The following discussion and analysis should be read with our financial statements and the notes thereto included elsewhere in this report. This discussion and analysis contains trend analysis and might contain forward-looking statements. These statements are based on current expectations, and actual results might differ materially. Among the factors that could cause actual results to vary are those described in "Critical Accounting Policies" and "Certain Considerations" included in this report and "Risk Factors" included in this report and our 2007 Annual Report on Form 10-K, filed with the Securities and Exchange Commission.

Overview

We provide daily processing, assembly and delivery of reusable and disposable products and instruments required for surgery through our state-of-the-art, FDA-regulated service centers. Our integrated "closed-loop" process starts with daily delivery of reusable and disposable surgical supplies and instruments to the healthcare providers. After use, we pick up the reusable textiles, basins and instruments used in surgery and return them to our processing facilities. Used products arriving at our processing facilities are sorted, cleaned, inspected, packaged, sterilized, and shipped back to the healthcare providers. In addition, we manage the instrumentation and supply chain of hospitals, surgery centers and operating rooms and their central sterilization facilities.

We believe our facilities are strategically situated to capitalize on future market opportunities. These facilities have significant available capacity to access more of the national market.

We derive our revenues from the sale and servicing of reusable and disposable surgical products and instruments and the management of our customers' supply chain. Reusable products include linens (gowns, towels and drapes) and basins (stainless steel cups, carafes, trays and basins). Disposable accessory packs supplement the reusable products with highly customizable components. We sell our products and services through a direct sales force located throughout most of the major markets in the United States. Our revenue growth is primarily determined by the number of customers, the number and type of surgical procedures that we service for each customer, and pricing for our various types of surgical packs and procedures. Revenues are recognized as the agreed upon products and services are delivered, generally daily. We incur most of our cost of revenues from processing the reusable surgical products and instruments at our processing facilities.

Most of our surgical instrument supply arrangements with customers utilize instruments owned by Aesculap, Inc. ("Aesculap"), which receives an agreed upon fee for each procedure based on the number and kinds of procedures performed with its instruments and the number and combination of instruments used for each procedure. This arrangement allows us to limit our cost of capital for instrument programs. In addition to the Aesculap-owned instruments, we purchase surgical instruments from other vendors to service customers who have requirements that Aesculap cannot fulfill. We expect instrument revenues will continue to grow and, as a result, we expect our instrument inventory will continue to grow. We estimate that our expenditures in 2008 for instrument inventory will be approximately $2.0 million.

Our profitability is primarily determined by our revenues, the efficiency with which we deliver products and services to our customers, and our ability to control our costs. We incurred operating and net losses for our nine month period ended September 30, 2008 and for the year ended December 31, 2007, primarily due to increased material costs from disposable products, higher consumables, labor and instrument repair related costs, as well as higher amortization expense associated with owned instruments and distribution expenses primarily related to higher fuel costs. Although sales to customers who predominantly purchase reusable textiles declined, we continue to see growth in other products sold with our ReadyCaseSM case cart management system (combining instruments, reusable textiles and disposable products).

Our principal strategic opportunity to improve our operating results is to capitalize on our service capabilities and considerable infrastructure by leveraging our current relationships with existing customers and adding new customers. We continue to focus on introducing current and potential new customers to our physician-specific ReadyCaseSM case cart management system, which has been our principal source of new sales.

We continue to seek ways to improve the efficiency and effectiveness of our operations. During 2007, we completed a lean transformation at our Tampa and Cincinnati facilities. This process involved a review of every element of our operations to identify cost savings opportunities and generate efficiencies. During the first six months of 2008, we completed the roll out of this transformation process to all of our processing facilities. We expect this initiative will have a positive impact on our performance in the years ahead.

Critical Accounting Policies

The preparation of our financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions, and estimates that affect the amounts reported in our financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that these estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions. We identified the following critical accounting policies that affect the more significant judgments, assumptions and estimates used in preparing our financial statements:

Allowance for Doubtful Accounts. Our allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts, the overall aging of the balances, and the financial stability of the customer. The use of different estimates or assumptions could produce different allowance balances. If a major customer's creditworthiness deteriorates or customer defaults run at a rate higher than historical experience, we would be required to increase this allowance, which could adversely affect our results of operations.

Reserves for Shrinkage, Obsolescence, and Scrap for Reusable Surgical Products and Instruments. We determine our reserves for shrinkage and obsolescence of our reusable surgical products and instruments based on historical experience. Any linen products not scanned by our RFID system for a 210-day period are considered lost and written off. We determine our reserve for scrap based upon quality assurance standards and historical evidence. We periodically verify the quantity of other reusable surgical products by counting and by applying observed turn rates. A third party, Aesculap, owns most of the surgical instruments that we use. We base our reserve for owned surgical instrument losses on our assessment of our historical loss experience, including periodic physical counts. Using different estimates or assumptions could produce different reserve balances for our reusable products and instruments. We review this reserve quarterly. If actual shrinkage, obsolescence or scrap differs from our estimates, our reserve would increase or decrease accordingly, which could adversely affect our results of operations.

Reserves for Shrinkage and Obsolescence for Inventories. We determine our reserves for shrinkage and obsolescence of our inventories based on historical data, including the results of cycle counts performed during the year and the evaluation of the aging of reusable and disposable surgical products and instruments. Using different estimates or assumptions could produce different reserve balances. We review this reserve quarterly. If actual losses differ from our estimates, our reserve would increase or decrease accordingly, which could adversely affect our results of operations.

Amortization of Reusable Surgical Products and Instruments. Our reusable surgical products are stated at cost. We amortize linens and basins on a basis similar to the units of production method. Estimated useful lives for each product are based on the estimated total number of available uses for each product. The expected total available usage for our linen products using the three principal fabrics (accounting for approximately 79% of the reusable surgical products) is 75, 100, and 125 uses, based on several factors, including our actual historical experience with these products. We believe our RFID technology enables us to evaluate the useful lives of linen products more often. Basins are amortized over their estimated useful life, which ranges from 25 to 200 uses. We amortize owned surgical instruments on the straight-line method based on a four-year useful life. If our actual use experience with these products is shorter than these assumptions, our amortization rates for reusable products and instruments would increase, which could adversely affect our results of operations.

Health Insurance Reserves. We offer employee benefit programs including health insurance to eligible employees. We retain a liability up to $85,000 annually for each health insurance claim. Our policy

has an estimated annual aggregate liability limit of $3.1 million. We accrue health insurance costs using estimates to approximate the liability for reported claims and claims incurred but not reported. Using different estimates or assumptions could produce different reserve balances. If actual claim results exceed our estimates, our health insurance reserve would increase, which could adversely affect our results of operations.

Workers' Compensation Insurance Reserve. Our workers' compensation insurance program is a large dollar deductible, self-funded plan. We retain a liability of $250,000 for each claim occurrence. Our insurance policy covers each claim above our retention level to $1 million. Our policy has an annual aggregate liability limit of $1.5 million. We base our reserve on historical claims experience and reported claims. We accrue workers' compensation insurance costs using estimates to approximate the liability for reported claims and claims incurred but not reported. We review this reserve quarterly. If actual claims differ from our estimates, the reserve would increase or decrease accordingly, which could adversely affect our results of operations.

Income Taxes. Our effective tax rate is based on expected income and statutory tax rates in the various jurisdictions in which we operate. Significant judgment is required in determining our effective tax rate and evaluating our tax positions. Our effective tax rate depends upon our forecast of results for the fiscal year. Each quarter, we evaluate our forecasted fiscal year results and adjust our tax provision to reflect the effective tax rate on a cumulative basis. This rate is applied to our quarterly operating results. Income taxes have been provided using the liability method in accordance with Statement of Financial Accounting Standards Statement No. 109, Accounting for Income Taxes ("SFAS 109"). In accordance with SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in operations in the period that includes the enactment date of the rate change. The tax benefits must be reduced by a valuation allowance in certain circumstances. Realization of the deferred tax benefits is dependent on generating sufficient taxable income prior to expiration of any net operating loss carry-forwards. We periodically review deferred tax assets for recoverability, and provide valuation allowances as necessary.

Stock-Based Compensation. In accordance with the Statement of Financial Accounting Standards Statement No. 123R, Share-Based Payments, ("SFAS 123R") and the Security and Exchange Commission Staff Accounting Bulletin No. 107 ("SAB 107"), we recognize stock-based compensation expense in our statements of operations. We have elected to use the binomial model to determine the fair value of our issued options. Option pricing models require the input of subjective assumptions, including the expected life of the option, the price volatility of the underlying stock, expected interest rates and forfeitures. If actual results differ significantly from our assumptions, stock-based compensation could increase or decrease. For further discussion of our stock-based compensation, see Note B-Summary of Significant Accounting Policies-Stock-Based Compensation to the financial statements.

Recently Issued Financial Accounting Standards

In September 2006, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 157 ("SFAS 157"), Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 157 creates a fair value hierarchy, which prioritizes the inputs to be used in determining fair value. The three hierarchy levels are based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, such as quoted market prices in active markets for identical assets and liabilities. Level 2 includes observable inputs other than those included in Level 1. For example, quoted market prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets. Level 3 generally requires significant management judgment as the inputs reflect management's own assumptions used in pricing the asset or liability. Companies are required to disclose relevant fair value information in their financial statements that allows users to assess inputs used to measure fair value, and the effect of those measurements on earnings for the periods presented. Companies are also required to separately reconcile the beginning and ending balances for each major category of assets and liabilities. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007; however, the

FASB delayed the effective date of SFAS 157 for one year for certain nonfinancial assets and liabilities that are not remeasured at fair value on a recurring basis. Examples of nonfinancial assets and liabilities include goodwill and intangible assets that are not amortized. We have elected to defer this aspect of SFAS 157. We are in the process of evaluating the impact of SFAS 157, relating to our nonfinancial assets and liabilities; however, we believe its adoption will not have a material impact on our financial statements. There were no fair value measurements requiring the application of SFAS 157 in the current period.

In April 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits an entity to measure certain financial assets and financial liabilities at fair value where entities will report unrealized gains and losses in earnings at each subsequent reporting date. The standard allows entities to elect fair value application on an instrument-by-instrument basis with certain exceptions. The fair value option election is irrevocable in most cases. The new standard establishes presentation and disclosure requirements and assets and liabilities that are measured at fair value must be displayed on the face of the balance sheet. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 did not have a material impact on our financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007) ("SFAS 141(R)"), Business Combinations, which revises SFAS No. 141, Business Combinations. SFAS 141(R) essentially requires the following: (a) Upon initially obtaining control, the acquiring entity in a business combination must recognize 100% of the fair values of the acquired assets, including goodwill, and assumed liabilities, with only limited exceptions even if the acquirer has not acquired 100% of its target. As a consequence, the current step acquisition model will be eliminated;
(b) Contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration. The concept of recognizing contingent consideration at a later date when the amount of that consideration is determinable beyond a reasonable doubt, will no longer be applicable; and (c) All transaction costs will be expensed as incurred. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. Adoption of this standard will only affect our financial statements in the event of a future business combination.

Results of Operations

We operate on a 52-53 week fiscal year ending the Sunday nearest December 31. The unaudited financial statements are reflected as of September 30, 2008 and 2007 for presentation purposes only. The actual end of each period was September 28, 2008 and September 30, 2007, respectively. There are 39 weeks included for each of the nine-month periods ended September 30, 2008 and 2007.

The following table sets forth for the periods shown the percentage of revenues represented by certain items reflected in our statements of income:

                                         Three Months Ended         Nine months Ended
                                           September 30,              September 30,
                                        2008           2007         2008          2007
 Revenues                                100.0 %        100.0 %      100.0 %      100.0 %
 Cost of revenues                         77.8           80.4         77.8         77.9

 Gross profit                             22.2           19.6         22.2         22.1
 Distribution expenses                     7.7            6.7          7.5          6.7
 Selling and administrative expenses      14.2           16.2         16.6         17.6

 Income (loss) from operations             0.3           (3.3 )       (1.9 )       (2.2 )
 Interest expense                          1.3            1.4          1.1          1.5
 Other income                             (0.4 )         (0.6 )       (0.4 )       (0.3 )

 Loss before income taxes                 (0.6 )         (4.1 )       (2.6 )       (3.4 )
 Income tax expense (benefit)              0.1           (1.3 )         -          (1.2 )

 Net loss                                 (0.7 )%        (2.8 )%      (2.6 )%      (2.2 )%

Three and Nine months Ended September 30, 2008 Compared to Three and Nine months Ended September 30, 2007

Revenues. Revenues increased $808,000, or 3.5%, to $24.0 million for the three months ended September 30, 2008, compared to $23.2 million for the three months ended September 30, 2007. For the nine months ended September 30, 2008, revenues increased $2.8 million, or 4.0% to $73.0 million compared to $70.2 million for the nine months ended September 30, 2007. The increase in revenues in the three months and nine months ended September 30, 2008 is primarily attributable to an increase in the growth of our on-site management of hospital and surgery center instrumentation, supply chain and sterilization facilities and ReadyCaseSM delivery system. Our revenues for the nine months ended September 30, 2008 were also favorably affected by the reversal of an accrued customer discount of $440,000 that was not realized.

Gross Profit. Gross profit increased $773,000 and $695,000 for the three months and nine months ended September 30, 2008, respectively, as compared to the same periods in the prior year. As a percentage of revenues, gross profit increased by 2.6 and 0.1 percentage points for the three months and nine months ended September 30, 2008, respectively, as compared to the same periods in the prior year. For the three months ended September 30, 2008, the increase in gross profit was primarily due to lower disposable material costs, amortization of reusable products and laundry expense, partially offset by higher labor, instrument repair and instrument supply costs, as well as higher depreciation expense of owned instruments. For the nine months ended September 30, 2008, the increase in gross profit was primarily due to the reversal of the accrued customer discount noted above, and lower amortization of reusable products, partially offset by higher production labor and instrument repair and instrument supply costs, as well as higher amortization expense from a higher level of owned instruments.

Distribution Expenses. Distribution expenses for the three months ended September 30, 2008 increased $301,000 to $1.9 million (7.7% of revenues) compared to $1.6 million (6.7% of revenues) for the three months ended September 30, 2007. For the nine months ended September 30, 2008 and 2007, distribution expenses were $5.5 million (7.5% of revenues) and $4.7 million (6.7% of revenues), respectively. The increase in distribution expenses for the three months and nine months ended September 30, 2008 when compared to the prior year is primarily due to higher vehicle fuel costs and labor related costs.

Selling and Administrative Expenses. Selling and administrative expenses decreased $360,000, or 9.6%, to $3.4 million for the three months ended September 30, 2008 compared to $3.7 million for the same period in the prior year. Selling and administrative expenses for the nine months ended September 30, 2008 were $12.0 million, $355,000 lower than the same period in the prior year. Selling and administrative expenses for the three months ended September 30, 2008 were lower than the prior year primarily as a result of lower marketing expenses and professional fees, as well as a reduction of the provision for doubtful accounts, partially offset by higher compensation costs, stock option expense and bank charges. Selling and administrative expenses for the nine months ended September 30, 2008 were lower than the prior year primarily as a result of $392,000 lower severance expenses for our former President and CEO, professional fees and marketing expenses, as well as a reduction of the provisions for doubtful accounts, partially offset by higher compensation costs, stock option expense and bank charges. In the third quarter, we reduced our provision for doubtful accounts by $423,000 after a customer made significant steps to bring its account current.

Interest Expense. Interest expense for the three months ended September 30, 2008 was $302,000 compared to $331,000 for the three months ended September 30, 2007. For the nine months ended September 30, 2008, interest expense decreased $235,000, or 22.0% to $832,000 compared to the same period in the prior year. The decrease for both the three months and nine months ended September 30, 2008 is due to lower average outstanding balances under our line of credit agreement and generally lower interest rates.

Other Income. Other income was $90,000 for the three months ended September 30, 2008, compared to $128,000 in the prior year. Other income increased $25,000 to $275,000 for the nine months ended September 30, 2008. Other income is primarily rental income. Effective March 1, 2007, we entered into an agreement to lease to a third party a portion of our corporate headquarters under the terms of a non-cancelable operating lease.

Income Tax Expense (Benefit). Our effective tax rate is based on expected income and statutory tax rates as well as minimum taxes in the various jurisdictions in which we operate and the need for valuation allowance adjustments. Income taxes are a function of our net income (loss) and effective tax rate. The effective tax rate for the three months ended September 30, 2008 was 29.1% compared to 32.4% for the three months ended September 30, 2007. For the nine months ended September 30, 2008, the effective tax rate was 0.43% compared to 34.2% for the nine months ended September 30, 2007. The lower effective tax rate in the three and nine months ended September 30, 2008 when compared to the prior year is primarily attributable to the recording of an allowance in 2008 to reduce certain deferred tax assets to the amount that will more likely than not be realized. Our effective tax rate depends upon our forecast of tax expense or benefit based upon the expected results for the fiscal year. Each quarter, we evaluate our forecasted fiscal year results and adjust our tax provision to reflect the effective tax rate on a cumulative basis. Our effective tax rate may increase or decrease during the remainder of 2008 depending upon actual results of operations.

Liquidity and Capital Resources

Our principal sources of capital have been cash flows from operations and borrowings under our revolving credit facility. As of September 30, 2008, we had approximately $2.2 million in cash and cash equivalents, compared to approximately $656,000 as of December 31, 2007. In addition, as of September 30, 2008, we had $5.4 million available under our credit facility, which takes into consideration the amounts already outstanding under the credit facility, certain letters of credit principally associated with the bonds payable and a general reserve. Net cash provided by operations for the nine months ended September 30, 2008 was $8.6 million compared to $5.4 million in the prior year. Net cash provided by operations during the nine months ended September 30, 2008 is primarily attributable to depreciation and amortization expense of $6.3 million, a decrease in prepaid expenses and other assets of $1.7 million, and a decrease in our accounts receivable of $1.3 million and a decrease in our inventory of $569,000, partially offset by a decrease in our provision for doubtful accounts of $596,000, a decrease in our accrued expenses of $562,000 and a net loss of $1.9 million.

Net cash used in investing activities during the nine months ended September 30, 2008 was $7.8 million compared to $5.1 million in the prior year period. Cash used in investing activities during the nine months ended September 30, 2008 is the result of purchases of property, plant and equipment and reusable surgical products. We estimate that our expenditures in 2008 for property, plant and equipment will be approximately $2.0 million. We estimate that our expenditures in 2008 for reusable surgical products will be approximately $7.5 million, an amount that may fluctuate depending on the growth of our business. We expect continued growth in our instrument revenues and instrument inventory. We estimate that our expenditures in 2008 for instrument inventory will be approximately $2.0 million.

Net cash provided by financing activities in the nine months ended September 30, 2008 was $735,000 compared to net cash used of $149,000 for the nine months ended September 30, 2007. Cash provided was primarily a result of the borrowings on our notes payable, partially offset by our repayments on our notes payable, mortgage payable and bonds payable.

On August 7, 2008, we entered into a three-year credit facility with a financial institution to replace the expiring $20 million credit facility and the $4.2 . . .