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 operations for the three months ended October 31, 2008 compared with the three months ended October 31, 2007.

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

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

Forward-Looking Statements provides a discussion of cautionary factors that may affect future results.

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 prevention and 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.

See our Annual Report on Form 10-K for the fiscal year ended July 31, 2008 (the "2008 Form 10-K") and our Condensed Consolidated Financial Statements for additional financial information regarding our reporting segments.

Significant Activity

(i) Higher raw material, manufacturing and distribution costs adversely impacted our results of operations for the three months ended October 31, 2008, compared with the three months ended October 31, 2007, as more fully described elsewhere in this MD&A.

(ii) We sell our dialysis products to a concentrated number of customers. Sales in our Dialysis segment were adversely impacted during the three months ended October 31, 2008 and will continue to be adversely impacted during fiscal 2009 and thereafter due to the loss of some low margin dialysate concentrate business as a result of the highly competitive and price sensitive market for such product, as more fully described elsewhere in this MD&A.

(iii) In June 2008, we announced and began executing our plan to restructure our Netherlands manufacturing operations as part of our continuing effort to reduce operating costs and leverage our existing United States infrastructure. As a result of this restructuring, a charge of approximately $271,000 was recorded in the three months ended October 31, 2008, which decreased both basic and diluted earnings per share by $0.02. An additional charge of approximately $139,000 is expected in our second quarter of fiscal 2009, as more fully described in Note 16 to the Condensed Consolidated Financial Statements and elsewhere in this MD&A.

(iv) Fluctuations in the rates of currency exchange had an overall favorable impact on our results of operations for the three months ended October 31, 2008, compared with the three months ended October 31, 2007, as more fully described elsewhere in this MD&A.

(v) Fiscal 2008 acquisitions: We acquired the businesses of Dialysis Services, Inc. ("DSI") on August 1, 2007, Verimetrix, LLC ("Verimetrix") on September 17, 2007, and Strong Dental Products, Inc. ("Strong Dental") on September 26, 2007, as more fully described in Note 3 to the Condensed Consolidated Financial Statements.

Results of Operations

The results of operations described below reflect the operating results of Cantel and its wholly-owned subsidiaries and includes the results of operations of DSI, Verimetrix and Strong Dental for the three months ended October 31, 2008 and the portion of the three months ended October 31, 2007 subsequent to their respective acquisition dates.

The following discussion should also be read in conjunction with our 2008 Form 10-K.

The following table gives information as to the net sales and the percentage to the total net sales for each of our reporting segments:

                                             Three Months Ended
                                                 October 31,
                                           2008                2007
                                        (Dollar amounts in thousands)
                                        $          %        $         %

Water Purification and Filtration   $   18,470    28.7   $ 15,953    26.5
Dialysis                                14,230    22.1     15,455    25.8
Healthcare Disposables                  15,749    24.4     13,966    23.3
Endoscope Reprocessing                  12,423    19.3     11,145    18.6
All Other                                3,534     5.5      3,486     5.8
                                    $   64,406   100.0   $ 60,005   100.0

Net Sales

Net sales increased by $4,401,000, or 7.3%, to $64,406,000 for the three months ended October 31, 2008 from $60,005,000 for the three months ended October 31, 2007.

Net sales were adversely impacted for the three months ended October 31, 2008 compared with the three months ended October 31, 2007 by approximately $102,000 due to the translation of Canadian dollar net sales primarily of our Water Purification and Filtration operating segment using a weaker Canadian dollar against the United States dollar.

The increase in net sales for the three months ended October 31, 2008 was principally attributable to increases in sales of water purification and filtration products and services, healthcare disposables products and endoscope reprocessing products and services, partially offset by a decrease in dialysis products.

Net sales of water purification and filtration products and services increased by $2,517,000, or 15.8%, for the three months ended October 31, 2008 compared with the three months ended October 31, 2007, primarily due to (i) an increase in demand for our water purification equipment from dialysis customers,
(ii) sales fulfillment delays of capital equipment during the three months ended October 31, 2007 as a result of the integration of the acquired GE Water & Process Technologies' water dialysis business into our facilities, (iii) an increase in demand for our sterilants and filters by pharmaceutical companies and within our installed equipment base of business, including one of our largest customers who standardized on our consumables products in their ordering system utilized by their dialysis clinics and (iv) approximately $285,000 in higher net sales due to increases in selling prices to partially offset increased manufacturing costs. Although commercial and industrial (large capital) equipment

sales were comparable during the three months ended October 31, 2008 compared with the three months ended October 31, 2007, we are seeing delayed investments in commercial and industrial capital equipment by customers due to the recent deterioration in the general economy and credit markets, which may adversely affect such sales during the remainder of fiscal 2009.

Net sales of healthcare disposable products increased by $1,783,000, or 12.8%, for the three months ended October 31, 2008, compared with the three months ended October 31, 2007, primarily due to (i) an increase in demand for our instrument sterilization pouches, face masks, towels, headrest and barrier covers and cups during the three months ended October 31, 2008, (ii) the adverse impact on the three months ended October 31, 2007 due to the consolidation of certain distributors of our dental products during 2007 resulting in the rationalization of duplicate inventories of the consolidated companies,
(iii) approximately $194,000 in incremental net sales due to the acquisition of Strong Dental on September 26, 2007 and (iv) approximately $400,000 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.

Net sales of endoscope reprocessing products and services increased by $1,278,000, or 11.5%, for the three months ended October 31, 2008, compared with the three months ended October 31, 2007, primarily due to the increase in demand in the United States for our disinfectants and product service due to the increased field population of equipment as well as our ability to gradually convert the sale of such items from our former equipment distributor (who continues to purchase high-level disinfectants, cleaners, and consumables from us and provide product service to our customers) to our direct sales and service force at higher selling prices. Higher selling prices, most of which relates to the direct sale of disinfectants, consumables and product service, resulted in approximately $760,000 in incremental net sales for the three months ended October 31, 2008, compared with the three months ended October 31, 2007. The increase in net sales was also due to approximately $184,000 in incremental net sales due to the acquisition of Verimetrix on September 17, 2007. Although endoscope reprocessing equipment sales were comparable during the three months ended October 31, 2008 and October 31, 2007, future sales may be adversely affected by the recent deterioration in the general economy and credit markets by potentially causing our customers to slow spending on such capital equipment.

Net sales of dialysis products and services decreased by $1,225,000, or 7.9%, for the three months ended October 31, 2008, compared with the three months ended October 31, 2007, primarily due to the loss of some dialysate concentrate business (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) 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. This decrease in net sales was partially offset by approximately $300,000 in higher net sales due to higher selling prices, 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.

Gross profit

Gross profit increased by $2,417,000, or 11.4%, to $23,623,000 for the three months ended October 31, 2008 from $21,206,000 for the three months ended October 31, 2007. Gross profit as a percentage of net sales for the three months ended October 31, 2008 and 2007 was 36.7% and 35.3%, respectively.

The gross profit percentage increased primarily due to (i) favorable sales mix due to the increased sales volume of certain high margin products such as disinfectants and consumables in our Endoscope Reprocessing segment, sterilants and filters in our Water Purification and Filtration segment, and sterilization pouches and masks in our Healthcare Disposables segment, and a decrease in sales of low margin dialysate concentrate in our Dialysis segment, (ii) our ability to gradually convert the sale of high-level disinfectants, cleaners, and consumables in our Endoscope Reprocessing segment from our former equipment distributor (who continues to purchase such items from us) to our direct sales and service force at higher selling prices and (iii) inefficiencies in our Water Purification and Filtration segment during the three months ended October 31, 2007 as a result of the integration of the acquired GE Water & Process Technologies' water dialysis business into our facilities. Partially offsetting this increase was a decrease in gross profit percentage attributed to an increase in raw material, manufacturing and shipping costs in all of our operating segments, which were only partially offset by selling price increases, and approximately $139,000 in restructuring charges recorded primarily in our Endoscope Reprocessing segment during the three months ended October 31, 2008 relating to the relocation of our Netherlands manufacturing operations, as more fully described elsewhere in this MD&A.

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

Operating Expenses

Selling expenses increased by $561,000, or 8.3%, to $7,350,000 for the three months ended October 31, 2008, from $6,789,000 for the three months ended October 31, 2007, primarily due to (i) higher compensation expense of approximately $430,000 relating to annual salary increases in all of our reporting segments and additional sales personnel primarily in our Water Purification and Filtration and Healthcare Disposables segments and (ii) an increase of approximately $100,000 in advertising and marketing expense primarily related to our Healthcare Disposables segment.

Selling expenses as a percentage of net sales were 11.4% and 11.3% for the three months ended October 31, 2008 and 2007.

General and administrative expenses increased by $67,000, or 0.7%, to $9,024,000 for the three months ended October 31, 2008, from $8,957,000 for the three months ended October 31, 2007, principally due to increases of approximately $390,000 in compensation expense primarily related to incentive compensation and approximately $132,000 of severance expense related to the relocation of our Medivators' manufacturing operations from the Netherlands to the United States. These increases were partially offset by a decrease of approximately $445,000 as a result of foreign exchange gains 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 weaker Canadian dollar and euro against the

United States dollar.

General and administrative expenses as a percentage of net sales were 14.0% and 14.9% for the three months ended October 31, 2008 and 2007.

Research and development expenses (which include continuing engineering costs) increased by $75,000 to $1,065,000 for the three months ended October 31, 2008, from $990,000 for the three months ended October 31, 2007 primarily due to the timing of projects. The majority of our research and development expenses related to our endoscope reprocessing and filtration products.

Interest

Interest expense decreased by $471,000 to $751,000 for the three months ended October 31, 2008, from $1,222,000 for the three months ended October 31, 2007, due to decreases in the average outstanding borrowings and average interest rates.

Interest income decreased by $77,000 to $70,000 for the three months ended October 31, 2008, from $147,000 for the three months ended October 31, 2007, primarily due to a decrease in average interest rates.

Income taxes

The consolidated effective tax rate was 39.4% and 42.9% for the three months ended October 31, 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 during fiscals 2009 and 2008 as described below.

The majority of our income before income taxes was generated from our United States operations, which had an overall effective tax rate for the three months ended October 31, 2008 and 2007 of 35.8% and 38.7%, respectively. This lower overall effective rate was principally caused by New York state tax rate reductions enacted in 2008, which primarily relate to our Healthcare Disposables segment, and recently enacted Federal tax legislation that enabled us to claim the research and experimentation tax credit.

Approximately 7% of our income before income taxes was generated from our Canadian operations, which had an overall effective tax rate for the three months ended October 31, 2008 of 36.2%.

A tax benefit was not recorded on the losses from operations at our Netherlands subsidiary for the three months ended October 31, 2008 and 2007, thereby causing our overall consolidated effective tax rate to exceed the effective tax rates in our United States and Canadian operations. The overall loss from our Netherlands operation for the three months ended October 31, 2008, compared with the three months ended October 31, 2007, increased due to restructuring activities, as described in Note 16 to the Condensed Consolidated Financial Statements and elsewhere in this MD&A, which will be completed during the second quarter of our fiscal 2009.

The results of operations for our subsidiaries in Japan and Singapore did not have a significant impact on our overall effective tax rate for the three months ended October 31, 2008 and 2007 due to the size of these operations relative to our United States, Canada and Netherlands operations.

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 Condensed 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. 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:

                                                           Unrecognized
                                                           Tax Benefits

Unrecognized tax benefits on August 1, 2007               $      484,000
Lapse of statute of limitations                                  (57,000 )
Unrecognized tax benefits on July 31, 2008                       427,000
Activity during the three months ended October 31, 2008                -
Unrecognized tax benefits on October 31, 2008             $      427,000

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 Condensed 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 Condensed Consolidated Statements of
Income:



                                                       Three Months Ended
                                                          October 31,
                                                        2008        2007

Cost of sales                                        $   18,000   $  13,000
Operating expenses:
Selling                                                  53,000      29,000
General and administrative                              443,000     485,000
Research and development                                  6,000       5,000
Total operating expenses                                502,000     519,000
Stock-based compensation before income taxes            520,000     532,000
Income tax benefits                                    (247,000 )  (204,000 )
Total stock-based compensation expense, net of tax   $  273,000   $ 328,000

For the three months ended October 31, 2008 and 2007, the above stock-based compensation expense before income taxes was recorded in the Condensed Consolidated Financial Statements as stock-based compensation expense and an increase to additional paid-in 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. For each of the three months ended October 31, 2008 and 2007, stock-based compensation expense, net of tax, decreased both basic and diluted earnings per share by $0.02.

The stock-based compensation expense recorded in the Condensed 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 options 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 October 31, 2008, total unrecognized stock-based compensation expense, net of tax, related to total nonvested stock options and stock awards was $2,094,000 with a remaining weighted average period of 24 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 paid-in capital (assuming deferred tax assets do not exist pertaining to the exercised stock options) and as a reduction of income taxes payable. For the three months ended October 31, 2008 and 2007, options exercised resulted in income tax deductions that reduced income taxes payable by $348,000 and $690,000, respectively.

We classify the cash flows resulting from excess tax benefits as financing cash flows on our Condensed 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.

Liquidity and Capital Resources

Working capital

At October 31, 2008, the Company's working capital was $46,988,000, compared with $45,639,000 at July 31, 2008.

Cash flows from operating activities

Net cash provided by operating activities was $5,407,000 and $992,000 for the three months ended October 31, 2008 and 2007, respectively. For the three months ended October 31, 2008, the net cash provided by operating activities was primarily due to net income after adjusting for depreciation, amortization and stock-based compensation expense, a decrease in accounts receivable (due to improved collections) and an increase in income taxes payable (due to the timing associated with tax payments). These items were partially offset by increases in inventories (due to planned increases in stock levels of certain products primarily in our Endoscope Reprocessing segment) and prepaid expenses (due to the prepayment of certain operating expenses) and decreases in accounts payable, deferred revenue and accrued expenses (due primarily to the timing associated with incentive compensation payments).

For the three months ended October 31, 2007, the net cash provided by operating activities was primarily due to net income after adjusting for depreciation, amortization and stock-based compensation expense, and an increase in income taxes payable (due to the timing associated with tax payments). These items were partially offset by increases in accounts receivable (due to an increase in sales) and inventories (due to planned increases in stock levels of certain products primarily in our Endoscope Reprocessing segment).

. . .