Cantel Medical (CMD) 10-Q 2007 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

Form 10-Q

x	Quarterly Report pursuant to Section 13 or 15(d)
	of the Securities Exchange Act of 1934
	For the quarterly period ended October 31, 2006.
	or
o	Transition Report pursuant to Section 13 or 15(d)
	of the Securities Exchange Act of 1934
	For the transition period from       to      .

Commission file number:   001-31337

CANTEL MEDICAL CORP.

(Exact name of registrant as specified in its charter)

Delaware	22-1760285
(State or other jurisdiction of	(I.R.S. employer
incorporation or organization)	identification no.)

150 Clove Road, Little Falls, New Jersey	07424
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code

(973) 890-7220

Indicate by check mark whether 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.       Yes  x           No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer  o Accelerated filer  x Non-accelerated filer  o

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

Number of shares of Common Stock outstanding as of November 30, 2006: 15,483,821.

PART I - FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar Amounts in Thousands, Except Share Data)

(Unaudited)

	October 31,			July 31,
	2006			2006
Assets
Current assets:
Cash and cash equivalents	$	20,480		$	29,898
Accounts receivable, net of allowance for doubtful accounts of $972 at October 31 and $929 at July 31	24,311			23,718
Inventories:
Raw materials	10,126			9,692
Work-in-process	3,438			3,717
Finished goods	11,409			10,533
Total inventories	24,973			23,942
Deferred income taxes	1,418			1,481
Prepaid expenses and other current assets	1,879			1,288
Assets of discontinued operations	404			2,121
Total current assets	73,465			82,448
Property and equipment, net	38,592			38,104
Intangible assets, net	42,160			43,219
Goodwill	72,667			72,571
Other assets	1,845			1,885
	$	228,729		$	238,227
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	4,500		$	4,000
Accounts payable	7,917			8,062
Compensation payable	4,376			4,120
Earnout payable	—			3,667
Accrued expenses	7,003			7,633
Deferred revenue	2,528			1,859
Income taxes payable	842			2,377
Liabilities of discontinued operations	941			7,379
Total current liabilities	28,107			39,097
Long-term debt	32,500			34,000
Deferred income taxes	22,083			22,021
Other long-term liabilities	2,386			2,304
Stockholders’ equity:
Preferred Stock, par value $1.00 per share; authorized 1,000,000 shares; none issued	—			—
Common Stock, par value $.10 per share; authorized 30,000,000 shares; October 31 - 16,426,951 shares issued and 15,556,621 shares outstanding; July 31 - 16,149,489 shares issued and 15,399,102 shares outstanding	1,643			1,615
Additional capital	71,592			69,171
Retained earnings	71,363			69,395
Accumulated other comprehensive income	6,774			6,715
Treasury Stock, at cost; October 31 - 870,330 shares; July 31 - 750,387 shares	(7,719		)	(6,091		)
Total stockholders’ equity	143,653			140,805
	$	228,729		$	238,227

See accompanying notes.

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CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended
	October 31,
	2006			2005
Net sales:
Product sales	$	45,271		$	43,841
Product service	5,213			3,971
Total net sales	50,484			47,812
Cost of sales:
Product sales	27,877			27,042
Product service	4,438			2,809
Total cost of sales	32,315			29,851
Gross profit	18,169			17,961
Expenses:
Selling	5,710			4,513
General and administrative	7,538			7,220
Research and development	1,166			1,220
Total operating expenses	14,414			12,953
Income from continuing operations before interest and income taxes	3,755			5,008
Interest expense	763			1,250
Interest income	(290		)	(212		)
Income from continuing operations before income taxes	3,282			3,970
Income taxes	1,559			1,752
Income from continuing operations	1,723			2,218
Income from discontinued operations, net of tax	245			1,660
Loss on disposal of discontinued operations, net of tax	—			(132		)
Net income	$	1,968		$	3,746
Earnings per common share:
Basic:
Continuing operations	$	0.11		$	0.14
Discontinued operations	0.02			0.11
Loss on disposal of discontinued operations	—			(0.01		)
Net income	$	0.13		$	0.24
Diluted:
Continuing operations	$	0.11		$	0.13
Discontinued operations	0.01			0.10
Loss on disposal of discontinued operations	—			—
Net income	$	0.12		$	0.23

See accompanying notes.

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CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar Amounts in Thousands)

(Unaudited)

	Three Months Ended
	October 31,
	2006			2005
Cash flows from operating activities
Net income	$	1,968		$	3,746
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	2,431			2,969
Stock-based compensation expense	198			405
Amortization of debt issuance costs	85			77
Loss on disposal of fixed assets	—			18
Deferred income taxes	7			(781		)
Excess tax benefits from stock-based compensation	(398		)	—
Changes in assets and liabilities:
Accounts receivable	(576		)	484
Inventories	(1,021		)	(2,483		)
Prepaid expenses and other current assets	(592		)	(302		)
Assets of discontinued operations	1,746			2,417
Accounts payable, accrued expenses and earnout	(3,475		)	(694		)
Income taxes payable	(1,022		)	935
Liabilities of discontinued operations	(6,539		)	(246		)
Net cash (used in) provided by operating activities	(7,188		)	6,545
Cash flows from investing activities
Capital expenditures	(1,768		)	(685		)
Proceeds from disposal of fixed assets	3			143
Acquisition of Crosstex, net of cash acquired	—			(68,093		)
Other, net	(36		)	105
Net cash used in investing activities	(1,801		)	(68,530		)
Cash flows from financing activities
Borrowings under term loan facility, net of debt issuance costs	—			39,399
Borrowings under revolving credit facility, net of debt issuance costs	—			27,635
Repayments under term loan facility	(1,000		)	(16,250		)
Repayments under revolving credit facility	—			(2,300		)
Proceeds from exercises of stock options	1,317			580
Excess tax benefits from stock-based compensation	398			—
Purchases of treasury stock	(1,249		)	—
Net cash (used in) provided by financing activities	(534		)	49,064
Effect of exchange rate changes on cash and cash equivalents	105			536
Decrease in cash and cash equivalents	(9,418		)	(12,385		)
Cash and cash equivalents at beginning of period	29,898			33,335
Cash and cash equivalents at end of period	$	20,480		$	20,950

See accompanying notes.

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CANTEL MEDICAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.                   Basis of Presentation

The unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and the requirements of Form 10-Q and Rule 10.01 of Regulation S-X. Accordingly, they do not include certain information and note disclosures required by generally accepted accounting principles for annual financial reporting and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report of Cantel Medical Corp. (“Cantel”) on Form 10-K for the fiscal year ended July 31, 2006 (the “2006 Form 10-K”), and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.

The unaudited interim financial statements reflect all adjustments (of a normal and recurring nature) which management considers necessary for a fair presentation of the results of operations for these periods. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

The Condensed Consolidated Balance Sheet at July 31, 2006 was derived from the audited Consolidated Balance Sheet of Cantel at that date.

Cantel had five principal operating companies at July 31, 2006. Crosstex International, Inc. (“Crosstex”), Minntech Corporation (“Minntech”), Mar Cor Purification, Inc. (“Mar Cor”), Biolab Equipment Ltd. (“Biolab”) and Saf-T-Pak, Inc. (“Saf-T-Pak”), all of which are wholly-owned operating subsidiaries. In addition, Minntech has three foreign subsidiaries, Minntech B.V., Minntech Asia/Pacific Ltd. and Minntech Japan K.K., which serve as Minntech’s bases in Europe, Asia/Pacific and Japan, respectively.

On July 31, 2006, Carsen Group Inc. (“Carsen”) closed the sale of substantially all of its assets to Olympus America Inc. and certain of its affiliates (collectively, “Olympus”) under an Asset Purchase Agreement dated as of May 16, 2006 among Carsen, Cantel and Olympus, as more fully described in Note 14 to the Condensed Consolidated Financial Statements. As a result of the foregoing transaction, Carsen no longer has any remaining product lines or active business operations. The businesses of Carsen, previously reported in the Endoscopy and Surgical, Endoscope Reprocessing and All Other reporting segments, are reflected as a discontinued operation in our Condensed Consolidated Financial Statements and have been excluded from segment results for all periods presented. Net sales, cost of sales, operating expenses, interest expense and income taxes attributable to Carsen’s operations have been aggregated into a single line, income from discontinued operations, net of tax, on the Condensed Consolidated Statements of Income. Additionally, the assets and liabilities related to the discontinued operations have been segregated from continuing operations in the Condensed Consolidated Balance Sheets.

Therefore, we currently operate our business through six operating segments: Dental, Dialysis, Water Purification and Filtration, Endoscope Reprocessing, Specialty Packaging and Therapeutic Filtration. The Specialty Packaging and Therapeutic Filtration operating segments are combined in the All Other reporting segment.

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Throughout this document, references to “Cantel,” “us,” “we,” “our,” and the “Company” are references to Cantel Medical Corp. and its subsidiaries, except where the context makes it clear the reference is to Cantel itself and not its subsidiaries.

Reclassifications

Certain distribution and warehouse expenses of Crosstex have been reclassified from amounts previously reported in our quarterly Form 10-Q’s for fiscal 2006 to conform with the accounting policies of Cantel which require such costs to be classified as cost of sales. These reclassifications affect cost of sales, gross profit and general and administrative expenses of our Dental segment, and therefore our consolidated amounts.

Note 2.                   Stock-Based Compensation

On August 1, 2005, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123, “Share-Based Payment (Revised 2004)” (“SFAS 123R”) using the modified prospective method for the transition. Under the modified prospective method, stock compensation expense will be recognized for any option grant or stock award granted on or after August 1, 2005, as well as the unvested portion of stock options granted prior to August 1, 2005, based upon the award’s fair value.

The following table shows the allocation of total stock-based compensation expense relating to continuing operations recognized in the Condensed Consolidated Statements of Income for the three months ended October 31, 2006 and 2005:

	Three Months Ended
	October 31,
	2006			2005
Cost of sales	$	(1,000	)	$	22,000
Operating expenses:
Selling	26,000			53,000
General and administrative	169,000			294,000
Research and development	4,000			8,000
Total operating expenses	199,000			355,000
Stock-based compensation before income taxes	198,000			377,000
Income tax benefits	(105,000		)	(93,000		)
Total stock-based compensation expense, net of tax	$	93,000		$	284,000

For the three months ended October 31, 2006 and 2005, we have recorded in our Condensed Consolidated Financial Statements stock-based compensation expense relating to continuing operations of $198,000 and $377,000, respectively, with a corresponding increase to additional capital, partially offset by the related income tax benefits of $105,000 and $93,000, respectively (which pertain to options that do not qualify as incentive stock options), with a corresponding increase to long-term deferred income tax assets (which are netted with long-term deferred income tax liabilities).

Most of our stock options are subject to graded vesting in which portions of the option award vest at different times during the vesting period, as opposed to awards that vest at the end of the vesting period. We recognize compensation expense for options subject to graded vesting

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using the straight-line basis, reduced by estimated forfeitures. Total unrecognized stock-based compensation expense related to total nonvested stock options was $598,000 at October 31, 2006 with a remaining weighted average period of 21 months over which such expense is expected to be recognized.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions for options granted during the three months ended October 31, 2006 and 2005: 

Weighted-Average	Three Months Ended
Black-Scholes Option	October 31,
Valuation Assumptions	2006		2005
Dividend yield	0.0	%	0.0	%
Expected volatility (1)	0.489		0.535
Risk-free interest rate (2)	4.67	%	4.30	%
Expected lives (in years) (3)	4.17		4.91

(1) Volatility was based on historical closing prices of our Common Stock.

(2) The U.S. Treasury rate on the expected life at the date of grant.

(3) Based on historical exercise behavior.

Additionally, all options were considered to be non-deductible for tax purposes in the valuation model, except for options granted during the three months ended October 31, 2006 and 2005 under the 1998 Director’s Plan and certain options under the 1997 Employee Plan. Such non-qualified options were tax-effected using the Company’s estimated U.S. effective tax rate at the time of grant. For the three months ended October 31, 2006 and 2005, the weighted average fair value of all options granted was approximately $6.26 and $9.61, respectively. The aggregate intrinsic value (i.e. the excess market price over the exercise price) of all options exercised during the three months ended October 31, 2006 and 2005 was approximately $2,092,000 and $880,000, respectively. The aggregate fair value of all options vested during the three months ended October 31, 2006 and 2005 was approximately $305,000 and $905,000, respectively.

A summary of stock option activity during the three months ended October 31, 2006 follows:

			Weighted
	Number of		Average
	Shares		Exercise Price
Outstanding at July 31, 2006	2,373,699		$	11.98
Granted	36,000		14.18
Canceled	(149,323	)	19.07
Exercised	(277,462	)	6.27
Outstanding at October 31, 2006	1,982,914		$	12.28
Exercisable at July 31, 2006	2,125,735		$	12.07
Exercisable at October 31, 2006	1,789,569		$	12.27

On November 7, 2006, the Company granted stock options for 270,000 shares to its employees at an exercise price of $14.22 per share. Total unrecognized stock-based compensation

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expense, net of tax, related to this November 7, 2006 grant was approximately $970,000 with a weighted average period of 44 months over which such expense is expected to be recognized. The weighted average fair value of the options granted was $6.13 per share.

Upon exercise of stock options, we typically issue new shares of our Common Stock (as opposed to using treasury shares).

If certain criteria are met when options are exercised or the underlying shares are sold, the Company is allowed a deduction on its income tax return. Accordingly, we account for the income tax effect on such income tax deductions as additional capital (assuming deferred tax assets do not exist pertaining to the exercised stock options) and as a reduction of income taxes payable. For the three months ended October 31, 2006, options exercised resulted in income tax deductions that reduced income taxes payable by $566,000. For the three months ended October 31, 2005, none of the options exercised resulted in an income tax deduction.

Beginning August 1, 2005, we changed our cash flow presentation in accordance with SFAS 123R which requires the cash flows resulting from excess tax benefits to be classified as financing cash flows. For the three months ended October 31, 2006, $398,000 of excess tax benefits were shown as financing cash flows in our Condensed Consolidated Statement of Cash Flows. There were no excess tax benefits for the three months ended October 31, 2005. Excess tax benefits arise when the ultimate tax effect of the deduction for tax purposes is greater than the tax benefit on stock compensation expense (including tax benefits on stock compensation expense that has only been reflected in the pro forma disclosures) which was determined based upon the award’s fair value.

The following table summarizes additional information related to stock options outstanding at October 31, 2006:

	Options Outstanding					Options Exercisable
			Weighted					Weighted
			Average					Average
			Remaining	Weighted				Remaining	Weighted
	Number		Contractual	Average		Number		Contractual	Average
Range of Exercise	Outstanding		Life	Exercise		Exercisable		Life	Exercise
Prices	at October 31, 2006		(Months)	Price		At October 31, 2006		(Months)	Price
$2.27 - $3.88	528,750		23	$	2.97	528,750		23	$	2.97
$7.62 - $14.83	646,513		27	$	10.16	492,418		24	$	9.88
$15.23 - $29.49	807,651		39	$	20.08	768,401		39	$	20.20
$2.27 - $29.49	1,982,914		31	$	12.28	1,789,569		31	$	12.27
Total Intrinsic Value	$	8,756,706				$	8,241,875

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A summary of our stock option plans follows:

1997 Employee Plan

A total of 3,750,000 shares of Common Stock was reserved for issuance or available for grant under our 1997 Employee Stock Option Plan, as amended, which expires on October 15, 2007. Options under this plan:

·  are granted at the closing market price at the time of the grant,

·  are granted either as incentive stock options or stock options that do not qualify as incentive stock options,

·  are usually exercisable in three or four equal annual installments contingent upon being employed by the Company during that period, and

·  typically expire five years from the date of the grant.

At October 31, 2006, options to purchase 1,421,164 shares of Common Stock were outstanding under the 1997 Employee Plan and 762,108 shares were available for grant.

1991 Directors’ Plan

A total of 450,000 shares of Common Stock was reserved for issuance or available for grant under our 1991 Directors’ Stock Option Plan, which expired in fiscal 2001. All options outstanding at October 31, 2006 under this plan do not qualify as incentive stock options, have a term of ten years and are fully exercisable. At October 31, 2006, options to purchase 61,875 shares of Common Stock were outstanding. No additional options will be granted under this plan.

1998 Directors’ Plan

A total of 450,000 shares of Common Stock was reserved for issuance or available for grant under our 1998 Directors’ Stock Option Plan, as amended. Options under this plan:

·  are granted to directors at the closing market price at the time of grant,

·  are granted automatically to each newly appointed or elected director to purchase 15,000 shares,

·  are granted annually on the last day of our fiscal year to each member of our Board of Directors to purchase 1,500 shares (assuming the individual is still a member of the Board of Directors, 50% are exercisable on the first anniversary of the grant of such options and 50% are exercisable on the second anniversary of the grant of such options),

·  are granted quarterly on the last day of each of our fiscal quarters to each non-employee director who attended that quarter’s regularly scheduled Board of Directors meeting to purchase 750 shares (100% are exercisable immediately),

·  have a term of ten years if granted prior to July 31, 2000 or five years if granted on or after July 31, 2000, and

·  do not qualify as incentive stock options.

At October 31, 2006, options to purchase 267,000 shares of Common Stock were outstanding under the 1998 Directors’ Plan and 80,625 shares were available for grant.

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Non-plan options

We also have 232,875 non-plan options outstanding at October 31, 2006 which have been granted at the closing market price at the time of grant and expire up to a maximum of ten years from the date of grant. These non-plan options do not qualify as incentive stock options.

Note 3.Acquisitions

Crosstex

On August 1, 2005, we acquired Crosstex, a privately held company founded in 1953 and headquartered in Hauppauge, New York. Crosstex is a leading manufacturer and reseller of single-use infection control products used principally in the dental market. Crosstex products include face masks, patient towels and bibs, self-sealing sterilization pouches, tray covers, sterilization packaging accessories, surface barriers including eyewear, aprons and gowns, disinfectants and deodorizers, germicidal wipes, hand care products, gloves, sponges, cotton products, cups, needles and syringes, scalpels and blades, and saliva evacuators and ejectors.

Under the terms of Stock Purchase Agreements with the five stockholders of Crosstex, pursuant to which we acquired all of the issued and outstanding capital stock of Crosstex, we paid an aggregate purchase price (excluding any earnout) of approximately $77,863,000, comprised of approximately $69,843,000 in cash consideration and 384,821 shares of Cantel common stock (valued at $6,737,000) to the former Crosstex shareholders, and transaction costs of $1,283,000. The purchase price included the retirement of bank debt and certain other liabilities of Crosstex.  Of this purchase price, $2,900,000 is held in escrow for a period of eighteen months from the closing date in the eventuality that the sellers breach standard representations and warranties in the purchase agreement. The Company believes it is likely that the escrowed funds will be fully paid to the sellers, and therefore such amount has been included in the determination of the purchase price. In addition to this purchase price, there is a further $12,000,000 potential earnout payable to the sellers of Crosstex over three years based on the achievement by Crosstex of certain targets of (i) earnings before interest and taxes and (ii) gross profit percentage. For the initial post-acquisition year ended July 31, 2006, the full potential earnout for year one of $3,667,000 was earned by the sellers of Crosstex and therefore represents additional purchase price, bringing the aggregate earned purchase price as of October 31, 2006 to $81,530,000. The additional earnout purchase price for fiscal 2006 has been reflected in the accompanying Condensed Consolidated Balance Sheets at October 31, 2006 and July 31, 2006 as additional goodwill and as a separate item within current liabilities at July 31, 2006. Such amount was paid in October 2006. For the fiscal years ending July 31, 2007 and 2008, an additional earnout of $3,667,000 and $4,666,000, respectively, is available to the sellers of Crosstex if the specified targets of earnings before interest and taxes, and gross profit percentage, are achieved. Such additional earnout, if achieved, would represent additional purchase price and therefore be recorded as additional goodwill when earned.

Since the acquisition was completed on the first day of fiscal 2006, the results of operations of Crosstex are included in our results of operations for the three months ended October 31, 2006 and 2005. As a result of the acquisition, we added a new reporting segment known as Dental.

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Operating income added by Crosstex excludes interest expense associated with the Company’s borrowings related to the acquisition. The segment operating income for the three months ended October 31, 2005 also excludes non-recurring charges directly related to the acquisition which were incurred by us upon the closing of the acquisition. Such non-recurring charges include (i) debt issuance costs relating to the term loan facility of approximately $160,000 and (ii) incentive compensation for an officer of Cantel of approximately $345,000. The aggregate amount of such charges was approximately $505,000 (or $318,000, net of tax) and has been included within general corporate expenses in our segment presentation in Note 12 to our Condensed Consolidated Financial Statements. However, included within our Dental segment operating income for the three months ended October 31, 2005 was amortization related to the step-up in the value of inventories of $658,000 (included within cost of sales.)

The reasons for the acquisition of Crosstex were as follows: (i) the complementary nature of the companies’ infection prevention and control products; (ii) the addition of a market leading company in a distinct niche in infection prevention and control; (iii) the increase in the percentage of our net sales derived from recurring consumables; (iv) the opportunity to utilize Crosstex as a sizeable platform to acquire additional companies in the healthcare consumables industry; (v) the expectation that the acquisition will be accretive to our earnings per share; and (vi) the opportunity for us to further expand our business into the design, manufacture and distribution of proprietary products. Such reasons constitute the significant factors which contributed to a purchase price that resulted in recognition of goodwill.

The purchase price (including the fiscal 2006 earnout) was allocated to the assets acquired and assumed liabilities based on estimated fair values as follows:

	Final
	Allocation
Net Assets
Cash and cash equivalents	$	4,264,000
Accounts receivable	4,387,000
Inventories	7,291,000
Other current assets	731,000
Total current assets	16,673,000
Property and equipment	13,809,000
Non-amortizable intangible assets - trade names (indefinite life)	5,200,000
Amortizable intangible assets:
Non-compete agreements (6-year life)	1,800,000
Customer relationships (10-year life)	17,900,000
Branded products (10-year life)	8,700,000
Total amortizable intangible assets (9-year weighted average life)	28,400,000
Other assets	50,000
Current liabilities	(4,571,000		)
Noncurrent deferred income tax liabilities	(16,241,000		)
Net assets acquired	$	43,320,000

There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of $38,210,000 was assigned to goodwill. Such goodwill, all of which is non-deductible for income tax purposes, has been included in our new Dental reporting segment. Included in cash and cash equivalents was $1,370,000 funded by the selling stockholders and utilized for the payment in August 2005 of current liabilities (included above and reflected within cash flows from investing activities in our Condensed Consolidated Statement of Cash Flows for the three months ended October 31, 2005) directly resulting from

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the acquisition.

Fluid Solutions

On May 1, 2006, Mar Cor purchased certain net assets of Fluid Solutions, Inc. (“Fluid Solutions”), a company with annual revenues of approximately $5,000,000 based in Lowell, Massachusetts that designs, manufactures, installs and services high quality, high purity water systems for use in biotech, pharmaceutical, research, hospitals, and semiconductor environments. Total consideration for the transaction was $2,959,000.

The purchase price was allocated to the assets acquired and assumed liabilities based on estimated fair values as follows:

	Allocation
Net Assets
Current assets	$	1,486,000
Property and equipment	887,000
Non-amortizable intangible assets - trade names (indefinite life)	214,000
Amortizable intangible assets - customer relationships (4-year weighted average life)	220,000
Current liabilities	(430,000		)
Net assets acquired	$	2,377,000

The excess purchase price of $582,000 was assigned to goodwill. Such goodwill, all of which is deductible for income tax purposes, has been included in our Water Purification and Filtration reporting segment.

The reasons for the acquisition were as follows: (i) the opportunity to add a base of business and expand the Mar Cor service network in a region that has a concentration of life science companies as well as healthcare and research institutions; (ii) further develop the Fluid Solutions water business to serve the New England dialysis market; (iii) the potential revenue and cost savings synergies and efficiencies that could be realized through optimizing and combining the acquired assets (including Fluid Solution employees) into Mar Cor; and (iv) the expectation that the acquisition will be accretive to our future earnings per share.

Since the acquisition was completed on May 1, 2006, the results of operations of Fluid Solutions are included in our results of operations for the three months ended October 31, 2006 and are excluded from our results of operations for the three months ended October 31, 2005. Pro forma consolidated statement of income data for the three months ended October 31, 2005 have not been presented due to the insignificant impact of this acquisition.

Note 4.                   Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FIN No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 clarifies the accounting and reporting for uncertainties in income tax law. FIN No. 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We are currently in the process of evaluating the effect of FIN 48 on our financial position and

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results of operations and are therefore unable to estimate the effect on our overall results of operations or financial position.

Note 5.                   Comprehensive Income

The Company’s comprehensive income for the three months ended October 31, 2006 and 2005 is set forth in the following table:

	Three Months Ended
	October 31,
	2006		2005
Net income	$	1,968,000	$	3,746,000
Other comprehensive income (loss):
Unrealized loss on currency hedging, net of tax	—		(365,000		)
Foreign currency translation, net of tax	59,000		1,759,000
Comprehensive income	$	2,027,000	$	5,140,000

Note 6.                   Financial Instruments

We account for derivative instruments and hedging activities in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended. SFAS 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in the fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the change in fair value of a derivative that is designated as a hedge will be immediately recognized in earnings.

During the three months ended October 31, 2005, Carsen purchased and paid for a substantial portion of its products in United States dollars and sold its products in Canadian dollars, and was therefore exposed to fluctuations in the rates of exchange between the United States dollar and the Canadian dollar. In order to hedge against the impact of such currency fluctuations on the purchases of inventories, Carsen entered into foreign currency forward contracts on firm purchases of such inventories in United States dollars. These foreign currency forward contracts were designated as cash flow hedge instruments. Recognition of losses related to the Canadian foreign currency forward contracts was deferred within other comprehensive income for the three months ended October 31, 2005 until settlement of the underlying commitments, and realized gains and losses were recorded within cost of sales (which is included within income from discontinued operations) upon settlement. Due to the sale of substantially all of Carsen’s assets to Olympus on July 31, 2006, Carsen no longer has any such foreign currency forward contracts.

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In addition, changes in the value of the euro against the United States dollar affect our results of operations because a portion of the net assets of our Netherlands subsidiary (which are reported in our Dialysis and Endoscope Reprocessing segments) are denominated and ultimately settled in United States dollars but must be converted into its functional euro currency. In order to hedge against the impact of fluctuations in the value of the euro relative to the United States dollar, we enter into short-term contracts to purchase euros forward, which contracts are generally one month in duration. These short-term contracts are designated as fair value hedge instruments. There was one foreign currency forward contract amounting to €294,000 at October 31, 2006 which covers certain assets and liabilities of Minntech’s Netherlands subsidiary which are denominated in United States dollars. Such contract expired on November 30, 2006. Under our credit facilities, such contracts to purchase euros may not exceed $12,000,000 in an aggregate notional amount at any time. For the three months ended October 31, 2006, such forward contracts were effective in offsetting most of the impact of the strengthening of the euro on our results of operations. Gains and losses related to the hedging contracts to buy euros forward are immediately realized within general and administrative expenses due to the short-term nature of such contracts. We do not hold any derivative financial instruments for speculative or trading purposes.

As of October 31, 2006, the carrying amounts for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short maturity of these instruments. We believe that as of October 31, 2006, the fair value of our outstanding borrowings under our credit facilities approximates the carrying value of those obligations based on the borrowing rates which are comparable to market interest rates.

Note 7.                   Intangibles and Goodwill

Our intangible assets which continue to be subject to amortization consist primarily of customer relationships, technology, brand names, non-compete agreements and patents. These intangible assets are being amortized on the straight-line method over the estimated useful lives of the assets ranging from 3-20 years and have a weighted average amortization period of 10 years. Amortization expense related to intangible assets was $1,153,000 and $1,146,000 for the three months ended October 31, 2006 and 2005, respectively. Our intangible assets that have indefinite useful lives and therefore are not amortized consist of trademarks and tradenames.

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The Company’s intangible assets consist of the following:

	October 31, 2006
			Accumulated
	Gross		Amortization			Net
Intangible assets with finite lives:
Customer relationships	$	23,430,000	$	(5,446,000	)	$	17,984,000
Technology	8,972,000		(3,151,000		)	5,821,000
Brand names	8,700,000		(1,087,000		)	7,613,000
Non-compete agreements	1,969,000		(544,000		)	1,425,000
Patents and other registrations	346,000		(52,000		)	294,000
	43,417,000		(10,280,000		)	33,137,000
Trademarks and tradenames	9,023,000		—			9,023,000
Total intangible assets	$	52,440,000	$	(10,280,000	)	$	42,160,000

	July 31, 2006
			Accumulated
	Gross		Amortization			Net
Intangible assets with finite lives:
Customer relationships	$	23,411,000	$	(4,778,000	)	$	18,633,000
Technology	8,880,000		(2,929,000		)	5,951,000
Brand names	8,700,000		(870,000		)	7,830,000
Non-compete agreements	1,969,000		(469,000		)	1,500,000
Patents and other registrations	343,000		(46,000		)	297,000
	43,303,000		(9,092,000		)	34,211,000
Trademarks and tradenames	9,008,000		—			9,008,000
Total intangible assets	$	52,311,000	$	(9,092,000	)	$	43,219,000

Estimated amortization expense of our intangible assets for the remainder of fiscal 2007 and the next five years is as follows:

Nine month period ending July 31, 2007	$	3,567,000
Fiscal 2008	4,546,000
Fiscal 2009	4,224,000
Fiscal 2010	3,999,000
Fiscal 2011	3,782,000
Fiscal 2012	3,349,000

Goodwill changed during fiscal 2006 and the three months ended October 31, 2006 as follows: 

									Water
						Endoscope			Purification						Total
	Dialysis			Dental		Reprocessing			and Filtration			All Other			Goodwill
Balance, July 31, 2005	$	8,415,000		$	—	$	6,258,000		$	11,437,000		$	7,009,000		$	33,119,000
Acquisitions	—			34,543,000		—			582,000			—			35,125,000
Earnout on acquisition	—			3,667,000		—			—			—			3,667,000
Adjustments primarily relating to income tax exposure of acquired businesses	(153,000		)	—		—			(66,000		)	(87,000		)	(306,000		)
Foreign currency translation	—			—		94,000			396,000			476,000			966,000
Balance, July 31, 2006	8,262,000			38,210,000		6,352,000			12,349,000			7,398,000			72,571,000
Foreign currency translation	—			—		(6,000		)	46,000			56,000			96,000
Balance, October 31, 2006	$	8,262,000		$	38,210,000	$	6,346,000		$	12,395,000		$	7,454,000		$	72,667,000

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On July 31, 2006, we performed impairment studies of the Company’s goodwill and trademarks and tradenames and concluded that such assets were not impaired.

Note 8.                   Warranty

A summary of activity in the Company’s warranty reserves follows:

	Three Months Ended
	October 31,
	2006			2005
Beginning balance	$	619,000		$	581,000
Provisions	185,000			174,000
Charges	(211,000		)	(237,000		)
Foreign currency translation	—			1,000
Ending balance	$	593,000		$	519,000

The warranty provisions and charges during the three months ended October 31, 2006 and 2005 relate principally to the Company’s endoscope reprocessing products.

Note 9.                   Financing Arrangements

In conjunction with the acquisition of Crosstex, we entered into amended and restated credit facilities dated as of August 1, 2005 (the “2005 U.S. Credit Facilities”) with a consortium of United States lenders to fund the cash consideration paid in the acquisition and costs associated with the acquisition, as well as to modify our existing United States credit facilities. The 2005 U.S. Credit Facilities include (i) a six-year $40.0 million senior secured amortizing term loan facility and (ii) a five-year $35.0 million senior secured revolving credit facility. In addition, we agreed to repay the July 31, 2005 outstanding borrowings of $15,750,000 under our original term loan facility within ninety (90) days from the closing. In October 2005, such amount was repaid primarily through the repatriation of funds from our foreign subsidiaries. Amounts we repay under the term loan facility may not be re-borrowed. Additionally, we incurred debt issuance costs of approximately $1,426,000, of which $160,000 of third-party costs was recorded in general and administrative expenses during the three months ended October 31, 2005 in accordance with applicable accounting rules. The remaining $1,266,000 of costs was recorded in other assets and will be amortized over the life of the credit facilities.

Borrowings under the 2005 U.S. Credit Facilities bear interest at rates ranging from 0% to 0.75% above the lender’s base rate, or at rates ranging from 1.0% to 2.0% above the London Interbank Offered Rate (“LIBOR”), depending upon our consolidated ratio of debt to earnings before interest, taxes, depreciation and amortization, and as further adjusted under the terms of the 2005 U.S. Credit Facilities (“EBITDA”). At October 31, 2006, the lender’s base rate was 8.25% and the LIBOR rates ranged from 5.32% to 5.50%. The margins applicable to our outstanding borrowings at October 31, 2006 were 0% above the lender’s base rate and 1.25% above LIBOR. All of our outstanding borrowings were under LIBOR contracts at October 31, 2006. The 2005 U.S. Credit Facilities also provide for fees on the unused portion of our facilities at rates ranging from 0.20% to 0.40%, depending upon our consolidated ratio of debt to EBITDA; such rate was 0.25% at October 31, 2006.

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The 2005 U.S. Credit Facilities require us to meet certain financial covenants and are secured by (i) substantially all of our U.S.-based assets (including assets of Cantel, Minntech, Mar Cor and Crosstex) and (ii) our pledge of all of the outstanding shares of Minntech, Mar Cor and Crosstex and 65% of the outstanding shares of our foreign-based subsidiaries. Additionally, we are not permitted to pay cash dividends on our Common Stock without the consent of our United States lenders. As of October 31, 2006, we are in compliance with all financial and other covenants under the 2005 U.S. Credit Facilities.

On October 31, 2006, we had $37,000,000 of outstanding borrowings under the 2005 U.S. Credit Facilities, all of which was under the United States term loan facility.

Aggregate annual required maturities of the 2005 U.S. Credit Facilities over the remainder of fiscal 2007 and the next five years are as follows:

Nine month period ending July 31, 2007	$	3,000,000
Fiscal 2008	6,000,000
Fiscal 2009	8,000,000
Fiscal 2010	10,000,000
Fiscal 2011	10,000,000
	$	37,000,000

All of such maturing amounts reflect the repayment terms under the 2005 U.S. Credit Facilities.

Note 10.                 Earnings Per Common Share

Basic earnings per common share are computed based upon the weighted average number of common shares outstanding during the period.

Diluted earnings per common share are computed based upon the weighted average number of common shares outstanding during the period plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our Common Stock for the period.

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The following table sets forth the computation of basic and diluted earnings per common share:

	Three Months Ended
	October 31,
	2006		2005
Numerator for basic and diluted earnings per share:
Income from continuing operations	$	1,723,000	$	2,218,000
Income from discontinued operations	245,000		1,660,000
Disposal of discontinued operations	—		(132,000		)
Net income	$	1,968,000	$	3,746,000
Denominator for basic and diluted earnings per share:
Denominator for basic earnings per share - weighted average number of shares outstanding	15,470,017		15,406,499
Dilutive effect of options using the treasury stock method and the average market price for the year	573,339		1,178,894
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents	16,043,356		16,585,393
Basic earnings per share:
Continuing operations	$	0.11	$	0.14
Discontinued operations	0.02		0.11
Disposal of discontinued operations	—		(0.01		)
Net income	$	0.13	$	0.24
Diluted earnings per share:
Continuing operations	$	0.11	$	0.13
Discontinued operations	0.01		0.10
Disposal of discontinued operations	—		—
Net income	$	0.12	$	0.23

Note 11.                 Income Taxes

The consolidated effective tax rate was 47.5% and 44.1% for the three months ended October 31, 2006 and 2005, respectively.

Our results of continuing operations for the three months ended October 31, 2006 and 2005 reflect income tax expense for our United States and international operations at their respective statutory rates. Our United States operations had an effective tax rate of 37.5% for the three months ended October 31, 2006. Our international operations include our subsidiaries in Canada, Singapore and Japan, which had effective tax rates for the three months ended October 31, 2006 of approximately 37.3%, 20.0% and 45.0%, respectively. A tax benefit was not recorded for the three months ended October 31, 2006 and 2005 on the losses from operations at our Netherlands subsidiary, thereby causing the overall effective tax rates to exceed statutory rates.

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The higher overall effective tax rate for the three months ended October 31, 2006, as compared with the three months ended October 31, 2005, was principally due to losses related to our Netherlands operation for which no income tax benefit was recorded and the geographic mix of pretax income.

Note 12.                 Operating Segments

We are a leading provider of infection prevention and control products in the healthcare market. Our products include specialized medical device reprocessing systems for renal dialysis and endoscopy, dialysate concentrates and other dialysis supplies, water purification equipment, sterilants, disinfectants and cleaners, hollow fiber membrane filtration and separation products for medical and non-medical applications, and specialty packaging for infectious and biological specimens. We also provide technical maintenance for our products and offer compliance training services for the transport of infectious and biological specimens.

In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”), we have determined our reportable business segments based upon an assessment of product types, organizational structure, customers and internally prepared financial statements. The primary factors used by us in analyzing segment performance are net sales and operating income.

The Company’s segments are as follows:

Dialysis, which includes disinfection/sterilization reprocessing equipment, sterilants, supplies and concentrates related to hemodialysis treatment of patients with acute kidney failure or chronic kidney failure associated with end-stage renal disease. Additionally, this segment includes technical maintenance service on its products.

Dental, which includes single-use infection control products used principally in the dental market such as face masks, patient towels and bibs, self-sealing sterilization pouches, tray covers, sterilization packaging accessories, surface barriers including eyewear, aprons and gowns, disinfectants and deodorizers, germicidal wipes, hand care products, gloves, sponges, cotton products, cups, needles and syringes, scalpels and blades, and saliva evacuators and ejectors.

Water Purification and Filtration, which includes water purification equipment design and manufacturing, project management, installation, maintenance, deionization and mixing systems, as well as hollow fiber filter devices and ancillary products for high-purity fluid and separation applications for the medical, pharmaceutical, biotechnology, research, beverage and semiconductor industries. Additionally, this segment includes cold sterilant products used to disinfect high-purity water systems.

Endoscope Reprocessing, which includes endoscope disinfection equipment and related accessories and supplies that are sold to hospitals, clinics and physicians. Additionally, this segment includes technical maintenance service on its products.

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All Other

In accordance with quantitative thresholds established by SFAS 131, we have combined the Specialty Packaging, and Therapeutic operating segments into the All Other reporting segment.

Specialty Packaging, which includes specialty packaging and thermal control products, as well as related compliance training, for the safe transport of infectious and biological specimens and thermally sensitive pharmaceutical, medical and other products.

Therapeutic Filtration, which includes hollow fiber filter devices and ancillary products for use in medical applications that are sold to biotech manufacturers and third-party distributors.

The operating segments follow the same accounting policies used for our Condensed Consolidated Financial Statements as described in Note 2 to the 2006 Form 10-K.

Information as to operating segments is summarized below:

	Three Months Ended
	October 31,
	2006			2005
Net sales:
Dental	$	15,407,000		$	13,127,000
Dialysis	13,538,000			16,263,000
Water Purification and Filtration	9,971,000			7,997,000
Endoscope Reprocessing	8,511,000			7,372,000
All Other	3,057,000			3,053,000
Total	$	50,484,000		$	47,812,000
Operating Income:
Dental	$	3,021,000		$	1,636,000
Dialysis	1,753,000			2,517,000
Water Purification and Filtration	415,000			998,000
Endoscope Reprocessing	(559,000		)	1,091,000
All Other	631,000			610,000
	5,261,000			6,852,000
General corporate expenses	(1,506,000		)	(1,844,000		)
Interest expense, net	(473,000		)	(1,038,000		)
Income before income taxes	$	3,282,000		$	3,970,000

Note 13.                 Legal Proceedings

In the normal course of business, we are subject to pending and threatened legal actions. It is our policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount of anticipated exposure can be reasonably estimated.

On January 27, 2006, the United States District Court, District of Minnesota, granted Minntech’s Motion for Summary Judgment in the previously reported antitrust lawsuit commenced by HDC Medical, Inc. in November 2003. As a result of the ruling, the complaint

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against Minntech, a wholly-owned subsidiary of Cantel, has been dismissed. In March 2006, HDC filed a Notice of Appeal with respect to the court’s ruling for Summary Judgment and in April 2006, HDC filed its Brief and Addendum in support of its appeal. Minntech filed its Brief in response to the appeal on May 24, 2006 and HDC submitted a Reply Brief on June 7, 2006. Oral argument before the Eighth Circuit Court of Appeals in St. Louis occurred on October 19, 2006. We do not expect the Court to render a decision on HDC’s appeal prior to January 2007.

In July 2006, we received a letter from the “Sellers” of Biolab Equipment Ltd. claiming that the Contingent Payment under the Biolab Stock Purchase Agreement is payable to the Sellers but providing virtually no support for their position. We responded by stating that the claim has absolutely no merit but that a formal analysis with respect to fiscal 2006 could not be provided until the completion of our year-end financial statements. In October 2006, the Sellers sent a letter to us claiming that the Contingent Payment, as well as related incentive compensation payments to two of the Sellers under their employment agreements, has been fully earned. Although the Sellers provided an analysis purportedly supporting their position, we believe that the analysis is erroneous and the claim has no merit whatsoever.  We have advised the Sellers of our position and have delivered to the Sellers the formal calculations required under the terms of the Stock Purchase Agreement. The Sellers have rejected our position and have threatened to commence an arbitration proceeding under the terms of the Stock Purchase Agreement. If such a proceeding is commenced, we intend to vigorously defend our position and assert counter claims against the Sellers. The maximum Contingent Payment and incentive compensation that could be earned under the Stock Purchase Agreement and related employment agreements of two of the Sellers (one of whom remains an employee of the Company) are approximately $3,000,000 and $600,000, respectively.

Note 14.                 Discontinued Operations

On July 31, 2006, Carsen closed the sale of substantially all of its assets to Olympus under an Asset Purchase Agreement dated as of May 16, 2006 among Carsen, Cantel and Olympus. Olympus purchased substantially all of Carsen’s assets other than those related to Carsen’s Medivators business and certain other smaller product lines. Following the closing, Olympus hired substantially all of Carsen’s employees and took over Carsen’s Olympus-related operations (as well as the operations related to the other acquired product lines). The transaction resulted in an after-tax gain of $6,776,000 and was recorded separately on the Consolidated Statements of Income for the year ended July 31, 2006 as gain on disposal of discontinued operations, net of tax. In connection with the transaction, Carsen’s Medivators-related assets as well as certain of its other assets that were not acquired by Olympus were sold to our new Canadian distributor of Medivators products.

The purchase price for the net assets sold to Olympus was approximately $31,200,000, comprised of a fixed sum of $10,000,000 plus an additional formula-based sum of $21,200,000. In addition, Olympus will pay Carsen 20% of Olympus’ revenues attributable to Carsen’s unfilled customer orders as of July 31, 2006 that were assumed by Olympus at the closing. Such payments to Carsen are made following Olympus’ receipt of customer payments for such orders. As of October 31, 2006, approximately $174,000 has been recorded as income and has been reported in income from discontinued operations, net of tax, in the Condensed Consolidated Statements of Income.

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The $10,000,000 fixed portion of the purchase price was in consideration for (i) Carsen’s customer lists, sales records, and certain other assets related to the sale and servicing of Olympus products and certain non-Olympus products distributed by Carsen, (ii) the release of Olympus’ contractual restriction on hiring Carsen personnel, (iii) real property leases (which were assumed or replaced by Olympus) and leasehold improvements, computer and software systems, equipment and machinery, telephone systems, and records related to the acquired assets, and (iv) assisting Olympus in effecting a smooth transition of Carsen’s business of distributing and servicing Olympus and certain non-Olympus products in Canada. Cantel has also agreed (on behalf of itself and its affiliates) not to manufacture, distribute, sell or represent for sale in Canada through July 31, 2007 any products that are competitive with the Olympus products formerly sold by Carsen under its Olympus Distribution Agreements.

The $21,200,000 formula-based portion of the purchase price was based on the book value of Carsen’s inventories of Olympus and certain non-Olympus products and the net book amount of Carsen’s accounts receivable and certain other assets, all at July 31, 2006, subject to offsets, particularly for accounts payable of Carsen due to Olympus.

Net proceeds from Carsen’s sale of net assets and the termination of Carsen’s operations were approximately $21,100,000 (excluding the backlog payments) after satisfaction of remaining liabilities and taxes.

As a result of the foregoing transaction, which coincided with the expiration of Carsen’s exclusive distribution agreements with Olympus on July 31, 2006, Carsen no longer has any remaining product lines or active business operations.

The net sales and operating income attributable to Carsen’s business (inclusive of both Olympus and non-Olympus business, but exclusive of the sale of Medivators reprocessors) constitute the entire Endoscopy and Surgical reporting segment and Scientific operating segment, which historically was included within the All Other reporting segment.

Operating results attributable to Carsen’s business are summarized below:

	Three Months ended October 31,
	2006		2005
Net sales	$	1,234,000	$	12,420,000
Operating income	380,000		2,595,000
Interest expense	—		15,000
Income before income taxes	380,000		2,580,000
Income taxes	135,000		920,000
Income from discontinued operations, net of tax	$	245,000	$	1,660,000
Loss on disposal of discontinued operations	$	—	$	(203,000	)
Income tax benefit	—		(71,000		)
Loss on disposal of discontinued operations, net of tax	$	—	$	(132,000	)

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Included in net sales for the three months ended October 31, 2006 are sales that did not meet the Company’s revenue recognition policy as of July 31, 2006 and $174,000 of backlog payments. For the three months ended October 31, 2005, the disposal of discontinued operations represents severance expense which was included in the $6,776,000 gain on sale recorded on July 31, 2006.

Cash flows attributable to discontinued operations comprise the following:

	Three Months ended October 31,
	2006			2005
Net cash (used in) provided by operating activities	$	(4,548,000	)	$	3,793,000

Investing and financing activities of our discontinued operations did not result in any net cash for the three months ended October 31, 2006 and 2005.

The components of assets and liabilities of discontinued operations in the Condensed Consolidated Balance Sheets and the activity during the three months ended October 31, 2006 are as follows:

	July 31,			Recorded as			Amounts			October 31,
	2006			Income (Expense)			Settled			2006
Current assets:
Accounts receivable, net	$	655,000		$	—		$	(443,000	)	$	212,000
Inventories	695,000			(695,000		)	—			—
Prepaids and other current assets	771,000			171,000			(750,000		)	192,000
Assets of discontinued operations	$	2,121,000		$	(524,000	)	$	(1,193,000	)	$	404,000
Current liabilities:
Accounts payable	$	(2,744,000	)	$	—		$	2,639,000		$	(105,000	)
Compensation payable	(1,195,000		)	(193,000		)	790,000			(598,000		)
Accrued expenses	(354,000		)	34,000			234,000			(86,000		)
Deferred revenue	(1,063,000		)	1,063,000			—			—
Income taxes payable	(2,023,000		)	(135,000		)	2,006,000			(152,000		)
Liabilities of discontinued operations	$	(7,379,000	)	$	769,000		$	5,669,000		$	(941,000	)

The liabilities at October 31, 2006 are expected to be settled prior to July 31, 2007.

Note 15.                 Minntech/Medivators-Olympus Distribution Agreement

On August 2, 2006, we commenced the sale and service of our Medivators brand endoscope reprocessing equipment, high-level disinfectants, cleaners and consumables through our own United States field sales and service organization. Our direct sale of these products is the result of our decision that it is in our best long-term interests to control and develop our own direct-hospital based United States distribution network and, as such, not to renew Olympus’ exclusive United States distribution agreement when it expired on August 1, 2006.

Throughout the former distribution arrangement with Olympus, we employed our own personnel to provide clinical sales support activities as well as an internal technical and customer service function, depot maintenance and service and all logistics and distribution services for the Medivators/Olympus customer base. This existing and fully developed infrastructure will continue to be a critical factor in our new direct sales and service strategy.

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During the seven-year period following the expiration of the distribution agreement with Olympus on August 1, 2006, Olympus will have the option to provide certain ongoing support functions to its existing customer base of Medivators products, subject to the terms and conditions of the agreement. In addition, Olympus may continue to purchase from Minntech for resale in connection with such support functions, Medivators accessories, consumables, and replacement and repair parts, as well as RapicideÒ disinfectant.

16.          Repurchase of Shares

On April 13, 2006, our Board of Directors approved the repurchase of up to 500,000 shares of our outstanding Common Stock. Under the repurchase program we repurchase shares from time-to-time at prevailing prices and as permitted by applicable securities laws (including SEC Rule 10b-18) and New York Stock Exchange requirements, and subject to market conditions. The repurchase program has a one-year term ending April 12, 2007.

The first purchase under our repurchase program occurred on April 19, 2006. Through October 31, 2006, we had completed the repurchase of 392,000 shares under the repurchase program at a total average price per share of $14.04. Through November 30, 2006, we had completed the repurchase of 464,800 shares under the repurchase program at a total average price per share of $14.02. Therefore, at November 30, 2006, the maximum number of additional shares that may be purchased under the program is 35,200 shares.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand Cantel Medical Corp. (“Cantel”). The MD&A is provided as a supplement to and should be read in conjunction with our financial statements and the accompanying notes. Our MD&A includes the following sections:

Overview provides a brief description of our business and a summary of significant activity that has affected or may affect our results of operations and financial condition.

Results of Operations provides a discussion of the consolidated results of operations for the three months ended October 31, 2006 as compared with the three months ended October 31, 2005.

Liquidity and Capital Resources provides an overview of our working capital, cash flows, and financing and foreign currency activities.

Critical Accounting Policies provides a discussion of our accounting policies that require critical judgments, assumptions and estimates.

Forward-Looking Statements provides a discussion of cautionary factors that may affect future results.

Overview

Cantel is a leading provider of infection prevention and control products in the healthcare market, specializing in the following operating segments:

·Dental: Single-use, infection control products used principally in the dental market including face masks, towels and bibs, tray covers, saliva ejectors, germicidal wipes, plastic cups, sterilization pouches and disinfectants.

·Dialysis: Medical device reprocessing systems, sterilants/disinfectants, dialysate concentrates and other supplies for renal dialysis.

·Endoscope Reprocessing: Medical device reprocessing systems and sterilants/disinfectants for endoscopy.

·Water Purification and Filtration: Water purification equipment and services, filtration and separation products, and disinfectants for the medical, pharmaceutical, biotech and other industrial markets.

·Therapeutic Filtration: Hollow fiber membrane filtration and separation technologies for medical applications (included in All Other reporting segment).

·Specialty Packaging: Specialty packaging and thermal control products, as well as related compliance training, for the transport of infectious and biological specimens and thermally sensitive pharmaceutical, medical and other products (included in All Other reporting segment).

Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread of infections.

See our Annual Report on Form 10-K for the fiscal year ended July 31, 2006 (the “2006 Form 10-K”) and our Condensed Consolidated Financial Statements for additional financial information regarding our reporting segments.

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Significant Activity

(i)As a result of our decision to not renew Olympus’ exclusive United States distribution agreement when it expired on August 1, 2006, we commenced the sale and service of our Medivators endoscope reprocessing equipment, as well as the Company’s high-level disinfectants, cleaners and consumables through our own United States field sales and service organization on August 2, 2006, as more fully described elsewhere in this MD&A, “Business – Risk Factors” in the 2006 Form 10-K and Note 15 to the Condensed Consolidated Financial Statements.

(ii)The dialysis industry has been undergoing significant consolidation which has adversely impacted the average selling price of some of our dialysis products and may continue to adversely affect our business, as more fully described elsewhere in this MD&A and in “Business - Risk Factors” in the 2006 Form 10-K.

(iii)The Olympus distribution agreements with Carsen, as well as Carsen’s active business operations, terminated on July 31, 2006, as more fully described elsewhere in this MD&A, “Business – Risk Factors” in the 2006 Form 10-K and Note 14 to the Condensed Consolidated Financial Statements. Accordingly, Carsen is reported as a discontinued operation for the three months ended October 31, 2006 and 2005.

Results of Operations

The results of operations reflect the continuing operating results of Cantel and its wholly-owned subsidiaries.

Certain distribution and warehouse expenses of Crosstex have been reclassified from amounts previously reported in our quarterly Form 10-Q for the three months ended October 31, 2005 to conform with the accounting policies of Cantel which require such costs to be classified as cost of sales. These reclassifications affect cost of sales, gross profit and selling expenses of our Dental segment, and therefore our consolidated totals.

The following discussion should also be read in conjunction with our 2006 Form 10-K.

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The following table gives information as to the net sales from continuing operations and the percentage to the total net sales from continuing operations for each of our reporting segments.

	Three Months Ended
	October 31,
	2006			2005
	$		%	$		%
	(Dollar amounts in thousands)
Dental	$	15,407	30.5	$	13,127	27.5
Dialysis	13,538		26.8	16,263		34.0
Water Purification and Filtration	9,971		19.8	7,997		16.7
Endoscope Reprocessing	8,511		16.9	7,372		15.4
All Other	3,057		6.0	3,053		6.4
	$	50,484	100.0	$	47,812	100.0

Net Sales

Net sales increased by $2,672,000, or 5.6%, to $50,484,000 for the three months ended October 31, 2006 from $47,812,000 for the three months ended October 31, 2005.

The increase in net sales for the three months ended October 31, 2006 was principally attributable to increases in sales of dental products, water purification and filtration products and services, and endoscope reprocessing products and services. This increase in net sales was partially offset by decreases in sales of dialysis products.

The increase in sales of dental products of $2,280,000, or 17.4%, for the three months ended October 31, 2006, compared with the three months ended October 31, 2005, was primarily due to increased demand in the United States for face mask products and increases in selling prices of approximately $580,000.

The increase in sales of water purification and filtration products and services of $1,974,000, or 24.7%, for the three months ended October 31, 2006, compared with the three months ended October 31, 2005, was primarily due to the acquisition of Fluid Solutions on May 1, 2006 which resulted in $1,167,000 of incremental net sales for the three months ended October 31, 2006, as well as increased demand in North America for our water purification and filtration equipment.

The increase in sales of endoscope reprocessing products and services of $1,139,000, or 15.5%, for the three months ended October 31, 2006, compared with the three months ended October 31, 2005, was primarily due to an increase in demand for our endoscope disinfection equipment, disinfectants and product service both in the United States (primarily from continued sales to Olympus, which sales are expected to decrease in the future) and internationally. The increase in demand for our disinfectants and product service is attributable to the increased field population of equipment (including our Dyped endoscope disinfection equipment in Europe) and our ability to convert users of competitive disinfectants to our products. Although on August 2, 2006 we commenced the direct sale and service of our Medivators endoscope reprocessing equipment, as well as the Company’s high-level disinfectants, cleaners and consumables, through

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our own United States field sales and service organization as more fully described elsewhere in this MD&A, we did not realize the full benefit of these efforts during the three months ended October 31, 2006. However, we expect the direct sales effort to have a more positive impact in the future, including an increase in selling prices as a result of selling directly to our customers and not through Olympus.

Sales of dialysis products and services decreased by $2,725,000, or 16.8%, for the three months ended October 31, 2006, as compared with the three months ended October 31, 2005, primarily due to a decrease in demand from domestic and international customers for dialysate concentrate (a concentrated acid or bicarbonate used to prepare dialysate, a chemical solution that draws waste products from a patient’s blood through a dialyzer membrane during hemodialysis treatment), lower average selling prices for Renatron equipment (partially offset by an increase in demand for Renatrons) and Renalin sterilant due to increased sales to large national chains that typically receive more favorable pricing, and reduced demand for Renalin sterilant domestically. Partially offsetting the decrease in sales of dialysis products and services was an increase of approximately $570,000 in net sales as a result of shipping and handling fees, such as freight, invoiced to customers during the three months ended October 31, 2006 (related costs of a similar amount are included within cost of sales). The majority of the $570,000 related to one of our larger customers who was previously responsible for transportation related to the products they purchased from us; beginning in November 2005, this customer requested that we undertake and invoice them for such transportation.

The dialysis industry has been undergoing significant consolidation through the acquisition by certain major dialysis chains of smaller chains and independents. In October 2005, DaVita Inc. (“DaVita”), the second-largest dialysis chain in the United States, acquired Gambro AB’s United States dialysis clinic business, Gambro Healthcare, Inc. (“Gambro US”). DaVita and Gambro US are significant customers of our dialysis reuse products and accounted for approximately 28% and 25% of our dialysis net sales for the three months ended October 31, 2006 and 2005, respectively. The DaVita/Gambro US acquisition has resulted in greater buying power for the larger resulting entity and thereby a reduction in our net sales and profit margins due to reduced average selling prices of our dialyzer reprocessing products beginning in November 2005.

In addition, on March 31, 2006, Fresenius Medical Care (“Fresenius”), the largest dialysis chain in the United States and a provider of single-use dialyzer products, completed its acquisition of Renal Care Group, Inc. (“RCG”). RCG has been a significant customer of our dialysis reuse products. Combined net sales of Fresenius and RCG accounted for approximately 14% and 22% of our dialysis net sales for the three months ended October 31, 2006 and 2005, respectively. We anticipate Fresenius will convert all or substantially all of the dialysis clinics of RCG into single-use facilities, which will adversely affect our sales of dialysis products. Given the uncertainty of the post-acquisition operating strategies for Fresenius/RCG, we are currently unable to determine the timing and impact on our future sales of dialysis products and services. In addition, the DaVita and Fresenius acquisitions have resulted in the loss of low margin dialysate concentrate business since Gambro and Fresenius manufacture dialysate concentrate. Consequently, the DaVita and RCG dialysis centers have reduced their purchases of dialysate concentrate from us.

Increases in selling prices of our products did not have a significant effect on net sales for the three months ended October 31, 2006, except in our dental segment as mentioned above. However, as discussed previously, we experienced a reduction in our dialysis net sales and profit margins for the three months ended October 31, 2006, as compared with the three months ended

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October 31, 2005, due to lower average selling prices resulting from the Davita/Gambro US acquisition.

Gross profit

Gross profit increased by $208,000, or 1.2%, to $18,169,000 for the three months ended October 31, 2006 from $17,961,000 for the three months ended October 31, 2005. Gross profit as a percentage of net sales for the three months ended October 31, 2006 and 2005 was 36.0% and 37.6%, respectively.

The lower gross profit percentage for the three months ended October 31, 2006, as compared with the three months ended October 31, 2005, was primarily attributable to a lower gross profit percentage on our (i) dialysis products due to lower average selling prices on Renatron equipment and sterilants principally as a result of increased sales to large national chains that typically receive more favorable pricing, unfavorable overhead absorption associated with the decrease in sales to domestic and international customers, and higher distribution costs; (ii) endoscope reprocessing products and services primarily due to higher manufacturing costs related to our Dyped product line manufactured in the Netherlands, and underutilization of our newly developed field service organization as we transition to our new direct sales and service strategy; and (iii) water purification and filtration products and services primarily due to unabsorbed manufacturing overhead, as well as the sale of water purification equipment at lower than normal margins due to start-up costs of a new line of machines. Partially offsetting these decreases in gross profit percentage were improved overhead absorption in our Dental segment due to increases in sales volume and the non-reoccurrence of a $658,000 one-time purchase accounting charge related to our Dental segment’s inventory which was incurred during the three months ended October 31, 2005.

Operating Expenses

Selling expenses increased by $1,197,000 to $5,710,000 for the three months ended October 31, 2006, from $4,513,000 for the three months ended October 31, 2005. For the three months ended October 31, 2006, selling expenses increased principally due to a higher cost structure of approximately $800,000 for our endoscope reprocessing direct sales network as a result of our decision to not renew Olympus’ exclusive United States distribution agreement when it expired on August 1, 2006, as more fully described elsewhere is this MD&A, and an increase in compensation expense of approximately $140,000 primarily due to additional sales and marketing personnel in our Specialty Packaging and Dental segments.

Selling expenses as a percentage of net sales were 11.3% for the three months ended October 31, 2006, compared with 9.4% for the three months ended October 31, 2005. The increase in selling expenses as a percentage of net sales was primarily attributable to the aforementioned factors.

General and administrative expenses increased by $318,000, or 4.4%, to $7,538,000 for the three months ended October 31, 2006, from $7,220,000 for the three months ended October 31, 2005 principally due to increased compensation expense, including additional personnel, of approximately $330,000; an increase of $160,000 in bad debt expense; the inclusion of approximately $135,000 of expenses related to Fluid Solutions; and increased accounting fees. Partially offsetting these increases were the non-reoccurrences of $345,000 in incentive compensation directly related to the Crosstex acquisition and $160,000 in debt financing costs related to our amended and restated credit facilities, both of which charges were incurred during the

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three months ended October 31, 2005.

General and administrative expenses as a percentage of net sales were 14.9% for the three months ended October 31, 2006, compared with 15.1% for the three months ended October 31, 2005.

Research and development expenses (which include continuing engineering costs) decreased by $54,000 to $1,166,000 for the three months ended October 31, 2006, from $1,220,000 for the three months ended October 31, 2005. The majority of our research and development expenses related to our Dyped endoscope reprocessor and specialty filtration products.

Interest

Interest expense decreased by $487,000 to $763,000 for the three months ended October 31, 2006, from $1,250,000 for the three months ended October 31, 2005 primarily due to the decrease in average outstanding borrowings, partially offset by an increase in average interest rates.

Interest income increased by $78,000 to $290,000 for the three months ended October 31, 2006, from $212,000 for the three months ended October 31, 2005 primarily due to an increase in average interest rates for the three months ended October 31, 2006.

Income from continuing operations before income taxes

Income from continuing operations before income taxes decreased by $688,000 to $3,282,000 for the three months ended October 31, 2006, from $3,970,000 for the three months ended October 31, 2005.

Income taxes

The consolidated effective tax rate was 47.5% and 44.1% for the three months ended October 31, 2006 and 2005, respectively.

Our results of continuing operations for the three months ended October 31, 2006 and 2005 reflect income tax expense for our United States and international operations at their respective statutory rates. Our United States operations had an effective tax rate of 37.5% for the three months ended October 31, 2006. Our international operations include our subsidiaries in Canada, Singapore and Japan, which had effective tax rates for the three months ended October 31, 2006 of approximately 37.3%, 20.0% and 45.0%, respectively. A tax benefit was not recorded for the three months ended October 31, 2006 and 2005 on the losses from operations at our Netherlands subsidiary, thereby causing the overall effective tax rates to exceed statutory rates.

The higher overall effective tax rate for the three months ended October 31, 2006, as compared with the three months ended October 31, 2005, was principally due to losses related to our Netherlands operation for which no income tax benefit was recorded and the geographic mix of pretax income.

Stock-Based Compensation

On August 1, 2005, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123, “Share-Based Payment (Revised 2004)” (“SFAS 123R”) using the modified

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prospective method for the transition. Under the modified prospective method, stock compensation expense will be recognized for any option grant or stock award granted on or after August 1, 2005, as well as the unvested portion of stock options granted prior to August 1, 2005, based upon the award’s fair value.

The following table shows the allocation of total stock-based compensation expense relating to continuing operations recognized in the Condensed Consolidated Statements of Income for the three months ended October 31, 2006 and 2005:

	Three Months Ended
	October 31,
	2006			2005
Cost of sales	$	(1,000	)	$	22,000
Operating expenses:
Selling	26,000			53,000
General and administrative	169,000			294,000
Research and development	4,000			8,000
Total operating expenses	199,000			355,000
Stock-based compensation before income taxes	198,000			377,000
Income tax benefits	(105,000		)	(93,000		)
Total stock-based compensation expense, net of tax	$	93,000		$	284,000

For the three months ended October 31, 2006 and 2005, we have recorded in our Condensed Consolidated Financial Statements stock-based compensation expense relating to continuing operations of $198,000 and $377,000, respectively, with a corresponding increase to additional capital, partially offset by the related income tax benefits of $105,000 and $93,000, respectively (which pertain to options that do not qualify as incentive stock options), with a corresponding increase to long-term deferred income tax assets (which are netted with long-term deferred income tax liabilities).

Most of our stock options are subject to graded vesting in which portions of the option award vest at different times during the vesting period, as opposed to awards that vest at the end of the vesting period. We recognize compensation expense for options subject to graded vesting using the straight-line basis, reduced by estimated forfeitures. Total unrecognized stock-based compensation expense related to total nonvested stock options was $598,000 at October 31, 2006 with a remaining weighted average period of 21 months over which such expense is expected to be recognized.

On November 7, 2006, the Company granted stock options for 270,000 shares to its employees at an exercise price of $14.22 per share. Total unrecognized stock-based compensation expense, net of tax, related to this November 7, 2006 grant was approximately $970,000 with a weighted average period of 44 months over which such expense is expected to be recognized. The weighted average fair value of the options granted was $6.13 per share.

Upon exercise of stock options, we typically issue new shares of our Common Stock (as opposed to using treasury shares).

If certain criteria are met when options are exercised or the underlying shares are sold, the Company is allowed a deduction on its income tax return. Accordingly, we account for the income tax effect on such income tax deductions as additional capital (assuming deferred tax assets do not

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exist pertaining to the exercised stock options) and as a reduction of income taxes payable. For the three months ended October 31, 2006, options exercised resulted in income tax deductions that reduced income taxes payable by $566,000. For the three months ended October 31, 2005, none of the options exercised resulted in an income tax deduction.

Beginning August 1, 2005, we changed our cash flow presentation in accordance with SFAS 123R which requires the cash flows resulting from excess tax benefits to be classified as financing cash flows. Excess tax benefits arise when the ultimate tax effect of the deduction for tax purposes is greater than the tax benefit on stock compensation expense (including tax benefits on stock compensation expense that has only been reflected in the pro forma disclosures) which was determined based upon the award’s fair value.

Liquidity and Capital Resources

Working capital

At October 31, 2006, the Company’s working capital was $45,358,000, compared with $43,351,000 at July 31, 2006.

Cash flows from operating activities

Net cash used in operating activities was $7,188,000 for the three months ended October 31, 2006, compared with net cash provided by operating activities of $6,545,000 for the three months ended October 31, 2005. For the three months ended October 31, 2006, the net cash used in operating activities was primarily due to an increase in inventories (due to planned increases in stock levels of certain products) and decreases in liabilities of discontinued operations (due to the wind-down of Carsen’s operations), accounts payable, accrued expenses and earnout (due to the payment of an earnout to the former owners of Crosstex) and income taxes payable (due to the timing associated with payments), partially offset by net income (after adjusting for depreciation and amortization, and stock-based compensation expense) and a decrease in assets of discontinued operations (due to the wind-down of Carsen’s operations). For the three months ended October 31, 2005, the net cash provided by operating activities was primarily due to net income (after adjusting for depreciation and amortization, stock-based compensation expense and deferred income taxes), and a decrease in assets of discontinued operations (primarily due to a decrease in Carsen’s receivables due to the timing of cash collections), partially offset by an increase in inventories (due to planned increases in stock levels of certain products).

Cash flows from investing activities

Net cash used in investing activities was $1,801,000 and $68,530,000 for the three months ended October 30, 2006 and 2005, respectively. For the three months ended October 31, 2006, the net cash used in investing activities was primarily for capital expenditures. For the three months ended October 31, 2005, the net cash used in investing activities was primarily for the acquisition of Crosstex and capital expenditures.

Cash flows from financing activities

Net cash used in financing activities was $534,000 for the three months ended October 31, 2006, compared with net cash provided by financing activities of $49,064,000 for the three months ended October 31, 2005. For the three months ended October 31, 2006, the net cash used in financing activities was primarily attributable to repayments under our credit facilities and the

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purchase of treasury stock, partially offset by exercises of stock options. For the three months ended October 31, 2005, net cash provided by financing activities was primarily attributable to borrowings under our credit facilities related to the acquisition of Crosstex, net of debt issuance costs, and proceeds from the exercises of stock options, partially offset by repayments under our credit facilities.

Repurchase of shares

On April 13, 2006, our Board of Directors approved the repurchase of up to 500,000 shares of our outstanding Common Stock. Under the repurchase program we repurchase shares from time-to-time at prevailing prices and as permitted by applicable securities laws (including SEC Rule 10b-18) and New York Stock Exchange requirements, and subject to market conditions. The repurchase program has a one-year term ending April 12, 2007.

The first purchase under our repurchase program occurred on April 19, 2006. Through November 30, 2006, we had completed the repurchase of 464,800 shares under the repurchase program at a total average price per share of $14.02. Therefore, at November 30, 2006, the maximum number of additional shares that may be purchased under the program is 35,200 shares.

Discontinued Operations -Termination of Carsen’s Operations

On July 31, 2006, Carsen closed the sale of substantially all of its assets to Olympus under an Asset Purchase Agreement dated as of May 16, 2006 among Carsen, Cantel and Olympus. Olympus purchased substantially all of Carsen’s assets other than those related to Carsen’s Medivators business and certain other smaller product lines. Following the closing, Olympus hired substantially all of Carsen’s employees and took over Carsen’s Olympus-related operations (as well as the operations related to the other acquired product lines). The transaction resulted in an after-tax gain of $6,776,000 and was recorded separately on the Consolidated Statements of Income for the year ended July 31, 2006 as gain on disposal of discontinued operations, net of tax. In connection with the transaction, Carsen’s Medivators-related assets as well as certain of its other assets that were not acquired by Olympus were sold to our new Canadian distributor of Medivators products.

The purchase price for the net assets sold to Olympus was approximately $31,200,000, comprised of a fixed sum of $10,000,000 plus an additional formula-based sum of $21,200,000. In addition, Olympus will pay Carsen 20% of Olympus’ revenues attributable to Carsen’s unfilled customer orders as of July 31, 2006 that were assumed by Olympus at the closing. Such payments to Carsen are made following Olympus’ receipt of customer payments for such orders. As of October 31, 2006, approximately $174,000 has been recorded as income and has been reported in income from discontinued operations, net of tax, in the Condensed Consolidated Statements of Income.

The $10,000,000 fixed portion of the purchase price was in consideration for (i) Carsen’s customer lists, sales records, and certain other assets related to the sale and servicing of Olympus products and certain non-Olympus products distributed by Carsen, (ii) the release of Olympus’ contractual restriction on hiring Carsen personnel, (iii) real property leases (which were assumed or replaced by Olympus) and leasehold improvements, computer and software systems, equipment and machinery, telephone systems, and records related to the acquired assets, and (iv) assisting Olympus in effecting

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a smooth transition of Carsen’s business of distributing and servicing Olympus and certain non-Olympus products in Canada. Cantel has also agreed (on behalf of itself and its affiliates) not to manufacture, distribute, sell or represent for sale in Canada through July 31, 2007 any products that are competitive with the Olympus products formerly sold by Carsen under its Olympus Distribution Agreements.

The $21,200,000 formula-based portion of the purchase price was based on the book value of Carsen’s inventories of Olympus and certain non-Olympus products and the net book amount of Carsen’s accounts receivable and certain other assets, all at July 31, 2006, subject to offsets, particularly for accounts payable of Carsen due to Olympus.

Net proceeds from Carsen’s sale of net assets and the termination of Carsen’s operations were approximately $21,100,000 (excluding the backlog payments) after satisfaction of remaining liabilities and taxes.

As a result of the foregoing transaction, which coincided with the expiration of Carsen’s exclusive distribution agreements with Olympus on July 31, 2006, Carsen no longer has any remaining product lines or active business operations.

The net sales and operating income attributable to Carsen’s business (inclusive of both Olympus and non-Olympus business, but exclusive of the sale of Medivators reprocessors) constitute the entire Endoscopy and Surgical reporting segment and Scientific operating segment, which historically was included within the All Other reporting segment.

Operating results attributable to Carsen’s business are summarized below:

	Three Months ended October 31,
	2006		2005
Net sales	$	1,234,000	$	12,420,000
Operating income	380,000		2,595,000
Interest expense	—		15,000
Income before income taxes	380,000		2,580,000
Income taxes	135,000		920,000
Income from discontinued operations, net of tax	$	245,000	$	1,660,000
Loss on disposal of discontinued operations	$	—	$	(203,000	)
Income tax benefit	—		(71,000		)
Loss on disposal of discontinued operations, net of tax	$	—	$	(132,000	)

Included in net sales for the three months ended October 31, 2006 are sales that did not meet the Company’s revenue recognition policy as of July 31, 2006 and $174,000 of backlog payments. For the three months ended October 31, 2005, the disposal of discontinued operations represents severance expense which was included in the $6,776,000 gain on sale recorded on July 31, 2006.

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Cash flows attributable to discontinued operations comprise the following:

	Three Months ended October 31,
	2006			2005
Net cash (used in) provided by operating activities	$	(4,548,000	)	$	3,793,000

Investing and financing activities of our discontinued operations did not result in any net cash for the three months ended October 31, 2006 and 2005.

The components of assets and liabilities of discontinued operations in the Condensed Consolidated Balance Sheets and the activity during the three months ended October 31, 2006 are as follows:

	July 31,			Recorded as			Amounts			October 31,
	2006			Income (Expense)			Settled			2006
Current assets:
Accounts receivable, net	$	655,000		$	—		$	(443,000	)	$	212,000
Inventories	695,000			(695,000		)	—			—
Prepaids and other current assets	771,000			171,000			(750,000		)	192,000
Assets of discontinued operations	$	2,121,000		$	(524,000	)	$	(1,193,000	)	$	404,000
Current liabilities:
Accounts payable	$	(2,744,000	)	$	—		$	2,639,000		$	(105,000	)
Compensation payable	(1,195,000		)	(193,000		)	790,000			(598,000		)
Accrued expenses	(354,000		)	34,000			234,000			(86,000		)
Deferred revenue	(1,063,000		)	1,063,000			—			—
Income taxes payable	(2,023,000		)	(135,000		)	2,006,000			(152,000		)
Liabilities of discontinued operations	$	(7,379,000	)	$	769,000		$	5,669,000		$	(941,000	)

The liabilities at October 31, 2006 are expected to be settled prior to July 31, 2007.

Direct Sale of Medivators Systems in the United States

On August 2, 2006, we commenced the sale and service of our Medivators brand endoscope reprocessing equipment, high-level disinfectants, cleaners and consumables through our own United States field sales and service organization. Our direct sale of these products is the result of our decision that it is in our best long-term interests to control and develop our own direct-hospital based United States distribution network and, as such, not to renew Olympus’ exclusive United States distribution agreement when it expired on August 1, 2006.

Throughout the former distribution arrangement with Olympus, we employed our own personnel to provide clinical sales support activities as well as an internal technical and customer service function, depot maintenance and service and all logistics and distribution services for the Medivators/Olympus customer base. This existing and fully developed infrastructure will continue to be a critical factor in our new direct sales and service strategy.

During the seven-year period following the expiration of the distribution agreement with Olympus on August 1, 2006, Olympus will have the option to provide certain ongoing support functions to its existing customer base of Medivators products, subject to the terms and conditions of the agreement. In addition, Olympus may continue to purchase from Minntech for resale in connection with such support functions, Medivators accessories, consumables, and replacement and repair parts, as well as RapicideÒ disinfectant.

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Credit facilities

In conjunction with the acquisition of Crosstex, we entered into amended and restated credit facilities dated as of August 1, 2005 (the “2005 U.S. Credit Facilities”) with a consortium of United States lenders to fund the cash consideration paid in the acquisition and costs associated with the acquisition, as well as to modify our existing United States credit facilities. The 2005 U.S. Credit Facilities include (i) a six-year $40.0 million senior secured amortizing term loan facility and (ii) a five-year $35.0 million senior secured revolving credit facility. In addition, we agreed to repay the July 31, 2005 outstanding borrowings of $15,750,000 under our original term loan facility within ninety (90) days from the closing. In October 2005, such amount was repaid primarily through the repatriation of funds from our foreign subsidiaries. Amounts we repay under the term loan facility may not be re-borrowed. Additionally, we incurred debt issuance costs of approximately $1,426,000, of which $160,000 of third-party costs was recorded in general and administrative expenses during the three months ended October 31, 2005 in accordance with applicable accounting rules. The remaining $1,266,000 of costs was recorded in other assets and will be amortized over the life of the credit facilities.

Borrowings under the 2005 U.S. Credit Facilities bear interest at rates ranging from 0% to 0.75% above the lender’s base rate, or at rates ranging from 1.0% to 2.0% above the London Interbank Offered Rate (“LIBOR”), depending upon our consolidated ratio of debt to earnings before interest, taxes, depreciation and amortization, and as further adjusted under the terms of the 2005 U.S. Credit Facilities (“EBITDA”). At November 30, 2006, the lender’s base rate was 8.25% and the LIBOR rate was 5.32%. The margins applicable to our outstanding borrowings at November 30, 2006 were 0% above the lender’s base rate and 1.25% above LIBOR. All of our outstanding borrowings were under LIBOR contracts at November 30, 2006. The 2005 U.S. Credit Facilities also provide for fees on the unused portion of our facilities at rates ranging from 0.20% to 0.40%, depending upon our consolidated ratio of debt to EBITDA; such rate was 0.25% at November 30, 2006.

The 2005 U.S. Credit Facilities require us to meet certain financial covenants and are secured by (i) substantially all of our U.S.-based assets (including assets of Cantel, Minntech, Mar Cor and Crosstex) and (ii) our pledge of all of the outstanding shares of Minntech, Mar Cor and Crosstex and 65% of the outstanding shares of our foreign-based subsidiaries. As of October 31, 2006, we are in compliance with all financial and other covenants under the 2005 U.S. Credit Facilities.

On October 31, 2006, we had $37,000,000 of outstanding borrowings under the 2005 U.S. Credit Facilities all of which was under the United States term loan facility.

Aggregate annual required maturities of the 2005 U.S. Credit Facilities over the remainder of fiscal 2007 and the next five years are as follows:

Nine month period ending July 31, 2007	$	3,000,000
Fiscal 2008	6,000,000
Fiscal 2009	8,000,000
Fiscal 2010	10,000,000
Fiscal 2011	10,000,000
	$	37,000,000

All of such maturing amounts reflect the repayment terms under the 2005 U.S. Credit Facilities.

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Dyped note payable and other long-term liabilities

In conjunction with the Dyped acquisition on September 12, 2003, we issued a note with a face value of €1,350,000 ($1,505,000 using the exchange rate on the date of the acquisition). At October 31, 2006, approximately $1,177,000 of this note was outstanding using the exchange rate on October 31, 2006. Such note is non-interest bearing and has been recorded at its present value of $1,102,000 at October 31, 2006. The current portion of this note is recorded in accrued expenses and the remainder is recorded in other long-term liabilities.

Also included in other long-term liabilities are amounts due pursuant to deferred compensation arrangements for certain former Minntech directors and officers.

Operating leases

Aggregate future minimum commitments at October 31, 2006 under noncancelable operating leases for property and equipment are as follows:

Nine month period ending July 31, 2007	$	2,283,000
Fiscal 2008	2,375,000
Fiscal 2009	2,192,000
Fiscal 2010	1,652,000
Fiscal 2011	1,120,000
Thereafter	2,140,000
	$	11,762,000

Financing needs

At October 31, 2006, we had a cash balance of $20,480,000, of which $8,339,000 was held by foreign subsidiaries. We believe that our current cash position, anticipated cash flows from operations, and the funds available under our revolving credit facility will be sufficient to satisfy our cash operating requirements for the foreseeable future based upon our existing operations. At November 30, 2006, substantially all of our $35,000,000 United States revolving credit facility was available.

Foreign currency

During the three months ended October 31, 2006, as compared with the three months ended October 31, 2005, the average value of the Canadian dollar increased by approximately 6.1% relative to the value of the United States dollar. Changes in the value of the Canadian dollar against the United States dollar affect our results of operations principally for the following reasons:

(i)Our Canadian subsidiaries (which are included in the Specialty Packaging and Water Purification and Filtration segments) purchase a portion of their inventories, incur certain operating costs and sell a significant amount of their products in United States dollars, and therefore are exposed to realized foreign currency gains and losses upon payment of such payables and the collection of such receivables. Similarly, such United States denominated assets and liabilities must be converted into their functional Canadian currency when preparing their financial statements, which results in realized foreign exchange gains and losses. The increase in the average value of the Canadian dollar, as explained above, primarily resulted in gains for such liabilities and losses for such assets. Since our Canadian subsidiaries had a similar amount of assets and liabilities

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denominated in United States dollars, the increase in the average value of the Canadian dollar had an insignificant effect on our results of operations for the three months ended October 31, 2006.

(ii)Since our Canadian subsidiaries purchase a portion of their inventories, incur certain operating costs and sell a significant amount of their products in United States dollars and record such amounts in their financial statements in their functional Canadian currency, such amounts can be higher or lower based on the change in the average value of the Canadian dollar compared to the prior year. The increase in the average value of the Canadian dollar primarily resulted in such costs and such sales to be recorded at a lower amount for the three months ended October 31, 2006, as compared with the three months ended October 31, 2005. Since our Canadian subsidiaries had significantly more sales of their products in United States dollars than costs paid in United States dollars, the increase in the average value of the Canadian dollar had an insignificant negative impact upon their results of operations for the three months ended October 31, 2006 as compared to the three months ended October 31, 2005.

(iii)The results of operations of our Canadian subsidiaries are translated from their functional Canadian currency to United States dollars for purposes of preparing our Condensed Consolidated Financial Statements. The increase in the average value of the Canadian dollar, as explained above, had an overall insignificant positive impact upon our results of operations due to translating the results of operations for the three months ended October 31, 2006 at a higher average currency exchange rate as compared with the average currency exchange rate used to translate the results of operations for the three months ended October 31, 2005.

During the three months ended October 31, 2006, such strengthening of the Canadian dollar relative to the United States dollar had an overall insignificant impact upon our continuing results of operations.

For the three months ended October 31, 2006, as compared with the three months ended October 31, 2005, the value of the euro increased by approximately 4.4% relative to the value of the United States dollar. Changes in the value of the euro against the United States dollar affect our results of operations for the following reasons:

(i)Our Netherlands subsidiary (which is reported primarily in our Dialysis and Endoscope Reprocessing segments) maintains a portion of its cash in United States dollars, sells some of its products in United States dollars and pays various liabilities in United States dollars. Therefore, it is exposed to realized foreign currency gains and losses upon activity in such dollar cash accounts, collection of such receivables and payment of such liabilities. Similarly, such United States denominated assets and liabilities must be converted into their functional euro currency when preparing their financial statements, which results in realized foreign exchange gains and losses. The increase in the average value of the euro, as explained above, primarily resulted in gains for such liabilities and losses for such assets. Since our Netherlands subsidiary had more assets than liabilities denominated in United States dollars, the increase in the average value of the euro had an overall adverse affect on our results of operations for the three months ended October 31, 2006.

(ii)The results of operations of our Netherlands subsidiary are translated from its functional euro currency to United States dollars for the purpose of preparing our consolidated

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financial statements. The increase in the average value of the euro, as explained above, had an overall adverse impact upon our results of operations due to translating the fiscal 2006 results of operations (which had an overall loss) at a higher average currency exchange rate as compared with the average currency exchange rate used to translate the three months ended October 31, 2005 results of operations (which also had an overall loss).

During the three months ended October 31, 2006, such strengthening of the euro relative to the United States dollar had an overall adverse impact upon our results of operations.

In order to hedge against the impact of fluctuations in the value of the euro relative to the United States dollar on the conversion of such dollar denominated net assets into functional currency, we enter into short-term contracts to purchase euros forward, which contracts are generally one month in duration. These short-term contracts are designated as fair value hedges.  There was one foreign currency forward contract amounting to €189,000 at November 30, 2006 which covers certain assets and liabilities of Minntech’s Netherlands subsidiary which are denominated in United States dollars. Such contract expires on December 31, 2006. Under our credit facilities, such contracts to purchase euros may not exceed $12,000,000 in an aggregate notional amount at any time. During the three months ended October 31, 2006, such forward contracts were effective in offsetting most of the impact of the strengthening of the euro on our results of operations.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, as amended, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), all of our foreign currency forward contracts were designated as hedges. Gains and losses related to the hedging contracts to buy euros forward are immediately realized within general and administrative expenses due to the short-term nature of such contracts.

For purposes of translating the balance sheet at October 31, 2006 compared with July 31, 2006, the value of the Canadian dollar increased by approximately 0.9% and the value of the euro decreased by approximately 0.4% compared with the value of the United States dollar. The total of these currency movements resulted in a foreign currency translation gain of $59,000 during the three months ended October 31, 2006, thereby increasing stockholders’ equity.

Changes in the value of the Japanese yen relative to the United States dollar during the three months ended October 31, 2006, as compared with the three months ended October 31, 2005, did not have a significant impact upon either our results of operations or the translation of our balance sheet, primarily due to the fact that our Japanese subsidiary accounts for a relatively small portion of consolidated net sales, net income and net assets.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we continually evaluate our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

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Actual results may differ from these estimates.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements.

Revenue Recognition

Revenue on product sales is recognized as products are shipped to customers and title passes. The passing of title is determined based upon the FOB terms specified for each shipment. With respect to dialysis, therapeutic, specialty packaging and endoscope reprocessing products, shipment terms are generally FOB origin for common carrier and FOB destination when our distribution fleet is utilized (except for one large customer in dialysis whereby all products are shipped FOB destination). With respect to water purification and filtration and dental products, shipment terms may be either FOB origin or destination. Customer acceptance for the majority of our product sales occurs at the time of delivery. In certain instances, primarily with respect to some of our water purification and filtration equipment, endoscope reprocessing equipment and an insignificant amount of our sales of dialysis equipment, post-delivery obligations such as installation, in-servicing or training are contractually specified; in such instances, revenue recognition is deferred until all of such conditions have been substantially fulfilled such that the products are deemed functional by the end-user. With respect to a portion of water purification and filtration product sales, equipment is sold as part of a system for which the equipment is functionally interdependent or the customer’s purchase order specifies “ship-complete” as a condition of delivery; revenue recognition on such sales is deferred until all equipment has been delivered.

Revenue on service sales is recognized when repairs are completed at the customer’s location or when repairs are completed at our facilities and the products are shipped to customers. All shipping and handling fees invoiced to customers, such as freight, are recorded as revenue (and related costs are included within cost of sales) at the time the sale is recognized.

None of our sales contain right-of-return provisions, and customer claims for credit or return due to damage, defect, shortage or other reason must be pre-approved by us before credit is issued or such product is accepted for return. No cash discounts for early payment are offered except with respect to a small portion of our sales of dialysis and dental products and certain prepaid packaging products. We do not offer price protection, although advance pricing contracts or required notice periods prior to implementation of price increases exist for certain customers with respect to many of our products. With respect to certain of our dialysis and dental customers, volume rebates and trade-in allowances are provided; such volume rebates and trade-in allowances are provided for as a reduction of sales at the time of revenue recognition and amounted to $779,000 and $21,000 for the three months ended October 31, 2006 and 2005, respectively. Included in the volume rebates for the three months ended October 31, 2005 was approximately $300,000 in volume rebates as a result of the addition of dental products, offset by the cancellation of a volume rebate program resulting from consolidation in the dialysis industry. Such allowances are determined based on estimated projections of sales volume and trade-ins for the entire rebate agreement periods. Trade-in allowances were not significant for the three months ended October 31, 2006 and 2005. If it becomes known that sales volume to customers will deviate from original projections, the volume rebate provisions originally established would be adjusted accordingly.

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The majority of our dialysis products are sold to end-users; the majority of therapeutic filtration products, endoscope reprocessing products and services, and dental products are sold to third party distributors; the majority of water purification and filtration products and services are sold directly and through third-party distributors to hospitals, dialysis clinics, pharmaceutical and biotechnology companies and other end-users; and specialty packaging products are sold to third-party distributors, medical research companies, laboratories, pharmaceutical companies, hospitals, government agencies and other end-users. Sales to all of these customers follow our revenue recognition policies. Due to the direct distribution of our endoscope reprocessing products in the United States which commenced on August 2, 2006, the majority of our endoscope reprocessing products and services will be sold directly to hospitals and other end-users in the future.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist of amounts due to us from normal business activities. Allowances for doubtful accounts are reserves for the estimated loss from the inability of customers to make required payments. We use historical experience as well as current market information in determining the estimate. While actual losses have historically been within management’s expectations and provisions established, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Alternatively, if certain customers paid their delinquent receivables, reductions in allowances may be required.

Inventories

Inventories consist of products which are sold in the ordinary course of our business and are stated at the lower of cost (first-in, first-out) or market. In assessing the value of inventories, we must make estimates and judgments regarding reserves required for product obsolescence, aging of inventories and other issues potentially affecting the saleable condition of products. In performing such evaluations, we use historical experience as well as current market information. With few exceptions, the saleable value of our inventories has historically been within management’s expectation and provisions established, however, rapid changes in the market due to competition, technology and various other factors could have an adverse effect on the saleable value of our inventories, resulting in the need for additional reserves.

Goodwill and Intangible Assets

Certain of our identifiable intangible assets, including customer relationships, brand names, technology, non-compete agreements and patents, are amortized on the straight-line method over their estimated useful lives which range from 3 to 20 years. Additionally, we have recorded goodwill and trademarks and trade names, all of which have indefinite useful lives and are therefore not amortized. All of our intangible assets and goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and goodwill and intangible assets with indefinite lives are reviewed for impairment at least annually. Our management is primarily responsible for determining if impairment exists and considers a number of factors, including third-party valuations, when making these determinations. In performing a review for goodwill impairment, management uses a two-step process that begins with an estimation of the fair value of the related operating segments. The first step is a review for potential impairment, and the second step measures the amount of impairment, if any. In performing our annual review for indefinite lived intangibles, management compares the current fair value of such assets to their carrying

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values. With respect to amortizable intangible assets when impairment indicators are present, management would determine whether non-discounted cash flows would be sufficient to recover the carrying value of the assets; if not, the carrying value of the assets would be adjusted to their fair value. On July 31, 2006, management concluded that none of our intangible assets or goodwill was impaired. While the results of these annual reviews have historically not indicated impairment, impairment reviews are highly dependent on management’s projections of our future operating results which management believes to be reasonable.

Long-lived assets

We evaluate the carrying value of long-lived assets including property, equipment and other assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An assessment is made to determine if the sum of the expected future non-discounted cash flows from the use of the assets and eventual disposition is less than the carrying value. If the sum of the expected non-discounted cash flows is less than the carrying value, an impairment loss is recognized based on fair value. With few exceptions, our historical assessments of our long-lived assets have not differed significantly from the actual amounts realized. However, the determination of fair value requires us to make certain assumptions and estimates and is highly subjective, and accordingly, actual amounts realized may differ significantly from our estimate.

Warranties

We provide for estimated costs that may be incurred to remedy deficiencies of quality or performance of our products at the time of revenue recognition. Most of our products have a one year warranty, although a majority of our endoscope reprocessing equipment in the United States carry a warranty period of up to fifteen months. We record provisions for product warranties as a component of cost of sales based upon an estimate of the amounts necessary to settle existing and future claims on products sold. The historical relationship of warranty costs to products sold is the primary basis for the estimate. A significant increase in third party service repair rates, the cost and availability of parts or the frequency of claims could have a material adverse impact on our results for the period or periods in which such claims or additional costs materialize. Management reviews its warranty exposure periodically and believes that the warranty reserves are adequate; however, actual claims incurred could differ from original estimates, requiring adjustments to the reserves.

Stock-Based Compensation

On August 1, 2005, we adopted SFAS No. 123R using the modified prospective method for the transition. Under the modified prospective method, stock compensation expense will be recognized for any option grant or stock award granted on or after August 1, 2005, as well as the unvested portion of stock options granted prior to August 1, 2005, based upon the award’s fair value. For fiscal 2005 and earlier periods, we have accounted for stock options using the intrinsic value method under which stock compensation expense is not recognized because we granted stock options with exercise prices equal to the market value of the shares at the date of grant.

Most of our stock options are subject to graded vesting in which portions of the option award vest at different times during the vesting period, as opposed to awards that vest at the end of the vesting period. We recognize compensation expense for options subject to graded vesting using the straight-line basis, reduced by estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.

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The stock-based compensation expense recorded in our Condensed Consolidated Financial Statements may not be representative of the effect of stock-based compensation expense in future periods due to the level of options issued in past years (which level may not be similar in the future), assumptions used in determining fair value, and estimated forfeitures. We estimate the fair value of each option grant on the date of grant using the Black-Scholes option valuation model. The determination of fair value using an option-pricing model is affected by our stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the option grant (which is determined by using the historical closing prices of our Common Stock), the expected dividend yield (which is expected to be 0%), and the expected option life (which is based on historical exercise behavior). If factors change and we employ different assumptions in the application of SFAS 123R in future periods, the compensation expense that we would record under SFAS 123R may differ significantly from what we have recorded in the current period.

Costs Associated with Exit or Disposal Activities

We recognize costs associated with exit or disposal activities, such as costs to terminate a contract, the exit or disposal of a business, or the early termination of a leased property, by recognizing the liability at fair value when incurred, except for certain one-time termination benefits, such as severance costs, for which the period of recognition begins when a severance plan is communicated to employees.

Inherent in the calculation of liabilities relating to exit and disposal activities are significant management judgments and estimates, including estimates of termination costs, employee attrition, and the interest rate used to discount certain expected net cash payments. Such judgments and estimates are reviewed by us on a regular basis. The cumulative effect of a change to a liability resulting from a revision to either timing or the amount of estimated cash flows is recognized by us as an adjustment to the liability in the period of the change.

Although we have historically recorded minimal charges associated with exit or disposal activities, we recorded $132,000 of severance costs, net of tax, as a loss from disposal of discontinued operations for the three months ended October 31, 2005 related to the sale of substantially all of Carsen’s assets on July 31, 2006.

Legal Proceedings

In the normal course of business, we are subject to pending and threatened legal actions. We record legal fees and other expenses related to litigation as incurred. Additionally, we assess, in consultation with our counsel, the need to record a liability for litigation and contingencies on a case by case basis. Amounts are accrued when we, in consultation with counsel, determine that a liability has been incurred and an amount of anticipated exposure can be reasonably estimated.

Income Taxes

We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities also include items recorded in conjunction with the purchase accounting for business acquisitions. We regularly review our deferred tax assets for recoverability and establish a valuation allowance, if necessary, based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. Although

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realization is not assured, management believes it is more likely than not that the recorded deferred tax assets, as adjusted for valuation allowances, will be realized. Additionally, deferred tax liabilities are regularly reviewed to confirm that such amounts are appropriately stated. Such a review considers known future changes in various effective tax rates, principally in the United States. If the United States effective tax rate were to change in the future, our items of deferred tax could be materially affected. All of such evaluations require significant management judgments.

It is our policy to establish reserves for exposures as a result of an examination by tax authorities. We establish the reserves based primarily upon management’s assessment of exposure associated with acquired companies and permanent tax differences. The tax reserves are analyzed periodically (at least annually) and adjustments are made, as events occur to warrant adjustment to the reserves. The majority of our income tax reserves originated from acquisitions.

Business Combinations

Acquisitions require significant estimates and judgments related to the fair value of assets acquired and liabilities assumed.

Certain liabilities are subjective in nature. We reflect such liabilities based upon the most recent information available. In conjunction with our acquisitions, such subjective liabilities principally include certain income tax and sales and use tax exposures, including tax liabilities related to our foreign subsidiaries. The ultimate settlement of such liabilities may be for amounts which are different from the amounts recorded.

Other Matters

We do not have any off balance sheet financial arrangements, other than operating leases.

Forward Looking Statements

This quarterly report on Form 10-Q contains “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 and releases issued by the Securities and Exchange Commission (the “SEC”) and within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are based on current expectations, estimates, or forecasts about our businesses, the industries in which we operate, and the beliefs and assumptions of management; they do not relate strictly to historical or current facts. We have tried, wherever possible, to identify such statements by using words such as “expect,” “anticipate,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,”  “may,” “could,” and variations of such words and similar expressions. In addition, any statements that refer to predictions or projections of our future financial performance, anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions about future events, activities or developments and are subject to numerous risks, uncertainties, and assumptions that are difficult to predict including, among other things, the following:

·the increasing market share of single-use dialyzers relative to reuse dialyzers

·the adverse impact of consolidation of dialysis providers

·uncertainties related to our assumption of direct sales and service of Medivators endoscope reprocessing products in the United States on August 2, 2006

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·our dependence on a concentrated number of distributors for our dental segment products

·our dependence on acquiring new businesses and successfully integrating and operating such businesses

·the uncertain outcome of plaintiff’s appeal of Summary Judgment dismissing a lawsuit filed against us that alleged violations of federal antitrust laws

·foreign currency exchange rate and interest rate fluctuations

·the impact of significant government regulation on our businesses

You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the foregoing items to be a complete list of all potential risks or uncertainties. See “Risk Factors” in our 2006 Form 10-K for a discussion of the above risk factors and certain additional risk factors that you should consider before investing in the shares of our common stock.

All forward-looking statements herein speak only as of the date of this Report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Foreign Currency Market Risk

A portion of our products are imported from the Far East and Western Europe. All of our operating segments sell a portion of their products outside of the United States and our Netherlands subsidiary sells a portion of its products outside of the European Union. Consequently, our business could be materially affected by the imposition of trade barriers, fluctuations in the rates of exchange of various currencies, tariff increases and import and export restrictions, affecting the United States, Canada and the Netherlands.

A portion of our Canadian subsidiaries’ inventories and operating costs (which are reported in the Water Purification and Filtration and Specialty Packaging segments) are purchased in the United States and a significant amount of their sales are to customers in the United States. The businesses of our Canadian subsidiaries could be materially and adversely affected by the imposition of trade barriers, fluctuations in the rate of currency exchange, tariff increases and import and export restrictions between the United States and Canada. Additionally, the financial statements of our Canadian subsidiaries are translated using the accounting policies described in Note 2 to 2006 Form 10-K. Fluctuations in the rates of currency exchange between the United States and Canada had an insignificant impact for the three months ended October 31, 2006, as compared with the three months ended October 31, 2005, upon our continuing results of operations and a positive impact on stockholders’ equity, as described in our MD&A.

Changes in the value of the euro against the United States dollar affect our results of operations because a portion of the net assets of Our Netherlands subsidiary (which are reported in our Dialysis and Endoscope Reprocessing segments) are denominated and ultimately settled in United States dollars but must be converted into its functional euro currency. Additionally,

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financial statements of the Netherlands subsidiary are translated using the accounting policies described in Note 2 to the 2006 Form 10-K. Fluctuations in the rates of currency exchange between the Euro and the United States dollar had an overall insignificant impact for the three months ended October 31, 2006, as compared with the three months ended October 31, 2005, upon our continuing results of operations as described in our MD&A, and had an adverse impact upon stockholders’ equity.

In order to hedge against the impact of fluctuations in the value of the euro relative to the United States dollar, we enter into short-term contracts to purchase euros forward, which contracts are generally one month in duration. These short-term contracts are designated as fair value hedge instruments. There was one foreign currency forward contract amounting to €294,000 at October 31, 2006 which covered certain assets and liabilities of Minntech’s Netherlands subsidiary which are denominated in United States dollars. Such contract expired on November 30, 2006. Under our credit facilities, such contracts to purchase euros may not exceed $12,000,000 in an aggregate notional amount at any time. For the three months ended October 31, 2006, such forward contracts were effective in offsetting most of the impact of the strengthening of the euro on our results of operations.

The functional currency of Minntech’s Japan subsidiary is the Japanese yen. Changes in the value of the Japanese yen relative to the United States dollar for the three months ended October 31, 2006 and 2005 did not have a significant impact upon either our results of operations or the translation of the balance sheet, primarily due to the fact that our Japanese subsidiary accounts for a relatively small portion of consolidated net sales, net income and net assets.

Interest Rate Market Risk

We have a United States credit facility for which the interest rate on outstanding borrowings is variable. Therefore, interest expense is principally affected by the general level of interest rates in the United States.

Market Risk Sensitive Transactions

Additional information related to market risk sensitive transactions is contained in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our 2006 Form 10-K.

ITEM 4.CONTROLS AND PROCEDURES.

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) 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 by the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

We, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer each concluded that our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and

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forms of the SEC.

We have evaluated our internal controls over financial reporting and determined that no changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting, except as described below.

Changes in Internal Control

On August 1, 2005, which was the first day of fiscal 2006, we acquired Crosstex, as more fully described in Note 3 to the Condensed Consolidated Financial Statements. For the three months ended October 31, 2006 and 2005, Crosstex represented a material portion of our sales, net income and net assets. In conjunction with the due diligence performed by us in connection with this acquisition, we determined that the overall internal control environment of Crosstex contained a number of significant deficiencies, some of which rise to the level of material weaknesses. Some of the more significant internal control weaknesses included the lack of segregation of duties, the need to hire a principal financial and accounting officer, numerous limitations with respect to the management information systems, lack of application of GAAP in certain aspects of financial reporting, and substandard monthly closing procedures.

We believe we have remedied the majority of the more significant internal control weaknesses at Crosstex. In order to achieve these objectives, we took a number of steps during fiscal 2006 and the three months ended October 31, 2006 including hiring a principal financial and accounting officer at Crosstex in October 2005, formalizing the monthly closing procedures and timing, and ensuring consistent and complete application of GAAP. Additionally, we have implemented a number of additional internal control procedures designed to ensure the completeness and accuracy of reported financial information, including periodic physical inventories, monthly account analyses and quarter-end field reviews by representatives of Cantel’s financial and accounting staff. We are relying extensively on detect controls with respect to reported month-end financial information until such time that appropriate prevent controls can be implemented. We have evaluated the management information systems at Crosstex and have selected a replacement of the existing system. The implementation process of this new system has recently commenced and is expected to be completed late in fiscal 2007. Since the acquisition, significant improvements have already been made in the overall Crosstex internal control environment and will continue to be made throughout fiscal 2007. The most significant changes anticipated for fiscal 2007 are the implementation of a new management information system as discussed above and continued strengthening of the accounting and financial staff at Crosstex by hiring additional personnel. However, no assurances can be given that the implementation of the new management information system will be completed during fiscal 2007 and that such related controls will be operating effectively by July 31, 2007.

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PART II - OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

See Part I, Item 1. – Note 13 above.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchase of equity securities by Cantel:

On April 13, 2006, our Board of Directors approved the repurchase of up to 500,000 shares of our outstanding Common Stock. Under the repurchase program we repurchase shares from time-to-time at prevailing prices and as permitted by applicable securities laws (including SEC Rule 10b-18) and New York Stock Exchange requirements, and subject to market conditions. The repurchase program has a one-year term ending April 12, 2007.

The first purchase under our repurchase program occurred on April 19, 2006. Through October 31, 2006, we had completed the repurchase of 392,000 shares under the repurchase program. Through November 30, 2006, we had completed the repurchase of 464,800 shares under the repurchase program.

The following table summarizes the repurchase of Common Stock under the repurchase program by quarter during fiscal years 2007 and 2006:

			Total number of shares	Maximum number of
			purchased as part of	shares that may yet
	Total number of	Average price	publicly announced	be purchased under
Period	shares purchased	paid per share	plans or programs	the program
4/19/06 through 4/30/06	123,300	$14.63	123,300	376,700
5/1/06 through 7/31/06	179,700	$13.88	303,000	197,000
8/1/06 through 10/31/06	89,000	$13.56	392,000	108,000
11/1/06 through 11/30/06	72,800	$13.89	464,800	35,200

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ITEM 6.EXHIBITS

31.1– Certification of Principal Executive Officer.

31.2– Certification of Principal Financial Officer.

32– Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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.

	CANTEL MEDICAL CORP.
Date:  December 11, 2006
	By:	/s/ James P. Reilly
		James P. Reilly, President
		and Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ Craig A. Sheldon
		Craig A. Sheldon,
		Senior Vice President and
		Chief Financial Officer (Principal
		Financial and Accounting Officer)
	By:	/s/ Steven C. Anaya
		Steven C. Anaya,
		Vice President and Controller

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