieve patent protection, regulatory approval, or product commercialization that would limit our ability to compete with them. Although we believe that we compete effectively with all of our present competitors in our principal product groups, there can be no assurance that we will continue to do so. These and other competitive pressures could have a material adverse effect on our business.

Currency fluctuations and trade barriers could adversely affect our results of operations.

A portion of our products in all of our business segments are exported to and imported from the Far East, Western Europe and Canada, and our business could be materially and adversely affected by the imposition of trade barriers, fluctuations in the rates of exchange of various currencies, tariff increases and import and export restrictions, affecting the United States, Canada and the Netherlands.

Our Canadian and Netherlands subsidiaries purchase a portion of their inventories and incur expenses in United States dollars and sell a significant amount of their products in United States dollars and therefore are exposed to foreign exchange gains and losses upon settlement of such items. Similarly, such United States denominated assets and liabilities must be converted into their functional currency when preparing their financial statements, which results in foreign exchange gains and losses. Additionally, the results of operations of our Canadian and Netherlands subsidiaries are translated from their functional currency to United States dollars for purposes of preparing our Consolidated Financial Statements. Therefore, our continuing operations could be materially and adversely affected by fluctuations in the value of the Canadian dollar and euro against the United States dollar or by the imposition of trade barriers, tariff increases or import and export restrictions between the United States, Canada and the European Union. Moreover, a decrease in the value of the Canadian dollar or euro could result in a corresponding reduction in the United States dollar value of our assets that are denominated in Canadian dollars or euros.

Recent deterioration in the economy and credit markets may adversely affect our future results of operations.

Our future business may be adversely affected by the recent deterioration in the general economy and credit markets by potentially causing our customers to slow spending on our products, especially capital equipment. Sales of capital equipment represented approximately 30% of our fiscal 2008 consolidated net sales and are primarily included in our Water Purification and Filtration, Dialysis and Endoscope Reprocessing segments.

Because we operate in international markets, we are subject to political and economic risks that we do not face in the United States.

We operate in a global market. Global operations are subject to risks, including political and economic instability, general economic conditions, imposition of government controls, the need to comply with a wide variety of foreign and United States export laws, trade restrictions, and the greater difficulty of administering business overseas.

The markets for many of our products are subject to changing technology.

The markets for many products we sell, particularly endoscope reprocessing equipment, are subject to changing technology, new product introductions and product enhancements, and evolving industry standards. The introduction or enhancement of products embodying new technology or the emergence of new industry standards could render existing products obsolete or result in short product life cycles. Accordingly, our ability to compete is in part dependent on our ability to continually offer enhanced and improved products.

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We may be exposed to product liability claims resulting from the use of products we sell and distribute.

We may be exposed to product liability claims resulting from the products we sell and distribute. We maintain general liability insurance that includes product liability coverage, which we believe is adequate for our businesses. However, there can be no assurance that insurance coverage for these risks will continue to be available or, if available, that it will be sufficient to cover potential claims or that the present level of coverage will continue to be available at a reasonable cost. A partially or completely uninsured successful claim against us could have a material adverse effect on us.

We use chemicals and other regulated substances in the manufacturing of our products.

In the ordinary course of certain of our manufacturing processes, we use various chemicals and other regulated substances. Although we are not aware of any material claims involving violation of environmental or occupational health and safety laws or regulations, there can be no assurance that such a claim may not arise in the future, which could have a material adverse effect on us.

We rely on intellectual property and proprietary rights to maintain our competitive position.

We rely heavily on proprietary technology that we protect primarily through licensing arrangements, patents, trade secrets, and proprietary know-how. There can be no assurance that any pending or future patent applications will be granted or that any current or future patents, regardless of whether we are an owner or a licensee of the patent, will not be challenged, rendered unenforceable, invalidated, or circumvented or that the rights will provide a competitive advantage to us. There can also be no assurance that our trade secrets or non-disclosure agreements will provide meaningful protection of our proprietary information. There can also be no assurance that others will not independently develop similar technologies or duplicate any technology developed by us or that our technology will not infringe upon patents or other rights owned by others.

If we are unable to retain key personnel, our business could be adversely affected.

Our success is dependent to a significant degree upon the efforts of key members of our management. Although several key personnel are parties to employment agreements, such agreements cannot assure the continued services of such personnel, and the loss or unavailability of any of them could have a material adverse effect on our business. In addition, our success depends in large part on our ability to attract and retain highly qualified scientific, technical, sales, marketing and other personnel. Competition for such personnel is intense and there can be no assurance that we will be able to attract and retain the personnel necessary for the development and operation of our businesses.

Our stock price has been volatile and may experience continued significant price and volume fluctuations in the future that could reduce the value of outstanding shares.

The market for our common stock has, from time to time, experienced significant price and volume fluctuations that may have been unrelated to our operating performance. Factors such as announcements of variations in our quarterly financial results and new business developments could also cause the market price of our common stock to fluctuate significantly.

Item 1B.                 UNRESOLVED STAFF COMMENTS.

None

Item 2.                    PROPERTIES .

Owned Facilities

We own three buildings located on adjacent sites, comprising a total of 16.5 acres of land in Plymouth, a suburb of Minneapolis, Minnesota. The principal facility is a 110,000 square-foot building, used for executive, administrative and sales staff, research operations, manufacturing and warehousing. The second facility is a 65,000 square-foot building used for manufacturing and warehousing. The third facility is a 43,000 square-foot building used primarily for manufacturing and warehouse operations. These facilities are used for our Dialysis, Endoscope Reprocessing and Therapeutic operating segments, as well as a portion of our Water Purification and Filtration operating segment.

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We own a 63,000 square foot building in Hauppauge, New York, the headquarters for our Crosstex subsidiary, which is used for executive, administrative and sales staff, manufacturing and warehousing for our Healthcare Disposables operating segment.

We own a 21,000 square-foot building in Heerlen, the Netherlands that has served as our European headquarters and has been used as a sales office, manufacturing facility and warehouse for our Dialysis, Endoscope Reprocessing, and Therapeutic operating segments as well as a portion of our Water Purification and Filtration operating segment.  In June 2008, we announced that most of the operations at the facility would be transferred to our Plymouth, Minnesota facility. Consequently, we are seeking to sell the facility in fiscal 2009.

Leased Facilities

Our principal leased facilities include the following:

*The facility in Sharon is owned by an entity controlled by three of the former owners of Crosstex, two of whom also currently serve as officers of Crosstex.  The entity is currently negotiating the sale of the building to a third party in a transaction under which the buyer will be making substantial improvements in consideration for Crosstex agreeing to enter into a new lease agreement that will provide for increased rental charges.

In addition, we lease office and sales space in Tokyo, Japan; Singapore; and Beijing, China that is used for all of our operating segments other than Healthcare Disposables and Specialty Packaging. We lease office, sales and warehouse space in Lienden, the Netherlands, and Osaka, Japan for our Healthcare Disposables segment.

We lease additional space for our Water Purification and Filtration segment in Downers Grove, Illinois; Norcross, Georgia; Manassas Park, Virginia; Goshen, New York; Orion Township, Michigan; Cleveland, Ohio; Raleigh, North Carolina; Homewood, Alabama; Ethridge, Tennessee; Addison, Texas; Auburn, Washington; Lakeland, Florida; Toronto, Ontario; and Montreal, Quebec. The Downers Grove, Norcross, Toronto and Montreal facilities serve as warehouses and regeneration plants, while the other locations are small storage facilities supporting local service operations.

We also lease additional space for our Specialty Packaging segment in Glen Burnie, Maryland that is used for sales and marketing, warehousing and as a distribution hub.

Net rentals for leased space for fiscal 2008 aggregated approximately $2,849,000 compared with $2,792,000 in fiscal 2007.

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Item 3.                     LEGAL PROCEEDINGS .

In the normal course of business, we are subject to pending and threatened legal actions. It is our policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount of anticipated exposure can be reasonably estimated.

Item 4.                     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .

There was no submission of matters to a vote during the three months ended July 31, 2008.

PART II

Item 5.                     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES .

Our Common Stock trades on the New York Stock Exchange under the symbol “CMN.”

The following table sets forth, for the periods indicated, the high and low closing prices for the Common Stock as reported by the New York Stock Exchange.

We have not paid any cash dividends on our Common Stock and a change in this policy is not presently under consideration by the Board of Directors. We are not permitted to pay cash dividends on our Common Stock without the consent of our lenders.

On September 19, 2008, the closing price of our Common Stock was $10.31 and we had 365 record holders of Common Stock. A number of such holders of record are brokers and other institutions holding shares of Common Stock in “street name” for more than one beneficial owner.

In May 2008, our Board of Directors approved the repurchase of up to 500,000 shares of our outstanding Common Stock under a repurchase program commencing on June 9, 2008. Under the repurchase program we may repurchase shares from time-to-time at prevailing prices and as permitted by applicable securities laws (including SEC Rule 10b-18) and New York Stock Exchange requirements, and subject to market conditions. The repurchase program has a one-year term ending on June 8, 2009.

The first repurchase under our repurchase program occurred on July 11, 2008. Through July 31, 2008, we completed the repurchase of 90,700 shares under the program at a total average price per share of $9.42. Through September 19, 2008, we repurchased an additional 6,500 shares. Therefore, at September 19, 2008, we had repurchased 97,200 shares under the repurchase program at a total average price per share of $9.42 and the maximum number of remaining shares that may be repurchased under the program are 402,800 shares.

In April 2006, our Board of Directors approved the repurchase of up to 500,000 shares of our outstanding Common Stock under a repurchase program that expired on April 12, 2007. We repurchased 464,800 shares under that repurchase program at a total average price per share of $14.02. Of the 464,800 shares, 161,800 and 303,000 shares were repurchased during fiscals 2007 and 2006, respectively.

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Stock Performance Graph

The following graph compares the cumulative total stockholder return on our Common Stock for the last five fiscal years with the cumulative total returns on the Russell 2000 index and the Dow Jones US Health Care Equipment & Services index over the same period (assuming an investment of $100 in our common stock and in each of the indexes on July 31, 2003, and where applicable, the reinvestment of all dividends.)

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Cantel Medical Corp., The Russell 2000 Index

And The Dow Jones US Health Care Equipment & Services Index

*$100 invested on 7/31/03 in stock & index-including reinvestment of dividends.
Fiscal year ending July 31.

Copyright © 2008 Dow Jones & Co. All rights reserved.

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Item 6.                     SELECTED CONSOLIDATED FINANCIAL DATA .

The financial data in the following table is qualified in its entirety by, and should be read in conjunction with, the financial statements and notes thereto and other information incorporated by reference in this Form 10-K. Dyped and Saf-T-Pak are reflected in the Consolidated Statements of Income Data for fiscals 2008, 2007, 2006, 2005 and the portion of fiscal 2004 subsequent to their acquisitions on September 12, 2003 and June 1, 2004, respectively. Crosstex is reflected in the Consolidated Statements of Income Data for fiscals 2008, 2007 and 2006. GE Water and Twist are reflected in the Consolidated Statements of Income Data for 2008 and the portion of fiscal 2007 subsequent to their acquisitions on March 30, 2007 and July 9, 2007, respectively. DSI, Verimetrix and Strong Dental are reflected in the Consolidated Statements of Income Data for the portion of fiscal 2008 subsequent to their acquisitions on August 1, 2007, September 17, 2007 and September 26, 2007, respectively. DSI, Verimetrix, Strong Dental, Dyped, Saf-T-Pak, Crosstex, GE Water and Twist are not reflected in the results of operations for all other periods presented. Carsen is reflected as a discontinued operation for all years presented.

Consolidated Statements of Income Data
(Amounts in thousands, except per share data)

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Consolidated Balance Sheets Data

(Amounts in thousands, except per share data)

(1)    Per share and share amounts have been adjusted to reflect a three-for-two stock split effected in the form of a 50% stock dividend paid in January 2005.

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Item 7.                  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand Cantel Medical Corp. (“Cantel”). The MD&A is provided as a supplement to and should be read in conjunction with our financial statements and the accompanying notes. Our MD&A includes the following sections:

Overview provides a brief description of our business and a summary of significant activity that has affected or may affect our results of operations and financial condition.

Results of Operations provides a discussion of the consolidated results of continuing operations for fiscal 2008 compared with fiscal 2007, and fiscal 2007 compared with fiscal 2006.

Liquidity and Capital Resources provides an overview of our working capital, cash flows, contractual obligations, financing and foreign currency activities.

Critical Accounting Policies provides a discussion of our accounting policies that require critical judgments, assumptions and estimates.

Overview

Cantel is a leading provider of infection prevention and control products in the healthcare market, specializing in the following operating segments:

·       Water Purification and Filtration : Water purification equipment and services, filtration and separation products, and disinfectants for the medical, pharmaceutical, biotech, beverage and commercial industrial markets.

·       Dialysis : Medical device reprocessing systems, sterilants/disinfectants, dialysate concentrates and other supplies for renal dialysis.

·       Healthcare Disposables : Single-use, infection control products used principally in the dental market including face masks, towels and bibs, tray covers, saliva ejectors, germicidal wipes, plastic cups, sterilization pouches and disinfectants.

·       Endoscope Reprocessing : Medical device reprocessing systems and sterilants/disinfectants for endoscopy.

·       Therapeutic Filtration : Hollow fiber membrane filtration and separation technologies for medical applications. (Included in All Other reporting segment)

·       Specialty Packaging : Specialty packaging and thermal control products, as well as related compliance training, for the transport of infectious and biological specimens and thermally sensitive pharmaceutical, medical and other products. (Included in All Other reporting segment)

Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread of infections.

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Significant Activity

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Results of Operations

The results of operations reflect the continuing operating results of Cantel and its wholly-owned subsidiaries, but exclude the operating results of Carsen.

Since the GE Water and Twist acquisitions were completed on March 30, 2007 and July 9, 2007, respectively, their results of operations are included in our results of operations for fiscal 2008 and the portion of fiscal 2007 subsequent to their respective acquisition dates and are not reflected in our results of operations for fiscal 2006.

The acquisitions of DSI, Verimetrix and Strong Dental had an overall insignificant effect on our results of operations for fiscal 2008 since their respective acquisition dates due to the small size of these businesses. Their results of operations are not reflected in our results of operations for fiscal 2007 and 2006.

The distribution agreements between Olympus America Inc. and certain of its affiliates (collectively, “Olympus”) and our wholly-owned subsidiary, Carsen, as well as Carsen’s active business operations, terminated on July 31, 2006, as more fully described elsewhere in this MD&A and Note 19 to the Consolidated Financial Statements. Accordingly, Carsen is reported as a discontinued operation for fiscals 2008, 2007 and 2006.

For fiscal 2008 compared with fiscal 2007, and fiscal 2007 compared with fiscal 2006, discussion herein of our pre-existing business refers to all of our reporting segments with the exception of the operating results of the GE Water Acquisition included in our Water Purification and Filtration reporting segment, as well as the discontinued operations of Carsen.

The following table gives information as to the net sales from continuing operations and the percentage to the total net sales from continuing operations for each of our reporting segments.

Fiscal 2008 compared with Fiscal 2007

Net sales

Net sales increased by $30,330,000, or 13.8%, to $249,374,000 in fiscal 2008 from $219,044,000 in fiscal 2007. Net sales of our pre-existing business increased by $13,154,000, or 6.2%, to $225,249,000 in fiscal 2008 compared with $212,095,000 in fiscal 2007. Net sales contributed by the GE Water Acquisition in fiscal 2008 and 2007 were $24,125,000 and $6,949,000, respectively.

Net sales were positively impacted in fiscal 2008 compared with fiscal 2007 by approximately $1,040,000 due to the translation of euro net sales primarily of our Endoscope Reprocessing and Dialysis operating segments using a stronger euro against the United States dollar.

In addition, net sales were positively impacted in fiscal 2008 compared with fiscal 2007 by approximately $815,000 due to the translation of Canadian dollar net sales primarily of our Water Purification and Filtration operating segment using a stronger Canadian dollar against the United States dollar.

Although net sales in all of our reporting segments increased in fiscal 2008, the increase in net sales of our pre-existing business in fiscal 2008 was principally attributable to increases in sales of endoscope reprocessing products and services and water purification and filtration products and services.

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Net sales of endoscope reprocessing products and services increased by 20.5% in fiscal 2008, compared with fiscal 2007, primarily due to (i) an increase in demand for our endoscope disinfection equipment and disinfectants both internationally and in the United States and product service in the United States, (ii) approximately $1,950,000 in incremental net sales in fiscal 2008 due to the acquisition of Verimetrix on September 17, 2007, and (iii) approximately $1,670,000 in higher net sales due to an increase in selling prices of our Medivators endoscope reprocessing equipment and related products and service in the United States as a result of selling directly to our customers and not through a distributor. Beginning in our second quarter of fiscal 2007, we commenced the sale of equipment directly to our customers in the United States. Although this distributor continued to purchase high-level disinfectants, cleaners, and consumables from us and provide product service to our customers during fiscals 2008 and 2007, we have been gradually converting the sale of such items to our direct sales and service force at higher selling prices. The increase in demand for our disinfectants and product service is also attributable to the increased field population of equipment and our ability to convert users of competitive disinfectants to our products.

Net sales of water purification and filtration products and services from our pre-existing business increased by 5.7% in fiscal 2008 compared with fiscal 2007, primarily due to an increase in demand for our water purification equipment from dialysis customers as well as an increase in service revenue from the improved density and efficiency of our pre-existing service delivery network partially due to recent acquisitions. This increase was partially offset in fiscal 2008 by a decrease in commercial and industrial (large capital) equipment sales as a result of (i) our decision made in early fiscal 2007 to refocus our efforts on selling large capital equipment with standardized designs instead of customized designs that have historically provided lower profitability and (ii) delayed investments in capital equipment by customers due to the softening of the United States economy. Increases in selling prices of our water purification products and services did not have a significant effect on net sales in fiscal 2008 compared with fiscal 2007.

With respect to GE Water, which is excluded from the above discussion of our pre-existing business, average quarterly sales of water purification and filtration products and services in fiscal 2008 were approximately 15% higher when compared with the post-acquisition period ended July 31, 2007, due to improved sales opportunities within the installed equipment base of business as a result of combining GE Water with our pre-existing water purification and filtration business.

Net sales of dialysis products and services increased by 2.3% in fiscal 2008, compared with fiscal 2007, primarily due to (i) increased demand during the first nine months of fiscal 2008 from customers, both in the United States and internationally, for dialysate concentrate (a concentrated acid or bicarbonate used to prepare dialysate, a chemical solution that draws waste products from a patient’s blood through a dialyzer membrane during hemodialysis treatment) and (ii) higher selling prices primarily on dialysate concentrate, including freight invoiced to customers (related costs of a similar amount are included within cost of sales), to partially offset increased manufacturing and shipping costs. This increase in net sales was partially offset by a decrease of approximately $2,600,000, or 27%, in net sales of dialysate concentrate during the three months ended July 31, 2008, compared with the three months ended July 31, 2007, due to the loss of some dialysate concentrate business as a result of the highly competitive and price sensitive market for this low margin commodity product. Due to sales price decreases by some of our competitors, we expect a similar decrease in net sales of our low margin dialysate concentrate product throughout fiscal 2009 as we elect not to pursue unprofitable concentrate sales.

Net sales of healthcare disposable products increased by 1.8% in fiscal 2008, compared with fiscal 2007, primarily due to (i) an increase in demand during the second half of fiscal 2008 for our instrument sterilization pouches, cups, towels and face mask products, (ii) approximately $2,032,000 in incremental net sales in fiscal 2008 due to the acquisitions of Strong Dental on September 26, 2007 and Twist on July 9, 2007 and (iii) approximately $1,639,000 in higher net sales due to an increase in selling prices. Such selling price increases were implemented to offset corresponding supplier cost increases and therefore did not have a significant impact on gross profit. Partially offsetting these increases in 2008 net sales were (i) a high level of demand during the first three months of fiscal 2007 for face mask products due to a heightened awareness of avian flu prevention and (ii) distributors of our dental products had undergone consolidation during 2007, which has adversely impacted sales of our Healthcare Disposables segment in fiscal 2008 due to the loss of some private label business, and with respect to the first three months of fiscal 2008 and our fourth quarter of fiscal 2007, rationalization of duplicate inventories in the consolidated companies.

Net sales contributed by the Therapeutic Filtration operating segment were $8,294,000, an increase of 6.5%, in fiscal 2008 compared with fiscal 2007. The increase in sales in fiscal 2008 was primarily due to the recommencement in February 2007 of sales of filters manufactured by us on an OEM basis for a single customer’s hydration system. This customer had previously experienced a voluntary recall of the system (unrelated to our product) and was not purchasing filters until their sales of hydration systems recommenced. Increases in selling prices of our therapeutic filtration products did not have a significant effect on net sales in fiscal 2008 compared with fiscal 2007.

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Net sales contributed by the Specialty Packaging operating segment were $6,835,000, a decrease of 2.1%, in fiscal 2008 compared with fiscal 2007. This decrease in sales was primarily due to decreased customer demand in the United States for our compliance training products due to the timing of orders relating to the government mandated two-year compliance certification period, partially offset by increases in selling prices of approximately $240,000.

Gross profit

Gross profit increased by $8,614,000, or 10.9%, to $87,626,000  in fiscal 2008 from $79,012,000 in fiscal 2007. Gross profit of our pre-existing business increased by $4,197,000, or 5.5%, to $81,205,000 in fiscal 2008  from $77,008,000 in fiscal 2007. Gross profit contributed by the GE Water Acquisition in fiscal 2008 and for the four month period ended July 31, 2007 (since the date of the acquisition) was $6,421,000 and $2,004,000, respectively.

Gross profit as a percentage of net sales in fiscals 2008 and 2007 was 35.1% and 36.1%, respectively. Gross profit as a percentage of net sales of our pre-existing business in fiscals 2008 and 2007 was 36.1% and 36.3%, respectively. Gross profit as a percentage of net sales for the GE Water Acquisition in fiscal 2008 and for the four month period ended July 31, 2007 (since the date of the acquisition) was 26.6% and 28.8%, respectively.

The gross profit percentage of our pre-existing business in fiscal 2008 decreased compared with fiscal 2007 primarily due to (i) a change in sales mix, including increases in sales of Renalin ^® sterilant to large national chains that typically receive more favorable pricing, and lower margin water purification services, and with respect to the first six months of fiscal 2008 a decrease in sales of certain higher margin healthcare disposables products such as face masks, (ii) an increase in raw material, manufacturing and shipping costs in all of our operating segments, (iii) unabsorbed manufacturing overhead due to the decrease in commercial and industrial (large capital) equipment sales in our Water Purification and Filtration segment, (iv) inefficiencies in our Water Purification and Filtration segment as a result of the integration of the GE Water Acquisition into our pre-existing business, which is now complete, and (v) approximately $275,000 in restructuring charges recorded primarily in our Endoscope Reprocessing segment in our fourth quarter of fiscal 2008 relating to the relocation of our Netherlands manufacturing operations, as more fully described elsewhere in this MD&A. Partially offsetting these decreases was an increase in gross profit percentage in our Endoscope Reprocessing segment as a result of selling our Medivators brand endoscope reprocessing equipment and related products and service directly to customers through our own United States field sales and service organization instead of through a distributor as was done during a significant portion of the first three months of fiscal 2007. Additionally, although this distributor continued to purchase high-level disinfectants, cleaners, and consumables from us and provide product service to our customers during fiscals 2008 and 2007, we have been gradually converting the sale of such high margin items to our direct sales and service force resulting in an increase in gross profit percentage.

With respect to GE Water, which is excluded from the above discussion of our pre-existing business, the gross profit percentage of water purification and filtration products and services decreased to approximately 26.6% in fiscal 2008 from 28.8% for the four months ended July 31, 2007 (since the date of the acquisition) due to increased manufacturing costs.

With respect to the increase in the amount of gross profit (as opposed to the discussion of gross profit percentage), increases in net sales as explained above constitute the most significant factor in the increase in gross profit.

Operating expenses

Selling expenses increased by $4,818,000, or 20.2%, to $28,636,000 in fiscal 2008 from $23,818,000 in fiscal 2007 principally due to higher compensation expense of approximately $3,900,000 (including travel costs) primarily relating to increased commissions on increased sales by our endoscope reprocessing direct sales network and additional headcount resulting from the GE Water Acquisition; an increase of approximately $340,000 in advertising and marketing expense primarily related to our Healthcare Disposables segment; and an increase of approximately $280,000 as a result of translating selling expenses of our international subsidiaries using a significantly stronger Canadian dollar and euro against the United States dollar.

Selling expenses as a percentage of net sales were 11.5% in fiscal 2008 compared with 10.9% in fiscal 2007. Increases in selling expenses as explained above constitute the most significant factor in the higher selling expense as a percentage of net sales.

General and administrative expenses increased by $3,506,000, or 10.5%, to $37,013,000 in fiscal 2008 from $33,507,000 in fiscal 2007 principally due to an increase of approximately $1,200,000 in compensation expense due to additional headcount in our Water Purification and Filtration segment, annual salary increases, severance expense related to the relocation of our Medivators’

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manufacturing operations from the Netherlands to the United States and incentive compensation relating to the DSI, Verimetrix and Strong Dental acquisitions; an increase of $782,000 in amortization expense of intangible assets primarily relating to our acquisitions of GE Water, Twist, DSI, Verimetrix and Strong Dental; the inclusion of approximately $720,000 in estimated separation benefits and other costs related to the resignation of our former President and Chief Executive Officer on April 22, 2008, as more fully described elsewhere in this MD&A; an increase in stock-based compensation expense of $520,000; and an increase of approximately $565,000 as a result of foreign exchange losses associated with translating certain foreign denominated assets into functional currencies as well as the translation of general and administrative expenses of our international subsidiaries using a significantly stronger Canadian dollar and euro against the United States dollar. Partially offsetting these increases was the non-reoccurrence of $137,000 in incentive compensation directly related to the GE Water Acquisition, which was incurred during the three months ended April 30, 2007.

General and administrative expenses as a percentage of net sales were 14.8% in fiscal 2008, compared with 15.3% in fiscal 2007.

Research and development expenses (which include continuing engineering costs) were $4,010,000 and $4,848,000 in fiscal 2008 and 2007, respectively. The majority of our research and development expenses related to our MDS endoscope reprocessor and specialty filtration products. The decrease in research and development expense in fiscal 2008, compared with fiscal 2007, is due to less development work on the European version of our MDS endoscope reprocessor.

Interest

Interest expense increased by $1,123,000 to $4,631,000 in fiscal 2008 from $3,508,000 in fiscal 2007 primarily due to the increase in average outstanding borrowings as a result of financing the purchase prices of the acquisitions of GE Water, DSI, Verimetrix and Strong Dental.

Interest income decreased by $256,000 to $515,000 in fiscal 2008 from $771,000 in fiscal 2007 primarily due to a lower average balance of cash and cash equivalents and a decrease in average interest rates.

Income from continuing operations before taxes

Income from continuing operations before income taxes decreased by $251,000 to $13,851,000 in fiscal 2008 from $14,102,000 in fiscal 2007.

Income taxes

The consolidated effective tax rate was 37.2% and 42.5% for fiscal 2008 and 2007, respectively. The decrease in the consolidated effective tax rate was affected principally by the geographic mix of pre-tax income and statutory tax rate reductions as described below.

The majority of our income from continuing operations before income taxes is generated from our United States operations, which had an overall effective tax rate in fiscal 2008 of 34.4%. This low overall effective rate is principally caused by (i) our combined federal and state statutory tax rate of approximately 37.5% as applied to current operations and (ii) recently enacted New York state tax rate reductions as applied to existing deferred income tax liabilities in our Healthcare Disposables segment.

Our Canadian operations had an overall effective tax rate in fiscal 2008 of 22.5%, which overall rate was favorably impacted by recently enacted Canadian federal tax rate reductions as applied to existing deferred income tax liabilities in the Canadian portion of our Water Purification and Filtration business.

A tax benefit was not recorded on the losses from operations at our Netherlands subsidiary for fiscals 2008 and 2007, thereby causing our overall consolidated effective tax rate to exceed the effective tax rates in our United States and Canadian operations. Although we continued to incur an overall loss from our Netherlands operation in fiscal 2008, such loss decreased significantly compared to fiscal 2007. In fiscal 2009, we will be completing the restructuring of our Netherlands operation as described in Note 18 to the Consolidated Financial Statements and elsewhere in this MD&A.

Additionally, during fiscal 2008 we decided to place a full valuation allowance against the NOLs of our Japanese subsidiary, which resulted in the recording of tax expense on the past losses of our subsidiary in Japan. The results of continuing operations for our subsidiary in Singapore did not have a significant impact on our overall effective tax rate for fiscal 2008 due to the size of the operation relative to our United States, Canada and Netherlands operations.

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In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and reporting for uncertainties in income tax law. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006 and therefore was adopted on August 1, 2007. The adoption of FIN 48 did not have a material effect on our financial position or results of operations since, after the completion of our evaluation, we did not record an increase or decrease to our income taxes payable or deferred tax liabilities related to unrecognized income tax benefits for uncertain tax positions.

We record liabilities for an unrecognized tax benefit when a tax benefit for an uncertain tax position is taken or expected to be taken on a tax return, but is not recognized in our Consolidated Financial Statements because it does not meet the more-likely-than-not recognition threshold that the uncertain tax position would be sustained upon examination by the applicable taxing authority. The majority of our unrecognized tax benefits originated from acquisitions. Accordingly, any adjustments upon resolution of income tax uncertainties that predate or result from acquisitions are recorded as an increase or decrease to goodwill. Therefore, if the unrecognized tax benefits are recognized in our financial statements in future periods, there would not be a significant impact to our effective tax rate on continuing operations. We do not expect such unrecognized tax benefits to significantly decrease or increase in the next twelve months. A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is as follows:

Generally, the Company is no longer subject to federal, state or foreign income tax examinations for fiscal years ended prior to July 31, 2002.

Our policy is to record potential interest and penalties related to income tax positions in interest expense and general and administrative expense, respectively, in our Consolidated Financial Statements. However, such amounts have been relatively insignificant due to the amount of our unrecognized tax benefits relating to uncertain tax positions.

Stock-Based Compensation

The following table shows the income statement components of stock-based compensation expense recognized in the Consolidated Statements of Income:

The above stock-based compensation expense before income taxes was recorded in the Consolidated Financial Statements as stock-based compensation expense (which decreased both basic and diluted earnings per share from net income by $0.07,

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$0.06 and $0.05 in fiscals 2008, 2007 and 2006, respectively) and an increase to additional capital. The related income tax benefits (which pertain only to stock awards and options that do not qualify as incentive stock options) were recorded as an  increase to long-term deferred income tax assets (which are netted with long-term deferred income tax liabilities) or a reduction to income taxes payable, depending on the timing of the deduction, and a reduction to income tax expense.

The stock-based compensation expense recorded in our Consolidated Financial Statements may not be representative of the effect of stock-based compensation expense in future periods due to the level of awards issued in past years (which level may not be similar in the future), assumptions used in determining fair value, and estimated forfeitures. We determine the fair value of each stock award using the closing market price of our Common Stock on the date of grant. We estimate the fair value of each option grant on the date of grant using the Black-Scholes option valuation model. The determination of fair value using an option-pricing model is affected by our stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the expected option life (which is determined by using the historical closing prices of our Common Stock), the expected dividend yield (which is expected to be 0%), and the expected option life (which is based on historical exercise behavior). If factors change and we employ different assumptions in the application of SFAS 123R in future periods, the compensation expense that we would record under SFAS 123R may differ significantly from what we have recorded in the current period.

Most of our stock option and stock awards (which consist only of restricted shares) are subject to graded vesting in which portions of the award vest at different times during the vesting period, as opposed to awards that vest at the end of the vesting period. We recognize compensation expense for awards subject to graded vesting using the straight-line basis, reduced by estimated forfeitures. At July 31, 2008, total unrecognized stock-based compensation expense, net of tax, related to total nonvested stock options and stock awards was $2,262,000 with a remaining weighted average period of 27 months over which such expense is expected to be recognized.

If certain criteria are met when options are exercised, or with respect to incentive stock options the underlying shares are sold, the Company is allowed a deduction on its income tax return. Accordingly, we account for the income tax effect on such income tax deductions as additional capital (assuming deferred tax assets do not exist pertaining to the exercised stock options) and as a reduction of income taxes payable. In fiscals 2008 and 2007, options exercised resulted in income tax deductions that reduced income taxes payable by $1,071,000 and $1,137,000, respectively.

We classify the cash flows resulting from excess tax benefits as financing cash flows on our Consolidated Statements of Cash Flows. Excess tax benefits arise when the ultimate tax effect of the deduction for tax purposes is greater than the tax benefit on stock compensation expense (including tax benefits on stock compensation expense that has only been reflected in past pro forma disclosures relating to fiscal years prior to August 1, 2005) which was determined based upon the award’s fair value.

Fiscal 2007 compared with Fiscal 2006

Net sales

Net sales increased by $26,865,000, or 14.0%, to $219,044,000 in fiscal 2007 from $192,179,000 in fiscal 2006. Net sales of our pre-existing business increased by $19,916,000, or 10.4%, to $212,095,000 in fiscal 2007 compared with fiscal 2006. Net sales contributed by the GE Water Acquisition in fiscal 2007 were $6,949,000.

Net sales were positively impacted in fiscal 2007 compared with fiscal 2006 by approximately $726,000 due to the translation of euro net sales primarily of our Endoscope Reprocessing and Dialysis operating segments using a stronger euro against the United States dollar.

In addition, net sales were positively impacted in fiscal 2007 compared with fiscal 2006 by approximately $215,000 due to the translation of Canadian dollar net sales primarily of our Water Purification and Filtration operating segment using a stronger Canadian dollar against the United States dollar.

The increase in net sales of our pre-existing business in fiscal 2007 was principally attributable to increases in sales of endoscope reprocessing products and services, water purification and filtration products and services, healthcare disposable products, specialty packaging products and therapeutic filtration products.

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Net sales of endoscope reprocessing products and services increased by 28.1% in fiscal 2007, compared with fiscal 2006, primarily due to an increase in selling prices of our Medivators endoscope reprocessing equipment and related products and service in the United States as a result of selling directly to our customers and not through a distributor, as more fully described elsewhere in this MD&A, and an increase in demand for our endoscope disinfection equipment in Europe and disinfectants and product service both in the United States and internationally. The increase in demand for our disinfectants and product service is attributable to the increased field population of equipment and our ability to convert users of competitive disinfectants to our products. The increase in customer prices as a result of the direct sales effort increased sales by approximately $4,700,000 in fiscal 2007, compared with fiscal 2006.

Net sales of water purification and filtration products and services from our pre-existing business increased by 15.8% in fiscal 2007, compared with fiscal 2006, primarily due to the acquisition of Fluid Solutions on May 1, 2006, which contributed approximately $4,015,000 of incremental net sales in fiscal 2007. In early fiscal 2007, a decision was made to refocus the consumer and industrial (large capital) portion of the water purification and filtration equipment business by eliminating contracts with low profitability; as such, revenue growth in this segment for the total year was moderated by this activity.

Net sales of healthcare disposable products increased by 6.1% in fiscal 2007, compared with fiscal 2006, primarily due to increased demand in the United States for our face masks and instrument sterilization pouches, and increases in selling prices of approximately $1,500,000. Such selling price increases were implemented to offset corresponding supplier cost increases and therefore did not have a significant impact on gross profit.

Net sales contributed by the Specialty Packaging operating segment were $6,979,000, an increase of 34.0%, in fiscal 2007 compared with fiscal 2006. This increase in sales was primarily due to increased customer demand in the United States for our specialty packaging and compliance training products and increases in selling prices of approximately $730,000. There can be no assurance that the sales growth of specialty packaging products in fiscal 2008 will be comparable with fiscal 2007.

Net sales contributed by the Therapeutic Filtration operating segment were $7,786,000, an increase of 11.1%, in fiscal 2007 compared with fiscal 2006. The increase in sales in fiscal 2007 was primarily due to an increase in demand internationally for our hemoconcentrator products (a device used to concentrate red blood cells and remove excess fluid from the bloodstream during open-heart surgery) and the recommencement of sales of filters manufactured by us on an OEM basis for a single customer’s hydration system. This customer had previously experienced a voluntary recall of the system (unrelated to our product) and was not purchasing filters until their sales of hydration systems recommenced; there can be no assurance that future sales of such filters will continue at current levels.

Sales of dialysis products and services in fiscal 2007 were comparable with fiscal 2006. Such sales decreased primarily due to lower average selling prices for Renalin ®  sterilant and Renatron ®  equipment due to increased sales to large national chains that typically receive more favorable pricing, and reduced demand for Renalin sterilant domestically primarily due to the acquisition of Renal Care Group (“RCG”) by Fresenius Medical Care (“Fresenius”), as discussed below. Offsetting this decrease was an increase in customer demand for Renatron equipment, both in the United States and internationally, and dialysate concentrate (a concentrated acid or bicarbonate used to prepare dialysate, a chemical solution that draws waste products from a patient’s blood through a dialyzer membrane during hemodialysis treatment) internationally (partially offset by decreased demand for concentrate in the United States), as well as an increase of approximately $2,900,000 in net sales as a result of shipping and handling fees, such as freight, invoiced to customers in fiscal 2007 (related costs of a similar amount are included within cost of sales). The majority of this amount related to two of our larger customers who were previously responsible for transportation related to the products they purchased from us; during fiscal 2007, we became responsible for the transportation and invoiced them for such costs.

The dialysis industry has undergone significant consolidation through the acquisition by certain major dialysis chains of other major chains, as well as smaller chains and independents. In October 2005, DaVita Inc. (“DaVita”), the second-largest dialysis chain in the United States, acquired Gambro AB’s United States dialysis clinic business, Gambro Healthcare, Inc. (“Gambro US”). DaVita/Gambro US are significant customers of our dialysis reuse products and accounted for approximately 29% and 25% of our dialysis net sales in fiscal 2007 and 2006, respectively. The DaVita/Gambro US acquisition has resulted in greater buying power for the larger resulting entity and thereby a reduction in our net sales and profit margins due to reduced average selling prices of our dialyzer reprocessing products beginning in November 2005; however, offsetting this reduction is increased demand for our Renatron equipment and Renalin sterilant from DaVita/Gambro in fiscal 2007, as compared with fiscal 2006.

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In addition, on March 31, 2006, Fresenius, the largest dialysis chain in the United States and a provider of single-use dialyzer products, completed its acquisition of RCG, which was a significant customer of our dialysis reuse products. Combined net sales of Fresenius and RCG accounted for approximately 12% and 19% of our dialysis net sales in fiscal 2007 and 2006, respectively. We believe Fresenius has converted most of the dialysis clinics of RCG into single-use facilities, which has adversely affected our sales of reuse dialysis products. In addition, the Fresenius acquisition has resulted in the loss of low margin concentrate business to the RCG dialysis centers since Fresenius manufactures dialysate concentrate.

We believe that the majority of the adverse impact of these acquisitions has already occurred and is therefore reflected in the operating results of our dialysis segment for the last nine months of fiscal 2007.

Gross profit

Gross profit increased by $9,796,000, or 14.2%, to $79,012,000 in fiscal 2007 from $69,216,000 in fiscal 2006. Gross profit of our pre-existing business increased by $7,792,000, or 11.3%, to $77,008,000 in fiscal 2007 compared with fiscal 2006. Gross profit contributed by the GE Water Acquisition for the four month period ended July 31, 2007 was $2,004,000 (since the date of the acquisition).

Gross profit as a percentage of net sales in fiscals 2007 and 2006 was 36.1% and 36.0%, respectively. Gross profit as a percentage of net sales of our pre-existing business in fiscal 2007 was 36.3%. Gross profit as a percentage of net sales for the GE Water Acquisition for the four month period ended July 31, 2007 was 28.8% (since the date of the acquisition).

The higher gross profit percentage of our pre-existing business in fiscal 2007, compared with fiscal 2006, was primarily attributable to an increase in gross profit percentage on our dialysis products due to (i) an improvement in both customer and product mix related to our dialysate concentrate product, which improvements resulted from the Fresenius acquisition of RCG and our strategy of only maintaining concentrate business with an acceptable gross margin, (ii) lower manufacturing costs including the closing of a distribution center and (iii) more favorable transportation costs due to new freight arrangements with certain customers. The increase in gross profit percentage was also attributable to selling our Medivators brand endoscope reprocessing equipment, high-level disinfectants, cleaners and consumables directly to customers through our own United States field sales and service organization instead of through a distributor; increases in sales of higher margin healthcare disposable products, such as our face masks and instrument sterilization pouches, and specialty packaging products; and the non-reoccurrence of a $658,000 one-time purchase accounting charge related to our Healthcare Disposables segment’s inventory incurred during the first quarter of fiscal 2006.

Partially offsetting these increases in gross profit percentage were a lower gross profit percentage due to (i) MDS integration costs (including material, overhead and warranty costs) and increased international sales of our low margin MDS product line of endoscope reprocessing equipment, (ii) endoscope reprocessing services primarily due to a low level of billable time for our newly developed U.S. field service organization since most machines sold directly to our customers under our new direct sales and service strategy are still under warranty and (iii) water purification and filtration products and services primarily due to unabsorbed manufacturing overhead, as well as the sale of water purification equipment at lower than normal margins due to start-up costs of a new line of machines.

With respect to the increase in gross profit (as opposed to gross profit percentage), increases in net sales as explained above, as well as the aforementioned reasons for the increase in gross profit percentage, constitute the most significant factors in the increase in gross profit.

Operating expenses

Selling expenses increased by $5,288,000, or 28.5%, to $23,818,000 in fiscal 2007 from $18,530,000 in fiscal 2006 principally due to a higher cost structure of approximately $3,700,000 for our endoscope reprocessing direct sales network as a result of our decision to not renew Olympus’ exclusive United States distribution agreement when it expired on August 1, 2006; the inclusion of approximately $740,000 of selling expenses related to the acquisitions of GE Water and Fluid Solutions; an increase in advertising and marketing expense primarily related to our Healthcare Disposables and Endoscope Reprocessing segments; and an increase in compensation expense primarily due to additional sales and marketing personnel in our Specialty Packaging and Healthcare Disposables segments.

Selling expenses as a percentage of net sales were 10.9% in fiscal 2007 compared with 9.6% in fiscal 2006. The increase in selling expenses as a percentage of net sales was primarily attributable to a higher cost structure for our endoscope reprocessing direct sales network as a result of our decision to not renew Olympus’ exclusive United States distribution agreement when it expired on August 1, 2006.

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General and administrative expenses increased by $3,282,000, or 10.9%, to $33,507,000 in fiscal 2007, from $30,225,000 in fiscal 2006 principally due to increased compensation expense, including additional personnel, of approximately $1,250,000; the inclusion of approximately $570,000 of expenses related to the acquisitions of GE Water and Fluid Solutions; increased accounting and other professional fees (including executive transition expenses) of approximately $700,000; an increase in stock-based compensation expense of $413,000; $325,000 in higher medical insurance costs; and $137,000 in incentive compensation directly related to the GE Water Acquisition. Partially offsetting these increases were the non-reoccurrences of $345,000 in incentive compensation directly related to the Crosstex acquisition and $160,000 in debt financing costs related to our amended and restated credit facilities, both of which charges were incurred during the first three months of fiscal 2006.

General and administrative expenses as a percentage of net sales were 15.3% in fiscal 2007, compared with 15.7% in fiscal 2006.

Research and development expenses (which include continuing engineering costs) were $4,848,000 and $5,117,000 in fiscal 2007 and 2006, respectively. The majority of our research and development expenses related to our MDS endoscope reprocessor and specialty filtration products. The decrease in research and development expense in fiscal 2007, compared with fiscal 2006, is due to less development work on the European version of our MDS endoscope reprocessor.

Interest

Interest expense decreased by $724,000 to $3,508,000 in fiscal 2007 from $4,232,000 in fiscal 2006 primarily due a decrease in average outstanding borrowings, partially offset by an increase in average interest rates. Interest expense specifically related to the financing of the GE Water Acquisition was $578,000 since the date of the acquisition.

Interest income decreased by $68,000 to $771,000 in fiscal 2007 from $839,000 in fiscal 2006 primarily due to a decrease in average cash and cash equivalents partially offset by an increase in average interest rates.

Income from continuing operations before taxes

Income from continuing operations before income taxes increased by $2,151,000 to $14,102,000 in fiscal 2007 from $11,951,000 in fiscal 2006.

Income taxes

The consolidated effective tax rate was 42.5% and 44.3% for fiscal 2007 and 2006, respectively.

Our results of continuing operations for fiscal 2007 and 2006 reflect income tax expense for our United States, Canada and Japan operations at their respective statutory rates, which rates in fiscal 2007 were 38.1%, 33.7% and 49.7% , respectively. However, only a partial tax benefit was recorded in fiscal 2007 and 2006 at our Netherlands subsidiary, thereby causing our overall effective tax rate to exceed statutory rates.

The decrease in the overall effective tax rate for fiscal 2007, compared with fiscal 2006, was principally due to the geographic mix of pretax income, particularly in our fourth quarter of 2007. This decrease was also attributable to a reduction in the statutory United States tax rate to 34.3% in fiscal 2007, compared with 35.0% in fiscal 2006. In fiscal 2008, we believe our consolidated effective tax rate will be approximately 40%.

In July 2006, the FASB issued FIN No. 48, which clarifies the accounting and reporting for uncertainties in income tax law. FIN No. 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN No. 48 is effective for fiscal years beginning after December 15, 2006 and therefore is effective for our fiscal year 2008. We are assessing the impact of the adoption of FIN 48 and currently do not believe that the adoption will have a material effect on our financial position or results of operations.

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Liquidity and Capital Resources

Working capital

At July 31, 2008, our working capital was $45,639,000, compared with $40,760,000 at July 31, 2007. This increase in working capital was principally due to increases in cash, as further explained below, and inventories due to planned increases in stock levels of certain products primarily in our Endoscope Reprocessing segment.

Cash flows from operating activities

Net cash provided by operating activities was $18,557,000, $5,967,000 and $22,061,000 for fiscal 2008, 2007 and 2006, respectively. With respect to continuing operations only, net cash provided by operating activities was $18,650,000, $10,834,000 and $15,500,000 for fiscals 2008, 2007 and 2006, respectively.

In fiscal 2008, the net cash provided by operating activities was primarily due to net income (after adjusting for depreciation and amortization, stock-based compensation expense and deferred income taxes), a decrease in accounts receivable (due to improved collections) and an increase in income taxes payable (due to timing associated with payments), partially offset by increases in inventories (due to planned increases in stock levels of certain products primarily in our Endoscope Reprocessing and Healthcare Disposables segments) and prepaid expenses (due to the prepayment of certain operating expenses primarily relating to commissions).

In fiscal 2007, the net cash provided by operating activities was primarily due to net income (after adjusting for depreciation, amortization, stock-based compensation expense and deferred income taxes), and an increase in accounts payable and accrued expenses (due to increased purchases in July to meet product demand and additional compensation as a result of more personnel, including the additional sales and service personnel of our Endoscope Reprocessing operating segment). These items were partially offset by increases in (i) accounts receivable (due to strong sales in the months of July and June, including sales related to the GE Water Acquisition, and increases in customer prices in our Endoscope Reprocessing operating segment as a result of the direct sales effort) and (ii) inventories (due to planned increases in stock levels of certain products) and decreases in (i) net liabilities of discontinued operations (due to the wind-down of Carsen’s operations including substantial tax payments that were payable in fiscal 2007) and (ii) income taxes payable (due to timing associated with payments).

In fiscal 2006, the net cash provided by operating activities was primarily due to net income (after adjusting for depreciation and amortization, stock-based compensation expense, gain on disposal of discontinued operations and deferred income taxes), and decreases in accounts receivable (due to a decrease in net sales primarily in our Dialysis segment), partially offset by an increase in inventories (due to timing of sales) and changes in assets and liabilities of discontinued operations (due to the sale of substantially all of Carsen’s assets on July 31, 2006).

Cash flows from investing activities

Net cash used in investing activities was $18,466,000, $41,535,000 and $45,950,000 in fiscals 2008, 2007 and 2006, respectively. In fiscal 2008, the net cash used in investing activities was primarily for the acquisitions of DSI, Verimetrix and Strong Dental, a payment for an acquisition earnout to the former owners of Crosstex and capital expenditures. In fiscal 2007, the net cash used in investing activities was primarily due to the acquisitions of GE Water and Twist, an earnout payment to the former owners of Crosstex and capital expenditures. In fiscal 2006, the net cash used in investing activities was primarily due to the acquisition of Crosstex and capital expenditures, partially offset by the proceeds received from the sale of our discontinued operations.

Cash flows from financing activities

Net cash provided by financing activities was $1,882,000, $21,082,000 and $20,127,000 in fiscals 2008, 2007 and 2006, respectively. In fiscal 2008, net cash provided by financing activities was primarily attributable to borrowings under our revolving credit facility primarily related to the acquisitions of DSI, Verimetrix and Strong Dental and proceeds from the exercises of stock options, partially offset by repayments under our credit facilities and purchases of treasury stock. In fiscal 2007, net cash provided by financing activities was primarily attributable to borrowings under our revolving credit facility related to the acquisition of GE Water, net of debt issuance costs, and proceeds from the exercises of stock options, partially offset by repayments under our credit facilities and purchases of treasury stock. In fiscal 2006, net cash provided by financing activities was primarily attributable to borrowings under our credit facilities related to the acquisition of Crosstex, net of debt

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issuance costs, and proceeds from the exercises of stock options, partially offset by repayments under our credit facilities and purchases of treasury stock.

Repurchase of shares

In May 2008, our Board of Directors approved the repurchase of up to 500,000 shares of our outstanding Common Stock under a repurchase program commencing on June 9, 2008. Under the repurchase program we repurchase shares from time-to-time at prevailing prices and as permitted by applicable securities laws (including SEC Rule 10b-18) and New York Stock Exchange requirements, and subject to market conditions. The repurchase program has a one-year term ending on June 8, 2009.

The first repurchase under our repurchase program occurred on July 11, 2008. Through July 31, 2008, we completed the repurchase of 90,700 shares under the program at a total average price per share of $9.42. Through September 19, 2008, we repurchased an additional 6,500 shares. Therefore, at September 19, 2008, we had repurchased 97,200 shares under the repurchase program at a total average price per share of $9.42 and the maximum number of remaining shares that may be repurchased under the program are 402,800 shares.

In April 2006, our Board of Directors approved the repurchase of up to 500,000 shares of our outstanding Common Stock under a repurchase program that expired on April 12, 2007. We repurchased 464,800 shares under that repurchase program at a total average price per share of $14.02. Of the 464,800 shares, 161,800 and 303,000 shares were repurchased during fiscals 2007 and 2006, respectively.

Restructuring activities

During the fourth quarter of fiscal 2008, our management approved and initiated plans to restructure our Netherlands subsidiary by relocating all of our manufacturing operations from the Netherlands to the United States. This action is part of our continuing effort to reduce operating costs and improve efficiencies by leveraging the existing infrastructure of our Minntech operations in Minnesota. The elimination of manufacturing operations in the Netherlands will lead to the end of onsite material management, quality assurance, finance and accounting, human resources and some customer service functions. However, we will continue to maintain a strong marketing, sales, service and technical support presence based in the Netherlands to serve customers throughout Europe, the Middle East and Africa. During the fourth quarter of fiscal 2008, we recorded $365,000 in restructuring expenses, which decreased both basic and diluted earnings per share from continuing operations by approximately $0.02 in fiscal 2008, and expect to incur approximately $450,000 in additional restructuring costs in the first half of fiscal 2009. Any changes to the estimated expenses of executing this restructuring plan will be reflected in our future results of operations. The majority of the restructuring costs are included in our Endoscope Reprocessing segment.

The restructuring costs recorded in fiscal 2008 in our Consolidated Financials Statements and expected to be recorded in fiscal 2009 are as follows:

Since the above costs are recorded in our Netherlands subsidiary, which has been experiencing losses from its operations, tax benefits on the above costs were not recorded. The unsalable inventory is recorded in inventories as part of

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our inventory reserve and the accrued severance is recorded in compensation payable in our Consolidated Balance Sheet at July 31, 2008.

As part of the restructuring plan, we intend to sell our Netherlands building and land. At July 31, 2008, these assets had a book value of $1,808,000, net of accumulated depreciation, and are included in property and equipment in our Consolidated Balance Sheet. Such assets will be held and used during the relocation of the manufacturing operations until December 1, 2008. Based on an appraisal obtained in June 2008, a gain of approximately $300,000 may be generated when the building and land are sold. However, due to the deteriorating real estate market and other factors, no assurances can be given as to the timing of the sale and whether a gain or loss on the sale of the facility will ultimately be realized.

Discontinued Operations -Termination of Carsen’s Operations

On July 31, 2006, Carsen closed the sale of substantially all of its assets to Olympus under an Asset Purchase Agreement dated as of May 16, 2006 among Carsen, Cantel and Olympus. Olympus purchased substantially all of Carsen’s assets other than those related to Carsen’s Medivators business and certain other smaller product lines. Following the closing, Olympus hired substantially all of Carsen’s employees and took over Carsen’s Olympus-related operations (as well as the operations related to the other acquired product lines). The transaction resulted in an after-tax gain of $6,776,000 and was recorded separately on the Consolidated Statement of Income for the year ended July 31, 2006 as gain on disposal of discontinued operations, net of tax. In connection with the transaction, Carsen’s Medivators-related assets as well as certain of its other assets that were not acquired by Olympus were sold to our new Canadian distributor of Medivators products.

The purchase price for the net assets sold to Olympus was approximately $31,200,000, comprised of a fixed sum of $10,000,000 plus an additional formula-based sum of $21,200,000. In addition, Olympus paid Carsen 20% of Olympus’ revenues attributable to Carsen’s unfilled customer orders (“backlog”) as of July 31, 2006 that were assumed by Olympus at the closing. Such payments to Carsen were made following Olympus’ receipt of customer payments for such orders and totaled $368,000. In fiscal 2007, the entire $368,000 related to such backlog was recorded as income and reported in income from discontinued operations, net of tax, in the Consolidated Statements of Income.

The $10,000,000 fixed portion of the purchase price was in consideration for (i) Carsen’s customer lists, sales records, and certain other assets related to the sale and servicing of Olympus products and certain non-Olympus products distributed by Carsen, (ii) the release of Olympus’ contractual restriction on hiring Carsen personnel, (iii) real property leases (which were assumed or replaced by Olympus) and leasehold improvements, computer and software systems, equipment and machinery, telephone systems, and records related to the acquired assets, and (iv) assisting Olympus in effecting a smooth transition of Carsen’s business of distributing and servicing Olympus and certain non-Olympus products in Canada. Cantel has also agreed (on behalf of itself and its affiliates) not to manufacture, distribute, sell or represent for sale in Canada through July 31, 2008 any products that are competitive with the Olympus products formerly sold by Carsen under its Olympus Distribution Agreements.

The $21,200,000 formula-based portion of the purchase price was based on the book value of Carsen’s inventories of Olympus and certain non-Olympus products and the net book amount of Carsen’s accounts receivable and certain other assets, all at July 31, 2006, subject to offsets, particularly for accounts payable of Carsen due to Olympus.

Net proceeds from Carsen’s sale of net assets and the termination of Carsen’s operations were approximately $21,100,000 (excluding the backlog payments) after satisfaction of remaining liabilities and taxes.

As a result of the foregoing transaction, which coincided with the expiration of Carsen’s exclusive distribution agreements with Olympus on July 31, 2006, Carsen no longer has any remaining product lines or active business operations.

Cash flows attributable to discontinued operations comprise the following:

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In fiscal 2008, net cash used in operating activities was due to the payment of Carsen’s remaining liabilities that existed at July 31, 2007, which primarily related to various taxes. In fiscal 2007, net cash used in operating activities was primarily due to the payment of Carsen’s remaining operating costs relating to fiscal 2006, income tax payments and various wind-down costs, partially offset by the collection of the remaining receivables.

In fiscal 2006, net cash provided by investing activities was due to proceeds from disposal of the discontinued operations. Financing activities of our discontinued operations did not result in any net cash in fiscals 2008, 2007 and 2006.

Direct Sale of Medivators Systems in the United States

On August 2, 2006, we commenced the sale and service of our Medivators brand endoscope reprocessing equipment, high-level disinfectants, cleaners and consumables through our own United States field sales and service organization. Our direct sale of these products is the result of our decision that it is in our best long-term interests to control and develop our own direct-hospital based United States distribution network and, as such, not to renew Olympus’ exclusive United States distribution agreement when it expired on August 1, 2006.

Throughout the former distribution arrangement with Olympus, we employed our own personnel to provide clinical sales support activities as well as an internal technical and customer service function, depot maintenance and service and all logistics and distribution services for the Medivators/Olympus customer base. This existing and fully developed infrastructure will continue to be a critical factor in our new direct sales and service strategy.

Notwithstanding the expiration of the distribution agreement with Olympus on August 1, 2006, Olympus has retained the right to purchase from Minntech for resale to certain permitted customers, Medivators accessories, consumables, and replacement and repair parts, as well as Rapicide Ò  disinfectant. Various aspects of such rights expire over the next three years.  During fiscals 2008 and 2007, Olympus continued to purchase such items from us, although we have been gradually converting the sale of such items over to our direct sales and service force.

Long-term contractual obligations

As of July 31, 2008, aggregate annual required payments over the next five years and thereafter under our contractual obligations that have long-term components are as follows:

Credit facilities

In conjunction with the acquisition of Crosstex, we entered into amended and restated credit facilities dated as of August 1, 2005 (the “2005 U.S. Credit Facilities”) with a consortium of lenders to fund the cash consideration paid in the

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acquisition and costs associated with the acquisition, as well as to modify our existing United States credit facilities. The 2005 U.S. Credit Facilities, as amended, include (i) a six-year $40.0 million senior secured amortizing term loan facility and (ii) a five-year $50.0 million senior secured revolving credit facility. Amounts we repay under the term loan facility may not be re-borrowed. Debt issuance costs relating to the 2005 U.S. Credit Facilities have been recorded in other assets and are being amortized over the life of the credit facilities. Such unamortized debt issuance costs amounted to approximately $960,000 at July 31, 2008.

At September 19, 2008, borrowings under the 2005 U.S. Credit Facilities bear interest at rates ranging from 0% to 0.50% above the lender’s base rate, or at rates ranging from 0.625% to 1.75% above the London Interbank Offered Rate (“LIBOR”), depending upon our consolidated ratio of debt to earnings before interest, taxes, depreciation and amortization, and as further adjusted under the terms of the 2005 U.S. Credit Facilities (“EBITDA”). At September 19, 2008, the lender’s base rate was 5.00% and the LIBOR rates on our outstanding borrowings ranged from 2.65% to 4.95%. The margins applicable to our outstanding borrowings at September 19, 2008 were 0.00% above the lender’s base rate and 1.00% above LIBOR. Substantially all of our outstanding borrowings were under LIBOR contracts at September 19, 2008. The majority of such contracts were twelve month LIBOR contracts; therefore, we are substantially protected throughout most of fiscal 2009 from any exposure associated with increasing LIBOR rates. In order to protect our interest rate exposure in future years, we entered into an interest rate cap agreement in July 2008 for the two-year period beginning June 30, 2009 and ending June 30, 2011 initially covering $20,000,000 of borrowings under the term loan facility (and thereafter reducing in quarterly $2,500,000 increments consistent with the mandatory repayment schedule of our term loan facility), which caps three-month LIBOR on this portion of outstanding borrowings at 4.25%. The 2005 U.S. Credit Facilities also provide for fees on the unused portion of our facilities at rates ranging from 0.15% to 0.30%, depending upon our consolidated ratio of debt to EBITDA; such rate was 0.25% at September 19, 2008.

The 2005 U.S. Credit Facilities require us to meet certain financial covenants and are secured by (i) substantially all of our U.S.-based assets (including assets of Cantel, Minntech, Mar Cor, Crosstex and Strong Dental) and (ii) our pledge of all of the outstanding shares of Minntech, Mar Cor, Crosstex and Strong Dental and 65% of the outstanding shares of our foreign-based subsidiaries. Additionally, we are not permitted to pay cash dividends on our Common Stock without the consent of our United States lenders. As of July 31, 2008, we are in compliance with all financial and other covenants under the 2005 U.S. Credit Facilities.

On July 31, 2008 and September 19, 2008, we had $58,300,000 of outstanding borrowings under the 2005 U.S. Credit Facilities, which consisted of $28,000,000 and $30,300,000 under the term loan facility and the revolving credit facility, respectively.

Operating leases

Minimum commitments under operating leases include minimum rental commitments for our leased manufacturing facilities, warehouses, office space and equipment.

Rent expense related to operating leases for fiscal 2008 was recorded on a straight-line basis and aggregated $3,321,000 compared with $3,531,000 and $2,881,000 for fiscal 2007 and 2006, respectively, which excludes rent expense in fiscal 2006 related to our discontinued operations.

License agreement

On January 1, 2007, we entered into a license agreement with a third-party which allows us to manufacture, use, import, sell and distribute certain thermal control products relating to our Specialty Packaging segment.  In consideration, we agreed to pay a minimum annual royalty payable in Canadian dollars each calendar year over the license agreement term of 20 years. At July 31, 2008, we had minimum future royalty obligations of approximately $3,366,000 relating to this license agreement.

Deferred Compensation

Included in other long-term liabilities are deferred compensation arrangements for certain former Minntech directors and officers.

Employment Agreements

We have previously entered into various employment agreements with several executives of the Company, including the former President and Chief Executive Officer. Effective April 22, 2008, our former President and Chief Executive Officer

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resigned and our Chief Operating Officer and Executive Vice President was promoted to President. As a result of this resignation, estimated separation benefits and other related costs of approximately $720,000 were recorded in general and administrative expenses in the Consolidated Statements of Income during fiscal 2008. Approximately $600,000 of such amount is not payable until after November 22, 2008, and accordingly, has been reflected in the table above as a required payment during fiscal 2009.

Financing needs

At July 31, 2008, we had a cash balance of $18,318,000, of which $10,680,000 was held by foreign subsidiaries. We believe that our current cash position, anticipated cash flows from operations, and the funds available under our revolving credit facility will be sufficient to satisfy our cash operating requirements for the foreseeable future based upon our existing operations. At September 19, 2008, $19,700,000 was available under our United States revolving credit facility, as amended.

Foreign currency

During fiscal 2008, compared with fiscal 2007, the average value of the Canadian dollar increased by approximately 11.8%  relative to the value of the United States dollar. The financial statements of our Canadian subsidiaries are translated using the accounting policies described in Note 2 to the Consolidated Financial Statements and therefore are impacted by changes in the Canadian dollar exchange rate. Additionally, changes in the value of the Canadian dollar against the United States dollar favorably affected our results of operations because a portion of our Canadian subsidiaries’ inventories and operating costs (which are reported in the Water Purification and Filtration and Specialty Packaging segments) are purchased in the United States and a significant amount of their sales are to customers in the United States. Overall, fluctuations in the rates of currency exchange between the United States and Canada had an adverse impact in fiscal 2008, compared with fiscal 2007, upon our continuing results of operations of approximately $275,000, net of tax.

During fiscal 2008, compared with fiscal 2007, the value of the euro increased by approximately 13.3% relative to the value of the United States dollar and by approximately 16.5% relative to the value of the British pound. The financial statements of our Netherlands subsidiary are translated using the accounting policies described in Note 2 to the Consolidated Financial Statements and therefore are impacted by changes in the euro exchange rate relative to the United States dollar. Additionally, changes in the value of the euro against the United States dollar and British pound affect our results of operations because a portion of the net assets of our Netherlands subsidiary (which are reported in our Dialysis, Endoscope Reprocessing and Water Purification and Filtration segments) are denominated and ultimately settled in United States dollars or British pounds but must be converted into its functional euro currency.

In order to hedge against the impact of fluctuations in the value of the euro relative to the United States dollar and British pound on the conversion of such dollar denominated net assets into functional currency, we enter into short-term contracts to purchase euros forward, which contracts are generally one month in duration. These short-term contracts are designated as fair value hedges. There were two foreign currency forward contracts amounting to €838,000 and €420,000 at September 19, 2008 which cover certain assets and liabilities of Minntech’s Netherlands subsidiary which are denominated in United States dollars and British pounds, respectively. Such contracts expired on September 30, 2008. Under our credit facilities, such contracts to purchase euros may not exceed $12,000,000 in an aggregate notional amount at any time. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, as amended, “ Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), such foreign currency forward contracts are designated as hedges. Gains and losses related to these hedging contracts to buy euros forward are immediately realized within general and administrative expenses due to the short-term nature of such contracts. In fiscal 2008, such forward contracts were partially effective in offsetting the impact of the strengthening of the euro on certain assets and liabilities of Minntech’s Netherlands subsidiary that are denominated in United States dollars or British pounds.

Overall, fluctuations in the rates of currency exchange between the euro and the United States dollar and British pound had an adverse impact in fiscal 2008, compared with fiscal 2007, upon our continuing results of operations of approximately $380,000, net of tax.

For purposes of translating the balance sheet at July 31, 2008 compared with July 31, 2007, the value of the Canadian dollar increased by approximately 4.2% and the value of the euro increased by approximately 13.7% compared with the value of the United States dollar. The total of these currency movements resulted in a foreign currency translation gain of $1,797,000 in fiscal 2008, thereby increasing stockholders’ equity.

Changes in the value of the Japanese yen relative to the United States dollar during fiscal 2008, compared with fiscal 2007, did not have a significant impact upon either our results of operations or the translation of our balance sheet, primarily

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due to the fact that our Japanese subsidiary accounts for a relatively small portion of consolidated net sales, net income and net assets.

Inflation

During fiscal 2008, we experienced unprecedented price increases in certain raw materials due in large part to the rising price of fuel and oil, including chemicals, paper pulp, and plastics (resins and bottles), which had a significant adverse impact on our gross margins. Rising fuel and oil prices also had a significant adverse impact on transportation costs related to both the purchasing and delivery of products, which also impacted our gross margins. We implemented price increases for certain of our products, which partially offset these cost increases; however, some of our businesses (primarily the Water Purification and Filtration and Healthcare Disposables segments) were unable to obtain higher selling prices necessary to offset the full impact of such higher costs, which resulted in the loss of gross margin, as more fully described in “Results of Operations.”

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we continually evaluate our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

Revenue Recognition

Revenue on product sales is recognized as products are shipped to customers and title passes. The passing of title is determined based upon the FOB terms specified for each shipment. With respect to dialysis, therapeutic, specialty packaging and endoscope reprocessing products, shipment terms are generally FOB origin for common carrier and FOB destination when our distribution fleet is utilized (except for one large customer in dialysis whereby all products are shipped FOB destination). With respect to water purification and filtration and healthcare disposable products, shipment terms may be either FOB origin or destination. Customer acceptance for the majority of our product sales occurs at the time of delivery. In certain instances, primarily with respect to some of our water purification and filtration equipment, endoscope reprocessing equipment and an insignificant amount of our sales of dialysis equipment, post-delivery obligations such as installation, in-servicing or training are contractually specified; in such instances, revenue recognition is deferred until all of such conditions have been substantially fulfilled such that the products are deemed functional by the end-user. With respect to a portion of water purification and filtration product sales, equipment is sold as part of a system for which the equipment is functionally interdependent or the customer’s purchase order specifies “ship-complete” as a condition of delivery; revenue recognition on such sales is deferred until all equipment has been delivered.

A portion of our water purification and filtration sales relating to our acquisition of GE Water are recognized as multiple element arrangements, whereby revenue is allocated to the equipment and installation components based upon vendor specific objective evidence which principally includes comparable historical transactions of similar equipment and installation sold as stand alone components, as well as an evaluation of unrelated third party competitor pricing of similar installation.

Revenue on service sales is recognized when repairs are completed at the customer’s location or when repairs are completed at our facilities and the products are shipped to customers. With respect to certain service contracts in our Endoscope Reprocessing and Water Purification and Filtration operating segments, service revenue is recognized on a straight-line basis over the contractual term of the arrangement. All shipping and handling fees invoiced to customers, such as freight, are recorded as revenue (and related costs are included within cost of sales) at the time the sale is recognized.

None of our sales contain right-of-return provisions except certain sales of a small portion of our endoscope reprocessing equipment which contain a 15 day right-of-return trial period. Such sales are not recognized as revenue until the 15 day trial period has elapsed. Customer claims for credit or return due to damage, defect, shortage or other reason must be

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pre-approved by us before credit is issued or such product is accepted for return. No cash discounts for early payment are offered except with respect to a portion of our sales of dialysis and healthcare disposable products and certain prepaid packaging products. We do not offer price protection, although advance pricing contracts or required notice periods prior to implementation of price increases exist for certain customers with respect to many of our products. With respect to certain of our dialysis, dental and water purification and filtration customers, volume rebates are provided; such volume rebates are provided for as a reduction of sales at the time of revenue recognition and amounted to $1,757,000, $1,449,000 and $1,216,000 in fiscal 2008, 2007 and 2006, respectively. Such allowances are determined based on estimated projections of sales volume for the entire rebate agreement periods. If it becomes known that sales volume to customers will deviate from original projections, the volume rebate provisions originally established would be adjusted accordingly.