Summary of MEDICAL ACTION INDUSTRIES INC

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

All dollar amounts presented in our Management's Discussion and Analysis of
Financial Condition and Results of Operations are presented in thousands, expect
share and per share data. The following table sets forth certain operational
data (in dollars and as a percentage of net sales) for the fiscal years
indicated:



                                           2009                    2008                    2007
Net Sales                           $ 296,070    100.0 %    $ 290,528    100.0 %    $ 217,328    100.0 %
Gross Profit                        $  50,935     17.2 %    $  64,452     22.2 %    $  53,372     24.6 %
Selling, General and
Administrative Expenses             $  40,161     13.6 %    $  39,672     13.7 %    $  30,723     14.1 %
Income Before Income Taxes          $   8,096      2.7 %    $  21,452      7.4 %    $  21,128      9.7 %
Net Income                          $   4,955      1.7 %    $  13,225      4.6 %    $  12,969      6.0 %

The Company's revenues increased by $5,542 or 1.9% to $296,070 for the fiscal year ended March 31, 2009 over the fiscal year March 31, 2008. The increase in revenue is comprised of price/sales mix increases of $12,736, which was partially offset by net unit volume decreases of $7,194.

Gross profit declines in both dollars and as a percentage of net sales were primarily a result of increased costs of products sourced from foreign suppliers, principally from China, inefficiencies incurred at our Tennessee manufacturing facility and higher resin costs. These costs more than offset the increases in gross profit associated with the increase in net sales.

The major causes of the manufacturing inefficiencies were equipment productivity issues in our Tennessee plant and other inefficiencies associated with the consolidation of the MMP manufacturing facilities. Throughout the past fiscal year, the inefficiencies have resulted in backorders and order fulfillment issues on certain products. Management anticipates reductions in these inefficiencies during the 2010 fiscal year. However, no assurance can be given that the backorders and order fulfillment issues will not result in the loss of business.

Selling, general and administrative expenses increased primarily due to increased compensation and related expenses incurred as a result of the Company's current and anticipated future growth. Selling, general and administrative expenses as a percentage of sales decreased to 13.6% versus 13.7% for the years ended March 31, 2009 and March 31, 2008, respectively.

FISCAL 2009 COMPARED TO FISCAL 2008

The following table sets forth the major sales variance components for the year
ended March 31, 2009 versus March 31, 2008:



                     2008 Net Sales                $ 290,528
                     Volume of Existing Products      (7,194 )
                     Price/Sales Mix                  12,736

                     2009 Net Sales                $ 296,070

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Net sales for the fiscal year ended March 31, 2009 increased 1.9% to $296,070 from $290,528 for the fiscal year ended March 31, 2008. The following table sets forth the major components of the increase in net sales as well as percent increases or decreases in unit sales and average selling prices by significant product classes for the fiscal year ended March 31, 2009 compared to the fiscal year ended March 31, 2008:

                                                                                 Average Selling
                                        Net Sales           Unit Sales          Prices / Sales Mix
                                        $ increase          % increase              % increase
                                        (decrease)          (decrease)              (decrease)
Minor Procedure Kits and Trays         $      8,660                  6.8 %                     5.7 %
Containment Systems for Medical
Waste                                         2,743                  1.3 %                     4.1 %
Protective Apparel                            2,658                 27.8 %                     6.0 %
Patient Bedside Utensils                       (409 )               (6.6 )%                    6.4 %
Other Dressings and Surgical
Sponges                                        (432 )              (14.0 )%                    1.3 %
Laboratory Products                            (669 )               (7.4 )%                    4.5 %
Laparotomy Sponges                             (740 )               (8.9 )%                    2.6 %
Specimen Containers                            (766 )              (15.3 )%                    9.8 %
Operating Room Towels                        (1,919 )              (11.1 )%                    3.7 %
Other Operating Room Disposables
and Sterilization Products                   (4,022 )               13.1 %                   (26.6 )%
Other, net                                      438       not meaningful            not meaningful

                                       $      5,542

The net unit volume decreases were primarily from losses in specimen containers, other dressings and surgical sponges, operating room towels, laparotomy sponges and patient bedside utensils. Management believes that the decline is attributable to competitive pressures, the effect of customers' management of inventory balances in reaction to current economic conditions, back order positions and the termination of a supply contract. A significant component of the Company's net unit volume decreases in other operating room disposables and sterilization products relates to patient aids and resulted from the Company's inability to negotiate acceptable price increases on crutches to a major customer and the Company's unwillingness to continue to provide these crutches at current pricing levels. This resulted in a decline of approximately $3,239 in net sales with only a negligible impact on profitability for the fiscal year ended March 31, 2009 compared to the fiscal year ended March 31, 2008. These net unit volume declines were partially offset by volume increases primarily from greater domestic penetration of our minor procedure kits and trays product line.

The price/sales mix increases were primarily from increased average selling prices of our minor procedure kits and trays, containment systems for medical waste and specimen containers product lines. The increase in average selling prices of certain containment systems for medical waste and specimen container products was due primarily to price increases implemented to recover a portion of the increases in plastic resin (the primary raw material utilized in the manufacture of these products). The increase in average selling prices of our minor procedure kits and trays products was the result of a shift in sales mix and due to an increase in sales of kits containing enhanced components.

Containment systems for medical waste and the product lines added as a result of the acquisition of Medegen, represents approximately 50% of the Company's revenue. The primary raw material utilized in the manufacture of this product line is plastic resin. In recent years, world events have caused the cost of plastic resin to increase and be extremely volatile. The Company anticipates that such volatility may continue in the future. In the past, the Company has been able, from time to time, to increase selling prices for certain of these products to recover a portion of the increased cost. However, the Company is unable to give any assurance that it will be able to pass along future cost increases to its customers, if necessary. It is anticipated that the Company will purchase in excess of 50,000,000 pounds of resin during fiscal 2010. Each $.01 fluctuation could impact cost of goods sold by $500 on an annualized basis.

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The volatility associated with resin costs and product acquisition costs from foreign suppliers may continue for the foreseeable future. In the past, we have been able, from time to time, to increase selling prices for certain products subject to such cost volatility as a means to recover a portion of the increases. However, we are unable to give any assurance that we will be successful in passing along future cost increases to our customers, if deemed necessary.

The Company has entered into agreements with nearly every major group purchasing organization. These agreements, which expire at various times over the next several years, can be terminated typically on ninety (90) day advance notice and do not contain minimum purchase requirements. The Company, to date, has been able to achieve significant compliance to their respective member hospitals. The termination or non-renewal of any of these agreements may result in the significant loss of business or lower average selling prices. In some cases, as these agreements are renewed, the average selling prices could be materially lower.

During the quarter ended June 30, 2008, the Company elected to exercise the ninety (90) day advanced notice termination provisions within one of its GPO agreements, under which the Company supplies disposable operating room towels and laparotomy sponges. The termination of the agreement with the aforementioned GPO amounts to less than 2% of the Company's net sales and had resulted from the Company's inability to negotiate acceptable price increases with the GPO and the Company's unwillingness to continue to provide products to the GPO members at current pricing levels. Although net sales have not been significantly impacted by this termination, the Company cannot predict the future effects on its financial results from such termination.

During fiscal 2009, the Company participated in several reverse auctions and bid processes in order to achieve renewal of certain major group purchasing agreements. This process has resulted in the renewal or extension of fourteen existing agreements. No new agreements were added and the only existing agreement lost is noted above. Several of the renewals were renewed at lower average selling prices and may also result in the attainment of additional business. The Company anticipates continued participation in reverse auctions or similar bid processes as deemed necessary during fiscal 2010.

The following table sets forth sales and cost of sales data for the periods indicated:

                                                    2009          2008          2007
   Net Sales                                      $ 296,070     $ 290,528     $ 217,328
   Cost of Sales                                    245,135       226,076       163,956
   Gross Profit                                      50,935        64,452        53,372
   Gross Profit Percentage                             17.2 %        22.2 %        24.6 %

   Selling, General and Administrative Expenses   $  40,161     $  39,672     $  30,723
   As a Percentage of Net Sales                        13.6 %        13.7 %        14.1 %

Gross profit declines in both dollars and as a percentage of net sales were a result of increased costs of products sourced from foreign suppliers, principally from China, of approximately $6,238, inefficiencies incurred at our Tennessee manufacturing facility of approximately $6,167, higher resin prices of approximately $3,789, increased operating expenses in our West Virginia and North Carolina manufacturing facilities and the transfer of certain administrative processes to manufacturing overhead of approximately $1,713 and increases in our provision for excess and obsolete inventory and other costs of sales of approximately $1,505. These decreases were partially offset by a net increase of approximately $5,542 resulting from higher average selling prices and changes in the mix of products sold and decreased outbound freight costs to customers of approximately $342.

Many of the Company's products are produced from petroleum derived raw materials such as plastic resin. The Company also bears the cost of both inbound and outbound freight shipments of raw materials and finished products, which are significantly impacted by the cost of oil. The cost of crude oil has declined significantly from its peak levels reached during the month of July 2008. The cost of plastic resin has begun to decline and, to some

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extent, the Company has experienced the benefits from lower plastic resin costs during the three months ended March 31, 2009 as much of the resin that was used in production during the three months ended March 31, 2009 was purchased at a lower average cost than resin used during the first nine months of fiscal 2009.

Selling, general and administrative expenses for the fiscal year ended March 31, 2009 increased 1.2% to $40,161 or 13.6% of net sales from $39,672 or 13.7% of net sales for the fiscal year ended March 31, 2008. The increase in selling, general and administrative expenses was primarily due to severance and related expenses associated with the restructuring of certain sales related departments. The increase was partially offset by decreased salary and related expenses as a result of increased efficiencies due to the consolidation of certain administrative functions from the Tennessee facility into its Brentwood, New York corporate headquarters and transfer of certain administrative processes into cost of goods sold also as a result of the consolidation of the facilities and a decrease in bonuses as a result of the Company not meeting certain earnings targets.

Interest expense for the fiscal year ended March 31, 2009 decreased to $2,682 from $3,406 for the fiscal year ended March 31, 2008. The decrease in interest expense was primarily due to a decrease in interest rates during the fiscal year ended March 31, 2009 versus March 31, 2008 which was partially offset by a net increase in average principal loan balances outstanding during the fiscal year ended March 31, 2009 versus March 31, 2008. The increase in principal loan balances were primarily due to a decline in net cash provided by operating activities and an increase in investing activities, which were primarily comprised of equipment and renovations to our new corporate headquarters.

Income tax expense amounted to $3,141 and $8,227 for the fiscal years ended March 31, 2009 and 2008, respectively. Income tax expense as a percent of income before income taxes was 38.8% and 38.3% for the fiscal years ended March 31, 2009 and 2008, respectively. The increase in the tax rate was the result of a change in state apportionment factors which was partially offset by a decline in our federal statutory rate resulting from a decline in profitability.

Net income for the fiscal year ended March 31, 2009 decreased to $4,955 from $13,225 for the fiscal year ended March 31, 2008. The decrease in net income is attributable to the aforementioned decrease in gross profit and increase in selling, general and administrative expenses, which were partially offset by an increase in net sales and a decrease in interest expense.

FISCAL 2008 COMPARED TO FISCAL 2007

The following table sets forth the major sales variance components for the year
ended March 31, 2008 versus March 31, 2007:



                      2007 Net Sales                $ 217,328
                      Acquisition                      61,315
                      Volume of Existing Products       6,590
                      Price/Sales Mix                   5,295

                      2008 Net Sales                $ 290,528

Net sales for the fiscal year ended March 31, 2008 increased 34% to $290,528 from $217,328 for the fiscal year ended March 31, 2007. The increase in net sales of $73,200 was primarily attributable to a full year of net

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sales of disposable patient utensils for the laboratory and medical markets and laboratory products resulting from the Medegen acquisition of approximately $61,315, a $11,584 or 22% increase in net sales of minor procedure kits and trays; a $1,029 or 32% increase in net sales of patient slippers, a $517 or 7% increase in protective apparel, and a $384 or 11% increase in net sales of patient aids. These increases were partially offset by a $449 or 8% decrease in net sales of sterilization products, a $1,069 or 9% decrease in net sales of laparotomy sponges and a $239 or 1% decrease in net sales of operating room towels. Net sales of minor procedure kits and trays, patient slippers, protective apparel and patient aids increased primarily due to greater domestic market penetration. Net sales of laporatomy sponges and operating room towels decreased due to a shift of sales channels for these products by their inclusion in custom procedural trays and increased competition in the domestic market. Sterilization products decreased due to increased competition in the domestic market.

Major Product Line Variances for the year ended

March 31, 2008 compared to the year ended          Unit Sales          Average Selling
March 31, 2007                                    % Inc. (Dec.)      Prices % Inc. (Dec.)
Containment systems for medical waste                        (2 )%                      2 %
Minor procedure kits and trays                               11 %                       9 %
Patient Slippers                                             30 %                       2 %
Operating Room Towels                                         2 %                      (3 )%
Laparotomy Sponges                                           (7 )%                     (1 )%
Patient Aids                                                  7 %                       4 %
Protective Apparel                                           11 %                      (3 )%
Sterilization Products                                      (11 )%                     (4 )%

Management believes that the decrease in average selling prices of laparotomy sponges, operating room towels, patient slippers and protective apparel was primarily due to increased competition in the domestic market, which it believes will continue in fiscal 2009. The decrease in unit sales of laparotomy sponges, sterilization products and containment systems for medical waste was primarily due to increased competition in the domestic market, which it believes will continue in fiscal 2009. The increase in the average selling prices of certain containment systems products was due to price increases instituted in early fiscal 2008 to recover a portion of the increases in plastic resin. The Company's international sales for the fiscal year ended March 31, 2008 were $8,888 or 3% of the cost of total net sales as compared to $6,587 or 3% of total net sales for the fiscal year ended March 31, 2007.

Containment systems for medical waste and the product lines added as a result of the acquisition of Medegen, represents approximately 54% of the Company's revenue. The primary raw material utilized in the manufacture of this product line is plastic resin. In recent years, world events have caused the cost of plastic resin to increase and be extremely volatile. The Company anticipates that such volatility may continue in the future. In the past, the Company has been able, from time to time, to increase selling prices for certain of these products to recover a portion of the increased cost. However, the Company is unable to give any assurance that it will be able to pass along future cost increases to its customers, if necessary. It is anticipated that the Company will purchase in excess of 54,000,000 pounds of resin during fiscal 2009. Each $.01 fluctuation could impact cost of goods sold by $540 on an annualized basis.

During fiscal 2008, the Company participated in several reverse auctions and bid processes in order to achieve renewal of certain major group purchasing agreements. This process has resulted in the renewal or

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extension of nine existing agreements. No new agreements were added and no existing agreements were lost. Several of the renewals were renewed at lower average selling prices and may also result in the attainment of additional business. The Company anticipates continued participation in reverse auctions or similar bid processes as deemed necessary during fiscal 2009.

Effective September 30, 2007, a urinal supply agreement expired with a significant customer. As of the date of this filing, a renewal or extension to this supply agreement has not been consummated. Subsequent to September 30, 2007, the customer has continued to place orders for urinals. However, there can be no assurances that these orders will continue absent a new supply agreement which could have a negative effect on our financial results.

The following table sets forth sales and cost of sales data for the periods indicated:

                                                        2008           2007
                                                      $ 290,528      $ 217,328
       Cost of Sales                                    226,076        163,956
       Gross Profit                                      64,452         53,372
       Gross Profit Percentage                             22.2 %         24.6 %

       Selling, General and Administrative Expenses   $  39,672      $  30,723
       As a Percentage of Net Sales                        13.7 %         14.1 %

Gross profit for the twelve months ended March 31, 2008 increased 20% to $64,452 from $53,372 for the twelve months ended March 31, 2007. Gross profit as a percentage of net sales for the twelve months ended March 31, 2008 decreased to 22.2% from 24.6% for the twelve months ended March 31, 2007. Gross profit dollars increased primarily due to a full year of net sales of products as a result of the Medegen acquisition and increased sales volume from greater domestic market penetration primarily of its minor procedure kits and trays product line, protective apparel and patient slippers.

Gross profit as a percentage of sales decreased primarily due to manufacturing inefficiencies, increased resin costs, increased acquisition costs from foreign suppliers and a change in sales mix from the MMP acquisition, which accounted for approximately $19,951 of gross profit at 18.2%. The manufacturing inefficiencies, increased resin costs and increased acquisition costs from foreign suppliers amounted to approximately $10,400 for the year ended March 31, 2008. The major causes of the manufacturing inefficiencies were equipment productivity issues in our Tennessee plant and other inefficiencies associated with the consolidation of the MPP manufacturing facilities. The inefficiencies have resulted in backorders and other fulfillment issues on certain products. Additionally, freight expenses have increased due to the backorder and order fulfillment issues. Management anticipates substantial reductions in these inefficiencies effective the end of the second quarter of fiscal 2009. However, no assurance can be given that the backorders and order fulfillment issues will not result in the loss of business. The increase in resin costs and increased acquisition costs from foreign suppliers (predominately those based in China) also negatively impacted our gross margin percentage. The volatility associated with these costs may continue for the forseeable future. In the past, we have been able, from time to time, to increase selling prices for certain products subject to such cost volatility as a means to recover a portion of the increases. However, we are unable to give any assurance that we will be successful in passing along future cost increases to our customers, if deemed necessary. The future operating results of the Company are dependent on our ability to manage these factors.

Selling, general and administrative expenses for the twelve months ended March 31, 2008 increased 29% to $39,672 from $30,722 for the twelve months ended March 31, 2007. As a percentage of net sales, selling, general and administrative expenses decreased to 13.7% for the twelve months ended March 31, 2008 from 14.1% for the twelve months ended March 31, 2007. The increases consisted primarily of increased sales and marketing expenses of $3,772, increased general and administrative expenses of $2,091, increased distribution expenses of $2,337 and increased amortization of intangible expenses of $805. The increases in expenses were due primarily to a full year of expenses associated with the MMP

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Interest expense for the twelve months ended March 31, 2008 increased to $3,406 from $1,961 for the twelve months ended March 31, 2007. Interest income for the twelve months ended March 31, 2008 decreased to $77 from $440 for the twelve months ended March 31, 2007. The increase in interest expense and decrease in interest income was attributable to a net increase in the average principal loan balances outstanding and a decrease in the average cash and cash equivalents balance during the twelve months ended March 31, 2008 as compared to the twelve months ended March 31, 2007. The increase in loan balances was primarily attributable to purchase price and related acquisition costs associated with the MMP acquisition.

Income tax expense increased to $8,227 or 38.3% of income before income taxes compared to $8,159 or 38.6% of income before income taxes. The primary reason for the decrease in the tax rate was due to a decrease in state income taxes as a result of a change in state apportionment factors and the Company qualifying for the Domestic Production Activities Deduction for a full year.

Net income for the twelve months ended March 31, 2008 increased to $13,225 from $12,969 for the twelve months ended March 31, 2007. The increase in net income is attributable to the aforementioned increase in net sales and gross profit, which were partially offset by an increase in selling, general and administrative expenses and interest expense and a decrease in interest income.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Cash and cash equivalents increased (decreased) as follows for the years ended
March 31,:



                                                      2009          2008          2007
. . .