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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2006

COMMISSION FILE NUMBER 0-13251

MEDICAL ACTION INDUSTRIES INC.

(Exact name of Registrant as specified in its charter)

800 Prime Place, Hauppauge, New York 11788

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code:

(631) 231-4600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ            No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨                Accelerated filer  þ                Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):

Yes  ¨            No  þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 10,541,857 shares of common stock as of February 7, 2007.

Table of Contents

Form 10-Q

CONTENTS

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Item 1.

MEDICAL ACTION INDUSTRIES INC.

Consolidated Balance Sheets

(dollars in thousands)

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

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Item 1.

MEDICAL ACTION INDUSTRIES INC.

Consolidated Balance Sheets

(dollars in thousands)

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

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Item 1.

MEDICAL ACTION INDUSTRIES INC.

Consolidated Statements of Earnings

(dollars in thousands except per share data)

(Unaudited)

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

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Item 1.

MEDICAL ACTION INDUSTRIES INC.

Consolidated Statements of Earnings

(dollars in thousands except per share data)

(Unaudited)

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

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Item 1.

MEDICAL ACTION INDUSTRIES INC.

Consolidated Statements of Cash Flows

(dollars in thousands)

(Unaudited)

The accompanying notes are an integral part of these financial statements

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Item 1.

MEDICAL ACTION INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q for quarterly reports under section 13 or 15(d) of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended December 31, 2006 are not necessarily indicative of the results that may be expected for the year ended March 31, 2007. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report for the year ended March 31, 2006.

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

STOCK COMPENSATION

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) requires that stock-based employee compensation be recorded as a charge to earnings. SFAS 123(R) is effective for interim and annual financial statements for years beginning after December 15, 2005 and will apply to all outstanding and unvested share-based payments at the time of adoption. Accordingly, we have adopted SFAS 123(R) commencing April 1, 2006 using a modified prospective application, as permitted by SFAS 123(R). Accordingly, prior period amounts have not been restated. Under this application, we are required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.

Prior to the adoption of SFAS No. 123(R), we applied Accounting Principles Board Opinions (“APB”) No. 25 and related interpretations to account for our stock plans resulting in the intrinsic value to value the stock. Under APB 25, we were not required

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Note 1. (continued)

to recognize compensation expense for the cost of stock options. In accordance with the adoption of SFAS 123(R), we recorded stock-based compensation expense for the cost of non-qualified stock options granted under our stock plans. Stock-based compensation expense recognized under the provisions of SFAS 123(R) were $357,000 ($220,000 after tax) and $1,159,000 ($713,000 after tax) or $.02 and $.07 per basic and diluted share for the three and nine months ended December 31, 2006, respectively.

Note 2. STOCK-BASED COMPENSATION PLANS

During fiscal 1990, the Company’s Board of Directors and stockholders approved a Non-Qualified Stock Option Plan (the “Non-Qualified Option Plan”). The Non-Qualified Option Plan, as amended, authorizes the granting to employees of the Company options to purchase an aggregate of 2,650,000 shares of the Company’s common stock. The options are granted with an exercise price equal to the fair market price or at a value that is not less than 85% of the fair market value on the date of grant. The options are exercisable in two installments on the second and third anniversary of the date of grant. Options expire from five to ten years from the date of grant unless the employment is terminated, in which event, subject to certain exceptions, the options terminate two months subsequent to date of termination.

In 1994, the Company’s Board of Directors and stockholders approved the 1994 Stock Incentive Plan (the “Incentive Plan”), which, as amended, covers 2,350,000 shares of the Company’s common stock. The Incentive Plan, which expires in 2015, permits the granting of incentive stock options, shares of restricted stock and non-qualified stock options. All officers and key employees of the Company and its affiliates are eligible to participate in the Incentive Plan. The Incentive Plan is administered by the Compensation Committee of the Board of Directors, which determines the persons to whom, and the time at which, awards will be granted. In addition, the Compensation Committee decides the type of awards to be granted and all other related terms and conditions of the awards. The per share exercise price of any option may not be less than the fair market value of a share of common stock at the time of grant. No incentive options have been issued under this plan.

The following is a summary of the changes in restricted stock granted under the 1994 Stock Incentive Plan for the nine months ended December 31, 2006:

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Note 2. (continued)

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

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

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

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

The following is a summary of the changes in outstanding options for the nine months ended December 31, 2006:

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Note 2. (continued)

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

The weighted average fair value of options granted was $10.46 and $9.31 for the three and nine months ended December 31, 2006, respectively. As of December 31, 2006, there was $2,348,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Company’s plans; that cost is expected to be recognized over a period of three years.

Prior to April 1, 2006, we accounted for stock-based compensation to employees and directors in accordance with the intrinsic value method under APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under the intrinsic value method, no compensation expense was recognized in our financial statements for the stock-based compensation, because the stock-based compensation that we granted was non-qualified stock options and all of the stock options granted had exercise prices equivalent to the fair market value of our common stock on the grant date. We also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended, “Accounting for Stock-Based Compensation-Transition and Disclosure”.

Pro forma information required under SFAS No. 123 for periods prior to fiscal 2007 as if the Company had applied the fair value recognition provisions of SFAS No. 123, to options granted under the Company’s equity incentive plans, was as follows:

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Note 3. INVENTORIES

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

At December 31, 2006, MMP net inventories accounted for approximately $11,571,000 or 34% of total net inventories. On an ongoing basis, inventory quantities on hand are reviewed and an analysis of the provision for excess and obsolete inventory is performed based primarily on the Company’s estimated sales forecast of product demand, which is based on sales history and anticipated future demand. Such provision for excess and obsolete inventory approximated $555,000 and $174,000 at December 31, 2006 and March 31, 2006, respectively.

Note 4. NET INCOME PER SHARE

Basic earnings per share is based on the weighted average number of common shares outstanding without consideration of potential common shares. Diluted earnings per share is based on the weighted average number of common and potential common shares outstanding. The calculation takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average prices during the periods. Excluded from the calculation of earnings per share are options to purchase 204,000 shares for the three and nine months ended December 31, 2005, as their inclusion would not have been dilutive. The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended December 31, 2006 and for the three and nine months ended December 31, 2005.

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Note 4. (continued)

Note 5. SHAREHOLDER’S EQUITY

For the three and nine months ended December 31, 2006, 4,500 and 13,906 stock options were exercised by employees of the Company in accordance with the Company’s 1994 Stock Incentive Plan. The exercise price of the options exercised ranged from $12.75 per share to $16.31 per share for the three months ended December 31, 2006 and $12.75 per share to $17.22 per share for the nine months ended December 31, 2006. The net cash proceeds from these exercises were $64,000 and $213,000 for the three and nine months ended December 31, 2006, respectively.

For the three and nine months ended December 31, 2005, 7,700 and 172,075 stock options were exercised by employees of the Company in accordance with the Company’s 1989 Non-Qualified Stock Option Plan and the 1994 Stock Incentive Plan, respectively. The exercise price of the options exercised ranged from $4.00 per share to $13.95 per share for the three months ended December 31, 2005 and $2.88 per share to $13.97 per share for the nine months ended December 31, 2005. The net cash proceeds from these exercises were $57,000 and $1,604,000 for the three and nine months ended December 31, 2005, respectively.

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Note 6. ACQUISITIONS

On October 17, 2006, the Company acquired, through one of its subsidiaries, the membership interest of MMP. MMP is in the business of manufacturing and distributing disposable plastic products for the medical and laboratory markets. MMP markets its products primarily under the trade names Medegen and Vollrath. The purchase price for the assets acquired including related closing costs was approximately $80,455,000.

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

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

MMP is engaged in the business of high speed injection molding manufacturing, specializing in disposable products in the health care market. Essentially, the acquisition increased the Company’s market share in these products, while gaining manufacturing efficiencies and the benefit of increased purchasing power and lower material costs. As a result of the acquisition, the Company has projected

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Note 6. (continued)

approximately $104,000,000 on an annualized basis of incremental sales primarily to existing customers of injection molded and disposable products with limited incremental selling and general administrative expenses. The aforementioned were the primary reasons for the acquisition and the main factors that contributed to the purchase price, which resulted in the recognition of goodwill. For tax purposes, the goodwill will be deductible.

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

The Company utilized cash on hand and the funds available under its credit agreement in order to satisfy the purchase price. The purchase price allocation is subject to certain adjustments, none of which are anticipated to be material, because the valuation of the assets and acquisition costs have not been finalized.

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

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

The pro forma financial information presented above for the three and nine months ended December 31, 2006 and 2005 is not necessarily indicative of either the results of operations that would have occurred had the acquisition taken place at the beginning of the period presented or of future operating results of the combined companies.

Note 7. LONG-TERM DEBT

On October 17, 2006, the Company entered into a credit agreement with certain lenders and a bank acting as administration agent for the lenders (the “Credit Agreement”). The Credit Agreement provides for borrowing of $75,000,000 and is divided into two types of

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Note 7. (continued)

borrowing facilities, (i) a term loan with a principal amount of $65,000,000 which is payable in twenty consecutive equal quarterly installments which will commence on March 31, 2007, and (ii) revolving credit loans, which amounts may be borrowed, repaid and reborrowed up to $10,000,000. As of December 31, 2006, $62,000,000 is outstanding on the term loan and zero is outstanding on the revolving credit loans.

Both the term loan and revolving credit loans bear interest at the “alternate base rate” plus the applicable margin or at the Company’s option the “LIBOR rate” plus the “applicable margin.” The alternate base rate shall mean a rate per annum equal to the greater of (a) the Prime rate or (b) the Base CD rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus  ¹/2 of 1%. “Applicable margin” shall mean with respect to an adjusted LIBOR loan a range of 75 basis points to 150 basis points. With respect to an alternate base rate loan, the applicable margin shall range from 0 basis points to 50 basis points. The rates for both LIBOR and alternate base rate loans are established quarterly based upon agreed upon financial ratios. Borrowings under this agreement are collateralized by all the assets of the Company, and the agreement contains certain restrictive covenants, which, among other matters, impose limitations with respect to the incurrence of liens, guarantees, merger, acquisitions, capital expenditures, specified sales of assets and prohibits the payment of dividends. The Company is also required to maintain various financial ratios which will be measured quarterly. As of December 31, 2006, the Company is in compliance with all such covenants and financial ratios.

Note 8. SUBSEQUENT EVENTS

In January 2007, the Company’s Board of Directors declared a three-for-two split of the Company’s common stock, effected in the form of a 50 percent stock dividend, to shareholders of record as of January 23, 2007, with a distribution date of February 8, 2007 (shares begin trading on a post-split basis on February 9, 2007). This stock split will result in the issuance of approximately 5,269,000 additional shares of common stock and will be accounted for by the transfer of approximately $5,000 from additional paid-in capital and retained earnings to common stock. Pro forma earnings per share amounts on a post-split basis for the three and nine months ended December 31, 2006 and 2005 would be as follows:

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Note 8. (continued)

Information presented in the Condensed Consolidated Financial Statements and related notes have not been restated to reflect the three-for-two stock split.

Note 9. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs” (“SFAS 151”). SFAS 151 amends the guidance in Chapter 4 of Accounting Research Bulletin No. 43, “Inventory Pricing” to clarify the accounting for amounts of idle facility expense, freight, handling costs and wasted material. SFAS 151 requires that these types of items be recognized as current period charges as they occur. The provisions of SFAS 151 are effective for inventory costs incurred during fiscal years beginning after September 15, 2005. The adoption of this new pronouncement did not have a material impact on the Company’s financial position, results of operations or cash flow.

In December 2004, the FASB issued SFAS No. 123(R), “Accounting for Stock-Based Compensation” (“SFAS 123(R)”). SFAS 123(R) establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123(R) requires that the fair value of such equity instruments be recognized as expense in the historical financial statements as services are performed. See Footnote 1 for the impact on the Company’s financial position and results of operations.

In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have a material impact on the Company’s financial position, results of operations or cash flow.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”). Due to diversity in practice among registrants, SAB 108 expresses SEC staff views regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement is necessary. SAB 108 is effective for fiscal years ending after November 15, 2006, and early application is encouraged. The Company does not believe SAB 108 will have a material impact on its financial position or results from operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively for

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Note 9. (continued)

fiscal years beginning after November 15, 2007, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The Company is currently evaluating the impact this new standard will have on its future results of operations and financial position.

Note 10. OTHER MATTERS

The Company is a party to a lawsuit arising out of the conduct in the ordinary course of business. While the results of this lawsuit cannot be predicted with certainty, management does not expect that the ultimate liabilities, if any, will have a material adverse effect on the financial position or results of operations of the Company.

The Company is currently in negotiations for a new Collective Bargaining Agreement, which expired in March 2006, with union employees at the Company’s Gallaway, Tennessee facility.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statement

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

Important factors and risks that could cause actual results to differ materially from those referred to in the forward-looking statements include, but are not limited to, the effect of economic and market conditions, the impact of the consolidation throughout the healthcare supply chain, the impact of healthcare reform, opportunities for acquisitions and the Company’s ability to effectively integrate acquired companies, the ability of the Company to maintain its gross profit margins, the ability to obtain additional financing to expand the Company’s business, the failure of the Company to successfully compete with the Company’s competitors that have greater financial resources, the loss of key management personnel or the inability of the Company to attract and retain qualified personnel, the impact of current or pending legislation and regulation, as well as the risks described from time to time in the Company’s filings with the Securities and Exchange Commission, which include this report on Form 10-Q and the Company’s annual report on Form 10-K for the year ended March 31, 2006.

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

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Item 2.

Three Months ended December 31, 2006 compared to Three Months ended December 31, 2005

Overview

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

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

The Company’s revenue increased by $27,280,000 or 69% to $66,719,000 and its net income increased by $1,010,000 or 32% to $4,148,000 for the quarter ended December 31, 2006 over the quarter ended December 31, 2005.

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

Containment systems for medical waste and the product lines added as a result of the acquisition of MMP on October 17, 2006, represent approximately 45% of the Company’s revenue. The primary raw material utilized in the manufacture of these product lines is plastic resin. In recent years, world events have caused the cost of plastic resin to increase and be extremely volatile. The Company

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anticipates that such volatility may continue in the future. In the past, the Company has been able, from time to time, to increase selling prices for certain of these products to recover a portion of the increased cost. However, the Company is unable to give any assurance that it will be able to pass along future cost increases to its customers, if necessary.

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

Results of Operations

The following table sets forth the major sales variance components for the quarter ended December 31, 2006 versus December 31, 2005:

Net sales for the three months ended December 31, 2006 increased $27,280,000 or 69% to $66,719,000 from $39,439,000 for the three months ended December 31, 2005. The increase in net sales of $27,280,000 was primarily attributed to net sales of approximately $21,263,000 of disposable patient utensils for the laboratory and medical markets, a $3,384,000 or 28% increase of minor procedure kits and trays, a $1,176,000 or 135% increase of protective apparel and a $935,000 or 16% increase in operating room towels. The increase in net sales was primarily attributed to $21,263,000 due to net sales of products from the Company’s acquisition on October 17, 2006, $823,000 of net sales of new products, an increase of $3,083,000 due to increased sales volume of existing products and an increase of $2,111,000 due to higher average selling price and change in sales mix of existing products.

Net sales of minor procedure kits and trays, protective apparel, and operating room towels was increased primarily due to greater domestic market penetration. Unit sales of minor procedure kits and trays increased 12% and average selling prices increased 10%. Unit sales of protective apparel increased 98% and average selling prices increased approximately 18%. Unit sales of operating room towels increased 12% and average selling prices increased 3%. Unit sales of laparotomy sponges decreased 1% and average selling prices increased 3%. Management believes that the increase in average selling prices of minor procedure kits and trays was a result of shift in sales mix to kits with enhanced components. Net sales of disposable patient utensils of approximately $21,263,000 was due to the Company’s acquisition of MMP on October 17, 2006.

Gross profit for the three months ended December 31, 2006 increased 58% to $16,607,000 from $10,480,000 for the three months ended December 31, 2005. Gross profit as a percentage of net sales for the three months ended December 31, 2006 decreased to 24.9% from 26.6% for the three months ended December 31, 2005. Gross profit dollars increased primarily due to increased sales

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volume from greater domestic market penetration primarily of its minor procedure kits and trays product line and net sales of products as a result of the acquisition of MMP on October 17, 2006. Gross margin as a percentage of sales decreased primarily due to a change in sales mix as a result of the MMP acquisition, which accounted for approximately $4,386,000 of gross margin at 21%.

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

Selling, general and administrative expenses for the three months ended December 31, 2006 increased 66% to $8,978,000 from $5,393,000 for the three months ended December 31, 2005. As a percentage of net sales, selling, general and administrative expenses decreased to 13.5% for the three months ended December 31, 2006 from 13.7% for the three months ended December 31, 2005. Selling, general and administrative expenses increased primarily due to increased expenses associated with the MMP acquisition of approximately $2,711,000, increased compensation and related expenses of $852,000 incurred as a result of the Company’s current and anticipated future growth. Approximately $283,000 of the compensation and related expenses are attributable to the Company’s implementation of SFAS No. 123(R) (Accounting for Stock Based Compensation).

Interest expense for the three months ended December 31, 2006 increased to $888,000 from $5,000 for the three months ended December 31, 2005. Interest income for the three months ended December 31, 2006 decreased $9,000 to $77,000 from $86,000 for the three months ended December 31, 2005. The increase in interest expense and decrease in interest income was attributable to a net increase in the average principal loan balances outstanding and a decrease in the average cash and cash equivalents balance during the quarter ended December 31, 2006 as compared to the quarter ended December 31, 2005. Interest income also increased to a lesser extent due to increased interest rates. The increase in loan balances and decrease in cash and cash equivalents was primarily attributable to purchase price and related acquisition costs associated with the MMP acquisition.

Net income for the three months ended December 31, 2006 increased to $4,148,000 from $3,138,000 for the three months ended December 31, 2005. The increase in net income is attributable to the aforementioned increase in net sales and gross profit, which were partially offset by a decrease in interest income, an increase in interest expense and an increase in selling, general and administrative expenses.

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Nine Months ended December 31, 2006 compared to Nine Months ended December 31, 2005

Overview

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

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

The Company’s revenue increased by $34,913,000 or 31% to $147,923,000 and its net income increased by $1,155,000 or 13% to $9,742,000 for the nine months ended December 31, 2006 over the nine months ended December 31, 2005.

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

Containment systems for medical waste and the product lines added as a result of the acquisition of MMP on October 17, 2006, represents approximately 45% of the Company’s revenue. The primary raw material utilized in the manufacture of this product line is plastic resin. In recent years, world events have caused the cost of plastic resin to increase and be extremely volatile. The Company anticipates that such volatility may continue in the future. In the past, the Company has been able, from time to time, to increase selling prices for certain of these products to recover a portion of the increased cost. However, the Company is unable to give any assurance that it will be able to pass along future cost increases to its customers, if necessary.

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Item 2.

Gross margin dollars increased primarily due to net sales of products from the Company’s acquisition and due to increased sales volume from greater domestic market penetration primarily of its minor procedure kits and trays product line and its containment systems for medical waste product line. Gross margin as a percentage of sales decreased primarily due to a change in sales mix also as a result of the acquisition.

Results of Operations

The following table sets forth the major sales variance components for the nine months ended December 31, 2006 versus December 31, 2005:

Net sales for the nine months ended December 31, 2006 increased $34,913,000 or 31% to $147,923,000 from $113,010,000 for the nine months ended December 31, 2005. The increase in net sales of $34,913,000 was primarily attributed to net sales of approximately $21,263,000 of disposable patient utensils for the laboratory and medical markets, a $7,155,000 or 22% increase of minor procedure kits and trays, a $2,011,000 or 6% increase in net sales of containment systems for medical waste, a $2,264,000 or 93% increase in net sales of protective apparel and a $1,822,000 or 10% increase in net sales of operating room towels. The increase in net sales was primarily attributed to $21,263,000 due to net sales of products from the Company’s acquisition on October 17, 2006, a $1,928,000 of net sales of new products, an increase of $8,639,000 due to increased sales volume of existing products and an increase of $3,083,000 due to higher average selling prices and change in sales mix of existing products.

Net sales of containment systems for medical waste, minor procedure kits and trays, protective apparel and operating room towels increased primarily due to greater domestic market penetration. Unit sales of minor procedure kits and trays increased 15% and average selling prices increased 6%. Unit sales of containment systems for medical waste increased 3% and average selling prices increased approximately 3%. Unit sales of operating room towels increased 10% and average selling prices remained approximately the same. Unit sales of laparotomy sponges decreased 2% and average selling prices decreased 1%. Management believes that the decrease in average selling prices of laparotomy sponges was primarily due to increased competition in the domestic market, which it believes will continue throughout fiscal 2007. Management believes that the increase in net selling prices in containment systems was as a result of increased selling prices for certain of these products to recover a portion of increased resin costs. Management believes that the increase in net selling prices of minor procedure kits and trays was as a result of a shift in sales mix to kits with enhanced components. Net sales of disposable patient utensils of approximately $21,263,000 was due to the Company’s acquisition of MMP on October 17, 2006.

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Item 2.

Gross profit for the nine months ended December 31, 2006 increased 26% to $36,934,000 from $29,287,000 for the nine months ended December 31, 2005. Gross profit as a percentage of net sales for the nine months ended December 31, 2006 decreased to 25.0% from 25.9% for the nine months ended December 31, 2005. Gross profit dollars increased primarily due to net sales of products as a result of the acquisition of MMP on October 17, 2006 and increased sales volume from greater domestic market penetration primarily of its minor procedure kits and trays product line, containment systems for medical waste product line, protective apparel and operating room towels. Gross margin as a percentage of sales decreased primarily due to a change in sales mix as a result of the MMP acquisition, which accounted for approximately $4,386,000 of gross margin at 21%.

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

Selling, general and administrative expenses for the nine months ended December 31, 2006 increased 33% to $20,603,000 from $15,522,000 for the nine months ended December 31, 2005. As a percentage of net sales, selling, general and administrative expenses increased to 13.9% for the nine months ended December 31, 2006 from 13.7% for the nine months ended December 31, 2005. Selling, general and administrative expenses increased primarily due to increased expenses associated with MMP acquisition of approximately $2,711,000 and increased compensation and related expenses of $2,016,000 incurred as a result of the Company’s current and anticipated future growth. Approximately $1,034,000 of the compensation and related expenses are attributable to the Company’s implementation of SFAS No. 123(R) (Accounting for Stock Based Compensation).

Interest expense for the nine months ended December 31, 2006 increased to $900,000 from $43,000 for the nine months ended December 31, 2005. Interest income for the nine months ended December 31, 2006 increased $304,000 to $410,000 from $106,000 for the nine months ended December 31, 2005. The increase in interest expense and increase in interest income was attributable to a net increase in the average principal loan balances outstanding and an increase in the average cash and cash equivalents balance during the nine months ended December 31, 2006 as compared to the nine months ended December 31, 2005. Interest income also increased to a lesser extent due to increased interest rates. The increase in loan balances was primarily attributable to purchase price and related acquisition costs associated with the MMP acquisition.

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Item 2.

Net income for the nine months ended December 31, 2006 increased to $9,742,000 from $8,587,000 for the nine months ended December 31, 2005. The increase in net income is attributable to the aforementioned increase in net sales, gross profit and interest income, which were partially offset by an increase in selling, general and administrative expenses and interest expense.

Liquidity and Capital Resources

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

The Company had working capital of $19,071,000 with a current ratio of 1.5 to 1 at December 31, 2006 as compared to working capital of $37,430,000 with a current ratio of 4.8 to 1 at March 31, 2006. Total borrowings outstanding were $64,530,000 with a debt to equity ratio of .69 to 1 at December 31, 2006 as compared to $2,800,000 with a debt to equity ratio of .03 to 1 at March 31, 2006. The decrease in cash at December 31, 2006 was primarily attributable to net cash used in financing activities of $81,292,000.

The Company has financed its operations primarily through cash flow from operations. At December 31, 2006, the Company had a cash balance of $3,177,000 compared to $16,068,000 at March 31, 2006.

The Company’s operating activities provided cash of $6,479,000 for the nine months ended December 31, 2006 as compared to $11,074,000 provided for the nine months ended December 31, 2005. Net cash provided during the nine months ended December 31, 2006 consisted primarily of net income from operations, depreciation and amortization, stock-based compensation, an increase in income taxes payable and an increase in accrued expenses, payroll and payroll taxes. This was partially offset by increases in accounts receivable, inventories, prepaid expenses and other current assets and other assets. The increase in accounts receivable at December 31, 2006 was due to a higher concentration of sales at the end of the quarter when compared to the quarter ended March 31, 2006. The increase in inventories was due to increased stocking requirements necessary to support increased sales volume and due to purchasing strategies.

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Item 2.

Investing activities used net cash of $81,292,000 and $715,000 for the nine months ended December 31, 2006 and December 31, 2005, respectively. The principal use during the nine months ended December 31, 2006 was for the acquisition of MMP on October 17, 2006. The purchase price and related acquisition costs for MMP was approximately $80,455,000. In addition, the Company’s purchases of property, plant and equipment amounted to $963,000 for the nine months ended December 31, 2006.

Financing activities provided cash of $61,922,000 for the nine months ended December 31, 2006 compared to $1,334,000 for the nine months ended December 31, 2005. Financing activities during the nine months ended December 31, 2006 consisted of net borrowings under the Company’s credit facilities of $61,709,000, principally to finance the acquisition of MMP. Other financing activities include cash proceeds from the exercise of employee stock options of $213,000.

During the three months ended December 31, 2006, the Company implemented a new enterprise resource planning system. As of December 31, 2006, the Company has incurred approximately $2,027,000 in costs related to this project which is included in other assets. Approximately $858,000 of these costs were incurred during the nine months ended December 31, 2006. The Company will depreciate the costs related to this project on a straight-line basis over the estimated useful life of the asset (7 years).

On October 17, 2006, the Company entered into a credit agreement with certain lenders and a bank acting as administration agent for the lenders (the “Credit Agreement”). The Credit Agreement provides for borrowing of $75,000,000 and is divided into two types of borrowing facilities, (i) a term loan with a principal amount of $65,000,000 which is payable in twenty consecutive equal quarterly installments which will commence on March 31, 2007, and (ii) revolving credit loans, which amounts may be borrowed, repaid and reborrowed up to $10,000,000. As of December 31, 2006, $62,000,000 is outstanding on the term loan and zero is outstanding on the revolving credit loans.

Both the term loan and revolving credit loans bear interest at the “alternate base rate” plus the applicable margin or at the Company’s option the “LIBOR rate” plus the “applicable margin.” The alternate base rate shall mean a rate per annum equal to the greater of (a) the Prime rate or (b) the Base CD rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus  ¹/2 of 1%. “Applicable margin” shall mean with respect to an adjusted LIBOR loan a range of 75 basis points to 150 basis points. With respect to an alternate base rate loan, the applicable margin shall range from 0 basis points to 50 basis points. The rates for both LIBOR and alternate base rate loans are established quarterly based upon agreed upon financial ratios. Borrowings under this agreement are collateralized by all the assets of the Company, and the agreement contains certain restrictive covenants, which, among other matters, impose limitations with respect to the incurrence of liens, guarantees, merger, acquisitions, capital expenditures, specified sales of assets and prohibits the payment of dividends. The Company is also required to maintain various financial ratios which will be measured quarterly. As of December 31, 2006, the Company is in compliance with all such covenants and financial ratios.

As of September 21, 2006 the Company has entered into an agreement to purchase a building in the Hauppauge, NY area for approximately $4,000,000 to function as its corporate headquarters. The Company plans on financing the purchase price with its revolving credit agreement and cash provided by operations.

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Item 2.

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

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to interest rate change market risk with respect to its credit facility with a financial institution which is priced based on the alternate base rate of interest plus a spread of up to 1%, or at LIBOR rate plus a spread of up to 1  ¹/2 %. The spread over the alternate base rate and LIBOR rates is determined based upon the Company’s performance with regard to agreed-upon financial ratios. The Company decides at its sole discretion as to whether borrowings will be at the alternate base rate or LIBOR. At December 31, 2006, $62,000,000 was outstanding under the credit facility. Changes in the alternate base rates or LIBOR rates during fiscal 2007 will have a positive or negative effect on the Company’s interest expense. Each 1% fluctuation in the interest rate will increase or decrease interest expense for the Company by approximately $620,000 on an annualized basis.

In addition, the Company is exposed to interest rate change market risk with respect to the proceeds received from the issuance and sale by the Buncombe County Industrial and Pollution Control Financing Authority Industrial Development Revenue Bonds. At December 31, 2006, $2,530,000 was outstanding for these Bonds. The Bonds bear interest at a variable rate determined weekly. During the nine months ended December 31, 2006, the average interest rate on the Bonds approximated 3.7%. Each 1% fluctuation in interest rates will increase or decrease the interest expense on the Bonds by approximately $25,000 on an annualized basis.

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

Item 4.

Controls and Procedures

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

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Item 4.

period covered by this report, our disclosure controls and procedures were effective for the purpose of ensuring that material information required to be in this quarterly report is made known to them by others on a timely basis.

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

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

Change to Internal Control over Financial Reporting

On October 17, 2006, the Company acquired, through one of its subsidiaries, the membership interest of MMP. The Company’s management performed due diligence procedures associated with the acquisition. During these due diligence procedures and in the time subsequent to the acquisition, management found no significant deficiencies or material weaknesses in the design of MMP’s disclosure controls.

On December 4, 2006 the Company converted its Enterprise Resource Planning system to SAP. As a result of the conversion, management has performed an evaluation of the Company’s disclosure controls post-conversion. The Company has determined that disclosure controls that have changed due to the SAP conversion, although minimal, are properly designed.

We are involved in ongoing evaluations of internal controls. In anticipation of the filing of this Form 10-Q, our Chief Executive Officer and Principal Financial Officer, with the assistance of other members of our management, reviewed our internal controls and have determined, based on such review and excluding the above, that there have been no further changes in internal control over financial reporting during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.

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MEDICAL ACTION INDUSTRIES INC.

PART II – OTHER INFORMATION

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

None

None

None

None

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

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

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

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