Summary of SUNAIR SERVICES CORP

Item 2. Management's Discussion And Analysis of Financial Condition and Results
of Operations
Cautionary Statement Regarding Forward Looking Information:
Some of the statements in this Quarterly Report, including those that contain the words "anticipate," "believe," "plan," "estimate," "expect," "should," "intend" and other similar expressions, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements or those of our industry to be materially different from any future results, performance or achievements expressed or implied by those forward-looking statements. Among the factors that could cause actual results, performance or achievement to differ materially from those described or implied in the forward-looking statements are general economic conditions, competition, potential technology changes, changes in or the lack of anticipated changes in the regulatory environment, in the risks inherent in new product and service introductions and the entry into new geographic markets and other factors included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008 filed with the Securities and Exchange Commission (the "SEC") on January 13, 2009 and other filings with the SEC. Copies of our SEC filings are available from the SEC or may be obtained upon request from us. We do not undertake any obligation to update the information contained herein, which speaks only as of this date.
Company Overview
Sunair Services Corporation (the "Company" "we" or "us") 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 Pest Control, Inc. ("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 to divest our legacy businesses (Telephone Communications and High Frequency Radio) and will continue to focus on growing our core business, Lawn and Pest Control Services.
The acquisitions and divestitures that have taken place since September 30, 2007 are as follows:
Acquisitions:
• In October 2007 we acquired substantially all the assets of Marshall Pest Control of SW FL, Inc. ("Marshall").

Dispositions:
• In September 2008 we sold all the issued and outstanding stock of Telecom FM Limited, ("Telecom FM"), a wholly-owned subsidiary operating in our Telephone Communications business segment.

Results of Operations
Results of Operations for the Three Months Ended December 31, 2008 as Compared to the Three Months Ended December 31, 2007.

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Revenue, Cost of Sales, and Gross Profit:

                                       (dollars in thousands)
                                     For the Three Months Ended
                                            December 31,
                                        2008                2007
                   Revenue:        $        12,720        $ 13,477
                   Cost of sales             5,052           5,240

                   Gross Profit    $         7,668        $  8,237

Revenue
Revenue from lawn and pest control services is comprised of lawn, pest control and termite services. Revenue decreased by $0.8 million or 5.6% for the three months ended December 31, 2008 as compared to the three months ended December 31, 2007. The decrease was the result of a decline in new sales. All service offerings experienced a reduction in new sales, which was expected considering the overall economic downturn experienced in the latter part of our fiscal 2008 and expected to continue into our fiscal 2009. Cost of Sales
Cost of sales decreased by $0.2 million or 3.6 % to $5.1 million or 39.7% of revenue for the three months ended December 31, 2008 as compared to $5.2 million or 38.9% of revenue for the three months ended December 31, 2007 due to the following factors:
• Payroll costs decreased $0.1 million for the three months ended December 31, 2008 as compared to the three months ended December 31, 2007, primarily due to a reduction in new sales.

• Vehicle costs decreased $0.1 million for the three months ended December 31, 2008 as compared to the three months ended December 31, 2007, primarily due to lower fuel costs and reduced fleet size.

Gross Profit
   The gross profit of the lawn and pest control services decreased by
$0.6 million or 6.9% to $7.7 million or 60.3% of revenue for three months ended
December 31, 2008 as compared to $8.2 million or 61.1% of revenue for the three
months ended December 31, 2007.
Operating Expenses:
Selling, General and Administrative Expenses:

                                               (dollars in thousands)
                                       For the Three Months Ended December 31,
                                           2008                         2007

   Selling                         $                871           $          1,554
   General and administrative                     6,231                      7,478
   Depreciation and amortization                  1,114                      1,123

   Total operating expenses        $              8,216           $         10,155

Total operating expenses decreased by $1.9 million or 19.1% to $8.2 million or 64.6% of revenue for the three months ended December 31, 2008 as compared to $10.2 million or 75.3% of revenue for the three months ended December 31, 2007. Due to the reduction in new sales and the expected decline in the economic outlook for 2009, we have made a concerted effort to identify opportunities to further reduce our operating expenses.

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Selling expenses decreased by $0.7 million or 44.0% to $0.9 million or 6.8% of revenue for the three months ended December 31, 2008 as compared to $1.6 million or 11.5% of revenue for three months ended December 31, 2007.
• Advertising costs decreased by $0.3 million for the three months ended December 31, 2008 as compared to the same time period in 2007 mainly due to reduced use of television advertising.

• Sales payroll costs decreased by $0.4 million for the three months ended December 31, 2008 as compared to the same time period in 2007. The reduction in sales payroll costs was due to a decrease in sales commissions paid as a result of a decrease in new sales activity.

General and administrative expenses decreased by $1.3 million or 16.7% to $6.2 million or 49.0% of revenue for three months ended December 31, 2008 as compared to $7.5 million or 55.5% of revenue for the three months ended December 31, 2007.
• Middleton's general and administrative expenses decreased by $0.9 million for the three months ended December 31, 2008 as compared to the three months ended December 31, 2007. Payroll expenses decreased by $0.3 million primarily due to a reduction in headcount. Vehicle expenses decreased $0.1 million due to lower fuel costs and reduced fleet size. Professional fees decreased $0.1 million. Office and printing expenses decreased by $0.1 million primarily due to lower costs for printed materials and customer damage costs decreased by $0.1 million.

• Corporate general and administrative expenses decreased by $0.4 million for the three months ended December 31, 2008 as compared to the three months ended December 31, 2007. Management fees decreased by $0.2 million as a result of the Amended Management Services Agreement between the Company and RPC (a related party) that commenced on February 8, 2008, resulting in lower management fees. Legal and professional fees decreased by $0.1 million. Stock-based compensation decreased by $0.1 million due to a number of grants that were forfeited during the three months ended December 31, 2008 coupled with a reduction in the average market price from $2.47 for the three months ended December 31, 2007 to $1.84 for the three months ended December 31, 2008.

Depreciation and amortization expenses remained flat for the three months ended December 31, 2008 as compared to the three months ended December 31, 2007. Other Income (Expenses):

                                                 (dollars in thousands)
                                               For the Three Months Ended
                                                      December 31,
                                                 2008               2007

         Interest income                     $           2       $        46
         Interest expense                             (263 )            (380 )
         (Loss) gain on disposal of assets             (12 )               5
         Gain on extinguishment of debt                 25                 -

         Total other income (expenses)       $        (248 )     $      (329 )

Other expenses decreased by $0.1 million or 24.6% for the three months ended December 31, 2008 as compared to the three months ended December 31, 2007 primarily related to a decrease in interest expense. Lower interest rates on the revolving line of credit and note payable - related party resulted in lower interest expense for the three months ended December 31, 2008 as compared to the three months ended December 31, 2007. The interest rate on the revolving line of credit was 5.44% at December 31, 2008 compared to 7.10% at December 31, 2007.

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Income Tax (Provision) from Continuing Operations:

(dollars in thousands)
For the Three Months Ended December 31, 2008 2007 Income tax (provision) benefit $ - $ -

The income tax provision from continuing operations for the three months ended December 31, 2008 and 2007 was zero. The Company did not recognize an income tax benefit for the three months ended December 31, 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 operating loss carrybacks. As a result the Company was unable to recognize an income tax benefit for the quarter ended December 31, 2008 and 2007.

Discontinued Operations:

                                                                        (dollars in thousands)              (dollars in thousands)
                                                                      For the Three Months Ended          For the Three Months Ended
                                                                          December 31, 2008                   December 31, 2007
Sunair Communications - Net loss                                     $                        (59 )      $                          -
Percepia - Net loss                                                                            (4 )                                 -
Telecom FM - Net income                                                                         -                                 132

Pre-tax (loss) income from discontinued operations                                            (63 )                               132
Income tax benefit                                                                              -                                   -

(Loss) income from discontinued operations, net of income taxes      $                        (63 )      $                        132

Our significant divestitures have been recorded as discontinued operations:
• 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.

• For the three months ended December 31, 2008 there were some miscellaneous charges related to our discontinued operations which we continue to classify as discontinued operations in accordance with FASB No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".

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 customers are billed when service is rendered and payment is usually received in less than thirty (30) days.
As of December 31, 2008, our liquidity and capital resources included cash and equivalents of $1.7 million, a working capital deficit of $(7.4) million and $0.5 million was available under our revolving line of credit. As of September 30, 2008, our liquidity and capital resources included cash and equivalents of $3.0 million, a working capital deficit of $(5.7) million and $1.4 million available under our revolving line of credit.
Cash provided by operating activities was $1.9 million for the three months ended December 31, 2008 as compared to cash used in operating activities of $3.2 million for the three months ended December 31, 2007. During the three months ended December 31, 2008 the primary sources of cash from operating activities were a decrease in accounts receivable of $0.6 million, a decrease in inventories of $0.4 million, and a decrease in prepaid and other assets of $2.2 million. During the three months ended December 31, 2008, we collected the $1.8 million receivable related to the sale of Telecom FM which took place on September 30, 2008 and which was included in prepaid and other current assets at September 30, 2008. The primary uses of cash for the three months ended December 31, 2008 were an increase in other assets of $0.2 million, a decrease in accounts payable and accrued expenses of $0.7 million, a decrease in unearned revenue of $0.2 million and a decrease in customer deposits of $0.6 million. For the three months ended December 31, 2007, the primary sources of cash were reductions in prepaid expenses of $0.5 million and inventory of $0.2 million.

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The primary uses of cash from operating activities for the three months ended December 31, 2007 were an increase in accounts receivable of $1.9 million, reduction in accounts payable and accrued expenses of $0.8 million, reduction in customer deposits or $0.3 million, reduction in unearned revenue of $0.2 million and funding of cash loss of $0.7 million.
Net cash used in investing activities was $0.1 million during the three months ended December 31, 2008 as compared to cash used in investing activities of $1.2 million for the three months ended December 31, 2007. During the three months ended December 31, 2008 the primary uses of cash from investing activities was $0.1 million for software development. For the three months ended December, 2007 the primary uses of cash from investing activities were $1.0 million used for business acquisitions and $0.2 million used for capital expenditures.
Net cash used in financing activities was $3.1 million for the three months ended December 31, 2008 as compared to net cash provided by financing activities of $3.1 million for the three months ended December 31, 2007. During the three months ended December 31, 2008 the primary use of cash from financing activities were the repayment of the revolving line of credit of $2.8 million and the repayment of notes payable and capital leases of $0.3 million. For the three months ended December 31, 2007, the primary source of cash from financing activities was proceeds from revolving line of credit of $3.1 million. Cash flows from discontinued operations for the three months ended December 31, 2008 and 2007 are minimal and are included in the condensed consolidated statement of cash flows within operating, investing and financing activities. 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 January 28, 2009.
Recent Accounting Pronouncements
See Note 2, "Summary of Significant Accounting Policies" in the Notes to the Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect, if any, on the Company. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.
Item 4t. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, at December 31, 2008, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.
(b) Changes in Internal Controls There was no change in our internal controls or in other factors that could affect these controls during the quarter ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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