Introduction. In Management's Discussion and Analysis of Financial Condition and Results of Operations (the "MD&A"), we explain the general financial condition and the results of operations for STERIS including:

• what factors affect our business;

• what our earnings and costs were in each period presented;

• why those earnings and costs were different from the prior periods;

• where our earnings came from;

• how this affects our overall financial condition; and

• where cash will come from to pay for future capital expenditures.

As you read the MD&A, you should refer to information in our unaudited consolidated financial statements, which present the results of our operations for the third quarter and first nine months of fiscal 2009 and fiscal 2008. For additional information, you should also read the MD&A in our Annual Report on Form 10-K for the year ended March 31, 2008, filed with the SEC on May 30, 2008. In the MD&A, we analyze and explain the period-over-period changes in the specific line items in the Consolidated Statements of Income. Our analysis may be important to you in making decisions about your investments in STERIS.

Financial Measures. In the following sections of the MD&A, we may, at times, refer to financial measures that are not required to be presented in the consolidated financial statements under U.S. GAAP. We have used the following financial measures in the context of this report: backlog, debt-to-capital, and days sales outstanding. We define these financial measures as follows:

• Backlog - We define backlog as the amount of unfilled capital equipment purchase orders at a point in time. We use this figure as a measure to assist in the projection of short-term financial results and inventory requirements.

• Debt-to-capital - We define debt-to-capital as total debt divided by the sum of total debt and shareholders' equity. We use this figure as a financial liquidity measure to gauge our ability to borrow, fund growth, and measure the risk of our financial structure.

• Days sales outstanding ("DSO") - We define DSO as the average collection period for accounts receivable. It is calculated as net accounts receivable divided by the trailing four quarters' revenues, multiplied by 365 days. We use this figure to help gauge the quality of accounts receivable and expected time to collect.

In the following sections of MD&A, we may, at times, also refer to financial measures which are considered to be "non-GAAP financial measures" under the rules of the SEC. Non-GAAP financial measures we may use are as follows:

• Free cash flow - We define free cash flow as net cash flows provided by operating activities as presented in the Consolidated Statements of Cash Flows less purchases of property, plant, equipment, and intangibles, net, plus proceeds from the sale of property, plant, equipment, and intangibles, which are also presented in the Consolidated Statements of Cash Flows. We use this measure to gauge our ability to fund future growth outside of core operations, repurchase common shares, pay cash dividends, and reduce debt. The following table reconciles the calculations of our free cash flow for the nine months ended December 31, 2008 and 2007:

                                                                  Nine Months Ended
                                                                     December 31,
(dollars in thousands)                                          2008             2007
Cash flows from operating activities                          $ 108,324        $  94,945
Purchases of property, plant, equipment and
intangibles, net                                                (29,704 )        (39,142 )
Proceeds from the sale of property, plant, equipment
and intangibles                                                  10,981            4,740

Free cash flow                                                $  89,601        $  60,543

We may, at times, refer to our results of operations excluding certain transactions or amounts that are non-recurring or are not indicative of future results, in order to provide meaningful comparative analysis between the periods presented. For example, when discussing changes in revenues, we may, at times, exclude the impact of recently completed acquisitions and divestitures.

We present these financial measures because we believe that understanding these additional factors underlying our performance provides meaningful analysis of our financial performance. These financial measures should not be considered alternatives to measures required by U.S. GAAP. Our calculations of these measures may be different from the calculations of similar measures used by other companies.

Revenues - Defined. As required by Regulation S-X, we separately present revenues generated as either product revenues or service revenues on our Consolidated Statements of Income for each period presented. When we discuss revenues, we may, at times, refer to revenues summarized differently than the Regulation S-X requirements. The terminology, definitions, and applications of terms that we use to describe revenues may be different from terms used by other companies. We use the following terms to describe revenues:

• Revenues - We present revenues net of sales returns and allowances.

• Product Revenues - We define product revenues as revenues generated from sales of capital equipment, which includes steam and low temperature liquid sterilizers, washing systems, VHP® technology, water stills, and pure steam generators; surgical lights, tables and ceiling management systems; and the consumable family of products, which includes STERIS SYSTEM 1® consumables, sterility assurance products, skin care products, and cleaning consumables.

• Service Revenues - We define service revenues as revenues generated from parts and labor associated with the maintenance, repair, and installation of capital equipment, as well as revenues generated from contract sterilization offered through our Isomedix segment.

• Capital Revenues - We define capital revenues, a subset of product revenues, as revenues generated from sales of capital equipment, which includes steam and low temperature liquid sterilizers, washing systems, VHP® technology, water stills, and pure steam generators; and surgical lights, tables and ceiling management systems.

• Recurring Revenues - We define recurring revenues as the combination of consumable revenues and service revenues.

General Company Overview and Executive Summary. Our mission is to provide a healthier today and safer tomorrow through knowledgeable people and innovative infection prevention, decontamination and health science technologies, products, and services. Our dedicated employees around the world work together to supply a broad range of solutions by offering a combination of equipment, consumables, and services to healthcare, pharmaceutical, industrial, and governmental Customers.

The bulk of our revenues is derived from the healthcare and pharmaceutical industries. Much of the growth in these industries is driven by the aging of the population throughout the world, as an increasing number of individuals are entering their prime healthcare consumption years, and is dependent upon advancement in healthcare delivery, acceptance of new technologies, government policies, and general economic conditions. In addition, each of our core industries is experiencing specific trends that may drive growth. Within the healthcare market, there is increased concern regarding the level of hospital-acquired infections around the world. The pharmaceutical industry has been impacted by increased regulatory scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. In the contract sterilization industry, where our Isomedix segment competes, a trend toward the outsourcing of sterilization services continues to drive growth.

However, recent financial market conditions may have an adverse economic effect and could negatively impact investment activity within the markets we serve and the ability of our Customers to obtain financing. Should that be the case, our business and the growth of our markets could be negatively impacted and our exposure to bad debt losses could increase.

Fiscal 2009 third quarter and year-to-date revenues were $319.5 million and $954.2 million, respectively, representing increases of 1.7% and 7.2%, respectively, from each of the same prior year periods. Revenue growth in the third quarter of fiscal 2009 was primarily driven by a 4.4% increase in our Healthcare business segment. Revenue growth in the first nine months of fiscal 2009 was driven by increases in all three reportable business segments.

Our gross margin percentages were 38.8% and 40.6% for the third quarter and first nine months of fiscal 2009, respectively, representing decreases of 150 basis points and 10 basis points, respectively, from the same prior year periods. Gross margins during both fiscal 2009 periods include pre-tax expenses of $9.5 million related to our restructuring actions, which are discussed in further detail below. During both fiscal 2009 periods, we benefited from price increases and productivity improvements, including labor savings from the transfer of our manufacturing operations from Erie, Pennsylvania to Monterrey, Mexico, which more than offset increases in raw materials and freight costs. We are now beyond the one year anniversary of reaching full production levels in Monterrey and therefore, we do not anticipate significant additional savings when compared to prior year periods. In the third quarter of fiscal 2009, we also benefited from favorable foreign currency exchange rates.

Free cash flow was $89.6 million in the first nine months of fiscal 2009 compared to $60.5 million in the same prior year period, reflecting an increase in cash earnings in fiscal 2009 and $9.5 million in proceeds received during the second quarter of fiscal 2009 from the sale of an Isomedix facility located in the Chicago, Illinois area to a privately held Customer. Our debt-to-capital ratio increased to 22.7% at December 31, 2008 from 20.3% at March 31, 2008, reflecting increased borrowings which were used and will be used for general corporate purposes, including repayment of debt, capital expenditures, acquisitions, dividends, and common share repurchases. During the first nine months of fiscal 2009, we paid for the repurchase of approximately 2.6 million common shares at an average purchase price per share of $30.41. During the first nine months of fiscal 2008, we paid for the repurchase of approximately 3.4 million common shares at an average purchase price per share of $28.24. We also declared and paid quarterly cash dividends totaling $0.22 per common share in the first nine months of fiscal 2009. In the first nine months of fiscal 2008, we declared and paid quarterly cash dividends totaling $0.17 per common share.

Additional information regarding our fiscal 2009 third quarter and year to date financial performance is included in the subsection below titled "Results of Operations."

Matters Affecting Comparability

Restructuring. During the third quarter of fiscal 2009, we adopted a restructuring plan intended to enhance our profitability and improve efficiency primarily by reducing ongoing international operating costs (the "Fiscal 2009 Restructuring Plan"). As part of this plan, we took actions to improve operations at our Pieterlen, Switzerland manufacturing facility, rationalized certain products, recorded impairment charges for certain assets no longer used, and made targeted workforce reductions. We will also close two sales offices in Japan. These actions are expected to impact approximately 100 employees worldwide. In the three months ended December 31, 2008, we recorded $13.7 million in pre-tax expenses related to these actions, including $3.8 million recorded as restructuring expenses and $9.9 million recorded in cost of revenues. The expenses recorded primarily related to severance and related benefits, product rationalization costs, and asset impairment costs.

In the fourth quarter of fiscal 2008, we adopted a restructuring plan intended to enhance profitability and improve efficiency by reducing ongoing operating costs (the "Fiscal 2008 Restructuring Plan"). The Fiscal 2008 Restructuring Plan included the closure of two sales offices, rationalization of certain products, and workforce reductions in certain support functions. In the third quarter of fiscal 2009, we reversed our decision with respect to one of the sales offices, since a satisfactory exit from our warranty and service obligations could not be achieved. As a result, we have reversed restructuring expenses recorded in the fourth quarter of fiscal 2008 totaling approximately $1.0 million.

During the third quarter and first nine months of fiscal 2009, we did not incur any significant additional expenses related to our other previously announced restructuring actions, and we settled certain termination benefits for less than originally expected. During the third quarter and first nine months of fiscal 2008, we recorded pre-tax expenses of $1.3 million and $4.6 million, including $1.0 million and $3.1 million classified as restructuring expenses, respectively. The expenses recorded primarily related to accelerated depreciation of assets, asset impairment costs, compensation and severance, and termination benefits related to the transfer of our Erie, Pennsylvania manufacturing operations to Monterrey, Mexico.

International Operations. Since we conduct operations outside of the United States using various foreign currencies, our operating results are impacted by foreign currency movements relative to the U.S. dollar. During the third quarter of fiscal 2009, our revenues were unfavorably impacted by $7.0 million, or 2.1%, and income before taxes was favorably impacted by $5.7 million, or 13.9%, compared with the same period in fiscal 2008. During the first nine months of fiscal 2009, our revenues were unfavorably impacted by $1.0 million, or 0.1%, and income before taxes was favorably impacted by $3.2 million, or 2.6%, as compared to the same prior year period.

Results of Operations

In the following subsections, we discuss our earnings and the factors affecting them for the third quarter and first nine months of fiscal 2009 compared with the same fiscal 2008 periods. We begin with a general overview of our operating results and then separately discuss earnings for our operating segments.

Revenues. The following table contains information regarding our revenues for the third quarter and first nine months of fiscal 2009 and 2008:

                                        Three Months Ended                                 Percent of Total
                                           December 31,                     Percent            Revenues
(dollars in thousands)                   2008        2007       Change      Change       2008 (1)     2007 (1)
Capital Revenues                      $  129,563   $ 129,025   $    538         0.4 %        40.6 %       41.1 %
Consumable Revenues                       73,745      72,718      1,027         1.4 %        23.1 %       23.2 %

Product Revenues                         203,308     201,743      1,565         0.8 %        63.6 %       64.3 %
Service Revenues                         116,159     112,231      3,928         3.5 %        36.4 %       35.7 %

Total Revenues                        $  319,467   $ 313,974   $  5,493         1.7 %       100.0 %      100.0 %

Service Revenues                      $  116,159   $ 112,231   $  3,928         3.5 %        36.4 %       35.7 %
Consumable Revenues                       73,745      72,718      1,027         1.4 %        23.1 %       23.2 %

Recurring Revenues                       189,904     184,949      4,955         2.7 %        59.4 %       58.9 %
Capital Revenues                         129,563     129,025        538         0.4 %        40.6 %       41.1 %

Total Revenues                        $  319,467   $ 313,974   $  5,493         1.7 %       100.0 %      100.0 %

United States                         $  250,355   $ 238,988   $ 11,367         4.8 %        78.4 %       76.1 %
International                             69,112      74,986     (5,874 )      (7.8 )%       21.6 %       23.9 %

Total Revenues                        $  319,467   $ 313,974   $  5,493         1.7 %       100.0 %      100.0 %


                                        Nine Months Ended                                  Percent of Total
                                           December 31,                     Percent            Revenues
                                         2008        2007       Change      Change       2008 (1)     2007 (1)
Capital Revenues                      $  379,993   $ 345,910   $ 34,083         9.9 %        39.8 %       38.9 %
Consumable Revenues                      222,753     210,653     12,100         5.7 %        23.3 %       23.7 %

Product Revenues                         602,746     556,563     46,183         8.3 %        63.2 %       62.5 %
Service Revenues                         351,413     333,357     18,056         5.4 %        36.8 %       37.5 %

Total Revenues                        $  954,159   $ 889,920   $ 64,239         7.2 %       100.0 %      100.0 %

Service Revenues                      $  351,413   $ 333,357   $ 18,056         5.4 %        36.8 %       37.5 %
Consumable Revenues                      222,753     210,653     12,100         5.7 %        23.3 %       23.7 %

Recurring Revenues                       574,166     544,010     30,156         5.5 %        60.2 %       61.1 %
Capital Revenues                         379,993     345,910     34,083         9.9 %        39.8 %       38.9 %

Total Revenues                        $  954,159   $ 889,920   $ 64,239         7.2 %       100.0 %      100.0 %

United States                         $  736,713   $ 688,443   $ 48,270         7.0 %        77.2 %       77.4 %
International                            217,446     201,477     15,969         7.9 %        22.8 %       22.6 %

Total Revenues                        $  954,159   $ 889,920   $ 64,239         7.2 %       100.0 %      100.0 %

(1) Certain percentages may not calculate precisely due to rounding.

Quarter over Quarter Comparison

Revenues increased $5.5 million, or 1.7%, to $319.5 million for the quarter ended December 31, 2008, as compared to $314.0 million for the comparable prior year quarter. The increase was driven primarily by a 2.7% increase in recurring revenues resulting from growth of 3.5% and 1.4% in service revenues and consumable revenues, respectively. Capital equipment revenues increased 0.4% quarter over quarter, as growth in the United States and in the Asia Pacific region more than offset declines in Canada, Europe, and the Latin America region.

International revenues decreased $5.9 million, or 7.8%, to $69.1 million, for the quarter ended December 31, 2008, as compared to $75.0 million for the comparable prior year quarter. Foreign currency movements were the primary driver of the decrease in international revenues. Declines in international capital equipment revenues and consumable revenues were 10.0% and 8.2%, respectively. The primary driver for this decrease was within the Life Sciences segment, which experienced a decline in international capital equipment revenues of 28.8% quarter over quarter. Service revenues also decreased 2.6% as compared to the same prior year period.

United States revenues increased $11.4 million, or 4.8%, to $250.4 million, for the quarter ended December 31, 2008, as compared to $239.0 million for the comparable prior year quarter. United States revenues were positively impacted by recurring revenue growth in all three business segments with increases of 5.0%, 8.7%, and 0.6% in the Healthcare, Life Sciences, and Isomedix segments, respectively. Capital equipment revenues also grew within the Healthcare segment with an increase of 9.7%, which more than offset a 14.5% decline in the Life Sciences segment's capital equipment revenues.

Nine Months over Nine Months Comparison

Revenues increased $64.2 million, or 7.2%, to $954.2 million for the first nine months of fiscal 2009, as compared to $889.9 million for the same prior year period. Capital equipment revenues increased 9.9%, driven by growth in the Healthcare business segment. Recurring revenues also increased 5.5%, reflecting growth in consumable revenues and service revenues, with increases of 5.7% and 5.4%, respectively.

International revenues for the first nine months of fiscal 2009 amounted to $217.4 million, an increase of $16.0 million, or 7.9%, as compared to the first nine months of fiscal 2008. International revenues were positively impacted by strong capital equipment revenue growth within both the Healthcare and Life Sciences segments, with increases of 11.4% and 2.8%, respectively. Recurring revenues grew within all three business segments with increases of 7.2%, 8.0%, and 4.9% in the Healthcare, Life Sciences, and Isomedix segments.

United States revenues for the first nine months of fiscal 2009 amounted to $736.7 million, an increase of $48.3 million, or 7.0%, as compared to the first nine months of fiscal 2008. Strong underlying demand for our consumable products in the Healthcare and Life Sciences segments and service offerings in all three segments, combined with growth in capital revenues in the Life Sciences segment more than offset a decline in capital revenues in the Healthcare segment.

Revenues are further discussed on a segment basis in the section of MD&A titled, "Business Segment Results of Operations."

Gross Profit. The following table contains information regarding our gross profit for the three and nine months ended December 31, 2008 and 2007:

                                        Three Months Ended
                                           December 31,                        Percent
      (dollars in thousands)            2008          2007         Change      Change
      Gross Profit:
      Product                         $  76,197     $  81,035     $ (4,838 )      (6.0 )%
      Service                            47,870        45,567        2,303         5.1 %

      Total Gross Profit              $ 124,067     $ 126,602     $ (2,535 )      (2.0 )%


      Gross Profit Percentage:
      Product                              37.5 %        40.2 %
      Service                              41.2 %        40.6 %

      Total Gross Profit Percentage        38.8 %        40.3 %


                                         Nine Months Ended
                                           December 31,                        Percent
                                        2008          2007         Change      Change
      Gross Profit:
      Product                         $ 241,845     $ 224,185     $ 17,660         7.9 %
      Service                           145,086       138,225        6,861         5.0 %

      Total Gross Profit              $ 386,931     $ 362,410     $ 24,521         6.8 %


      Gross Profit Percentage:
      Product                              40.1 %        40.3 %
      Service                              41.3 %        41.5 %

      Total Gross Profit Percentage        40.6 %        40.7 %

Our gross profit (margin) is affected by the volume, pricing, and mix of our products and services, as well as, the costs associated with the products and services that are sold. Gross margin for the third quarter of fiscal 2009 amounted to 38.8%, representing a decrease of 150 basis points as compared to the same prior year period. For the first nine months of fiscal 2009, gross margin amounted to 40.6%, representing a decrease of 10 basis points as compared to the same prior year period. Gross margins during both the third quarter and first nine months of fiscal 2009 include pre-tax expenses of $9.5 million related to our restructuring actions. During both fiscal 2009 periods, we benefited from price increases, favorable foreign currency exchange rates, and productivity improvements, including labor savings from the transfer of our manufacturing operations from Erie, Pennsylvania to Monterrey, Mexico, which more than offset increases in raw materials and freight costs. We are now beyond the one year anniversary of reaching full production levels in Monterrey and therefore, we do not anticipate significant additional savings when compared to prior year periods.

Operating Expenses. The following table contains information regarding our operating expenses for the three and nine months ended December 31, 2008 and 2007:

                                           Three Months Ended
                                              December 31,                      Percent
  (dollars in thousands)                    2008        2007       Change       Change
  Operating Expenses:
  Selling, General, and Administrative   $   67,272   $  82,015   $ (14,743 )     (18.0 )%
  Research and Development                    8,122      10,173      (2,051 )     (20.2 )%
  Restructuring Expenses                      2,855         952       1,903       199.9 %

  Total Operating Expenses               $   78,249   $  93,140   $ (14,891 )     (16.0 )%


                                           Nine Months Ended
                                              December 31,                      Percent
                                            2008        2007       Change       Change
  Operating Expenses:
  Selling, General, and Administrative   $  231,910   $ 249,929   $ (18,019 )      (7.2 )%
  Research and Development                   24,469      27,963      (3,494 )     (12.5 )%
  Restructuring Expenses                      2,726       3,041        (315 )     (10.4 )%

  Total Operating Expenses               $  259,105   $ 280,933   $ (21,828 )      (7.8 )%

Significant components of total selling, general, and administrative expenses ("SG&A") are compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general and administrative expenses. As a percentage of total revenues, SG&A decreased 500 basis points to 21.1% for the third quarter of fiscal 2009 and decreased 380 basis points to 24.3% for the first nine months of fiscal 2009, as compared to the same prior year periods. The decrease in SG&A in both fiscal 2009 periods includes a reduction of $7.9 million resulting from a change in our paid time off benefit which is now earned throughout the calendar year rather than earned in full at the beginning of the year. The reduction in both periods also reflects improved . . .