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Article by DailyStocks_admin    (03-03-08 02:49 AM)

Richard Aster Jr. and Kenneth Fisher upped their STERIS holdings in quarter of September, as George Soros sold out of his holdings in the last quarter. Edward Owens and Bruce Sherman also own STERIS shares.
President & CEO, Director Walter M. Rosebrough Jr. bought 17,000 shares on 2/11/08 at $23.11. Also, Senior VP Mark D. Mcginley bought 1,000 shares at $26.92 in mid-September and Senior VP Peter A. Burke sold 5,000 shares on 1/07/08 at $30.05.
BUSINESS OVERVIEW

INTRODUCTION

STERIS Corporation is a leading provider of infection prevention and surgical products and services, focused primarily on the critical markets of healthcare, pharmaceutical and research. Our mission is to provide a healthier today and a safer tomorrow through knowledgeable people and innovative infection prevention, decontamination and health science technologies, products and services. We offer our customers a unique mix of capital products, such as: sterilizers and surgical tables; consumable products, such as detergents and skin care products; and services, including equipment installation and maintenance, as well as the bulk sterilization of single-use medical devices.

We were founded as Innovative Medical Technologies in Ohio in 1985, and renamed STERIS Corporation in 1987. With global headquarters in Mentor, Ohio, we have approximately 5,100 employees worldwide and operate in more than 60 countries. We have a direct sales force of 522 and a service organization of 1,056 who work diligently to ensure that we are meeting the increasingly complex needs of our customers.

We manage our business in three market-focused business segments: Healthcare, Life Sciences and STERIS Isomedix Services. Healthcare is the largest piece of our business, contributing 70.6% of fiscal 2007 revenues and 80.3% of our fiscal 2007 operating income. In this segment, we serve customers anywhere surgical procedures take place by providing support directly to the operating room, as well as to the sterile processing department where instruments are reprocessed in between surgeries. Our products and services enable customers to reduce cost and improve outcomes in these critical environments.

Our second largest segment, Life Sciences, contributed 18.2% of fiscal 2007 revenues and 3.1% of our fiscal 2007 operating income. In this segment, we primarily serve pharmaceutical manufacturers and research organizations by providing decontamination and sterilization technologies, products and services that help ensure the safety of the products they produce. In addition, we are targeting emerging market opportunities for the decontamination of environments, including transportation, food and beverage, government, military and aerospace customers.

STERIS Isomedix Services (“Isomedix”) performs sterilization services on a contract basis through 21 facilities in North America, where we sterilize single-use medical devices and other products in bulk prior to their delivery to the end user. This segment contributed 11.2% of fiscal 2007 revenues and 16.6% of our fiscal 2007 operating income.

Many factors are driving an increased awareness of the importance of infection control throughout the world. In the United States, hospitals in 16 states are now required to report infection rates, providing patients for the first time with information that can help shape their decisions about where to receive care. On a more global basis, emerging threats such as Avian Bird Flu and Mad Cow Disease have gained prominence in the news, raising awareness of the need for enhanced safety on a worldwide basis. We are uniquely positioned to help address these concerns in traditional and non-traditional settings with our combination of capital equipment, consumables and services.

INFORMATION RELATED TO BUSINESS SEGMENTS

Our chief operating decision maker is our President and Chief Executive Officer (“CEO”) because the CEO has the final authority over performance assessment and resource allocation decisions. The CEO regularly receives discrete financial information about each reportable segment. The CEO uses this information to assess performance and allocate resources. The accounting policies of the reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements titled, “Nature of Operations and Summary of Significant Accounting Policies,” of our Annual Report. Segment performance information for fiscal years 2007, 2006, and 2005 is presented in Note 13 to the Consolidated Financial Statements and in Item 7 titled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), of this Annual Report.

HEALTHCARE SEGMENT

Description of Business. Our Healthcare segment manufactures and sells capital equipment and accessories used in surgical and critical care environments, emergency departments, gastrointestinal and sterile processing environments, and in infection control processes. We also manufacture and sell consumable products and provide services to this healthcare customer base.

Products Offered. Our Healthcare segment manufactures and sells a broad range of capital equipment and consumable products and supplies, including:


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Sterilizers, including low temperature liquid, steam, and Ethylene Oxide (“EO”), that allow customers to meet rigorous sterility assurance standards and regulations and allow for the safe and effective re-use of medical equipment and devices in healthcare facilities throughout the world.


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Automated washer/disinfector systems that clean and disinfect a wide range of items from rolling instrument carts and other large healthcare equipment to small surgical instruments.


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General and specialty surgical tables, surgical and examination lights, equipment management systems, operating room storage cabinets, warming cabinets, scrub sinks, and other complementary products and accessories for use in hospitals and other ambulatory surgery sites.


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Cleaning chemistries and sterility assurance products used in instrument cleaning and decontamination systems.


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Cleansing products, including hard surface disinfectants and skin care and hand hygiene solutions, for use by care-givers and patients.

Significant brand names for these products include STERIS SYSTEM 1 ® , Amsco ® , Hamo™, Reliance ® , Cmax ® , Harmony™, Kindest Kare ® , Alcare ® , Verify ® , and Cal Stat ® .

Services Offered. Our Healthcare segment provides various preventive maintenance programs and repair services to support the effective operation of capital equipment over its lifetime. Field service personnel install, maintain, upgrade, repair, and troubleshoot equipment throughout the world. We also offer comprehensive sterilization management consulting services allowing healthcare facilities to meet their instrument reprocessing needs. Additionally, our Healthcare segment provides other support services such as facility planning, engineering support, device testing, customer education, and the sale of replacement parts.

Customer Concentration. Our Healthcare segment manufactures and sells capital equipment, consumables, and services to customers in the United States and throughout the rest of the world. For the year ended March 31, 2007, the segment generated revenues in the United States and internationally of $663.2 million and $182.5 million, respectively. For the year ended March 31, 2007, no customer represented more than 10% of the Healthcare segment’s total revenues and the loss of any single customer is not expected to have a material impact on the segment’s results of operations or cash flows.

Competition. Our Healthcare segment manufactures and sells capital equipment, consumables, and services to customers in the United States and throughout the rest of the world. We compete with a number of large companies that have significant product portfolios and global reach, as well as a number of small companies with very limited product offerings and operations in one or a limited number of countries. Our two most significant competitors are Getinge and Johnson & Johnson. On a product basis, we also compete with 3M, Belimed, Berchtold, Cantel Medical, Cardinal, Ecolab, Hillenbrand, Kimberly-Clark, Skytron, and Stryker.

LIFE SCIENCES SEGMENT

Description of Business. Our Life Sciences segment manufactures and sells capital equipment, cleaning chemistries, and service solutions to global pharmaceutical companies, private and public research facilities, government, military, industrial, transportation and food and beverage customers.

Products Offered. Our Life Sciences segment manufactures and sells a broad range of capital equipment and consumable products and supplies including:


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Sterilizers that efficiently and effectively sterilize and decontaminate medical equipment and research tools used by pharmaceutical and research customers, mitigating the risk of contamination.


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Washer/disinfectors that efficiently decontaminate various large and small materials and components used in pharmaceutical and industrial manufacturing processes, such as glassware, vessels, equipment parts, drums, and hoses.


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Vaporized Hydrogen Peroxide (“VHP” ® ) technology to create safer environments within emergency vehicle interiors and exteriors, high-containment bio-safety labs, and other enclosed environments.


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Consumables and supplies that are used to prevent the spread of infectious diseases and to monitor sterilization and decontamination processes, including products used to clean instruments, decontaminate systems, and disinfect hard surfaces. We also manufacture and sell skin care and hand hygiene solutions for use in high risk and routine applications.

Significant brand names for these products include Amsco ® , Hamo ® , Reliance ® , Finn-Aqua ® , Kindest Kare ® , Alcare ® , Verify ® , and Cal Stat ® .

Services Offered. Our Life Sciences segment offers various preventive maintenance programs and repair services to support the effective operation of capital equipment over its lifetime. Field service personnel install, maintain, upgrade, repair, and troubleshoot equipment throughout the world. Service personnel also provide a variety of consulting services focused on biological and chemical contamination remediation and recovery solutions, risk/threat assessment, and biological contaminant mapping and assessment. Additionally, we provide general sterilization consulting services and other support services such as facility planning, engineering support, device testing, and customer education.

Customer Concentration. Our Life Sciences segment manufactures and sells capital equipment, consumables, and services to customers in the United States and throughout the rest of the world. For the year ended March 31, 2007, the segment generated revenues in the United States and internationally of $144.2 million and $73.7 million, respectively. For the year ended March 31, 2007, no customer represented more than 10% of the Life Sciences segment’s total revenues and the loss of any single customer is not expected to have a material impact on the segment’s results of operations or cash flows.

Competition. Our Life Sciences segment operates in highly regulated environments where the most intense competition results from technological innovations, product performance, convenience and ease of use, and overall cost-effectiveness. In recent years, our pharmaceutical customer base has also undergone consolidation and reduced capital spending, resulting in more intense competition. We compete for pharmaceutical, research and industrial customers with a number of large companies that have significant product portfolios and global reach, as well as a number of small companies with very limited product offerings and operations in one or a limited number of countries. Competitors in the pharmaceutical market include Ecolab, Fedegari, Getinge, MECO, Scientek, Stilmas and Tuttnauer. We also compete with a small number of large companies for defense and industrial customers. The defense and industrial customer base primarily includes governmental-type customers. Our ability to successfully sell to these customers partially depends on government funding and budgetary appropriations. Competitors in the defense and industrial markets include AeroClave, Bioquell and Sabre Technologies.

STERIS ISOMEDIX SERVICES SEGMENT

Description of Business. Our STERIS Isomedix Services segment operates through a network of 21 facilities located in North America. We sell a comprehensive array of contract sterilization services using Gamma Irradiation (“Gamma”), EO technologies and to a lesser extent, Electron Beam Irradiation (“E-Beam”). We provide sterilization, microbial reduction, and materials modification services to companies that supply products to the healthcare, industrial, and consumer product industries.

Services Offered. We use Gamma, E-Beam, and EO technologies to sterilize a wide range of products. Gamma, using cobalt-60 isotope, and E-Beam, using accelerated electrons, are irradiation processes. EO is a gaseous process primarily used to sterilize surgical kits. Greater than 90 percent of the industrial contract sterilization market uses Gamma or EO technology, with the remainder using E-Beam technology. Our locations are in major population centers and core distribution corridors throughout North America, primarily in the Northeast, Midwest, Southwest, and southern California. We adapt to increasing imports and changes in manufacturing points-of-origin by monitoring trends in supply chain management. Demographics partially drives this segment’s growth. The aging baby boomer population and rising life expectancy increase the demand for medical procedures, which increases the consumption of single use medical devices and surgical kits. Our technical services group supports customers in all phases of the sterilization design process, including product development, materials testing, and sterility validation.

Customer Concentration. Our STERIS Isomedix Services segment operates in North America. For the year ended March 31, 2007, the segment generated revenues in the United States and Canada of $126.1 million and $7.7 million, respectively. The segment’s services are offered to customers throughout the footprint of our network. For the year ended March 31, 2007, no customer represented more than 10% of the segment’s revenues. Because of a largely fixed cost structure, the loss of a single customer could have a material impact on the segment’s results of operations or cash flows but would not have a material impact on STERIS.

Competition. STERIS Isomedix Services operates in a highly regulated industry and competes in North America with Sterigenics International, Inc., other smaller contract sterilization companies and manufacturers that sterilize products in-house.

INFORMATION WITH RESPECT TO OUR BUSINESS IN GENERAL

Recent Events

Restructuring – Transfer of Erie, Pennsylvania Manufacturing Operations to Monterrey, Mexico. On January 30, 2006, we announced that the manufacturing portion of our Erie, Pennsylvania operations will be transferred to Mexico to reduce production costs and improve our competitive position. We also announced plans for other restructuring actions designed to reduce operating costs within the ongoing operations of both the Healthcare and Life Sciences segments.

During fiscal 2007 and fiscal 2006, we incurred pre-tax restructuring expenses of $4.9 million and $25.3 million, respectively, primarily for non-cash expenses related to asset write-downs, accelerated recognition of pension and retiree medical benefits, and severance and termination benefits related to the transfer of our Erie, Pennsylvania manufacturing operations to Monterrey, Mexico and other restructuring actions.

We anticipate the additional costs associated with this transfer during fiscal 2008 to approximate $6.0 million, including $4.0 million of restructuring expenses related to the shutdown of manufacturing operations in Erie, Pennsylvania.

Collective bargaining agreements with certain employees located at the Erie, Pennsylvania operations expire in June 2008.

Restructuring – European Restructuring Plan. During the third quarter of fiscal 2007, we adopted a restructuring plan related to certain of our European operations (“European Restructuring Plan”). As part of this plan, we closed our Nantarre, France and Stockholm, Sweden sales offices. We also took steps to reduce the workforce in certain European support functions. These actions are intended to improve our cost structure in Europe. Approximately 40 employees were impacted in various European locations. During fiscal 2007, we recorded pre-tax expenses of $1.7 million related to the European Restructuring Plan. We are continuing to evaluate our European operations for opportunities to enhance performance, but have not committed to any additional specific actions.

Acquisitions and Dispositions. During fiscal 2005, we completed three strategic acquisitions that expanded our breadth of product and service offerings and geographic reach.

During the fourth quarter of fiscal 2005, we acquired FHSurgical SAS (“FHSurgical”), a privately-held manufacturer of surgical tables located in Orleans, France. This acquisition expanded our European manufacturing base and distribution channel, and enhanced our offerings of surgical tables. FHSurgical has become part of our Healthcare segment.

During the fourth quarter of fiscal 2005, we acquired certain assets of Cosmed Group, Inc. (“Cosmed”), a privately-held contract sterilization service provider with corporate offices located in Jamestown, Rhode Island. The Cosmed assets we acquired became part of our Isomedix segment. As a result of this transaction, we added five EO processing facilities to our Isomedix segment’s existing network of locations.

During the second quarter of fiscal 2005, we acquired Albert Browne Limited and its subsidiaries (“Browne”), a privately-held manufacturer of chemical indicators, headquartered in Leicester, England. This acquisition gave us an established European distribution channel and expanded our consumable product offerings which are used with our broad line of infection control, sterilization, and decontamination capital equipment. Browne has become part of our Healthcare segment.

On October 31, 2005, we sold our lyophilizer (freeze dryer) product line to GEA Group of Germany for 20.8 million euros (approximately $25.2 million). As a result of the sale, we recorded an after-tax gain of approximately $7.3 million ($1.1 million recorded in fiscal 2007 and $6.2 million recorded in fiscal 2006). The sale of this product line was a strategic step designed to create greater focus and further development of core sterilization, washing, and decontamination product offerings to the pharmaceutical, biopharmaceutical, governmental, and research markets.

Sources and Availability of Raw Materials. We purchase raw materials, sub-assemblies, components, and other supplies needed in our operations from numerous suppliers in the United States and internationally. The principal raw materials used in our operations include stainless steel, organic chemicals, and plastic components. These raw materials are available from several suppliers and in enough quantities that we do not expect any significant sourcing problems in fiscal 2008. We have longer-term supply contracts for certain raw materials, such as cobalt-60 isotope used by the Isomedix segment, for which there are few suppliers.

We have recently experienced higher prices for raw materials such as stainless steel and other metals, and chemicals, which are important to our operations. While cost and availability are unpredictable, we have not experienced any difficulty, and do not expect significant difficulty, in obtaining the materials, sub-assemblies, components, or other supplies we need for our operations.

Intellectual Property. We protect our technology and products by, among other means, filing United States and foreign patent applications. There can be no assurance, however, that any patent will provide adequate protection for the technology, system, product, service, or process it covers. In addition, the process of obtaining and protecting patents can be long and expensive. We also rely upon trade secrets, technical know-how, and continuing technological innovation to develop and maintain our competitive position.

As of March 31, 2007, we held 288 United States patents and 833 foreign patents and had 95 United States patents and 616 foreign patents pending. Patents for individual products extend for varying periods according to the date of filing or grant and legal term of patents in various countries where a patent is obtained. The actual protection a patent provides, which can vary from country to country, depends upon the type of patent, the scope of its coverage, and the availability of legal remedies in each country.

Our products are sold around the world under various brand names and trademarks. We consider our brand names and trademarks to be valuable in the marketing of our products. As of March 31, 2007, we had a total of 822 trademark registrations in the United States and in various foreign countries.

Research and Development. Research and development is an important factor in our long-term strategy. For the years ended March 31, 2007, 2006, and 2005, research and development expenses were $33.6 million, $33.6 million, and $31.5 million, respectively. We incurred these expenses primarily for the research and development of commercial products. During fiscal 2007 two events occurred that are important to the commercialization of recently developed products or applications. First, we received market clearance from the United States Environmental Protection Agency (“EPA”) for expanded use of our Vaprox ® Hydrogen Peroxide Sterilant technology. This clearance provides an important advancement for us, which will enable the offering of a broader array of cleaning chemistries, capital equipment and sterilization services so that we can become a complete solutions provider to combat emerging decontamination needs in both our traditional and new markets. In addition, we received clearance from the United States Food and Drug Administration (“FDA”) to market the Reliance™ Endoscope Processing System (“EPS”) in the United States. This innovative technology addresses significant unmet reprocessing needs within the gastrointestinal departments of hospitals and surgery centers.

Quality Assurance. We manufacture, assemble, and package products in the United States and throughout the world. Each of our production facilities are dedicated to particular processes and products. Our success depends upon customer confidence in the quality of our production process and the integrity of the data that supports our product safety and effectiveness. We have implemented quality assurance procedures to ensure the quality and integrity of scientific information and production processes. All of our manufacturing and contract sterilization facilities throughout the world are ISO9001:2000 or ISO13485:2003 certified.

Government Regulation. Our business is subject to various degrees of governmental regulation in the countries in which we operate. In the United States, the FDA, the EPA, the United States Nuclear Regulatory Commission (“NRC”), and other governmental authorities regulate the development, manufacture, sale, and distribution of our products and services. Our international operations also are subject to a significant amount of government regulation and country-specific rules and regulations. Government regulations include detailed inspection of, and controls over, research and development, clinical investigations, product approvals and manufacturing, marketing and promotion, sampling, distribution, record-keeping, storage, and disposal practices.

Compliance with applicable regulations is a significant expense for us. Past, current, or future regulations, their interpretation, or their application could have a material adverse impact on our operations. Also, additional governmental regulation may be passed that could prevent, delay, revoke, or result in the rejection of regulatory clearance of our products. We cannot predict the affect on our operations resulting from current or future governmental regulation or the interpretation or application of these regulations.

If we fail to comply with any applicable regulatory requirements, sanctions could be imposed on us. For more information about the risks we face regarding regulatory requirements, see Part I, Item 1A of this Annual Report titled, “Risk Factors, We are subject to extensive regulatory . . .”

We have previously received warning letters, paid civil penalties, conducted product recalls, and been subject to other regulatory sanctions. We believe that we are currently compliant with applicable regulatory requirements. However, we cannot assure you that future or current regulatory, governmental, or private action will not have a material adverse affect on STERIS’s performance, results, or financial condition. You should also read Part I, Item 3, “Legal Proceedings” for further information.

Environmental Matters. We are subject to various laws and governmental regulations concerning environmental matters and employee safety and health in the United States and in other countries. We have made, and continue to make, significant investments to comply with these laws and regulations. We cannot predict the future capital expenditures or operating costs required to comply with environmental laws and regulations. We believe that we are currently compliant with applicable environmental, health, and safety requirements. However, we cannot assure you that future or current regulatory, governmental, or private action will not have a material adverse affect on STERIS or its performance, results, or financial condition. You should also read Part I, Item 3, “Legal Proceedings” for further information.

In the future, if a loss contingency related to environmental matters or conditional asset retirement obligations is significantly greater than the current estimated amount, we would record a liability for the obligation and it may result in a material impact on net income for the annual or interim period during which the liability is recorded. The investigation and remediation of environmental obligations generally occur over an extended period of time, and therefore we do not believe that liabilities for these events would have a material adverse affect on our financial condition, liquidity, or cash flow. However, we cannot assure you that such liabilities would not have a material adverse affect on STERIS’s performance, results, or financial condition.

Competition. The markets in which we operate are highly competitive and generally highly regulated. Competition is intense in all of our business segments and includes many large and small competitors. Product design and quality, safety, ease of use, product serviceability, and price are important competitive factors to us. We expect to face increased competition in the future as new infection prevention, sterile processing, contamination control, and surgical support products and services enter the market. We believe many organizations are working with a variety of technologies and sterilizing agents. Also, a number of companies have developed disposable medical instruments and other devices designed to address the risk of contamination.

We believe that our long-term competitive position depends on our success in discovering, developing, and marketing innovative, cost-effective products and services. We devote significant resources on research and development efforts and we believe STERIS is positioned as a global competitor in the search for technological innovations. In addition to research and development, we invest in quality control, customer programs, distribution systems, technical services, and other information services.

We cannot assure you that new products or services we provide or develop in the future will be more commercially successful than those provided or developed by our competitors. In addition, some of our existing or potential competitors may have greater resources than us. Therefore, a competitor may succeed in developing and commercializing products more rapidly than we do. Competition, as it relates to our business segments and product categories, is discussed in more detail in the section above titled, “Information Related to Business Segments.”

Employees. As of March 31, 2007, we had approximately 5,100 employees throughout the world. We believe we have good relations with our employees, including employees covered under collective bargaining agreements.

Methods of Distribution. As of March 31, 2007, we employed 1,160 direct field sales and service representatives within the United States and 417 in international locations. Sales and service activities are supported by a staff of regionally based clinical specialists, system planners, corporate account managers, and in-house customer service and field support departments. We also contract with distributors in select markets.

Customer training is important to our business. We provide a variety of courses at customer locations, at our training and education centers throughout the world, and over the internet. Our training programs help customers understand the science, technology, and operation of our products. Many of our operator training programs are approved by professional certifying organizations and offer continuing education credits to eligible course participants.

Seasonality. Our financial results have been, from time to time, subject to seasonal patterns. As a result of customer buying patterns and other factors sales of certain product lines have historically been weighted toward the latter part of each fiscal year. We cannot assure you that these trends will continue.

International Operations. Our objective is to expand internationally, as we currently only serve a small portion of the world that could benefit from our products. Through our subsidiaries, we operate in various international locations within the same business segments as in the United States. International revenues were $263.9 million, or 22.0%, of our total revenues for the year ended March 31, 2007. Revenues from Europe, Canada, and other international locations were 55.3%, 23.6%, and 21.1%, respectively, of our total international revenues for the year ended March 31, 2007.

You should also read Note 13 to our Consolidated Financial Statements titled, “Business Segment Information,” and Item 7, “MD&A” for a geographic presentation of our revenues for the three years ended March 31, 2007.

We conduct manufacturing in the United States, Canada, and various European countries. There are, in varying degrees, a number of inherent risks to our international operations. We describe these risks in Part I, Item 1A of this Annual Report titled, “Risk Factors, We conduct manufacturing . . .”

Fluctuations in the exchange rate of the U.S. dollar relative to the currencies of foreign countries in which we operate can also increase or decrease our reported net assets and results of operations. During fiscal 2007, revenues increased by $10.4 million, or 0.9%, and income before taxes increased by $1.9 million, or 1.4%, as a result of foreign currency movements relative to the U.S. dollar. We cannot predict future changes in foreign currency exchange rates or the effect they will have on our operations. Backlog. We define backlog as the amount of unfilled capital equipment purchase orders at a point in time. At March 31, 2007, we had a backlog of $110.2 million. Of this amount, $63.8 million and $46.4 million related to our Healthcare and Life Sciences segments, respectively. At March 31, 2006, we had backlog orders of $104.5 million. Of this amount $62.0 million and $42.5 million related to our Healthcare and Life Sciences segments, respectively. Most of the backlog orders in both years were expected to ship in the next fiscal year.
CEO BACKGROUND

Cynthia L. Feldmann, age 54, director since March 2005. Ms. Feldmann has served as President and Founder of Jetty Lane Associates, a consulting firm, since December 2005. Previously, Ms. Feldmann served as the Life Sciences Business Development Officer for the Boston law firm Palmer & Dodge, LLP from November 2003 to September 2005 and was with the global accounting firm, KPMG LLP, from July 1994 to September 2002, holding various leadership roles in the firm’s Medical Technology and Health Care & Life Sciences industry groups, including Partner, Northeast Regional Relationships. Prior to that, she spent 19 years with the accounting firm Coopers & Lybrand (now PricewaterhouseCoopers), ultimately as National Partner-in-Charge of its Life Sciences practice. Ms. Feldmann is a director of Hanger Orthopedic Group, Inc. and Hayes Lemmerz International, Inc.

Jacqueline B. Kosecoff, age 58, director since October 2003. Dr. Kosecoff has served as Chief Executive Officer of Ovations Pharmacy Solutions, a UnitedHealth Group Company, since December 2005. From July 2002 to December 2005, Dr. Kosecoff served as Executive Vice President, Specialty Companies, of PacifiCare Health Systems, Inc., one of the nation’s largest consumer health organizations. From 1998 to July 2002, Dr. Kosecoff was President and Founder of Protocare, Inc., a firm involved in the development and testing of drugs, devices, biopharmaceutical and nutritional products, and consulting and analytic services. Dr. Kosecoff is a director of Sealed Air Corporation.

Raymond A. Lancaster, age 61, director since 1988. Mr. Lancaster has served as Managing Director of South Franklin Street Partners (formerly known as Candlewood Partners, LLC), an investment banking firm specializing in employee stock ownership plans and restructurings, since 2002. During 2001, Mr. Lancaster was a self-employed consultant specializing in leveraged buyouts of manufacturing companies. From January 1995 to December 2000, Mr. Lancaster held the position of Managing Partner of Kirtland Capital Partners II L.P., a middle market leveraged buyout partnership.

Kevin M. McMullen, age 46, director since July 2000. Mr. McMullen is Chairman of the Board, Chief Executive Officer, and President of OMNOVA Solutions Inc., a major innovator of decorative and functional surfaces, emulsion polymers, and specialty chemicals. Mr. McMullen was Vice President of GenCorp Inc., a technology-based manufacturer with leading positions in the aerospace and defense, polymer products, and automotive industries, and President of GenCorp’s Decorative & Building Products business unit from September 1996 until GenCorp’s spin-off of OMNOVA in October 1999. Mr. McMullen was Vice President of OMNOVA and President of its Decorative & Building Products unit from September 1999 until January 2000, was President and Chief Operating Officer of OMNOVA from January to December 2000, became Chief Executive Officer and President of OMNOVA in December 2000, and became Chairman of the Board of OMNOVA in February 2001. Before joining GenCorp, Mr. McMullen held the position of General Manager of the Commercial & Industrial Lighting business of General Electric Corporation, a diversified services, technology, and manufacturing company, from 1993 to 1996.

J. B. Richey, age 70, director since 1987. Mr. Richey has been Senior Vice President of Invacare Corporation, a leading provider of home healthcare medical equipment, since 1984. Mr. Richey is a director of Invacare Corporation.

Mohsen M. Sohi, age 48, director since July 2005. Dr. Sohi has served as President and Chief Executive Officer of Freudenberg-NOK General Partnership, a joint venture between Freudenberg & Co. of Germany and NOK Corp. of Japan, since March 2003. Freudenberg-NOK is a supplier of sealing, noise and vibration control products to automotive and other industries. From January 2001 to March 2003, Dr. Sohi was with NCR Corporation, a leading global technology company, most recently as the Senior Vice President, Retail Solutions Division. Before serving with NCR, Dr. Sohi spent more than 14 years at Honeywell International Inc. and its pre-merger constituent, Allied Signal, Inc., providers of aerospace, automation & control solutions, specialty materials and transportation systems, serving from July 2000 to January 2001 as President, Honeywell Electronic Materials. Dr. Sohi is a director of Hayes Lemmerz International, Inc. and Harris Stratex Networks, Inc.

John P. Wareham, age 65, director since November 2000. Mr. Wareham was appointed Chairman of the Board of Directors of STERIS in May 2005. In April 2005, Mr. Wareham retired as Chairman of the Board and Chief Executive Office of Beckman Coulter, Inc., a leading provider of laboratory systems and complementary products used in biomedical analysis. Mr. Wareham became Chief Executive Officer of Beckman Coulter in September 1998 and was named Chairman in February 1999. Prior to these appointments, Mr. Wareham served as President and Chief Operating Officer of Beckman Coulter, a position he assumed in 1993. Mr. Wareham is a director of Greatbatch, Inc. and ResMed Inc.

Loyal W. Wilson, age 59, director since 1987. Mr. Wilson has been a Managing Director of Primus Venture Partners, Inc., a private equity investment and management firm, since 1993. He has been a Managing Partner of Primus Venture Partners, L.P. since 1983.

Michael B. Wood, age 63, director since October 2004. Dr. Wood has served as a consultant physician at the Mayo Clinic in Jacksonville, Florida since August 2004, and also serves as a Professor of Orthopedics at the Mayo Clinic College of Medicine. Dr. Wood served from June 2004 to August 2004 as a staff orthopedic surgeon at Luther-Midelfort Clinic in Eau Claire, Wisconsin. Previously, Dr. Wood held positions of increasing responsibility within the Mayo Foundation, culminating in his service as President and Chief Executive Officer from January 1999 to February 2003 and President Emeritus until February 2004. The Mayo Foundation is a charitable, not-for-profit organization based in Rochester, Minnesota, and is the parent corporate entity of the Mayo Clinics in Minnesota, Florida and Arizona. Dr. Wood is a director of Cubist Pharmaceuticals, Inc.

COMPENSATION

Principal Components of Compensation for Named Executive Officers

For the CEO and the other named executive officers, our compensation program is designed to recruit and retain management and align compensation with Company performance on both an annual and longer-term basis. Based on this general compensation philosophy, the Committee has established compensation for our named executive officers consisting of the following principal components:


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base salary;


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annual incentive compensation (cash bonus);


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long-term equity incentive compensation (generally, stock options, restricted shares, restricted stock units, and other equity incentives); and


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benefits and perquisites.

Base Salary:

Base salary for the CEO and other named executive officers is considered a basic component of executive compensation which is necessary to recruit and retain senior management. In addition, base salary is intended to support compensation practices that are competitive among medical device, hospital supply, pharmaceutical, and other industrial companies which we draw from and compete with for executive talent.

Although the payment of base salary is not directly tied to achievement of certain pre-established financial goals, the Committee considers a number of factors in determining base salary, including the past year’s performance, base salaries paid by comparable medical device and other industrial companies, the complexity and responsibility of the executive’s position, the executive’s overall experience and achievements against objectives, as well as the continued employment of the named executive officers. The Committee believes that the target salary for our executive positions should generally be at the median base salary of similar positions based on the survey data provided by the compensation consultant. While the median serves as a target, other factors such as experience, time in position, complexity of functions, competitive environment, special skills and past performance are also considered. The Committee believes that salaries for executives with significant experience and strong past performance should not generally exceed the 75th percentile for similar positions of industrial companies based on survey data.

To help assess the base salary of our executive officers, each year the Committee and its compensation consultant review market data for the CEO and other executive officers, including the named executive officers. This analysis includes the compensation consultant’s review of proxy data from similar industrial companies, information derived from multiple surveys, and other executive compensation data maintained by the compensation consultant. The Committee evaluates this data as well as other compensation trends and internal and external factors to develop a target base salary for each executive position.

Based on its consideration, information from the compensation consultant, and recommendations of the CEO with respect to compensation adjustments for the other named executive officers, the Committee uses its judgment to determine the appropriate salary level for the CEO and compensation ranges for each other executive officer. The Board of Directors then reviews and, if accepted by the Board, ratifies, the salary actions of the Committee.

With respect to the CEO, Mr. Vinney’s annual base salary rate of $726,000 was established by the Committee effective July 1, 2006, and represented approximately a 2% increase from his prior base salary. The Committee approved, and the Company entered into, an employment agreement with Mr. Vinney dated September 7, 2006, which continued this base salary rate through June 1, 2007. The Committee approved, and the Company entered into, a new employment agreement with Mr. Vinney dated May 7, 2007, which superseded the prior agreement and provided an annual base salary rate for Mr. Vinney of $750,000 commencing June 1, 2007, representing an increase of approximately 3.3% from the prior base salary. With respect to these employment agreements, the Committee and the Board considered Mr. Vinney’s leadership of the Company and his importance to the ongoing success of the business during the successor CEO search and transition period.

Annual Incentive Compensation (cash bonus):

Annual incentive compensation for executive officers is cash-based and is determined by the annual financial performance of the Company, the officer’s business segment performance, or a combination thereof, and the officer’s individual performance against objectives. Our annual incentive compensation is intended to reward past performance when financial objectives are achieved and motivate and retain qualified individuals who have the opportunity to influence future results and enhance shareholder value. This element of compensation is designed to provide competitive awards when financial objectives are achieved or exceeded, or a reduced award or no awards when the objectives are not achieved.

Annual incentive compensation is generally based on a weighted formula considering financial targets. An individual’s annual incentive compensation target under our Management Incentive Compensation Plan or Senior Executive Management Incentive Compensation Plan, which we refer to collectively in this Compensation Discussion and Analysis as the Plans, is expressed as a percentage of salary, with the incentive compensation opportunity increasing with the level of responsibility. The target bonus for our CEO was 100% of annual base salary based on performance against financial objectives, and could range from 0% to 175% of annual base salary based on performance against financial objectives, with the Committee having discretion to reduce the CEO’s bonus based upon performance against individual objectives. For fiscal year 2007, the Committee did not exercise its discretion to reduce the CEO’s bonus. For other executive officers, the target bonus is 35% to 60% of their annual base salary and annual incentive payments can range from 0% to 175% of target, based on the level of performance against the financial and individual objectives. This method of calculation is reviewed annually with the compensation consultant and compared to the compensation consultant’s survey data.

The payout percentages are based on the financial metrics established by the Committee for the fiscal year. Each year, the Committee and the Board evaluate our annual operating plan and strategic plan to consider financial metrics important to shareholder value and designed to support the overall strength and success of the business. After consideration of the recommendation of the compensation consultant and management, certain financial metrics are identified (typically three) and approved by the Committee. For fiscal year 2007, the Committee determined that revenue, operating income (calculated before deduction for interest and income taxes) and free cash flow were the appropriate criteria to be used for consideration of annual incentive compensation, adjusted to exclude the effect of amounts related to various special items that management and the Committee considered not representative of ongoing operations, including impairment and restructuring charges, gains or losses on sales of assets outside the ordinary course of business, gain or loss on sales or divestiture of a subsidiary, costs associated with divestiture or discontinued operations, and acquisition and other related and special costs. Those criteria were also approved and applied in fiscal years 2005 and 2006, again with certain adjustments. The Committee assigned weighting to the plan criteria, reflecting the Committee’s emphasis on the respective components of financial performance for fiscal year 2007. The criteria was weighted as follows: revenue growth – 35%; free cash flow – 15%; operating income (EBIT) – 50%.

For fiscal year 2007, the metrics for calculation of potential payout under the Plans were approved by the Committee and ratified by the Board at their April 2006 meetings, and required a minimum adjusted EBIT of $111 million before any payment would be made under the Plans. After the conclusion of fiscal year 2007, the Board and the Committee assessed the achievement of performance for determining payment under the Plans. This assessment resulted in the following incentive compensation determination for fiscal 2007:


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CEO – 61.1% performance against target, resulting in the payment of $443,586;


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Seven (7) executive officers – 45.7% to 92.6% performance against targets, reflecting adjustments for the officer’s business segment performance and the officer’s performance against objectives, resulting in an aggregate payment of $668,500; and •

569 other eligible employees – 74.6% performance against targets, resulting in an aggregate payment not to exceed $7,036,472 to those 569 employees.

Therefore, the maximum total incentive compensation payments approved for distribution to eligible employees under the Plans for fiscal year 2007 was of $8,148,558, including the payment to the CEO.

Long-Term Equity Incentive Compensation

Equity incentives are considered necessary to attract and retain outstanding key employees critical to the continuing, long-term success of STERIS, as well as providing key employees a significant identity and alignment of interest with STERIS shareholders. The Committee views nonqualified stock option and restricted share grants as a critical and direct link between management and shareholders. All value earned through stock options is dependent upon an increase in the value of our stock price. All STERIS equity compensation plans have provided that stock options may not be granted at less than 100% of fair market value on the grant date and that options may not be repriced.

Prior to fiscal year 2007, equity incentive awards have generally been limited to stock options; stock appreciation rights, restricted stock units and performance units were not granted and restricted shares were awarded only in very limited circumstances. In fiscal year 2006, the Board determined to seek approval to expand the types and forms of equity compensation and proposed the STERIS Corporation 2006 Long-Term Equity Incentive Plan, or the 2006 Plan, for the approval of shareholders. The 2006 Plan was approved by shareholders in July 2006.

Long-term equity incentive awards are now made pursuant to the 2006 Plan. The 2006 Plan is administered by the Committee and provides for a variety of equity-based incentive compensation such as stock options, stock appreciation rights, restricted stock units, restricted stock and performance units. The Committee believes the 2006 Plan provides flexibility to better design long-term equity compensation consistent with the long-term success of the Company and the interest of shareholders. Prior to fiscal year 2007, stock option grants to eligible employees have typically been made at the April meeting of the Board or Committee (the first meeting of the new fiscal year), with the option price being the closing price of the stock on the date the Board or Committee meets and approves the grant. (The dates of the regular Board and Committee meetings are usually set six to twelve months in advance.) In fiscal year 2007, the Committee determined to defer equity grants until after the shareholders voted on the 2006 Plan to provide the Committee with more flexibility in the form of equity compensation, if the 2006 Plan was approved.

With the approval of the 2006 Plan, these additional forms of equity-based compensation were able to be included in the mix of compensation to the named executive officers and other eligible employees. The Committee, with the assistance of the compensation consultant, decided to include restricted stock in the mix of long-term equity incentives to executive officers and reduce the number of stock options typically granted, reflecting an increasing trend in equity compensation awards. As to the level of equity incentives, the Committee generally considers the recommendation of the CEO (other than for himself), the consultant’s data regarding competitive trends and practices, the salary and level within the Company, and the Committee’s own evaluation of the performance of named executive officers, since the Committee members have an opportunity to observe their performance and have available information on the level of past awards. The Committee ultimately decides the level of long-term compensation granted to each named executive officer.

For fiscal year 2007, the grant of stock options and restricted shares were approved on September 7, 2006. As discussed above, the Committee determined to delay the grant because the 2006 Plan was being presented for a vote of shareholders at the Company’s annual meeting on July 26, 2006. The grant in fiscal 2007 was also delayed because the Company’s Board of Directors was in discussion with the CEO regarding his transition and ultimate retirement. On August 29, 2006, the Committee met and recommended the approval of certain grants of stock options and restricted shares to senior managers and other employees. On September 7, 2006, the Board of Directors met and approved the grants recommended by the Committee, and, established the option exercise price at the higher of the closing price of the Company’s common stock on the NYSE on September 7, 2006 or September 12, 2006. The Company announced the transition and retirement of the CEO on September 11, 2006 and established this alternative grant date to avoid potential impact on the price of the options from this unusual event involving CEO transition.

With respect to the CEO, Mr. Vinney was granted an option to purchase 62,500 Common Shares and restricted stock units for 20,850 Common Shares pursuant to his employment agreement approved by the Board and entered into September 7, 2006. With respect to his employment agreement approved by the Board and dated May 7, 2007, Mr. Vinney was granted restricted stock units for 30,000 Common Shares, again reflecting the Committee’s and the Board’s consideration of Mr. Vinney’s leadership of the Company and his importance to the ongoing success of the business during the successor CEO search and transition period.

Benefit and Perquisite Programs

Our executive officers, including all of the named executive officers, are eligible to participate in a number of benefit programs, including health, disability and life insurance programs and a qualified 401(k) plan. Our executive officers may also participate in other benefit programs including a nonqualified deferred compensation program and management continuity (change in control) agreements.

The perquisites provided to a limited number of senior managers include tax return preparation and financial planning and car allowances. The Committee has approved limited personal use of Company aircraft by the CEO, which is also included in the CEO’s compensation pursuant to IRS regulations. During fiscal year 2007, the CEO had no personal use of corporate aircraft. These perquisites are designed to create a reasonably competitive compensation program. However, the Committee believes the type and amounts of these perquisites are quite limited compared to those provided by other companies.

Stock Ownership Guidelines

The Committee approves stock ownership guidelines to help further align the interests of the senior management with those of the shareholders. Senior managers (including the named executive officers) are encouraged to maintain a significant equity interest in the Company through ownership of stock that they acquire either with their own funds or through certain long-term incentive awards. The Committee believes that stock ownership may help create economic alignment with shareholders and is a factor in motivating them to enhance shareholder value.

MANAGEMENT DISCUSSION FROM LATEST 10K

INTRODUCTION

In the MD&A, we explain the general financial condition and the results of operations for STERIS and its subsidiaries including:


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what factors affect our business;


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what our earnings and costs were in fiscal 2007 and 2006;


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why those earnings and costs were different from the year before;


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where our earnings came from;


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how this affects our overall financial condition;


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what our expenditures for capital projects were in fiscal 2007; and


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

As you read the MD&A, it may be helpful to refer to information in Item 1, “Business,” Item 6, “Selected Financial Data,” and our consolidated financial statements, which present the results of our operations for fiscal 2007, 2006 and 2005. In Management’s Discussion and Analysis we analyze and explain the annual 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 MD&A and in Item 1, “Business,” we, at times, may refer to financial measures that are not required to be presented in the consolidated financial statements under accounting principles generally accepted in the United States. 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:


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Backlog – We define backlog as the amount of unfilled capital 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.


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Debt-to-capital – We define debt-to-capital as total debt divided by the sum of debt and shareholders’ equity. We use this figure as a financial liquidity measure to gauge our ability to borrow, provide strength/protection against creditors, fund growth, and measure the risk of our financial structure.


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Days sales outstanding – We define days sales outstanding as the average collection period for accounts receivable. It is calculated as net accounts receivable divided by the trailing four quarter’s revenues, multiplied by 365. We use this figure to help gauge the quality of accounts receivable and expected time to collect.

In the following sections of MD&A and in Item 1, “Business,” we, at times, may also refer to financial measures which are considered to be “non-GAAP financial measures” under SEC rules. Non-GAAP financial measures we may use are as follows:


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Free cash flow – We define free cash flow as cash flows from operating activities as presented in the Consolidated Statements of Cash Flows, which are presented in Item 8, “Financial Statements and Supplementary Data,” less purchases of property, plant and equipment, net, plus proceeds from the sale of property, plant and equipment, 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, and pay cash dividends.

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 comparisons between the years presented. For example, when discussing changes in revenues, we may, at times, exclude the impact of current or prior year business acquisitions.

We have presented these financial measures because we believe that meaningful analysis of our financial performance is enhanced by an understanding of certain additional factors underlying that performance. These financial measures should not be considered an alternative to measures required by accounting principles generally accepted in the United States. Our calculations of these measures may differ from calculations of similar measures used by other companies and you should be careful when comparing these financial measures to those of 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 year 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:


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Revenues – Our revenues are presented net of sales returns and allowances.


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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 and tables; and the consumable family of products, which includes STERIS SYSTEM 1 ® consumables, sterility assurance products, skin care products, and cleaning consumables.


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


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Capital Revenues – We define capital 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 and tables.


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Consumable Revenues – We define consumable revenues as revenues generated from sales of the consumable family of products which includes STERIS SYSTEM 1 ® consumables, sterility assurance products, skin care products, and cleaning consumables.


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Recurring Revenues – We define recurring revenues as revenues generated from sales of consumable products and service revenues.


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Acquired Revenues – We define acquired revenues as base revenues generated from acquired businesses or assets and additional volumes driven through acquired businesses or assets. We will use such measure for up to a year after acquisition.

GENERAL COMPANY OVERVIEW AND OUTLOOK

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.

We participate in industries that currently benefit from strong underlying demand, with the bulk of our revenues derived from the healthcare and pharmaceutical industries. As such, much of the growth in our markets is driven by the aging of the population throughout the world, as an increasing number of individuals are entering their prime healthcare consumption years. In addition, each of our core industries are also benefiting from specific trends that 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 FDA scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. In the contract sterilization industry, where Isomedix competes, an increasing trend toward the outsourcing of sterilization services continues to drive growth.

Beyond our core markets, infection-control issues are becoming a global concern, and emerging threats have gained prominence in the news. Through the Life Sciences segment, we are actively pursuing new opportunities to adapt our proven technologies to meet the needs of emerging markets such as defense, aerospace, and industrial decontamination.

Developments during fiscal 2007 important to the commercialization of recently developed products or applications includes market clearance from the EPA for expanded use of our Vaprox ® Hydrogen Peroxide Sterilant technology. This clearance provides an important advancement for us, which will enable the offering of a broader array of cleaning chemistries, capital equipment and sterilization services so that we can become a complete solutions provider to combat emerging decontamination needs in both its traditional and new markets. In addition, we received clearance from the FDA to market the Reliance™ EPS in the United States. This innovative technology addresses significant unmet reprocessing needs within the gastrointestinal departments of hospitals and surgery centers.

In the third quarter of fiscal 2007, in an effort to improve our cost structure in Europe, we adopted a restructuring plan related to certain of our European operations. As part of this plan, we closed our Nanterre, France and Stockholm, Sweden sales offices and reduced the workforce in certain European support functions. We continue to look for opportunities to improve our costs, but have not committed to any specific additional reportable actions.

Several critical actions were taken in fiscal 2006. The sale of the lyophilizer (freeze dryer) business in the third quarter was an important step in the Life Sciences renewed strategic focus. In January 2006, we announced the transfer of manufacturing operations from Erie, Pennsylvania to Mexico as a major element of a plan to reduce the cost structure of operations.

Fiscal 2006 revenue growth was fueled by acquisitions completed in fiscal 2005 and moderate growth in recurring revenues from consumable and service offerings.

During fiscal 2005, we completed three strategic acquisitions that expanded the breadth of our product offerings and global reach. Within the Healthcare segment, the acquisitions of Browne and FHSurgical expanded our offerings of chemical indicators and surgical tables, respectively, within the European marketplace. Within the Isomedix Services segment, five EO processing facilities acquired from Cosmed expanded our processing capacity within our North American footprint of strategically located facilities.

Our financial position and cash flows remain strong. For fiscal 2007, cash flows from operations were $95.7 million and free cash flow was $49.5 million. We continue to maintain low debt levels with our debt to capital ratio of 11.6% at March 31, 2007. Our strong financial position and cash flows currently afford us the financial flexibility to return value to shareholders. Value to shareholders may be in the form of strategic acquisitions that strengthen our long-term competitive position and potential common share repurchases and cash dividends.

A detailed discussion of our fiscal 2007 performance is included in the subsection of MD&A titled, “Results of Operations.”

MATTERS AFFECTING COMPARABILITY

Accounting for Share-Based Compensation. On April 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS No. 123R”), “Share-Based Payment,” using the modified prospective transition method. SFAS No. 123R requires us to estimate the fair value of share-based awards on the date of the grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of income.

Our consolidated financial statements as of and for the year ended March 31, 2007 reflect the impact of SFAS No. 123R. In accordance with the modified prospective transition method, we did not restate the consolidated financial statements for prior periods, and they do not include the impact of SFAS No. 123R. Total share-based compensation expense for fiscal 2007 was $9.9 million on a pre-tax basis, or $6.1 million ($0.09 per basic and diluted share), net of tax.

As of March 31, 2007, there was $9.6 million of total unrecognized compensation cost related to non-vested share-based compensation granted under our stock option plans. The cost is expected to be recognized over a weighted average period of 1.59 years.

Additional information regarding our adoption of SFAS No. 123R is included in Note 2 to our consolidated financial statements titled, “Share-Based Compensation.”

Restructuring. During the third quarter of fiscal 2007, we adopted the European restructuring plan. As part of this plan, we closed our Nantarre, France and Stockholm, Sweden sales offices. We also took steps to reduce the workforce in certain European support functions. These actions are intended to improve our cost structure in Europe. Approximately 40 employees were impacted in various European locations. During fiscal 2007, we recorded pre-tax expenses of $1.7 million for the European restructuring plan, primarily for severance and termination benefits and for non-cash expenses related to asset write-downs.

On January 30, 2006, we announced that the manufacturing portion of our Erie, Pennsylvania operations will be transferred to Mexico to reduce production costs and improve our competitive position. Plans for other restructuring actions designed to reduce operating costs within the ongoing operations of both the Healthcare and Life Sciences segments also were approved.

Operating income for fiscal 2007 and fiscal 2006 includes restructuring expenses of approximately $4.9 million and $25.3 million, respectively, primarily for non-cash expenses related to asset write-downs, accelerated recognition of pension and retiree medical benefits, and severance and termination benefits related to the transfer and other restructuring actions.

We anticipate the remaining total costs associated with this transfer during fiscal 2008 to approximate $6.0 million, including $4.0 million of restructuring expenses.

Asset write-downs include the impairment of buildings, land, manufacturing equipment and office equipment, and the resulting write-down of the carrying value of these assets to fair value, which represents our best estimate of the fair value for the assets to be sold or idled.

Further information regarding our restructuring actions is included in Note 3 to our consolidated financial statements titled, “Restructuring.”

Business Dispositions. On October 31, 2005, we sold our lyophilizer (freeze dryer) product line to GEA Group of Germany for 20.8 million euros (approximately $25.2 million). As a result of this sale, we recorded an after-tax gain of approximately $7.3 million ($1.1 million recorded in fiscal 2007 and $6.2 million recorded in fiscal 2006). The freeze dryer product line, based in Cologne, Germany, was part of our Life Sciences segment. This product line is presented as a discontinued operation in our financial statements. Revenues, cost of revenues, operating expenses and income taxes attributable to this product line are aggregated in a single line on the income statement for all periods presented. Segment results for all periods presented exclude the freeze dryer product line and reflect the reallocation of corporate overhead charges to all business segments.

Further information regarding our discontinued operations is included in Note 4 to our consolidated financial statements titled, “Business Dispositions.”

Business Acquisitions. Our operating results for fiscal 2005 include the impact of acquisitions completed during the fiscal year from the date of acquisition. During fiscal 2005, we acquired Browne and FHSurgical and certain assets of Cosmed. During the initial twelve months following its acquisition, Browne contributed $18.7 million ($9.4 million and $9.3 million in fiscal years 2006 and 2005, respectively) to the Healthcare segment’s revenues. The addition of five EO facilities acquired from Cosmed contributed $25.0 million ($19.1 million and $5.9 million in fiscal years 2006 and 2005, respectively) to the Isomedix Services segment’s growth in revenues during the initial twelve months following its acquisition. The addition of FHSurgical to our operations contributed $19.7 million to the Healthcare segment’s revenues for fiscal 2006. The acquisition of FHSurgical was completed on March 24, 2005 and, therefore, did not have a material impact on our fiscal 2005 operating results.

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 fiscal 2007, our revenues were favorably impacted by $10.4 million, or 0.9%, and income before taxes was favorably impacted by $1.9 million, or 1.4%, as a result of foreign currency movements relative to the U.S. dollar.

RESULTS OF OPERATIONS

In the following subsections, we discuss our earnings and the factors affecting them. We begin with a general overview of the results of operations of the Company and then separately discuss earnings for our operating segments.

Revenues increased $37.1 million, or 3.2%, to $1,197.4 million for the year ended March 31, 2007, as compared to $1,160.3 million for fiscal 2006. For fiscal 2007, recurring revenues increased 5.0% as compared to fiscal 2006. The recurring revenues increase was generated primarily by a 5.8% increase in service revenues as compared to fiscal 2006. Service revenues, which increased in all segments, were driven by a $14.4 million, or 7.1%, increase in the Healthcare segment. Within our Life Sciences and Isomedix Services segments, service revenues for fiscal 2007 increased 3.8% and 5.0%, respectively, as compared to fiscal 2006. Consumable revenues also increased 3.8% for fiscal 2007 when compared to the prior year. Capital revenues increased $4.1 million, or 0.8%, during fiscal 2007, as compared to fiscal 2006. The Healthcare segment continued to experience strong demand for surgical tables both in the United States and internationally. However, the growth in Healthcare segment’s capital revenues of 2.4% was partially offset by a decline in the Life Sciences segment’s capital revenues of 5.2%. The decline in Life Sciences capital revenues was a result of strong price competition for capital equipment being sold into the United States research market.

International revenues for fiscal 2007 amounted to $263.9 million, an increase of $29.2 million, or 12.4%, as compared to fiscal 2006. The increase in year-over-year international revenues was attributable to a 14.9% increase in capital revenues primarily within the European and Canadian marketplaces. Within Europe, fiscal 2007 capital revenues reflect the continued success of surgical tables and related accessories in the Healthcare segment and increases in the Life Sciences segment’s revenues from VHP technologies and water systems. This increase was partially offset by a decrease in Asia Pacific/Latin America capital revenues in our Life Sciences segment during fiscal 2007. The increase in international capital revenues was supplemented by an increase of 9.4% in recurring revenue streams year over year.

United States revenues for fiscal 2007 amounted to $933.5 million, an increase of $7.9 million, or 0.9%, as compared to fiscal 2006. United States revenues were positively impacted by a 4.1% increase in recurring revenues, which were driven by increases in service revenues in all segments. Year over year, United States capital revenues decreased 3.9%, reflecting fluctuating demand within the Healthcare segment for sterile processing capital products generally associated with new construction projects and as a result of the strong price competition experienced by the Life Sciences segment for capital equipment being sold into the United States research market.

Revenues by segment are further discussed in the section of MD&A titled, “Business Segment Results of Operations.”

Our gross profit (margin) is affected by the volume, pricing, and mix of sales of our products and services, as well as the costs associated with the products and services that are sold. Our gross margin increased to 42.2% for fiscal 2007. Overall, our fiscal 2007 margins increased due to improved productivity and pricing, which more than offset increases in labor and material costs. Gross margins also benefited from a shift towards higher margin recurring revenue products within the Life Sciences segment. Gross margins for fiscal 2007 include $1.1 million in share-based compensation expense as a result of the impact of SFAS No. 123R.

The gross margins related to our operating segments are further discussed in the section of MD&A titled, “Business Segment Results of Operations.”

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 increased 10 basis points to 27.3% for fiscal 2007 as compared to fiscal 2006. The increase reflects higher compensation and benefit costs net of lower costs associated with consulting and marketing fees.

Research and development expenses as a percentage of total revenues decreased 10 basis points to 2.8% for fiscal 2007 as compared to fiscal 2006. During fiscal 2007 and fiscal 2006, research and development expenses were $33.6 million. Our research and development initiatives continually emphasize new product development, product improvements, and the development of new technological platform innovations. During fiscal 2007, our investments in research and development focused on, but were not limited to, enhancing capabilities of delivery systems in the defense and industrial areas, sterile processing combination technologies, surgical tables and accessories, and the area of emerging infectious agents such as Prions and Nanobacteria.

SG&A and research and development expenses for fiscal 2007 included $8.0 million and $0.8 million, respectively, in share-based compensation expense as a result of the impact of the adoption of SFAS No. 123R.

Restructuring Expenses. We recognize restructuring expenses as they are incurred. We also evaluate the property, plant and equipment associated with our restructuring actions for impairment. Asset impairment and accelerated depreciation expenses primarily relate to an adjustment in the carrying value of the related facilities to their estimated fair value. In addition, the remaining useful lives of other property, plant and equipment associated with the related operations were re-evaluated based on the respective plan, resulting in the acceleration of depreciation and amortization of certain assets.

During the third quarter of fiscal 2007, we adopted a restructuring plan related to certain of our European operations. As part of this plan, we closed our Nanterre, France and Stockholm, Sweden sales offices. We also took steps to reduce the workforce in certain of our European support functions. These actions are intended to improve our cost structure in Europe. Approximately 40 employees were impacted in various European locations.

In fiscal 2007, the Company recorded $1.7 million in restructuring expenses related to the European Restructuring Plan actions. The restructuring expenses are predominately for severance and related benefits, with restructuring expenses of $1.2 million and $0.5 million related to the Healthcare and Life Sciences business segments, respectively. We are continuing to evaluate our European operations for opportunities to enhance performance, but we have not committed to any additional specific actions.

In fiscal 2007 and fiscal 2006, we also recorded $4.9 million and $25.3 million in restructuring expenses, respectively, primarily related to the previously announced transfer of the Erie, Pennsylvania manufacturing operations to Monterrey, Mexico and other restructuring actions, including the closure of a sales office in Miami, Florida, rationalization of operations in Finland and the elimination of certain management positions (“Fiscal 2006 Restructuring Plan”). All such actions are intended to improve our cost structure.

Since the inception of the Fiscal 2006 Restructuring Plan, we have recorded restructuring expenses of $30.2 million, with restructuring expenses of $29.8 million and $0.4 million related to the Healthcare and Life Sciences business segments, respectively.

We anticipate incurring approximately an additional $4.0 million in restructuring expenses during fiscal 2008 in connection with the transfer of the Erie manufacturing operations. These additional restructuring expenses include severance, accelerated depreciation and other expenses.

These actions have impacted or will impact more than 450 employees beginning in the fourth quarter of fiscal 2006 and over the period in which the manufacturing operations are transferred. Information regarding the impact of the restructuring actions on our employee benefit plans is included in Note 11 to our consolidated financial statements titled, “Benefit Plans.”

Collective bargaining agreements with certain employees located at the Erie, Pennsylvania operations expire in June 2008.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Quarter over Quarter Comparison

Revenues increased $15.0 million, or 5.0%, to $314.0 million for the quarter ended December 31, 2007, as compared to $299.0 million for the comparable prior year quarter. The increase was driven primarily by a 7.9% increase in recurring revenues resulting from growth of 11.3% and 5.9% in consumable revenues and service revenues, respectively. Capital revenues increased $1.4 million quarter over quarter as revenues increased in the United States and in the Asia Pacific region to more than offset declines in Europe and Canada.

International revenues increased $3.8 million, or 5.4%, to $75.0 million, for the quarter ended December 31, 2007, as compared to $71.2 million for the comparable prior year quarter. International revenues were positively impacted by recurring revenue growth within both the Healthcare and Life Sciences segments with increases of 20.9% and 14.7%, respectively. Growth in capital revenues within the Healthcare segment of 5.6% was more than offset by a decline in Life Sciences capital revenues.

United States revenues increased $11.2 million, or 4.9%, to $239.0 million, for the quarter ended December 31, 2007, as compared to $227.8 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 7.0%, 3.2%, and 4.5% in the Healthcare, Life Sciences, and Isomedix Services segments, respectively. Capital revenues also grew within the Life Sciences segment with an increase of 38.9%, partially offset by a decline in the Healthcare segment’s capital revenues.

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