• Results of Operations

• Liquidity and Capital Resources

• Off-Balance Sheet Arrangements

• Critical Accounting Policies

• Recent Accounting Pronouncements

You should note that this MD&A discussion contains forward-looking statements that involve risks and uncertainties. Please see the section entitled "Risk Factors" at the beginning of Item 1A on pages 9 through 14 for important information to consider when evaluating such statements. You should read this MD&A in conjunction with the Company's financial statements and related notes included in Item 8.
Company Overview
Sunair Services Corporation is a Florida corporation organized in 1956. We changed our corporate name from Sunair Electronics, Inc. to Sunair Services Corporation in November of 2005. Previously, we operated through two business segments: Telephone Communications and High Frequency Radio. In June 2005 with the acquisition of Middleton we embarked on a new strategy to become a leading regional provider of lawn and pest control services focusing mainly on residential customers.
We have completed the execution of our strategy which was to focus on growing our core business, Lawn and Pest Control Services, and to divest our legacy businesses (Telephone Communications and High Frequency Radio).
The acquisitions and divestitures for the years ended September 30, 2007 and 2008 are as follows:
Acquisitions:
• November 2006 we acquired substantially all the assets of Archer.

• February 2007 we acquired substantially all the assets of Valentine.

• April 2007 we acquired substantially all the assets of Florida Exterminating.

• May 2007 we acquired substantially all the assets of Summer Rain.

• August 2007 we acquired substantially all the assets of Howell.

• September 2007 we acquired substantially all the assets of Longboat Key.

• October 2007 we acquired substantially all the assets of Marshall.

All of these acquisitions of lawn care and pest control companies have been made by Middleton, our platform company, and have been integrated into its operations.

Dispositions:
• November 2006 we sold real estate associated with the previously sold high frequency radio business.

• August 2007 we sold all the issued and outstanding stock of Percipia, a wholly owned subsidiary operating in our Telephone Communications business segment.

• September 2008 we sold all the issued and outstanding stock of Telecom FM, a wholly owned subsidiary operating in our Telephone Communications business segment.

The divestiture of Telecom FM represents a key transaction for us. With the sale of this subsidiary, we finalized the execution of our strategy of divesting our non-core assets while growing our core lawn and pest control services business via acquisitions and internally generated growth. Results of Operations
Fiscal Year Ended September 30, 2008 ("fiscal 2008") compared to the Fiscal Year ended September 30, 2007 ("fiscal 2007") Revenue, Cost of Sales, and Gross Profit:

                                        (dollars in thousands)
                                   For the Year Ended September 30,
                                      2008                    2007
               Revenue         $           56,613        $       53,016
               Cost of sales              (21,643 )             (19,286 )

               Gross profit    $           34,970        $       33,730

Revenue
Revenue from lawn and pest control services is comprised of lawn, pest control and termite services. Revenue increased by $3.6 million or 6.8% for fiscal 2008 as compared to fiscal 2007. The revenue increase was primarily attributable to the integration of our 6 acquisitions that took place throughout fiscal 2007 and which has been reflected for the entire year in fiscal 2008 coupled with our Marshall acquisition which took place on October 2, 2007. Cost of Sales
Cost of sales in the lawn and pest control services increased by $2.4 million or 12.2% to $21.6 million or 38.2% of revenue for fiscal 2008 as compared to $19.3 million or 36.4% of revenue for fiscal 2007 due to the following factors:
• Chemical costs increased by $0.7 million for fiscal 2008 as compared to fiscal 2007. The price of petroleum based chemical and fertilizer products increased due to higher oil prices.

• Payroll costs increased by $0.7 for fiscal 2008 as compared to fiscal 2007 due to an increase in activity and wage increases. Most of the increase in payroll in fiscal 2008 compared to fiscal 2007 was due to the integration of our fiscal 2007 and fiscal 2008 acquisitions.

• Vehicle costs increased by $1.0 million for fiscal 2008 compared to fiscal 2007 primarily due to an increase in fuel and vehicle maintenance costs.

Gross Profit

The gross profit of the lawn and pest control services increased by $1.2 million or 3.7% to $35.0 million or 61.8% of revenue for fiscal 2008 as compared to $33.7 million or 63.6% of revenue for fiscal 2007. Operating Expenses:
Selling, General and Administrative Expenses:

                                               (dollars in thousands)
                                                 For the Year Ended
                                                    September 30,
                                                 2008             2007

             Selling                         $      5,921       $  7,029
             General and administrative            28,128         27,051
             Depreciation and amortization          4,425          2,946

             Total operating expenses        $     38,474       $ 37,026

Total operating expenses increased by $1.4 million or 3.9% to $38.5 million or 68.0% of revenue for fiscal 2008 as compared to $37.0 million or 69.8% of revenue for fiscal 2007.
Selling expenses decreased by $1.1 million or 15.8% to $5.9 million or 10.5% of revenue for fiscal 2008 as compared to $7.0 million or 13.3% of revenue for fiscal 2007.
• Advertising costs decreased by $0.7 million for fiscal 2008 as compared to the same time period in 2007 due to reduced use of television and radio advertising.

• Sales payroll costs decreased by $0.4 million for fiscal 2008 as compared to the same time period in 2007. In fiscal 2008, the sales compensation structure was changed, moving sales consultants from salary to a commission-based compensation structure.

General and administrative expenses increased by $1.1 million or 4.0% to $28.1 million or 49.7% of revenue for fiscal 2008 as compared to $27.0 million or 51.0% of revenue for fiscal 2007.
• Middleton's general and administrative expenses increased by $1.5 million for fiscal 2008 as compared to fiscal 2007. The increase was primarily driven by payroll expenses which increased $1.0 million in fiscal 2008 compared to fiscal 2007 as a result of the increase in staff due to the purchase and integration of several acquisitions, expansion of staff related to meeting our compliance requirements with regard to Sarbanes-Oxley and an increase in staff related to the conversion of our existing operating software to a new system. Occupancy expenses increased by $0.3 million due to our expansion and increased facility lease rates. The Company moved to a lockbox system in August 2007. Lockbox fees and statement fulfillment expenses were $0.3 million for fiscal 2008. There were no lockbox fees and statement costs for the same time period in fiscal 2007. The implementation of a lockbox system has enabled us to streamline our billing and cash receipts processing and has improved our ability to manage cash flow.

• Corporate general and administrative expenses decreased by $0.4 million for fiscal 2008 as compared to fiscal 2007. Management fees decreased by $0.6 million as a result of the Amended Management Services Agreement that commenced on February 8, 2008, resulting in lower management fees. Stock-based compensation expense decreased by $0.1 million due to a reduction in the stock price of our common stock. During the fourth quarter of 2008, the Company incurred $0.4 million in severance payments related to the termination of the employment agreement of our former Chief Executive Officer and President.

Depreciation and amortization expenses increased by $1.5 million or 50.2% to $4.4 million or 7.8% of revenue for fiscal 2008 as compared to $2.9 million or 5.6% of revenue for fiscal 2007.
• Depreciation and amortization expenses increased by $1.5 million for fiscal 2008 as compared to fiscal 2007 due to a significant increase in the amortization of intangibles related to our fiscal 2007 acquisitions coupled with the change in estimated life for

customer lists from 8 years to 5 years which occurred during the fourth quarter of fiscal year 2007. In addition, Marshall was acquired on October 2, 2007. Thus, a full year of amortization expense in fiscal 2008 related to this acquisition.

Other Income (Expense):

                                                 (dollars in thousands)
                                                   For the Year Ended
                                                      September 30,
                                                   2008             2007

           Interest income                     $        143       $    202
           Interest expense                          (1,340 )       (1,225 )
           (Loss) gain on disposal of assets            (11 )           28
           Other income                                  75              -

           Total other expenses                $     (1,133 )     $   (995 )

Other expenses increased by $0.1 million or 13.9% for fiscal 2008 as compared to fiscal 2007 primarily related to an increase in interest expense. Since September 30, 2006, the Company has incurred an additional $4.4 million in debt related to acquisitions completed during fiscal 2007 and fiscal 2008. The debt incurred in fiscal 2007 has been outstanding all of fiscal 2008 and thus resulted in an increase in interest expense. Income Tax (Expense) Benefit from Continuing Operations:

The income tax provision from continuing operations decreased to zero in fiscal 2008 as compared to fiscal 2007. The Company did not recognize an income tax benefit for fiscal 2008 as the Company has $16.3 million of net operating losses carryforwards which expire in 2027 and which are fully reserved. In addition, the Company does not have any net operating loss carrybacks.

Discontinued Operations:

                                                                   (dollars in thousands)          (dollars in thousands)
                                                                     For the Year Ended              For the Year Ended
                                                                     September 30, 2008              September 30, 2007
Sunair Communications - Net loss                                  $                 (2,000 )      $                      -
Percipia - Net loss                                                                    (74 )                        (1,964 )
Telecom FM - Net (loss) income                                                        (229 )                           867

Pre-tax income (loss) from discontinued operations                                  (2,303 )                        (1,097 )
Income tax provision                                                                    (9 )                             -

Loss from discontinued operations                                                   (2,312 )                        (1,097 )

Gain on sale of assets from discontinued operations                                      -                           2,183
Income tax provision                                                                     -                            (822 )

Gain on sale of assets from discontinued operations, net of
income taxes                                                                             -                           1,361

Gain on sale of stock                                                                  436                             639
Income tax benefit                                                                       -                           1,110

Gain on sale stock, net of income taxes                                                436                           1,749

Total (loss) income from discontinued operations, net of
income taxes                                                      $                 (1,876 )      $                  2,013

As indicated earlier, the divestitures of our legacy businesses have been recorded as discontinued operations:
• On November 20, 2006, we closed a transaction to sell the real estate property associated with the previously sold high frequency radio business for $2.7 million in cash and a recognized gain in the amount of $2.2 million, $1.4 million net of income taxes.

• On August 1, 2007, we sold all the outstanding stock of Percipia, a wholly-owned subsidiary, in our Telephone Communications segment for approximately $4.0 million in cash, of which $750,000 was placed in an escrow account pending the resolution of certain tax matters. The tax matters relating to the escrowed funds were settled in September 2008, at which time we received approximately $0.3 million of the escrowed funds. We recognized a book gain in the amount of $1.7 million which included an income tax benefit of $1.1 million on the sales transaction. The income tax benefit arose as a result of the reversal of a net deferred tax liability of $1.1 million.

• Percipia incurred a book loss for fiscal 2007 of $2.0 million and had a net tax of zero for the year ended September 30, 2007 as the net deferred tax asset had been fully reserved. No current income tax expense was incurred because of the taxable loss position.

• On September 30, 2008 we completed the sale of all the issued and outstanding stock of Telecom FM, a wholly owned subsidiary operating in our Telephone Communications business segment. The effective date of the sale was September 1, 2008. The aggregate purchase price paid to the Company for Telecom FM was $3.6 million, which included the payment of outstanding inter-company debt in the amount of $1.2 million. The gain on the sale of Telecom FM amounted to $0.4 million.

• As of September 30, 2008 a reserve was set up for the entire amount of a $2.0 million note receivable due from Sunair Electronics LLC, relating to the sale of our legacy high frequency radio business, as collection of this note is doubtful due to recent adverse developments at Sunair Electronics LLC.

Liquidity and Capital Resources
Generally our working capital needs are funded from operations and advances under our revolving line of credit. In the lawn care and pest control business segment customers are billed when service is rendered and payment is usually received in less than thirty (30) days.
As of September 30, 2008, our liquidity and capital resources included cash and equivalents of $3.0 million, working capital deficit of $(5.7) million and $1.4 million was available under our revolving line of credit. As of September 30, 2007, our liquidity and capital resources included cash and equivalents of $2.8 million, a working capital deficit of $(0.9) million and there was $9.0 million available under our revolving line of credit.

Cash used in operating activities for fiscal 2008 was $0.1 million compared to cash provided by operating activities of $1.3 million for fiscal 2007.
In fiscal 2008 the primary uses of cash from operating activities were an increase in accounts receivable of $1.7 million, $1.6 million of this increase in accounts receivable pertained to Telecom which was disposed of as of August 31, 2008, and a decrease in unearned revenue of approximately $0.1 million. The primary sources of cash from operating activities for fiscal year 2008 were a decrease in prepaid expenses and other current assets of $0.7 million, an increase in accounts payable and accrued expenses of $0.6 million and a decrease in other assets of $0.2 million.
Net cash used in investing activities for fiscal 2008 and 2007 was $1.9 million and $2.0 million, respectively. The primary uses of cash from investing activities in fiscal 2008 were $1.0 million cash paid for a business acquisition related to our core lawn care and pest control services, $0.5 million for the purchase of property, plant and equipment and $0.2 million for the purchase of software and other related costs.
Net cash provided by financing activities for fiscal 2008 was $2.5 million compared to $1.9 million in fiscal 2007. In fiscal 2008 the primary source of cash from financing activities was $2.9 million in net proceeds from our line of credit. The primary use of cash from financing activities in fiscal 2008 was $0.4 million for the repayment of notes payable.
Cash flows from discontinued operations are included in the consolidated statement of cash flows within operating, investing and financing activities. The absence of cash flows from discontinued operations is not expected to impact future liquidity or capital resources.
Our uses of cash for fiscal 2009 will be principally for working capital needs, capital expenditures and debt service. We are not anticipating significant acquisition activity in fiscal 2009. We believe that we can fund our planned business activities from a combination of cash flows from operations and funds available under our revolving line of credit which we amended on December 31, 2008. See Note 6 - Revolving Line of Credit and Note
19 - Subsequent Event. Off-Balance Sheet Arrangements
We do not have any significant off-balance sheet arrangements. Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be materially different from those estimates. The following policies are those that we consider to be the most critical. See Note 1, "Summary of Significant Accounting Policies," for further description of these and all other accounting policies. Software development costs
Software development costs are capitalized under the provisions of Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). We capitalize the costs of acquiring, developing and testing software to meet its internal needs. Under the provisions of SOP 98-1, we capitalize costs associated with software developed or obtained for internal use when both the preliminary project stage is completed and management has authorized further funding for the project which it deems probable will be completed and used to perform the function intended. Capitalized costs include only (1) external direct costs of materials and services consumed in developing or obtaining internal-use software, (2) payroll and payroll-related costs for employees who are directly associated with and devote time to the internal-use software project and (3) interest costs incurred while developing internal-use software. Capitalization of such costs ceases no later than the point at which the project is substantially complete and ready for its intended use. Software development costs are amortized using a straight-line method over a

three-year period. At September 30, 2008, we capitalized software costs amounting to $246,979 for Middleton in accordance with SOP 98-1.
We also capitalized certain costs associated with software development in accordance with Financial Accounting Standards Board No. 86 ("FASB No. 86"), Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. We amortized software costs for periods of 5 to 10 years, the estimated useful life of the asset. During 2008, we sold the outstanding shares of Telecom FM where these software costs were incurred. At September 30, 2007, we capitalized software costs amounting to $359,375 for Telecom FM in accordance with FASB No. 86.
Customer Lists
Customer lists are stated at fair value based on the discounted cash flows over the estimated life of the customer contracts and relationships. The Company obtained a valuation study at the time of acquisition of Middleton to determine the value and estimated life of customer lists purchased in order to assist management in determining an appropriate method in which to amortize the asset. The amortization life is based on historic analysis of customer relationships combined with estimates of expected future revenues from customer accounts. Middleton has applied the same valuation method on all of the subsequent acquisitions. Customer lists and intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, ("FASB No. 144").
The Company previously amortized customer lists on a straight-line basis over the weighted average expected life of the customer of 8 years. In the fourth quarter of 2007, the Company performed an extensive analysis to reassess the expected life of the customer lists and concluded that the expected life of the customer should be adjusted from 8 years to 5 years. The change in the estimated useful life used to account for customer lists resulted from our ongoing analysis of all pertinent factors, including actual customer attrition data, demand, and competition. The pertinent factors have been influenced by management's ongoing customer retention programs, as well as tactical and strategic initiatives to improve service delivery, customer satisfaction, and the credit worthiness of the subscriber customer base. In accordance with FASB Statement No. 154, Accounting Changes and Error Corrections, ("FASB No. 154"), the change in estimated useful life of customer lists is accounted for prospectively. The effect of the change in estimated useful life for customer lists increased our loss from continuing operations and our net loss by approximately $442,000 and decreased basic and diluted earnings per share by $0.03 for 2007. During fiscal 2008, we continued to assess the expected life of the customer and concluded that a 5 year life remains appropriate. Amortization expense for the years ended September 30, 2008 and 2007 amounted to $3,726,734 and $2,223,545.
Goodwill and other intangible assets
Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Pursuant to FASB Statement No. 142 ("FASB No. 142"), Goodwill and Other Intangible Assets, goodwill acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of FASB No. 142. The Company tests goodwill for impairment as of September 30 of each year and, more frequently, if a triggering event occurs utilizing a valuation study. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of the reporting unit with its carrying amount. If a reporting unit's carrying amount exceeds its fair value, the second step is performed. The second step involves a comparison of the implied fair value and carrying value of that reporting unit's goodwill. To the extent that a reporting unit's carrying amount exceeds the implied fair value of its goodwill, an impairment loss is recognized.

In performing this assessment, we apply a weighting factor to the i) income approach ii) market capitalization approach under the market approach and the
(iii) similar transactions method which is the second method under the market approach to develop the fair value of the reporting unit in order to assess its potential impairment of goodwill. The income approach is based on a discounted cash flow model which relies on a number of factors, including operating results, business plans, economic projections and anticipated future cash flows. Developing these future cash flow projections requires management to make significant assumptions and estimates regarding the sales, gross margin and operating expenses of the reporting unit, as well as consideration of future macroeconomic conditions and the impact of planned business or operational strategies, such as cost cutting measures and focusing on enhancing efficiencies. The U.S. economy and specifically the State of Florida have experienced downward economic pressure during 2007 and 2008, which has impacted our growth and attrition rates. Over the forecasted period, we presumed a return to a more stable economic environment which would positively impact our overall growth and attrition rates. In addition, the forecasted period presumes a continued focus on enhancing our internal sales capabilities. Rates used to discount future cash flows are dependent upon interest rates and the cost of capital at a point in time. The similar transactions method is a market approach methodology in which the fair value of a business is estimated by analyzing the prices at which companies similar to the subject, which are used as guidelines, have sold in controlling interest transactions (mergers and acquisitions). Specific information and prices analyzed were the acquisitions that we completed over the last two years as well as the receipt of an unsolicited offer from a third party to purchase our stock. Target companies are compared to the subject company, and multiples paid in transactions are analyzed and applied to subject company data, resulting in value indications. Comparability can be affected by, among other things, the product or service produced or sold, geographic markets served, competitive position, profitability, growth expectations, size, risk perception, and capital structure. The similar transactions market approach is difficult to apply as there are none to very few similar companies from which comparisons can be . . .