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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2007

COMMISSION FILE NUMBER 0-13251

MEDICAL ACTION INDUSTRIES INC.

(Exact name of Registrant as specified in its charter)

800 Prime Place, Hauppauge, New York 11788

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (631) 231-4600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-b of the Exchange Act).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 16,020,661 shares of common stock as of February 8, 2008.

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Form 10-Q

CONTENTS

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Item 1.

MEDICAL ACTION INDUSTRIES INC.

Consolidated Balance Sheets

(dollars in thousands)

ASSETS

The accompanying notes are an integral part of these financial statements.

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MEDICAL ACTION INDUSTRIES INC.

Consolidated Balance Sheets

(dollars in thousands)

LIABILITIES AND SHAREHOLDERS’ EQUITY

The accompanying notes are an integral part of these financial statements.

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MEDICAL ACTION INDUSTRIES INC.

Consolidated Statements of Earnings

(dollars in thousands except per share data)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

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Item 1.

MEDICAL ACTION INDUSTRIES INC.

Consolidated Statements of Earnings

(dollars in thousands except per share data)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

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MEDICAL ACTION INDUSTRIES INC.

Consolidated Statements of Cash Flows

(dollars in thousands)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

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MEDICAL ACTION INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q for quarterly reports under section 13 or 15(d) of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended December 31, 2007 are not necessarily indicative of the results that may be expected for the year ended March 31, 2008. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report for the year ended March 31, 2007.

On October 17, 2006, the Company acquired, through one of its subsidiaries, the membership interest of Medegen Medical Products, LLC and certain Colorado fixed assets used in connection with its business (collectively, “MMP”). The Colorado fixed assets consist primarily of machinery, equipment and leasehold improvements at MMP’s Denver, CO facility. MMP’s operating results were consolidated with those of Medical Action’s beginning on the date of acquisition. Since our results are not restated retroactively to reflect the historical financial position or results of operations of MMP, a substantial portion of the fluctuations in our operating results for the three and nine months ended December 31, 2007 as compared to the prior periods are due to the acquisition of MMP. However, we have included supplemental pro forma information in Note 6 – Acquisition to our unaudited condensed consolidated financial statements contained in this Quarterly Report to give effect to the acquisition as though it had occurred at the beginning of each of the periods presented in this Form 10-Q.

On February 9, 2007, the Company affected a three-for-two stock split to shareholders of record as of January 23, 2007. All share and per share information has been retroactively adjusted to reflect the stock split.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

COMPREHENSIVE INCOME

Comprehensive income consists of two components: net income and other comprehensive income. Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of shareholders’ equity but are excluded from net income. The Company’s other comprehensive income is comprised of an accrued benefit liability relating to the Company’s defined benefit pension plan and an interest rate swap agreement.

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Note 1. (continued)

INTEREST RATE SWAP AGREEMENT

We do not enter into financial instruments for trading or speculative purposes. The principal financial instrument used for cash flow hedging purposes is an interest rate swap.

In April 2007, we entered into an interest rate swap agreement to manage our exposure to interest rate changes. The swap effectively converts a portion of our variable rate debt under the credit agreement to a fixed rate, without exchanging the notional principal amounts. At December 31, 2007, we had an interest rate swap agreement (in a notional principal amount of $30,000,000), which is scheduled to mature in March 2010. Under this agreement, we receive a floating rate based on the LIBOR interest rate, and pay a fixed rate of 5.02% plus the applicable margin. If, at any time, the swap is determined to be ineffective, in whole or in part, the fair value of the portion of the interest rate swap determined to be ineffective will be recognized as gain or loss in the statement of operations for the applicable period.

Note 2. STOCK-BASED COMPENSATION PLANS

During fiscal 1990, the Company’s Board of Directors and stockholders approved a Non-Qualified Stock Option Plan (the “Non-Qualified Option Plan”). The Non-Qualified Option Plan, as amended, authorizes the granting to employees of the Company options to purchase an aggregate of 3,975,000 shares of the Company’s common stock. The options are granted with an exercise price equal to the fair market price or at a value that is not less than 85% of the fair market value on the date of grant. The options are exercisable in two installments on the second and third anniversary of the date of grant. Options expire ten years from the date of grant unless the employment is terminated, in which event, subject to certain exceptions, the options terminate two months subsequent to date of termination.

In 1994, the Company’s Board of Directors and stockholders approved the 1994 Stock Incentive Plan (the “Incentive Plan”), which, as amended, covers 3,525,000 shares of the Company’s common stock. The Incentive Plan, which expires in 2015, permits the granting of incentive stock options, shares of restricted stock and non-qualified stock options. All officers and key employees of the Company and its affiliates are eligible to participate in the Incentive Plan. The Incentive Plan is administered by the Compensation Committee of the Board of Directors, which determines the persons to whom, and the time at which, awards will be granted. In addition, the Compensation Committee decides the type of awards to be granted and all other related terms and conditions of the awards. The per share exercise price of any option may not be less than the fair market value of a share of common stock at the time of grant. No incentive options have been issued under this plan.

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Note 2. (continued)

The following is a summary of the changes in restricted stock granted under the 1994 Stock Incentive Plan for the nine months ended December 31, 2007:

Grants of restricted stock are common stock awards granted to recipients with specified vesting provisions. The restricted stock issued vests based upon the recipients continued service over time (five-year vesting period). The Company estimates the fair value of restricted stock based on the Company’s closing stock price on the date of grant.

The Company’s 1996 Non-Employee Director Stock Option Plan (the “Director Plan”) was approved by the stockholders in August 1996 and, as amended, covers 750,000 shares of the Company’s common stock. Under the terms of the Director Plan, which expires in 2015, each non-employee director of the Company will be granted each year an option to purchase 2,500 shares of the Company’s common stock. These options vest immediately and have an exercise price equal to the fair market price of the common stock at the time of grant.

Effective April 1, 2006, we adopted SFAS No. 123R, “Share-Based Payment,” which prescribes the accounting for equity instruments exchanged for employee and director services. Under SFAS No. 123R, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the grant, and is recognized as an expense over the service period applicable to the grantee. The service period is the period of time that the grantee must provide services to the Company before the stock-based compensation is fully vested. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment,” relating to SFAS No. 123R. We have followed the SEC’s guidance in SAB No. 107 in our adoption of SFAS No. 123R.

In accordance with the adoption of SFAS 123R, we recorded stock-based compensation expense for the cost of non-qualified stock options granted under our stock plans. Stock-based compensation expense recognized under the provisions of SFAS 123R amounted to $337,000 and $1,198,000 ($208,000 and $740,000 net of tax) for the three and nine months ended December 31, 2007 and $357,000 and $1,159,000 ($220,000 and $713,000 net of tax) for the three and nine months ended December 31, 2006, respectively.

We adopted SFAS No. 123R using the modified prospective transition method. Under this transition method, the financial statement amounts for the periods before fiscal 2007 have not been restated to reflect the fair value method of expensing the stock-based compensation. The compensation expense recognized on or after April 1, 2006 includes the compensation cost based on the grant-date fair value estimated in accordance with: (a) SFAS No. 123 for all stock-based compensation that was granted prior to, but vested on or after April 1, 2006; and (b) SFAS No. 123R for all stock-based compensation that was granted on or after April 1, 2006.

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Note 2. (continued)

The following is a summary of the changes in outstanding options for all of the Company’s plans during the nine months ended December 31, 2007:

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes options pricing model. The following weighted average assumptions were used for grants in the nine months ended December 31, 2007 and 2006, respectively: expected volatility of 34.6% and 35.0%; a risk-free interest rate of 4.8% and 4.9% and an expected life of 5.3 years. The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the life of the grant. The expected volatility is based on the historical volatility of the Company’s stock.

The weighted average fair value of options granted was $8.14 and $10.46 for the three months ended December 31, 2007 and 2006, respectively and $8.62 and $9.31 for the nine months ended December 31, 2007 and 2006, respectively. As of December 31, 2007, there was approximately $2,754,000 of total SFAS No. 123R unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Company’s plans; that cost is expected to be recognized over a period of three years.

The following is a summary of the changes in non-vested stock options for the nine months ended December 31, 2007:

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Note 3. INVENTORIES

Inventories, which are stated at the lower of cost (first-in, first-out) or market, consist of the following:

On an ongoing basis, inventory quantities on hand are reviewed and an analysis of the provision for excess and obsolete inventory is performed based primarily on the Company’s estimated sales forecast of product demand, which is based on sales history and anticipated future demand. Such provision for excess and obsolete inventory approximated $902,000 and $664,000 at December 31, 2007 and March 31, 2007, respectively.

Note 4. NET INCOME PER SHARE

Basic earnings per share is based on the weighted average number of common shares outstanding without consideration of potential common shares. Diluted earnings per share is based on the weighted average number of common and potential common shares outstanding. The calculation takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average prices during the periods. Excluded from the calculation of earnings per share are options to purchase 256,200 and 232,700 shares for the three and nine months ended December 31, 2007, as their inclusion would not have been dilutive. The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended December 31, 2007 and for the three and nine months ended December 31, 2006.

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Note 4. (continued)

Note 5. SHAREHOLDER’S EQUITY

For the three and nine months ended December 31, 2007, 30,435 and 206,450 stock options were exercised by employees of the Company in accordance with the Company’s 1989 Non-Qualified Stock Option Plan and 1994 Stock Incentive Plan. The exercise price of the options exercised ranged from $8.50 per share to $11.93 per share for the three months ended December 31, 2007 and $1.92 per share to $11.93 per share for the nine months ended December 31, 2007. The net cash proceeds from these exercises were $272,000 and $1,193,000 for the three and nine months ended December 31, 2007, respectively.

For the three and nine months ended December 31, 2006, 6,750 and 20,859 stock options were exercised by employees of the Company in accordance with the Company’s 1989 Non-Qualified Stock Option Plan and the 1994 Stock Incentive Plan, respectively. The exercise price of the options exercised ranged from $8.50 per share to $10.87 per share for the three months ended December 31, 2006 and $8.50 per share to $11.48 per share for the nine months ended December 31, 2006. The net cash proceeds from these exercises were $64,000 and $213,000 for the three and nine months ended December 31, 2006, respectively.

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Note 6. ACQUISITIONS

On October 17, 2006, the Company acquired, through one of its subsidiaries, the membership interest of MMP. MMP is in the business of manufacturing and distributing disposable plastic products for the medical and laboratory markets. MMP markets its products primarily under the trade names Medegen and Vollrath. The purchase price for the assets acquired including related closing costs was approximately $80,497,000.

The membership interest acquired included accounts receivable, inventories, the land and manufacturing facility, certain fixed assets, trademarks, customer relationships, group purchasing organization contracts, accounts payable, accrued liabilities and intellectual property used in the operations of MMP.

The acquisition of MMP has been accounted for as a purchase pursuant to SFAS No. 141, Business Combinations as issued by the Financial Accounting Standards Board. The operations of MMP have been included in the Company’s statements of earnings since the acquisition date. The following table summarizes the assets acquired from MMP and the allocation of the purchase price:

MMP is engaged in the business of high speed injection molding manufacturing, specializing in disposable products in the health care market. The Company believes this acquisition will increase its market share and assist in gaining manufacturing efficiencies via the benefit of increased purchasing power and lower material costs. The aforementioned were the primary reasons for the acquisition and the main factors that contributed to the purchase price, which resulted in the recognition of goodwill. For tax purposes, the goodwill will be deductible.

During the course of the Company’s evaluation of the proposed acquisition of MMP, the Company determined that it would shutdown the Northglenn, Colorado manufacturing facility and relocate the operations into the Gallaway, Tennessee manufacturing facility. The primary reasons for the

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Note 6. (continued)

relocation project are as follows: redundancy of operations; elimination of inter-plant freight costs; increase of manufacturing efficiency and reduction of manufacturing costs. In connection with the relocation, Medical Action Industries Inc. will incur approximately $2,687,000 of restructuring costs of which $974,000 is related to severance and $1,713,000 is related to exit costs for the MMP related employees and facilities. The $2,687,000 was recorded as goodwill and accrued liabilities. As of December 31, 2007 the Company has incurred approximately $684,000 of expenses in connection with this project leaving a balance of $2,003,000 in accrued liabilities. In addition, the Company anticipates approximately $320,000 of integration costs, which will be expensed as incurred and $3,200,000 of building improvements and purchases of machinery and equipment in connection with the restructuring. The Company anticipates that the project will be completed in the first quarter of fiscal 2009.

Goodwill and trademarks will be tested for impairment periodically, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets as issued by the Financial Accounting Standards Board. The customer relationships, which amount to $14,100,000 will be amortized over a period of twenty years, group purchasing organization contracts, which amount to $2,200,000 will be amortized over a period of four years and intellectual property, which amounts to $400,000 will be amortized over a period of seven years.

The Company utilized cash on hand and the funds available under its credit agreement in order to satisfy the purchase price.

Summarized below are the unaudited pro forma results of operations of the Company as if MMP had been acquired at the beginning of the fiscal period presented:

Reclassifications and adjustments were made to the pro forma results to properly reflect depreciation of property, plant and equipment, amortization of intangible assets, interest expense, financing fees and tax rates.

The pro forma financial information presented above for the three and nine months ended December 31, 2006 is not necessarily indicative of either the results of operations that would have occurred had the acquisition taken place at the beginning of the period presented or of future operating results of the combined companies.

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Note 7. LONG-TERM DEBT

On October 17, 2006, the Company entered into a credit agreement with certain lenders and a bank acting as administration agent for the lenders (the “Credit Agreement”). The Credit Agreement, as amended, provides for borrowing of $85,000,000 and is divided into two types of borrowing facilities, (i) a term loan with a principal amount of $65,000,000 which is payable in twenty consecutive equal quarterly installments which commenced on March 31, 2007, and (ii) revolving credit loans, which amounts may be borrowed, repaid and reborrowed up to $20,000,000. As of December 31, 2007, $48,000,000 is outstanding on the term loan. The Company’s availability under the revolving credit loans amounts to $20,000,000 as of December 31, 2007.

Both the term loan and revolving credit loans bear interest at the “alternate base rate” plus the applicable margin or at the Company’s option the “LIBOR rate” plus the “applicable margin.” The alternate base rate shall mean a rate per annum equal to the greater of (a) the Prime rate or (b) the Base CD rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus  ¹/2 of 1%. “Applicable margin” shall mean with respect to an adjusted LIBOR loan a range of 75 basis points to 150 basis points. With respect to an alternate base rate loan, the applicable margin shall range from 0 basis points to 50 basis points. The rates for both LIBOR and

alternate base rate loans are established quarterly based upon agreed upon financial ratios. During the nine months ended December 31, 2007, the average interest rate on the term loan approximated 6.5%. Borrowings under this agreement are collateralized by all the assets of the Company, and the agreement contains certain restrictive covenants, which, among other matters, impose limitations with respect to the incurrence of liens, guarantees, merger, acquisitions, capital expenditures, specified sales of assets and prohibits the payment of dividends. The Company is also required to maintain various financial ratios which will be measured quarterly. As of December 31, 2007, the Company is in compliance with all such covenants and financial ratios.

Note 8. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Effective April 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The adoption of the provisions of FIN 48 did not have a material impact on the Company’s consolidated financial position and did not result in unrecognized tax benefits being recorded. Accordingly, no corresponding interest and penalties have been accrued. The Company files income tax returns in the U.S. federal jurisdiction and various states. There are currently no state income tax examinations underway. There is currently an IRS examination in process for the fiscal year ended March 31, 2005. The examination is in the beginning stages and no projections as to the outcome can be made at this time. The Company is no longer subject to

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Note 8. (continued)

U.S. federal income tax examinations by the Internal Revenue Service and most state and local authorities for fiscal tax years ending prior to March 31, 2004. (Certain state authorities may subject the Company to examination up to the period ending March 31, 2003). The Company does, however, have a prior year net operating loss as a result of a previous acquisition which will remain open for examination.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively for fiscal years beginning after November 15, 2007, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The Company is currently evaluating the impact this new standard will have on its future results of operations and financial position.

In December 2006, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” (“SFAS 141R”) to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. This Statement applies to all transactions or other events in which an entity obtains control of one or more businesses, and combinations achieved without the transfer of consideration. The standard is effective for fiscal years beginning after December 15, 2008. Earlier adoption is not permitted. The issuance of this Statement has no current impact on the Company.

In December 2006, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51, (“SFAS 160”) to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. This Statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This Statement is effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. The issuance of this Statement has no current impact on the Company.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure certain financial assets and liabilities at fair value at specified election dates. The statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The statement is effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the impact, if any, of the adoption of SFAS 159.

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Note 9. OTHER MATTERS

The Company is involved in two (2) product liability cases. While the results of these lawsuits cannot be predicted with certainty, management does not expect that the ultimate liabilities, if any, will have a material adverse effect on the financial position or results of operations of the Company and are covered by insurance.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statement

This report on Form 10-Q contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the future economic performance and financial results of the Company. The forward-looking statements relate to (i) the expansion of the Company’s market share, (ii) the Company’s growth into new markets, (iii) the development of new products and product lines to appeal to the needs of the Company’s customers, (iv) the retention of the Company’s earnings for use in the operation and expansion of the Company’s business and (v) the ability of the Company to avoid information technology system failures which could disrupt the Company’s ability to function in the normal course of business by potentially causing delays or cancellation of customer orders, impeding the manufacture or shipment of products, or resulting in the unintentional disclosure of customer or Company information.

Important factors and risks that could cause actual results to differ materially from those referred to in the forward-looking statements include, but are not limited to, the effect of economic and market conditions, the impact of the consolidation throughout the healthcare supply chain, the impact of healthcare reform, opportunities for acquisitions and the Company’s ability to effectively integrate acquired companies, the ability of the Company to maintain its gross profit margins, the ability to obtain additional financing to expand the Company’s business, the failure of the Company to successfully compete with the Company’s competitors that have greater financial resources, the loss of key management personnel or the inability of the Company to attract and retain qualified personnel, the impact of current or pending legislation and regulation, as well as the risks described from time to time in the Company’s filings with the Securities and Exchange Commission, which include this report on Form 10-Q and the Company’s annual report on Form 10-K for the year ended March 31, 2007.

The forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results, performance and/or achievements of the Company to differ materially from any future results, performance or achievements, express or implied, by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, and that in light of the significant uncertainties inherent in forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.

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Three Months ended December 31, 2007 compared to Three Months ended December 31, 2006

Overview

The following table sets forth certain operational data for the periods indicated:

The following table sets forth certain operational data as a percentage of net sales for the periods indicated:

The Company’s revenue increased by $9,179,000 or 14% to $75,898,000 and its net income decreased by $500,000 or 12% to $3,648,000 for the quarter ended December 31, 2007 over the quarter ended December 31, 2006. The revenue increased primarily due to net sales of products from the Company’s acquisition and due to increased sales volume from greater domestic market penetration of its minor procedure kits product line.

The Company has entered into agreements with many major group purchasing organizations. These agreements, which expire at various times over the next several years, can be terminated typically on ninety (90) day advance notice and do not contain minimum purchase requirements. The Company, to date, has been able to achieve significant compliance to their respective member hospitals. The termination of any of these agreements may result in the significant loss of business.

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

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Containment systems for medical waste and the product lines added as a result of the acquisition of MMP on October 17, 2006, represent approximately 55% of the Company’s revenue. The primary raw material utilized in the manufacture of these product lines is plastic resin. In recent years, world events have caused the cost of plastic resin to increase and be extremely volatile. The Company anticipates that such volatility may continue in the future. In the past, the Company has been able, from time to time, to increase selling prices for certain of these products to recover a portion of the increased cost. However, the Company is unable to give any assurance that it will be able to pass along future cost increases to its customers, if necessary.

Gross profit dollars increased primarily due to net sales of products from the Company’s acquisition and due to increased sales volume from greater domestic market penetration primarily of its minor procedure kits product line. Gross margin as a percentage of sales decreased primarily due to manufacturing inefficiencies, increased resin costs, increased acquisition costs from foreign suppliers and a change in sales mix.

Results of Operations

The following table sets forth the major sales variance components for the quarter ended December 31, 2007 versus December 31, 2006:

Net sales for the three months ended December 31, 2007 increased $9,179,000 or 14% to $75,898,000 from $66,719,000 for the three months ended December 31, 2006. The increase was primarily attributed to an increase in net sales of approximately $7,159,000 of disposable patient utensils for the laboratory and medical markets, of which $5,244,000 was due to the Company’s acquisition of MMP on October 17, 2006, a $1,325,000 or 9% increase of minor procedure kits and trays, a $487,000 or 4% increase in net sales of containment systems, a $523,000 or 85% increase in net sales of patient aids and a $389,000 or 45% increase in net sales of patient slippers. These increases were partially offset by a $145,000 or 4% decrease in net sales of laparotomy sponges.

Net sales of minor procedure kits and trays, containment products, patient aids and protective apparel increased primarily due to greater domestic market penetration. Unit sales of minor procedure kits and trays increased 3% and average selling prices increased 6%. Unit sales of containment products increased 3% and average selling prices increased 1%. Unit sales of patient aids increased 66% and average selling prices increased 12%. Unit sales of patient slippers increased 37% and average selling prices increased 6%. Unit sales of operating room towels increased 3% and average selling prices increased 1%. Unit sales of laparatomy sponges decreased 2% and average selling prices decreased 3%. Management believes that the increase in average selling prices of minor procedure kits and trays was a result of shift in sales mix to kits with enhanced components. Net sales of disposable patient utensils increased approximately $7,159,000; $5,244,000 of the increase was due to the Company’s acquisition of MMP on October 17, 2006.

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The additional increase of $1,915,000 was a result of increased domestic market penetration and higher average selling prices. The decrease in net sales of laparatomy sponges was as a result of increased competition in the domestic market.

Gross profit for the three months ended December 31, 2007 increased 1% to $16,736,000 from $16,607,000 for three months ended December 31, 2006. Gross profit as a percentage of net sales for the three months ended December 31, 2007 decreased to 22.1% from 24.9% for the three months ended December 31, 2006. Gross profit dollars increased primarily due to increased sales volume from greater domestic market penetration primarily of its minor procedure kits and trays product line and net sales of products as a result of the acquisition of MMP on October 17, 2006. Gross margin as a percentage of sales decreased primarily due to manufacturing inefficiencies, increased resin costs, increased acquisition costs from foreign suppliers and a change in sales mix from the MMP acquisition. The manufacturing inefficiencies, increased resin costs and increased acquisition costs from foreign suppliers amounted to approximately $1,700,000, $1,200,000 and $750,000, respectively for the three months ended December 31, 2007. The major causes of the manufacturing inefficiencies were equipment productivity issues in our Tennessee plant and other inefficiencies associated with the Medegen consolidation plan of the MMP manufacturing facilities. These inefficiencies have resulted in backorders and order fulfillment issues on certain products. Additionally, freight expenses have increased due to the backorder and order fulfillment issues. Management anticipates substantial reductions in these inefficiencies effective the end of the first quarter of fiscal 2009. However, no assurance can be given that the backorders and order fulfillment issues will not result in the loss of business.

The following table sets forth sales, cost of sales and selling, general and administrative expense data for the periods indicated:

Selling, general and administrative expenses for the three months ended December 31, 2007 increased 12% to $10,046,000 from $8,978,000 for the three months ended December 31, 2006. As a percentage of net sales, selling, general and administrative expenses decreased to 13.2% for the three months ended December 31, 2007 from 13.5% for the three months ended December 31, 2006. Selling, general and administrative expenses increased primarily due to increased sales and marketing salaries and related expenses, customer service expenses, salesman commissions and other variable selling expenses by approximately $727,000, increased distribution expenses of $365,000, increased amortization of intangibles of approximately $29,000 and was partially offset by decreased general and administrative expenses of approximately $48,000.

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Item 2.

During the past few quarters, the Company began investing in an international sales and marketing infrastructure designed to procure sales in certain foreign countries. The Company does not anticipate material sales as a result of this infrastructure for some time.

Management believes the increases in sales and marketing salaries, commissions, other variable selling expenses, distribution, customer service and amortization of other intangibles was primarily due to the MMP acquisition which occurred on October 17, 2006. The quarter ended December 31, 2007 carried a full quarter of MMP expenses compared to last year. In addition, the Company incurred increased variable expenses due to increased sales volume on existing business.

Interest expense for the three months ended December 31, 2007 decreased to $826,000 from $888,000 for the three months ended December 31, 2006. Interest income for the three months ended December 31, 2007 decreased $38,000 to $39,000 from $77,000 for the three months ended December 31, 2006. The decrease in interest expense and interest income was attributable to a net decrease in the average principal loan balances outstanding and a decrease in the average cash and cash equivalents balance during the quarter ended December 31, 2007 as compared to the quarter ended December 31, 2006. The decrease in loan balances and increase in cash and cash equivalents was primarily attributable to net cash provided by operating activities.

Net income for the three months ended December 31, 2007 decreased to $3,648,000 from $4,148,000 for the three months ended December 31, 2006. The decrease in net income is attributable to the aforementioned manufacturing inefficiencies, increased acquisition costs primarily from foreign suppliers and increases in selling, general and administrative expenses, which were partially offset by an increase in net sales and gross profit and a decrease in interest expense.

Nine Months ended December 31, 2007 compared to Nine Months ended December 31, 2006

Overview

The following table sets forth certain operational data for the periods indicated:

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Item 2.

The following table sets forth certain operational data as a percentage of net sales for the periods indicated:

The Company’s revenue increased by $70,506,000 or 32% to $218,429,000 and its net income increased by $686,000 or 7% to $10,428,000 for the nine months ended December 31, 2007 over the nine months ended December 31, 2006. The revenue increased primarily due to net sales of products from the Company’s acquisition and due to increased sales volume from greater domestic market penetration of its minor procedure kits product line.

The Company has entered into agreements with many major group purchasing organizations. These agreements, which expire at various times over the next several years, can be terminated typically on ninety (90) day advance notice and do not contain minimum purchase requirements. The Company, to date, has been able to achieve significant compliance to their respective member hospitals. The termination of any of these agreements may result in the significant loss of business.

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

Containment systems for medical waste and the product lines added as a result of the acquisition of MMP on October 17, 2006, represent approximately 55% of the Company’s revenue. The primary raw material utilized in the manufacture of these product lines is plastic resin. In recent years, world events have caused the cost of plastic resin to increase and be extremely volatile. The Company anticipates that such volatility may continue in the future. In the past, the Company has been able, from time to time, to increase selling prices for certain of these products to recover a portion of the increased cost. However, the Company is unable to give any assurance that it will be able to pass along future cost increases to its customers, if necessary.

Gross profit dollars increased primarily due to net sales of products from the Company’s acquisition and due to increased sales volume from greater domestic market penetration primarily of its minor procedure kits product line. Gross margin as a percentage of sales decreased primarily due to manufacturing inefficiencies, increased resin costs, increased acquisition costs from foreign suppliers and a change in sales mix.

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Item 2.

Results of Operations

The following table sets forth the major sales variance components for the nine months ended December 31, 2007 versus December 31, 2006:

Net sales for the nine months ended December 31, 2007 increased $70,506,000 or 48% to $218,429,000 from $147,923,000 for the nine months ended December 31, 2006. The increase was primarily attributed to an increase in net sales of approximately $61,236,000 of disposable patient utensils for the laboratory and medical markets, of which $59,321,000 was due to the Company’s acquisition of MMP on October 17, 2006, a $7,585,000 or 19% increase of minor procedure kits and trays, a $1,881,000 or 5% increase in net sales of containment systems, a $962,000 or 42% increase in net sales of patient slippers and a $582,000 or 24% increase in net sales of patient aids. These increases were partially offset by a $530,000 or 3% decrease in net sales of operating room towels and a $768,000 or 8% decrease in net sales of laparotomy sponges.

Net sales of minor procedure kits and trays, containment products, patient slippers and patient aids was increased primarily due to greater domestic market penetration. Unit sales of minor procedure kits and trays increased 9% and average selling prices increased 9%. Unit sales of containment products increased 1% and average selling prices increased 3%. Unit sales of patient slippers increased 36% and average selling prices increased 5%. Unit sales of patient aids increased 18% and average selling prices increased 5%. Unit sales of operating room towels increased 1% and average selling prices decreased 4%. Unit sales of laparatomy sponges decreased 6% and average selling prices decreased 2%. Management believes that the increase in average selling prices of minor procedure kits and trays was a result of shift in sales mix to kits with enhanced components. Net sales of disposable patient utensils increased approximately $61,236,000; $59,321,000 of the increase was due to the Company’s acquisition of MMP on October 17, 2006 and $1,915,000 of the increase was due to increased domestic market penetration and higher average selling prices. The decrease in net sales of laparatomy sponges and operating room towels was as a result of increased competition in the domestic market.

Gross profit for the nine months ended December 31, 2007 increased 36% to $50,287,000 from $36,934,000 for nine months ended December 31, 2006. Gross profit as a percentage of net sales for the nine months ended December 31, 2007 decreased to 23.0% from 25.0% for the nine months ended December 31, 2006. Gross profit dollars increased primarily due to increased sales volume from greater domestic market penetration primarily of its minor procedure kits and trays product line and net sales of products as a result of the acquisition of MMP on October 17, 2006. Gross margin as a percentage of sales decreased primarily due to manufacturing inefficiencies, increased acquisition costs from foreign suppliers, increased resin costs and a change in sales mix from the MMP acquisition. The manufacturing inefficiencies, increased acquisition costs from foreign suppliers and increased resin costs amounted to approximately $2,600,000, $2,250,000 and $1,400,000, respectively for the nine months ended December 31, 2007. The major causes of the

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Item 2.

inefficiencies were equipment productivity issues in our Tennessee plant and other inefficiencies associated with the Medegen consolidation plan of the MMP manufacturing facilities. These inefficiencies have resulted in backorders and order fulfillment issues on certain products. Additionally, freight expenses have increased due to the backorder and order fulfillment issues. Management anticipates substantial reductions in these inefficiencies effective the end of the first quarter of fiscal 2009. However, no assurance can be given that the backorders and order fulfillment issues will not result in the loss of business.

The following table sets forth sales, cost of sales and selling, general and administrative expense data for the periods indicated:

Selling, general and administrative expenses for the nine months ended December 31, 2007 increased 49% to $30,700,000 from $20,603,000 for the nine months ended December 31, 2006. As a percentage of net sales, selling, general and administrative expenses increased to 14.1% for the nine months ended December 31, 2007 from 13.9% for the nine months ended December 31, 2006. Selling, general and administrative expenses increased primarily due to increased sales and marketing salaries and related expenses, customer service expenses, salesman commissions and other variable selling expenses by approximately $10,097,000, increased distribution expenses of $2,196,000, increased amortization of intangibles of approximately $786,000 and increased general and administrative expenses of approximately $2,341,000.

During the past few quarters, the Company began investing in an international sales and marketing infrastructure designed to procure sales in certain foreign countries. The Company does not anticipate material sales as a result of this infrastructure for some time.

Management believes the increases in sales and marketing salaries, commissions, other variable selling expenses, distribution, customer service and amortization of other intangibles was primarily due to the MMP acquisition.

Management believes the increases in general and administrative expenses was due primarily to increases in expenses associated with the MMP acquisition and, to a lesser extent, increased information technology expenses as a result of the SAP integration completed in the third quarter of fiscal 2007, increased legal expenses and increased accounting fees.

Interest expense for the nine months ended December 31, 2007 increased to $2,781,000 from $900,000 for the nine months ended December 31, 2006. Interest income for the nine months

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Item 2.

ended December 31, 2007 decreased $342,000 to $68,000 from $410,000 for the nine months ended December 31, 2006. The increase in interest expense and decrease in interest income was attributable to a net increase in the average principal loan balances outstanding and a decrease in the average cash and cash equivalents balance during the nine months ended December 31, 2007 as compared to the nine months ended December 31, 2006. The increase in loan balances and decrease in cash and cash equivalents was primarily attributable to purchase price and related acquisition costs associated with the MMP acquisition.

Net income for the nine months ended December 31, 2007 increased to $10,428,000 from $9,742,000 for the nine months ended December 31, 2006. The increase in net income is attributable to the aforementioned increase in net sales and gross profit, which were partially offset by a decrease in interest income, an increase in interest expense and an increase in selling, general and administrative expenses.

Liquidity and Capital Resources

The following table sets forth certain liquidity and capital resources data for the periods indicated:

The Company had working capital of $20,870,000 with a current ratio of 1.5 to 1.0 at December 31, 2007 as compared to working capital of $17,719,000 with a current ratio of 1.4 to 1.0 at March 31, 2007. Total borrowings outstanding were $50,355,000 with a debt to equity ratio of 0.45 to 1.0 at December 31, 2007 as compared to $60,655,000 with a debt to equity ratio of 0.62 to 1.0 at March 31, 2007. The increase in cash was primarily due to net cash provided by operating activities of $13,903,000.

The Company has financed its operations primarily through cash flow from operations and borrowings from its existing credit facilities. At December 31, 2007 the Company had a cash balance of $1,210,000 compared to $827,000 at March 31, 2007.

The Company’s operating activities provided cash of $14,115,000 for the nine months ended December 31, 2007 as compared to $6,479,000 during the nine months ended December 31, 2006.

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Item 2.

Net cash provided during the nine months ended December 31, 2007 consisted primarily of net income from operations, depreciation and amortization, stock-based compensation, tax benefit from the exercise of options and an increase in income taxes payable. This was partially offset by increases in accounts receivable, prepaid expenses and other current assets, other assets and a decrease in accounts payable. The increase in accounts receivable at December 31, 2007 was due to a higher concentration of sales at the end of the quarter when compared to the quarter ended March 31, 2007.

The decrease in accounts payable was due to inventory purchasing strategies and timing of payments that occur in the normal course of business. Our payments are made in accordance with terms established with our vendors. The increase in prepaid expenses was due to payments for insurance policies which commenced on April 1, 2007.

Investing activities used net cash of $4,625,000 and $81,292,000 for the nine months ended December 31, 2007 and December 31, 2006, respectively. The principal use during the nine months ended December 31, 2007 was for the Company’s purchases of property, plant and equipment primarily for the consolidation of its Medegen manufacturing facilities.

Financing activities used net cash of $9,107,000 for the nine months ended December 31, 2007 compared to $61,922,000 provided during the nine months ended December 31, 2006. Financing activities during the nine months ended December 31, 2007 consisted of net payments under the Company’s credit facilities of $10,300,000. Other financing activities include cash proceeds from the exercise of employee stock options of $1,193,000.

During the course of the Company’s evaluation of the proposed acquisition of MMP, the Company determined that it would shutdown the Northglenn, Colorado manufacturing facility and relocate the operations into the Gallaway, Tennessee manufacturing facility. The primary reasons for the relocation project are as follows: redundancy of operations; elimination of inter-plant freight costs; increase of manufacturing efficiency and reduction of manufacturing costs. In connection with the relocation, Medical Action Industries Inc. will incur approximately $2,687,000 of restructuring costs of which $974,000 is related to severance and $1,713,000 is related to exit costs for the MMP related employees and facilities. The $2,687,000 was recorded as goodwill and accrued liabilities. As of December 31, 2007 the Company has incurred approximately $684,000 of expenses in connection with this project leaving a balance of $2,003,000 in accrued liabilities. In addition, the Company anticipates approximately $320,000 of integration costs, which will be expensed as incurred and $3,200,000 of building improvements and purchases of machinery and equipment in connection with the restructuring. The Company anticipates that the project will be completed in the first quarter of fiscal 2009.

On October 17, 2006, the Company entered into a credit agreement with certain lenders and a bank acting as administration agent for the lenders (the “Credit Agreement”). The Credit Agreement, as amended, provides for borrowing of $85,000,000 and is divided into two types of borrowing facilities, (i) a term loan with a principal amount of $65,000,000 which is payable in twenty consecutive equal quarterly installments which commenced on March 31, 2007, and (ii) revolving credit loans, which amounts may be borrowed, repaid and reborrowed up to $20,000,000. As of December 31, 2007, $48,000,000 is outstanding on the term loan. The Company’s availability under the revolving credit loans amounts to $20,000,000 as of December 31, 2007.

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Item 2.

Both the term loan and revolving credit loans bear interest at the “alternate base rate” plus the applicable margin or at the Company’s option the “LIBOR rate” plus the “applicable margin.” The alternate base rate shall mean a rate per annum equal to the greater of (a) the Prime rate or (b) the Base CD rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus  ¹/2 of 1%. “Applicable margin” shall mean with respect to an adjusted LIBOR loan a range of 75 basis points to 150 basis points. With respect to an alternate base rate loan, the applicable margin shall range from 0 basis points to 50 basis points. The rates for both LIBOR and alternate base rate loans are established quarterly based upon agreed upon financial ratios.

Borrowings under this agreement are collateralized by all the assets of the Company, and the agreement contains certain restrictive covenants, which, among other matters, impose limitations with respect to the incurrence of liens, guarantees, merger, acquisitions, capital expenditures, specified sales of assets and prohibits the payment of dividends. The Company is also required to maintain various financial ratios which will be measured quarterly. As of December 31, 2007, the Company is in compliance with all such covenants and financial ratios.

The Company has entered into an agreement to renovate a building purchased in February 2007 located in the Hauppauge, NY area. Renovations are expected to be completed by the end of the third quarter of fiscal 2009 at a total estimated cost of $6,017,000. Upon completion, the facility will function as the Company’s corporate headquarters. The Company plans on financing the renovations with cash flow from operations, revolving credit loans and proceeds from the sale of its existing corporate headquarters.

The Company believes that the anticipated future cash flow from operations, coupled with its cash on hand and available funds under its revolving credit agreement, will be sufficient to meet working capital requirements.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to interest rate change market risk with respect to its credit facility with a financial institution which is priced based on the alternate base rate of interest plus a spread of up to 1%, or at LIBOR rate plus a spread of up to 1 ¹/2 %. The spread over the alternate base rate and LIBOR rates is determined based upon the Company’s performance with regard to agreed-upon financial ratios. The Company decides at its sole discretion as to whether borrowings will be at the alternate base rate or LIBOR. At December 31, 2007, $48,000,000 was outstanding under the credit facility. Changes in the alternate base rates or LIBOR rates during fiscal 2008 will have a positive or negative effect on the Company’s interest expense. During the nine months ended December 31, 2007, the average interest rate on the term loan approximated 6.5%. Each 1% fluctuation in the interest rate will increase or decrease interest expense for the Company by approximately $480,000 on an annualized basis.

In April 2007, we entered into an interest rate swap agreement to manage our exposure to interest rate changes. The swap effectively converts a portion of our variable rate debt under the credit agreement to a fixed rate, without exchanging the notional principal amounts. At December 31,

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Item 3.

2007, we had an interest rate swap agreement (in a notional principal amount of $30,000,000), which is scheduled to mature in March 2010. Under this agreement, we receive a floating rate based on the LIBOR interest rate, and pay a fixed rate of 5.02% plus the applicable margin. If, at any time, the swap is determined to be ineffective, in whole or in part, the fair value of the portion of the interest rate swap determined to be ineffective will be recognized as gain or loss in the statement of operations for the applicable period.

In addition, the Company is exposed to interest rate change market risk with respect to the proceeds received from the issuance and sale by the Buncombe County Industrial and Pollution Control Financing Authority Industrial Development Revenue Bonds. At December 31, 2007, $2,170,000 was outstanding for these Bonds. The Bonds bear interest at a variable rate determined weekly. During the nine months ended December 31, 2007, the average interest rate on the Bonds approximated 3.8%. Each 1% fluctuation in interest rates will increase or decrease the interest expense on the Bonds by approximately $22,000 on an annualized basis.

A significant portion of the Company’s raw materials are purchased from China. All such purchases are transacted in U.S. dollars. The Company’s financial results, therefore, could be impacted by factors such as changes in foreign currency, exchange rates or weak economic conditions in foreign countries in the procurement of such raw materials. To date, sales of the Company’s products outside the United States have not been significant.

Although the Chinese Yuan has traded virtually in a straight line for many years, beginning in fiscal 2006 the Chinese government began to revalue the Yuan against other currencies, including the U.S. dollar. This revaluation or free floating exchange rate and removal of certain tax incentives to exporters by the Chinese government has caused the price of many items that are sourced from China to increase, which could adversely impact cost of goods sold and profitability. The Company will attempt to increase selling prices for certain of these products to recover a portion of the increased cost. However, there can be no assurance that the Company will be able to pass along future cost increases, if any, to its customers which could also have an adverse impact on our results of operations and financial condition.

Item 4.

Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and our Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As indicated in the certifications in Exhibit 32.1 and 32.2 of this report, our Chief Executive Officer and our Principal Financial Officer, with the assistance of other members of our management, have evaluated our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)). Based upon the evaluation of our disclosure controls and procedures required by Securities Exchange Act Rules 13a-15(b) or 15d-15(b), our Chief Executive Officer and Principal Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective for the purpose of ensuring that material information required to be in this quarterly report is made known to them by others on a timely basis.

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Item 4.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Change to Internal Control over Financial Reporting

On December 3, 2007 the Company converted a portion of its Enterprise Resource Planning system at its Medegen facility in Tennessee to SAP. An interface between the remaining legacy system and SAP was also created. As a result of the conversion, management has performed an evaluation of the Company’s disclosure controls post-conversion. The Company has determined that disclosure controls that have changed due to the SAP conversion, although minimal, are properly designed.

We are involved in ongoing evaluations of internal controls. In anticipation of the filing of this Form 10-Q, our Chief Executive Officer and Principal Financial Officer, with the assistance of other members of our management, reviewed our internal controls and have determined, based on such review and excluding the above, that there have been no changes in internal control over financial reporting during the nine months ended December 31, 2007 that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.

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MEDICAL ACTION INDUSTRIES INC.

PART II – OTHER INFORMATION

There are no material legal proceedings against the Company or in which any of its property is subject.

There have been no material changes to the Risk Factors disclosed in Item 1A of our Annual Report on Form 10-K for the year ended March 31, 2007 other than the following:

China reduces tax credits paid to export manufacturers; labor market

The Chinese government has cut the tax credits that exporters get on more than 2,200 products, including many of the Company’s products that are manufactured in China. These tax credits were adopted more than twenty (20) years ago to provide Chinese companies with tax breaks on revenues derived from exports. The cut in tax credits, together with a tight labor market, will cause the price of many items that are sourced in China to increase, which could adversely impact the Company’s cost of goods sold and profitability, to the extent the Company is unable to pass along these price increases to its customers.

Volatility in the Cost of Resin

During the past few years, world events have caused the price of oil and natural gas to increase to historical new heights, causing the cost of resin to rise to unprecedented levels. The Company anticipates this volatility to continue throughout the fiscal year. As a result of this volatility, the Company has been able, from time to time, to increase selling prices for certain of these products to recover a portion of the increased cost. However, selling price increases can take months to implement and there can be no assurance that the Company will be able to pass along future cost increases, if any, to its customers which could have an adverse impact on the Company’s results of operations and financial condition.

Manufacturing Inefficiencies – Consolidation of Medegen Facilities

During this fiscal year, gross profit dollars have been negatively impacted by manufacturing inefficiencies caused primarily by the consolidation of the MMP manufacturing facilities and equipment inefficiencies in our Tennessee manufacturing facility. These manufacturing inefficiencies, which amounted to approximately $2,600,000 and started in the second quarter, will continue through the balance of the MMP manufacturing facilities consolidation plan and until completing of the upgrading and repairing of the equipment in our Tennessee facility. These inefficiencies have resulted in backorders and order fulfillment issues on certain products. Additionally, freight expenses have increased due to the

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backorder and order fulfillment issues. Management anticipates substantial reductions in these inefficiencies effective the end of the first quarter of fiscal 2009. However, no assurance can be given that the backorders and order fulfillment issues will not result in the loss of business.

None

None

None

None

31.1 and 31.2 – Certifications pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

32.1 and 32.2 – Certifications pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Current Report on Form 8-K dated November 1, 2007, covering Item 7.01 – Results of Operations and Financial Condition and Item 9.01 – Financial Statements and Exhibits

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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