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 and six months ended January 31, 2009 compared with the three and six months ended January 31, 2008.

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) The deterioration in the economy and credit markets adversely impacted our results of operations for the three and six months ended January 31, 2009, compared with the three and six months ended January 31, 2008, by causing some of our customers to delay spending on certain products, especially capital equipment in our Water Purification and Filtration segment, as more fully described elsewhere in this MD&A. Sales of capital equipment represent approximately 30% of our overall consolidated net sales and are primarily included in our Water Purification and Filtration, Dialysis and Endoscope Reprocessing segments.

(ii) We sell our dialysis products to a concentrated number of customers. Sales in our Dialysis segment were favorably impacted by large shipments of low margin dialysate concentrate to an international customer during the three months ended January 31, 2009, partially offset by the continuing adverse impact of losing some low margin dialysate concentrate business from domestic customers 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, approximately $74,000 and $345,000 of restructuring costs were recorded in the three and six months ended January 31, 2009, respectively, which decreased both basic and diluted earnings per share by $0.02 during the six months ended January 31, 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 and six months ended January 31, 2009, compared with the three and six months ended January 31, 2008, 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 and six months ended January 31, 2009 and the portion of the three and six months ended January 31, 2008 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                      Six Months Ended
                                   January 31,                            January 31,
                             2009               2008               2009                2008
                                              (Dollar amounts in thousands)
                          $         %        $         %         $         %         $         %

Water Purification
and Filtration         $ 16,799    26.9   $ 18,069    29.7   $  35,269    27.8   $  34,022    28.1
Dialysis                 15,250    24.5     14,692    24.1      29,480    23.3      30,147    24.9
Healthcare
Disposables              14,371    23.0     13,985    23.0      30,120    23.7      27,951    23.1
Endoscope
Reprocessing             11,941    19.1     10,799    17.7      24,364    19.2      21,944    18.2
All Other                 4,059     6.5      3,365     5.5       7,593     6.0       6,851     5.7
                       $ 62,420   100.0   $ 60,910   100.0   $ 126,826   100.0   $ 120,915   100.0

Net Sales

Net sales increased by $1,510,000, or 2.5%, to $62,420,000 for the three months ended January 31, 2009 from $60,910,000 for the three months ended January 31, 2008.

Net sales increased by $5,911,000, or 4.9%, to $126,826,000 for the six months ended January 31, 2009 from $120,915,000 for the six months ended January 31, 2008.

Net sales were adversely impacted for the three and six months ended January 31, 2009 compared with the three and six months ended January 31, 2008 by approximately $278,000 and $380,000, respectively, 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 and six months ended January 31, 2009 was principally attributable to increases in sales of endoscope reprocessing products and services, therapeutic filtration products (included in All Other) and healthcare disposables products. Additionally, with respect to the three months ended January 31, 2009, net sales was impacted by an increase in dialysis products partially offset by a decrease in water purification and filtration products.

Net sales of endoscope reprocessing products and services increased by 10.6% and 11.0% for the three and six months ended January 31, 2009, respectively, compared with the three and six months ended January 31, 2008, 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 $720,000 and $1,480,000 in incremental net sales for the three and six months ended January 31, 2009, respectively, compared with the three and six months ended January 31, 2008. The increase in net sales was also due to approximately $184,000 in incremental net sales in the first quarter of our fiscal 2009 due to the acquisition of Verimetrix on September 17, 2007. Although endoscope reprocessing equipment sales were comparable during the three and six months ended January 31, 2009 and January 31, 2008, future sales may be adversely affected by the recent deterioration in the general economy and credit markets by potentially causing our customers to delay spending on such capital equipment.

Net sales contributed by the Therapeutic Filtration operating segment were $2,626,000 and $4,752,000 for the three and six months ended January 31, 2009, an increase of 66.9% and 35.5% compared with three and six months ended January 31, 2008, respectively. The increase in sales was primarily due to an increase in domestic demand for our hemoconcentrator products (filtration devices used to concentrate red blood cells and remove excess fluid from the bloodstream during open-heart surgery) and other specialty blood filter devices manufactured by us on an OEM basis for a customer's hydration system and another customer's new external artificial liver machine. Increases in selling prices of our therapeutic filtration products did not have a significant effect on net sales for the three and six months ended January 31, 2009 compared with the three and six months ended January 31, 2008.

Net sales of healthcare disposable products increased by 2.8% and 7.8% for the three and six months ended January 31, 2009, compared with the three and six months ended January 31, 2008, primarily due to (i) the adverse impact on the first quarter of our fiscal 2008 due to the consolidation of certain distributors of our dental products during 2007 resulting in the rationalization of duplicate inventories of the consolidated companies, (ii) approximately $194,000 in incremental net sales in the first quarter of our fiscal 2009 due to the acquisition of Strong Dental on September 26, 2007 and (iii) approximately $690,000 and $1,090,000, respectively, in higher net sales due to an increase in selling prices. Such selling price increases were implemented to offset corresponding supplier cost increases.

Net sales of dialysis products and services increased by 3.8% for the three months ended January 31, 2009 and decreased by 2.2%, for the six months ended January 31, 2009, compared with the three and six months ended January 31, 2008. The increase for the three months ended January 31, 2009 was primarily due to a large amount of low margin dialysate concentrate orders (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) from an international customer, partially offset by the continuing adverse impact of previously losing some dialysate concentrate business from domestic customers 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 decrease in net sales of our low margin dialysate concentrate product to domestic customers throughout fiscal 2009 as we elect not to pursue unprofitable concentrate sales. Additionally, we can not provide assurances that the level of concentrate sales to this international customer will be sustained. Higher selling prices to partially offset higher manufacturing and shipping costs, including freight invoiced to customers (related costs of a similar amount are included within cost of sales), favorably impacted net sales for the three and six months ended January 31, 2009 and 2008 by approximately $220,000 and $520,000, respectively.

Net sales of water purification and filtration products and services decreased by 7.0% for the three months ended January 31, 2009 and increased by 3.7% for the six months ended January 31, 2009, compared with the three and six months ended January 31, 2008, respectively. The decrease for the three months ended January 31, 2009 was primarily due to (i) delayed investments by our customers in our water purification equipment used for dialysis as well as for commercial and industrial (large capital) applications as a result of the continuing deterioration in the general economy and credit markets, which may continue to adversely effect such sales during the remainder of fiscal 2009, and (ii) the favorable impact on the second quarter of fiscal 2008 due to some unusually large commercial and industrial equipment sales as well as the sales fulfillment delays of capital equipment that occurred during the first quarter of fiscal 2008 as a result of the integration of the acquired GE Water & Process Technologies' water dialysis business into our facilities. Partially offsetting these decreases for the three months ended January 31, 2009 was an increase in demand during fiscal 2009 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. Higher selling prices, which offset increased manufacturing costs, favorably impacted net sales for the three and six months ended January 31, 2009 and 2008 by approximately $655,000 and $940,000, respectively.

Gross profit

Gross profit increased by $2,125,000, or 9.9%, to $23,611,000 for the three months ended January 31, 2009 from $21,486,000 for the three months ended January 31, 2008. Gross profit as a percentage of net sales for the three months ended January 31, 2009 and 2008 was 37.8% and 35.3%, respectively.

Gross profit increased by $4,542,000, or 10.6%, to $47,234,000 for the six months ended January 31, 2009 from $42,692,000 for the six months ended January 31, 2008. Gross profit as a percentage of net sales for the six months ended January 31, 2009 and 2008 was 37.2% and 35.3%, respectively.

The gross profit percentage for the three and six months ended January 31, 2009 increased compared with the three and six months ended January 31, 2008 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 hemoconcentrators and other specialty filters in our Therapeutic Filtration segment, (ii) higher selling prices including those attributable to 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,
(iii) improved efficiencies in our manufacturing, transportation and service functions and (iv) 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 attributable to restructuring charges of approximately $37,000 and $176,000 recorded primarily in our Endoscope Reprocessing segment during the three and six months ended January 31, 2009, respectively, relating to the relocation of our Netherlands manufacturing operations, as more fully described elsewhere in this MD&A.

Operating Expenses

Selling expenses increased by $156,000, or 2.3%, to $6,992,000 for the three months ended January 31, 2009, from $6,836,000 for the three months ended January 31, 2008, primarily due to higher compensation expense of approximately $250,000 relating to annual salary increases in all of our reporting segments and incentive compensation, and an increase of approximately $90,000 in advertising and marketing expense primarily related to our Healthcare Disposables segment. This increase was partially offset by a decrease of approximately $90,000 as a result of translating selling expenses of our international subsidiaries using a weaker Canadian dollar and euro against the United States dollar.

Selling expenses increased by $717,000, or 5.3%, to $14,342,000 for the six months ended January 31, 2009, from $13,625,000 for the six months ended January 31, 2008, primarily due to (i) higher compensation expense of approximately $680,000 relating to annual salary increases in all of our reporting segments, additional sales personnel primarily in our Water Purification and Filtration and Healthcare Disposables segments and incentive compensation and (ii) an increase of approximately $190,000 in advertising and marketing expense primarily related to our Healthcare Disposables segment. This increase was partially offset by a decrease of approximately $110,000 as a result of translating selling expenses of our international subsidiaries using a weaker Canadian dollar and euro against the United States dollar.

Selling expenses as a percentage of net sales were 11.2% for the three months ended January 31, 2009 and 2008, and 11.3% for the six months ended January 31, 2009 and 2008.

General and administrative expenses increased by $70,000, or 0.8%, to $9,037,000 for the three months ended January 31, 2009, from $8,967,000 for the three months ended January 31, 2008, primarily due to higher compensation expense relating to annual salary increases in all our reporting segments and approximately $37,000 of restructuring expense related to the relocation of our Medivators' manufacturing operations from the Netherlands to the United States, partially offset by a decrease in overhead at our Netherlands operation due to the completion of restructuring activities, as more fully described elsewhere in this MD&A, and a decrease of $192,000 in amortization expense of intangible assets.

General and administrative expenses increased by $137,000, or 0.8%, to $18,061,000 for the six months ended January 31, 2009, from $17,924,000 for the six months ended January 31, 2008, principally due to increases in compensation expense primarily related to incentive compensation and annual salary increases and approximately $169,000 of restructuring expense related to the relocation of our Medivators' manufacturing operations from the Netherlands to the United States. These increases were partially offset by (i) a decrease of approximately $465,000 as a result of foreign exchange gains associated with translating certain foreign denominated assets into functional currencies and the translation of general and administrative expenses of our international subsidiaries using a significantly weaker Canadian dollar and euro against the United States dollar, (ii) a decrease in overhead at our Netherlands operation due to the completion of restructuring activities, as more fully described elsewhere in this MD&A, and (iii) a decrease of $253,000 in amortization expense of intangible assets.

General and administrative expenses as a percentage of net sales were 14.5% and 14.7% for the three months ended January 31, 2009 and 2008, respectively, and 14.2% and 14.8% for the six months ended January 31, 2009 and 2008, respectively.

Research and development expenses (which include continuing engineering costs) were $983,000 and $961,000 for the three months ended January 31, 2009 and 2008, respectively. For the six months ended January 31, 2009 and 2008, research and development expenses were $2,048,000, from $1,951,000, respectively. The majority of our research and development expenses related to our endoscope reprocessing and filtration products.

Interest

Interest expense decreased by $581,000 to $674,000 for the three months ended January 31, 2009, from $1,255,000 for the three months ended January 31, 2008. For the six months ended January 31, 2009, interest expense decreased by $1,052,000 to $1,425,000, from $2,477,000 for the six months ended January 31, 2008. For the three and six months ended January 31, 2009, interest expense decreased primarily due to decreases in average outstanding borrowings and average interest rates.

Interest income decreased by $112,000 to $38,000 for the three months ended January 31, 2009, from $150,000 for the three months ended January 31, 2008. For the six months ended January 31, 2009, interest income decreased by $189,000 to $108,000, from $297,000 for the six months ended January 31, 2008. For the three and six months ended January 31, 2009, interest income decreased primarily due to a decrease in average interest rates.

Income taxes

The consolidated effective tax rate was 38.0% and 41.6% for the six months ended January 31, 2009 and 2008, respectively. The decrease in the consolidated effective tax rate was affected principally by the geographic mix of pre-tax income and the impact of various tax rate reductions, 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 each of the six months ended January 31, 2009 and 2008 of 38.5%. Our United States effective tax rate for the six months ended January 31, 2009 was favorably impacted 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, offset by additional taxes related to the repatriation of earnings from our Netherlands subsidiary.

Approximately 5% of our income before income taxes was generated from our Canadian operations, which had an overall effective tax rate for the six months ended January 31, 2009 of 10.5%. This low overall effective tax rate was attributable to the impact of a lower overall effective rate in our Specialty Packaging segment as applied to existing deferred income tax liabilities.

Due to the uncertainty of our Netherlands subsidiary utilizing tax benefits in the future, a tax benefit was not recorded on the losses from operations at our Netherlands subsidiary for the six months ended January 31, 2009 and 2008, thereby adversely affecting our overall consolidated effective tax rate. The overall loss from our Netherlands operation for the six months ended January 31, 2009 decreased compared with the six months ended January 31, 2008.

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 six months ended January 31, 2009 and 2008 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 six months ended January 31, 2009                -
      Unrecognized tax benefits on January 31, 2009           $      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          Six Months Ended
                                            January 31,                January 31,
                                         2009         2008          2009         2008

Cost of sales                         $   18,000    $   8,000    $   36,000    $  21,000
Operating expenses:
Selling                                   53,000       23,000       106,000       52,000
General and administrative               453,000      428,000       896,000      913,000
Research and development                   1,000        3,000         7,000        8,000
Total operating expenses                 507,000      454,000     1,009,000      973,000
Stock-based compensation before
income taxes                             525,000      462,000     1,045,000      994,000
Income tax benefits                     (199,000 )   (184,000 )    (446,000 )   (388,000 )
Total stock-based compensation
expense, net of tax                   $  326,000    $ 278,000    $  599,000    $ 606,000
. . .