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

• what factors affect our business;

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

• why those earnings and costs were different from the period before;

• where our earnings came from;

• how this affects our overall financial condition; and

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

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

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

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

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

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

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

• Free cash flow - We define free cash flow as net cash flows provided by operating activities as presented in the Consolidated Statements of Cash Flows less purchases of property, plant, equipment, and intangibles, net, plus proceeds from the sale of property, plant, equipment, and intangibles, which is also presented in the Consolidated Statements of Cash Flows. We use this measure to gauge our ability to fund future growth outside of core operations, repurchase common shares, pay cash dividends, and reduce debt. The following table summarizes the calculation of our free cash flow for the three months ended June 30, 2008 and 2007:

                                                                   Three Months Ended
                                                                        June 30,
(dollars in thousands)                                            2008             2007
Net cash flows provided by operating activities                $   28,727        $ 19,426
Purchases of property, plant, equipment and intangibles,
net                                                               (10,615 )        (9,691 )
Proceeds from the sale of property, plant, equipment and
intangibles                                                             7              22

Free cash flow                                                 $   18,119        $  9,757

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

We present these financial measures because we believe that understanding these additional factors underlying our performance provides meaningful analysis of our financial performance. These financial measures should not be considered alternatives to measures required by U.S. GAAP. Our calculations of these measures may be different from 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 under the Securities Exchange Act of 1934 ("Regulation S-X"), we separately present revenues generated as either product revenues or service revenues on our Consolidated Statements of Income for each period presented. When we discuss revenues, we may, at times, refer to revenues summarized differently than the Regulation S-X requirements. The terminology, definitions, and applications of terms that we use to describe revenues may be different from terms used by other companies. We use the following terms to describe revenues:

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

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

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

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

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

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

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 also are 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 regulatory scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. In the contract sterilization industry, where our Isomedix segment competes, a trend toward the outsourcing of sterilization services continues to drive growth.

Fiscal 2009 first quarter revenues were $311.6 million compared to $280.9 million in the first quarter of fiscal 2008, representing an increase of $30.6 million, or 10.9%, driven by revenue growth in all three reportable business segments. Our gross margin percentage for the first quarter of fiscal 2009 was 41.9% compared to 41.1% in the first quarter of fiscal 2008, or an increase of 80 basis points, reflecting volume and price increases and productivity gains, partially offset by the impact of higher freight expenses, foreign currency exchange rate movements, and raw material costs, particularly related to petroleum based products.

Free cash flow was $18.1 million in the first quarter of fiscal 2009 compared to $9.8 million in the prior year first quarter primarily due to the increase in cash earnings. Our debt-to-capital ratio was 20.0% at June 30, 2008 and 20.3% at March 31, 2008. During the first quarter of fiscal 2009, we paid for the repurchase of approximately 1.1 million common shares at an average purchase price per share of $27.56. We also declared and paid quarterly cash dividends in the first quarter of fiscal 2009 of $0.06 per common share.

Additional information regarding our fiscal 2009 first quarter financial performance is included in the subsection below titled "Results of Operations."

Matters Affecting Comparability

Restructuring. During the first quarter of fiscal 2009, we did not incur any significant additional expenses related to previously announced restructuring actions and we settled certain termination benefits for less than originally expected. During the first quarter of fiscal 2008, we incurred pre-tax expenses of $1.9 million, including $1.4 million classified as restructuring expenses, respectively, primarily related to accelerated depreciation of assets, compensation and severance, and termination benefits related to the transfer of our Erie, Pennsylvania manufacturing operations to Monterrey, Mexico.

Additional information regarding our restructuring actions is included in our Annual Report on Form 10-K for the year ended March 31, 2008, filed with the SEC on May 30, 2008.

International Operations. Since we conduct operations outside of the United States using various foreign currencies, our operating results are impacted by foreign currency movements relative to the U.S. dollar. During the first quarter of fiscal 2009, our revenues were favorably impacted by $4.2 million, or 1.4%, and income before taxes was unfavorably impacted by $3.0 million, or 8.4%, compared with the first quarter of fiscal 2008, 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 for the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008. We begin with a general overview of our operating results and then separately discuss earnings for our operating segments.

Revenues. The following table compares our revenues for the three months ended June 30, 2008 to the three months ended June 30, 2007:

                            Three Months Ended                              Percent of Total
                                 June 30,                     Percent           Revenues
 (dollars in thousands)      2008        2007       Change    Change        2008         2007
 Capital Revenues         $  120,117   $ 102,849   $ 17,268      16.8 %       38.6 %       36.6 %
 Consumable Revenues          75,465      69,520      5,945       8.6 %       24.2 %       24.7 %

 Product Revenues            195,582     172,369     23,213      13.5 %       62.8 %       61.4 %
 Service Revenues            115,983     108,575      7,408       6.8 %       37.2 %       38.6 %

 Total Revenues           $  311,565   $ 280,944   $ 30,621      10.9 %      100.0 %      100.0 %

 Service Revenues         $  115,983   $ 108,575   $  7,408       6.8 %       37.2 %       38.6 %
 Consumable Revenues          75,465      69,520      5,945       8.6 %       24.2 %       24.7 %

 Recurring Revenues          191,448     178,095     13,353       7.5 %       61.4 %       63.4 %
 Capital Revenues            120,117     102,849     17,268      16.8 %       38.6 %       36.6 %

 Total Revenues           $  311,565   $ 280,944   $ 30,621      10.9 %      100.0 %      100.0 %

 United States            $  241,219   $ 221,989   $ 19,230       8.7 %       77.4 %       79.0 %
 International                70,346      58,955     11,391      19.3 %       22.6 %       21.0 %

 Total Revenues           $  311,565   $ 280,944   $ 30,621      10.9 %      100.0 %      100.0 %

Revenues increased $30.6 million, or 10.9%, to $311.6 million for the quarter ended June 30, 2008, as compared to $280.9 million for the same prior year quarter, driven by growth in all three reportable business segments. Capital revenues grew $17.3 million in the first quarter of fiscal 2009, primarily driven by increased demand in the United States from hospitals within the Healthcare segment, particularly for new products. Service revenues increased $7.4 million in the first quarter of fiscal 2009 primarily due to increases in revenues within the United States in all three reportable business segments. Consumable revenues increased 8.6% for the quarter ended June 30, 2008, primarily driven by growth in the Healthcare segment.

International revenues increased $11.4 million, or 19.3%, to $70.3 million for the quarter ended June 30, 2008, as compared to $58.9 million for the same prior year quarter. International revenues were positively affected by growth in capital equipment revenues, which increased 18.9% primarily due to increases within the Asia Pacific markets for both our Healthcare and Life Sciences segments and within the European market for our Healthcare segment. International recurring revenues also grew during the first quarter of fiscal 2009 by 19.8%, with increases of 25.1% and 14.3% in consumable and service revenues, respectively. The growth in international consumable revenues was primarily within the European market, while the growth in international service revenues was primarily within the Canadian market.

United States revenues increased $19.2 million, or 8.7%, to $241.2 million for the quarter ended June 30, 2008, as compared to $222.0 million for the same prior year quarter. The increase in United States revenues was primarily driven by our Healthcare segment with a 20.2% increase in capital equipment revenues. United States recurring revenues also increased for the first quarter of fiscal 2009, with growth of 5.7% and 4.0% in service and consumable revenues, respectively. The growth in United States service revenues reflects increases in all three reportable business segments, while the growth in consumable revenues was driven by our Healthcare segment.

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

Gross Profit. The following table compares our gross profit for the three months ended June 30, 2008 to the three months ended June 30, 2007:

                                         Three Months Ended
                                              June 30,                        Percent
       (dollars in thousands)            2008          2007         Change    Change
       Gross Profit:
       Product                         $  82,715     $  69,737     $ 12,978      18.6 %
       Service                            47,786        45,863        1,923       4.2 %

       Total Gross Profit              $ 130,501     $ 115,600     $ 14,901      12.9 %


       Gross Profit Percentage:
       Product                              42.3 %        40.5 %
       Service                              41.2 %        42.2 %

       Total Gross Profit Percentage        41.9 %        41.1 %

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 total gross margin increased 80 basis points from the first quarter of fiscal 2008, reflecting volume and price increases and productivity gains, which were partially offset by increases in raw material and freight costs and the impact of changes in foreign exchange rates.

Operating Expenses. The following table compares our operating expenses for the three months ended June 30, 2008 to the three months ended June 30, 2007:

                                            Three Months Ended
                                                 June 30,                        Percent
   (dollars in thousands)                    2008          2007      Change      Change
   Operating Expenses:
   Selling, General, and Administrative   $   87,348     $ 83,383   $  3,965         4.8 %
   Research and Development                    8,279        9,259       (980 )     (10.6 )%
   Restructuring Expenses                       (166 )      1,391     (1,557 )    (111.9 )%

   Total Operating Expenses               $   95,461     $ 94,033   $  1,428         1.5 %

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 revenue, SG&A decreased 170 basis points to 28.0% for the first quarter of fiscal 2009 as compared to 29.7% in the first quarter of fiscal 2008. The decrease in SG&A expense as a percentage of total revenue in the first quarter of fiscal 2009 reflects improved operating expense leverage and the benefit of cost reduction initiatives implemented in the fourth quarter of fiscal 2008.

As a percentage of total revenues, research and development expenses were 2.7% and 3.3% for the three-month periods ended June 30, 2008 and 2007, respectively. Research and development expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects. Our research and development initiatives continually emphasize new product development, product improvements, and the development of new technological platform innovations. During the first quarter of fiscal 2009, our investments in research and development continued to be 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 areas of emerging infectious agents such as Prions and Nanobacteria.

Our operating expenses include restructuring expenses. We recognize restructuring expenses as incurred as required under the provisions of SFAS No. 146. In addition, we assessed the property, plant and equipment associated with the related facilities for impairment under SFAS No. 144.

In the first quarter of 2009, we did not incur any significant additional expenses related to our previously announced restructuring plans, and we settled certain termination benefits for less than originally expected. In the first quarter of fiscal 2008, we recorded $1.4 million in restructuring expenses primarily related to the previously announced transfer of the Erie, Pennsylvania manufacturing operations to Monterrey, Mexico, which was part of the Fiscal 2006 Restructuring Plan and related to our Healthcare business segment. The following tables summarize our total pre-tax restructuring expenses for the first quarter of fiscal 2009 and fiscal 2008:

                                           Fiscal 2008             European            Fiscal 2006
                                          Restructuring          Restructuring        Restructuring
Three Months Ended June 30, 2008              Plan                   Plan                 Plan              Total
Severance, payroll, and other
related costs                            $          (116 )      $            -       $          (149 )      $ (265 )
Lease termination obligations                         -                      99                   -             99

Total restructuring charges              $          (116 )      $            99      $          (149 )      $ (166 )


                                                                                       Fiscal 2006
                                                                                      Restructuring
Three Months Ended June 30, 2007                                                          Plan
Asset impairment and accelerated
depreciation                                                                         $         1,059
Severance, payroll, and other
related costs                                                                                    332

Total restructuring charges                                                          $         1,391

Liabilities related to restructuring activities are recorded as current liabilities on the accompanying Consolidated Balance Sheets within "Accrued payroll and other related liabilities" and "Accrued expenses and other." The following table summarizes our liabilities related to these restructuring activities:

                                                           Fiscal 2008 Restructuring Plan
                                                                     Fiscal 2009
                                           March 31,                           Payments/          June 30,
                                              2008          Provision         Impairments           2008
Severance and termination benefits        $      4,244     $      (116 )     $      (2,027 )     $    2,101
Asset impairments                                  492              -                   -               492
Lease termination obligations                      898              -                   -               898
Other                                              609              -                   -               609

Total                                     $      6,243     $      (116 )     $      (2,027 )     $    4,100


                                                             European Restructuring Plan
                                           March 31,                 Fiscal 2009                  June 30,
                                              2008          Provision          Payments             2008
Lease termination obligation              $        247     $        99       $        (346 )     $       -

Total                                     $        247     $        99       $        (346 )     $       -


                                                           Fiscal 2006 Restructuring Plan
                                           March 31,                 Fiscal 2009                  June 30,
                                              2008          Provision          Payments             2008
Severance and termination benefits        $        879     $      (149 )     $        (461 )     $      269

Total                                     $        879     $      (149 )     $        (461 )     $      269

Non-Operating Expense, Net. Non-operating expense (income), net consists of interest expense on debt, offset by interest earned on cash, cash equivalents, short-term investment balances, and other miscellaneous income. The following table compares our net non-operating expense for the three months ended June 30, 2008 and 2007:

                                                Three Months Ended
                                                     June 30,
        (dollars in thousands)                 2008            2007         Change
        Non-Operating Expense, Net:
        Interest Expense                    $    1,766      $    1,235     $    531
        Interest and Miscellaneous Income         (381 )          (462 )         81

        Non-Operating Expense, Net          $    1,385      $      773     $    612

Interest expense increased $0.5 million during the first three months of fiscal 2009 compared with the same prior year period, reflecting higher average debt levels. Interest and other miscellaneous income decreased $0.1 million during the first three months of fiscal 2009 compared with the same prior year period.

Income Tax Expense. The following table compares our income tax expense and effective income tax rates for continuing operations for the three months ended June 30, 2008 to the three months ended June 30, 2007:

                                       Three Months Ended
                                            June 30,                         Percent
       (dollars in thousands)         2008            2007         Change    Change
       Income Tax Expense          $    8,155      $    7,591     $    564       7.4 %
       Effective Income Tax Rate         24.2 %          36.5 %

Income tax expense includes United States federal, state and local, and foreign income taxes, and is based on reported pre-tax income. The effective income tax rates for continuing operations for the three-month periods ended June 30, 2008 and 2007 were 24.2% and 36.5%, respectively. We benefited from the settlement of certain tax years under examination in the United States during the three-month period ended June 30, 2008.

We record income tax expense during interim periods based on our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. We analyze various factors to determine the estimated annual effective income tax rate, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives.

Business Segment Results of Operations. We operate and report in three business segments: Healthcare, Life Sciences, and STERIS Isomedix Services. "Corporate and other," which is presented separately, contains the Defense and Industrial business unit plus costs that are associated with being a publicly traded company and certain other corporate costs. Our Annual Report on Form 10-K for the year ended March 31, 2008, filed with the SEC on May 30, 2008, provides additional information regarding each business segment. The following table compares business segment revenues for the three months ended June 30, 2008 to the three months ended June 30, 2007:

. . .