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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the Fiscal Year ended March 31, 2008

For the transition period              to             

Commission File No. 0-13251

MEDICAL ACTION INDUSTRIES INC.

(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  x.

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 12-b of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    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  x

The aggregate market value of the registrant’s Common Stock held by nonaffiliates of the registrant as of September 28, 2007, the last business day of registrant’s most recently completed second quarter, was approximately $347,000,000. Shares of Common Stock held by each officer and director of the registrant and by each person who may be deemed to be an affiliate have been excluded.

As of June 11, 2008, 16,020,661 shares of the registrant’s Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for registrant’s 2008 Annual Meeting to be filed pursuant to Regulation 14A within 120 days following registrant’s fiscal year ended March 31, 2008, are incorporated by reference into Part III of this Report.

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PART I

Unless otherwise indicated in this report, “we,” “us,” “our”, and similar terms refer to Medical Action Industries Inc. and its subsidiaries unless context requires otherwise.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Report includes “forward-looking statements” 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”). All statements other than statements of historical fact are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives for management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any forward-looking statement. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “potential,” or “continue,” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including the integration of Medegen Medical Products, LLC’s (“Medegen” or “MMP”) operations and consolidation of facilities, termination or interruption of relationships with our suppliers, potential delays in obtaining regulatory approvals, product recalls, product liability claims, our inability to successfully manage growth through acquisitions, our failure to comply with governing regulations, risks of international procurement of raw materials and finished goods, market acceptance of our products, market price of our Common Stock, foreign currency fluctuations, resin volatility and other factors referred to in our press releases and reports filed with the Securities and Exchange Commission (the “SEC”). All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Additional factors that may have a direct bearing on our operating results are described under Item 1A. “Risk Factors” beginning on page 20.

ITEM 1 – BUSINESS

Company Background

Medical Action Industries Inc. (“Medical Action” or the “Company”) was incorporated under the laws of the State of New York on April 1, 1977, and re-incorporated under the laws of the State of Delaware on November 5, 1987. Headquartered in Hauppauge, New York, Medical Action develops, manufactures, markets and supplies a variety of disposable medical products. The Company’s products are marketed primarily to acute care facilities in domestic and certain international markets. In recent years the Company has expanded its end-user markets to include physician, dental and veterinary offices, out-patient surgery centers, long-term care facilities and laboratories. Medical Action is a leading manufacturer and supplier of patient

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bedside products, collection systems for the containment of medical waste products, minor procedure kits and trays, sterile disposable operating room towels and sterile disposable laparotomy sponges. The Company’s products are marketed nationally by its direct sales personnel and extensive network of healthcare distributors. Medical Action has entered into preferred vendor agreements with national and regional distributors, as well as sole and multi source agreements with group purchasing organizations. The Company also offers OEM manufacturing capabilities of its products under private label programs to supply chain partners and medical suppliers. Medical Action’s manufacturing, packaging and warehousing activities are conducted in its Arden, North Carolina, Clarksburg, West Virginia, Gallaway, Tennessee and Northglenn, Colorado facilities. The Company’s procurement of certain products and raw materials from the People’s Republic of China is administered by its office in Shanghai, China.

Business Strategy

The Company’s strategy is to focus its resources on entering new markets for its existing product lines, including alternate care, physician, veterinary and dental markets; accelerate the internal development of new products for its existing markets; pursue acquisitions that complement existing product lines; introduce its products into the international marketplace and increase productivity by maximizing the utilization of its existing facilities.

Since 1994, the Company has engaged in an active acquisition program completing ten transactions. These transactions include:

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The Company’s products are divided into six (6) categories:

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Within each of these categories are multiple product lines that have either been internally developed or acquired, as set forth below:

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The following paragraphs contain a brief description of, and provide other information regarding, Medical Action’s key products:

Patient Bedside Utensils

Wash Basins – Used in both hospital in-patient setting, as well as in nursing homes and other long term convalescent care applications, polypropylene wash basins come in a range of sizes and colors. They are available in disposable, plastic single patient reusable, and stainless steel fully-reusable designs.

Bedpans – For immobile patients bedpans come in conventional, over the commode seat, stackable and pontoon styles. Polypropylene bedpans come in a range of sizes and colors and are available in disposable, plastic single patient reusable, and stainless steel fully-reusable designs.

Pitchers & Carafes – Are available in reusable and disposable configurations. Pitchers and carafes are injection molded from durable polypropylene and include options such as ice guards, cup covers, hinged lids, and graduations. Liner and jacket sets are sold separately and provide for additional insulation and quick replenishment.

Urinals – For immobile patients urinals are made in a variety of designs. Differing versions accommodate male and female anatomy, and are made from opaque blue or translucent clear polypropylene which facilitates measuring and visualizing contents. Urinals are graduated in 25 cc and 1 oz. increments up to 1,000 cc’s.

Emesis Basins – Are available in reusable and disposable configurations and are graduated in 100 cc increments. Emesis basins are used for containing fluids, measuring output and routine oral care.

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Minor Procedure Kits and Trays

The Company offers kits and trays which are used for a wide variety of minor surgical and medical procedures. Kit components are determined by the procedural requirements and may be customized to accommodate individual hospital protocols and preferences. Procedural applications and typical components for the Company’s larger kits segments are as follows:

I.V. Start Kits – One of the most common medical procedures is intravenous administration of fluids and medications usually done through an I.V. catheter or needle which is inserted into a peripheral vein. Since infection at the site of the catheter insertion can become systemic and potentially serious, I.V. start kits are used to insure speed and efficiency of catheter insertion while promoting sound clinical protocol. Typical components include a tourniquet, antiseptic ampule or swab, gauze, alcohol prep pads and a dressing. The Company’s I.V. start kits are marketed under the ActaSept™ and Cepti-Seal^® brands. For the fiscal years ended March 31, 2008, 2007 and 2006, I.V. Start Kits accounted for 12%, 13% and 15%, respectively, of the Company’s total sales.

Central Line Dressing Trays – Central line dressing trays are used to provide for cleansing and dressing placement at the site of a central venous catheter, which is typically placed in a vein in the patient’s chest area and is used for the rapid infusion of fluids and medications. Since infection at the site of catheter insertion can become systemic and represents a potentially serious medical complication, central line dressing kits facilitate fast and efficient dressing changes while allowing the clinician to maintain sterile technique. Typical components include an antiseptic ampule or swabs, gloves, gauze tape and a transparent dressing. The Company’s Central Line Dressing Trays are marketed under the ActaSept™ and Cepti-Seal^® brands.

Suture Removal Trays – Post procedural suture removal is a medical procedure commonly performed in physicians’ offices, outpatient settings, and hospital emergency rooms among other acute and alternate care settings. The procedure requires precise instruments for grasping and cutting fine sutures. Typical suture removal tray components include Littauer scissors, alcohol prep pads, metal or plastic forceps and the Company’s proprietary ACU-dyne™ povidone iodine anti-microbial solution.

Laceration Trays – Laceration trays are used to facilitate closure of lacerations and other deep wounds. Use is primarily concentrated in hospital emergency rooms although they are sold in both acute and alternate care settings wherever emergency care is provided. Typical components are high quality disposable instruments including needle drivers, forceps, scissors and hemostats, as well as drapes for creation of a sterile field, gauze and syringes and needles for administration of a local anesthetic.

Instruments and Instrument Trays – The Company offers a broad array of high quality disposable needle holders, hemostats, various procedural scissors, scalpels and forceps. These instruments are available in stainless steel, bent wire, and plastic versions. They can be purchased in bulk, packaged sterile as individual instruments, or combined in custom sterile instrument trays.

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Containment Systems for Medical Waste Products

Biohazardous Waste Containment and Autoclave Bags – Various state and federal regulations require that infectious medical waste be collected, stored, transported and disposed of in specially designed and specifically labeled containers. The Company’s infectious waste collection bags, known as biohazard bags or “red bags”, are constructed from high quality resins with reinforced seals for puncture resistance to reduce the risk of leakage. The bags come in a variety of sizes, and are red, and are clearly labeled with the international biohazard symbol. Autoclave bags are designed to survive the heat generated in a steam autoclave and are used to contain infectious waste through steam sterilization and disposal.

Non-Infectious Medical Waste Containment Bags – Non-infectious medical waste and trash must be collected, stored, transported and disposed of in a separate waste stream from potentially infectious or biohazardous waste. The Company’s non-infectious medical waste bags come in a variety of sizes, materials, mil thicknesses and seal configurations to isolate the range of non-infectious medical waste generated at healthcare provider sites from collection to disposal.

Chemotherapy Waste Containment Bags and Sharps Containers – Waste contaminated with chemotherapeutic agents must be disposed of in a separate waste stream from normal infectious and non-infectious medical waste due to the toxic nature of many of these agents. The Company’s chemotherapy waste containment bags and sharps containers are made of durable plastic resins for the collection and containment of chemo waste through disposal.

Laundry and Linen Containment Systems and Disposable Bags – Infectious and non-infectious reusable laundry and linen must be collected in specifically designed and clearly labeled receptacles and be segregated from the infectious and non-infectious medical waste streams. The Company offers laundry and linen containment systems consisting of hamper style receptacles and disposable laundry and linen receptacle bags for the collection, storage and transportation of infectious and non-infectious laundry and linen.

Laboratory Specimen Transport Bags – Used to collect, transport and contain tissue samples and other patient specimens obtained from examinations, diagnostic, or surgical procedures. The bags feature a specimen compartment and documentation pouch to insure that specimens and paperwork do not become separated during transport.

Patient Belonging Bags – Used to collect, contain and transport patient belongings from admission to discharge. The bags come in a variety of sizes, and thicknesses, and utilize a combination of handle, drawstring closure, and zip closure designs. These bags are often customized with hospital or healthcare facility logos and designs.

Sharps Containment Systems – Various state and federal regulations require that certain infectious medical waste, such as needles and blades, be collected, contained, transported and disposed of in rigid containers. The Company’s sharps containers come in variety of sizes and configurations and are constructed from high quality resins protecting the public and healthcare workers from accidental stick injuries and potential transmission of pathogens in blood and body fluids. These containers are designed to be puncture resistant and to have torturous path means of egress once a contaminated device is placed inside.

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Equipment Dust Covers – Are used to for the protection of hospital equipment which is non-sterile. They provide a dust and dirt barrier for equipment that is stored between procedures.

Operating Room Disposables and Sterilization Products

Disposable Operating Room Towels – The Company’s line of absorbent cotton operating room towels are used during surgery for drying hands, rolled up for propping instruments, on back tables and mayo stands for absorbing fluids, around the incision site for absorbing blood and to allow the surgeon to clip tubing and instruments close to the surgical site during the surgical procedure. Operating room towels are sold in sterile packaging for single (disposable) use and as a non-sterile component to be used with other health care companies’ products, primarily surgical pre-packaged procedure trays. For the fiscal years ended March 31, 2008, 2007, and 2006, operating room towels accounted for, 8%, 11% and 15%, respectively, of the Company’s total net sales.

Surgical Marking Pens – Used for marking the patient’s skin prior to making a surgical incision, as well as to address wrong site, wrong procedure surgery. Specifically designed so that the pen barrel fits comfortably in the surgeon’s hand and is made with gentian violet color ink. All pen barrels are embossed with a 5 cm. ruler and may also include a 15 cm. coated ruler and blank labels.

Needle Counters – Red plastic boxes manufactured from medical grade materials designed to resist breakage and punctures. They are produced with a variety of designs, including surgical grade magnets in order to facilitate sharps disposal. The foam blocks and foam strips allow for varying count capacity and designs.

Disposable Surgical Light Handle Covers—Light Shields^TM – A patented design assures a secure fit and acts as a sterile barrier on surgical light handles in the operating room. Light Shields^TM are manufactured of a heavy gauge flexible plastic for the optimum assurance of a sterile barrier.

Convenience Kits – The Company offers its customers the ability to purchase multiple products packaged with its needle counters. The Company has the flexibility to package many different kits to individualize a hospital’s requirements.

Surgical Headwear and Shoe Covers – Worn by operating room and other critical care personnel these items prevent contamination of sterile and clean environments from dust and other gross contaminants as well as protection of healthcare worker apparel. Bouffant caps made of lightweight spunbond polypropylene and surgeon’s caps made of kaycel are comfortable and absorbent. Shoe covers are made of durable polypropylene and are available with a skid resistant coating.

Isolation Gowns – The Company’s line of disposable isolation gowns are used to prevent contamination of health care worker apparel during a variety of medical procedures. They are available in yellow fluid resistant spunbond cloth and impervious poly coated spunbond configurations.

Sterilization Pouches – Used to house instruments during the sterilization process and maintain sterility of the instrument until it is needed. The pouches are primarily used in hospital central supply, operating rooms and in physicians’ and

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dentists’ offices as well as in any environment where sterile instruments are needed. There are three different styles of pouches available - self seal, heat seal and rolls. The self seal is already sealed on three sides and includes a peel back adhesive strip on the bottom of the package, which when folded over will seal the package. The second type is heat seal, which is also sealed on three sides but needs a heat sealer to seal the fourth side. The Company also markets a roll product, where the user can pull as long a pouch as needed and then seal each end of the pouch.

Sterilization Monitoring Products – These are printed paper and chemical devices used to measure certain necessary parameters within a sterilization cycle. Predominate users include the hospital operating room which often houses steam sterilization units for unanticipated needs while cases are in progress, and the central sterile department which cleans, packages and sterilizes the bulk of reusable surgical supplies.

Prior to sterilization, indicators and integrators are placed inside of the packaged products and sterilization pouches which are then distributed and used throughout the hospital, clinic or physician office environment.

Patient Aids – These products are used to assist the mobility of patients after injury, surgery, or to increase mobility of the elderly patient population. These devices are primarily fitted and dispensed in the hospital, surgery center and physician office setting.

Crutches – Lightweight aluminum adjustable patient crutches complete with tips and pads. Push-button adjustable foot piece for fast, precise measuring and fitting. Offered in a full range of sizes – child, youth, adult, and tall adult. Used to assist mobility in the event of a leg, foot, or ankle injury.

Walkers – Lightweight, high strength aluminum patient walkers. Contoured PVC handgrips for comfort and rubber tips for traction. They are available in a 1-button and 2-button version that facilitates folding of the walkers for easy storage and transport. Used to assist patient mobility for both the short and long term.

Canes – Lightweight, high strength aluminum patient canes that are fully height adjustable from 30” to 39” in 1” increments. PVC handgrip for comfort and non-slip rubber tip for stability. Used to assist patient mobility for both the short and long term.

Patient Slippers – Skid resistant patient slippers available in a full range of sizes from infant, toddler, youth, to adult (from small to XXL). Color coded by size. Used to prevent slipping and to provide warmth and comfort in both acute care and long-term care market settings.

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Dressings and Surgical Sponges

Burn Dressings – The Company provides many sizes and varieties of dry burn dressings. The dry burn dressings are composed of multiple layers of folded gauze that are typically customized for individual hospitals as to size, weave, folds, and stitching.

Disposable Laparotomy Sponges – Laparotomy sponges are designed primarily for use during surgical procedures in hospitals and health facilities. They are single use and made of gauze and sold in varying sizes and utilized for a multitude of purposes. Laparotomy sponges cover exposed internal organs, isolating them from the part of the body being operated upon. They also absorb blood and act as a buffer between medical instruments and the skin, thereby reducing trauma to the skin tissue caused by the medical instrument. Laparatomy sponges are sold in sterile packaging or as a non-sterile component to be used with other health care companies’ products, primarily surgical pre-packaged procedure trays. The Company’s laparotomy sponges contain an x-ray detectable element and loop handle in order to facilitate easy counting and identification in the operating room. For the fiscal years ended March 31, 2008, 2007, and 2006, laparotomy sponges accounted for 4%, 6%, and 9% respectively, of the Company’s total net sales.

Specialty Surgical Sponges – The Company’s line of specialty surgical sponges is an extension to its laparotomy sponge product line. They are single use and made of gauze and sold in varying sizes and shapes. The design of these sponges is tailored to specific surgical applications for which a standard laparotomy sponge is sub-optimal. There are two classifications of specialty surgical sponges:

a) Specialty Sponges for Open Surgical Procedures – including Peanut, Kittner, and Cherry dissecting sponges, used for blunt tissue dissection and fluid absorption, Tonsil Sponges with abdominal tape strings for easy retrieval from narrow body cavities, Stick Sponges used for surgical prepping and fluid absorption in deeper body cavities, and Eye Spears for absorption during eye surgery.

(b) Endoscopic Specialty Sponges – including Kittner, Cherry, and Bullet style dissecting sponges. Endoscopic specialty sponges are small sponges affixed to long fiberglass rods and are designed for performing blunt tissue dissection, fluid absorption, and anatomical manipulation through the narrow operating cannulae used in minimally invasive endoscopic surgery.

Gauze Sponges – Gauze sponges are used in the operating room as well as throughout the hospital. They are also used extensively throughout the alternate care market, including physicians’ offices, health clinics, and dentists’ offices and in veterinary practices. The Company also introduced gauze fluffs, which are pre-folded gauze sponges used for compression and absorption of blood and other fluids.

Sponge Counting System – The Company’s line of sponge counter bags is designed to facilitate and improve the post-procedural counting of surgical sponges. Peri-operative nursing protocol calls for a systematic count of used and unused sponges and instruments pre and post surgery to insure that foreign bodies are not left in the body cavity. The Company’s Sponge Counter Bags are clear faced opaque backed plastic bags with up to five sponge or ten gauze compartments. The compartments act as fluid receptacles while providing visualization of used sponges for fast and accurate post surgical counting. When used in conjunction with the patented Safe-T-Count™ gloves, the sponge counting procedure is even safer, as it accurately counts five sponges and reduces airborne contamination.

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Net, Padding and Wound Care – Includes proprietary Tubegauz® premium brand and SePro® value brand elastic nets, which are tubular bandages used for dressing retention. This category also includes Tubegauz^® brand tubular gauze, which is used to bandage fingers, toes, hands, or other areas that require wrapping to bodily contours. Padding products are used as a protective cushioning material for sensitive areas, and are sold in styles that offer unique characteristics such as being mold-resistant, water-repellant or designs for improved air circulation.

Laboratory Products

Petri Dishes – Used in the laboratory, Petri dishes are used to culture microorganisms. Economical, optically clear dishes are precision molded from polystyrene to maintain optical quality and controlled flat surfaces so cultures are clearly visible without distortion.

Specimen Containers – Used for the collection and transportation of fluid and tissue samples. Polypropylene specimen Containers are available in several sizes and styles including screw top, snap cap, and the patented ClikSeal™ for insuring sample security and leak resistance during transport. A sterility seal and patient i.d. label with lines for number, name, and doctor are typical features of specimen containers.

Commode Specimen Collectors – Used for the collection of and measurement of waste. Injection molded commode collectors fit securely on standard toilets and allow for easy collection and quick visualization, measurement and disposal. Other versions can be sealed for transportation to the laboratory for analysis.

Triangular Graduates – Used for measuring intake or output, triangular graduates are made from either clear polystyrene or translucent polypropylene. The containers are graduated in 25cc and .5 ounce increments, up to 1000 cc’s and 32 ounces. The triangular style provides measuring ease, visualization of contents and comfortable handling.

Tri-pour Beakers – Used in hospitals, clinics, laboratories and nursing homes for accurate drip-free mixing and or pouring of liquids. Tri-pour beakers are made from translucent polypropylene and are resistant to commonly used acids, alkalis, solvents and reagents and are autoclaveable. They range sizes from 50ml to 1000ml, and each beaker is graduated in increments of 10, 20 or 50ml.

Patents and Trademarks

The Company actively pursues a policy of seeking patent protection, both in the United States and abroad, for its proprietary technology. There can be no assurance that the Company’s patents will not be violated or that any issued patents will provide protection that has commercial significance. Litigation may be necessary to protect the Company’s patent position. Such litigation may be costly and time-consuming, and there can be no assurance that the Company will be successful in such litigation. Since no single patent covers product lines that constitute 5% or more of any sales of the Company for fiscal 2008, the Company does not believe that any violation of any patents owned by the Company would have a material adverse effect on it or its business prospects.

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The Company owns several patents and trademarks. While it considers that in the aggregate the patents and trademarks are important in the operation of its business, it does not consider that any of them, or any group of them, are of such importance that termination would materially affect its business.

Although there is no assurance that other companies will not be successful in developing similar products without violating the rights of the Company, management does not believe that the invalidation of any patents owned by the Company would have a material adverse effect on it or its business prospects. While the protection of patents is important to the Company’s business, management does not believe any one patent is essential to the success of the Company.

The Company also relies on trade secrets and product advancement to maintain its competitive position. There can be no assurance that the Company will prevent the unauthorized disclosure or use of its trade secrets and know-how or that others may not independently develop similar trade secrets or know-how or obtain access to the Company’s trade secrets, know-how or proprietary technology.

Group Purchasing Agreements

Hospital chains and large buying groups have played, and are expected to continue to play, an increasingly significant role in the purchase of medical devices. These group purchasing organizations (“GPO”) continue to narrow their list of suppliers. By contracting with a GPO, the Company can operate its sales force much more efficiently. As a result, the Company’s sales force continues to call on facilities associated with these buying groups in order to improve compliance with these group purchasing agreements and improve market share. These agreements, which typically have no minimum purchase requirements, can be terminated on ninety (90) days advance notice. The termination or non-renewal of any of the agreements could have a material adverse effect on the Company’s business.

Competition

The markets for the Company’s product lines are highly competitive. In general, the Company’s products compete with the products of numerous major companies in the business of developing, manufacturing, distributing and marketing medical products. Some of these competitors have greater financial or other resources than the Company. The Company believes that the principal competitive factors in each of its markets are (i) product design, development and improvement, (ii) customer support, (iii) brand loyalty, and (iv) price. The Company emphasizes overall value through a combination of competitive pricing, product quality and customer service.

The competitors differ based upon the products being sold. For instance, in the sale of sterile laparotomy sponges, where Cardinal Health, Inc., the Kendall Company, a subsidiary of Covidien Industries, Inc. and Medline Industries, Inc. are competitors, Medical Action’s sales represent a significant share of the domestic market. The Company’s primary competitors in the sale of sterile operating room towels, in which the Company is also a leading supplier in the domestic market, are Cardinal Health, Inc., Medline Industries, Inc. and DeRoyal, Inc. Management believes that the breadth of its line of collection systems for the containment of medical waste is the most complete in the industry, where it competes with Cardinal Health, Inc., Donovan, Inc. and Heritage Bag Company. In the sale of minor procedure kits and trays where the Company has a significant market share, the Company’s primary competitors include Cardinal Health, Inc., Becton, Dickinson and Company, Medline

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Industries, Inc. and the Kendall Company, a subsidiary of Covidien Industries, Inc. In the sale of medical pouches to the hospital market, where the Company is one of the leading suppliers, the Company’s primary competitors include Cardinal Health, Inc. In the sale of operating room accessories, where the Company’s portion of the market is relatively insignificant, the Company’s primary competitor is Devon Industries, Inc., a subsidiary of Covidien Industries, Inc. In the sale of patient bedside utensils, where Cardinal Health, Inc., and Medline Industries, Inc. are competitors, Medical Action’s sales represent a significant share of the domestic market. In the sale of laboratory products, where Cardinal Health, Inc., Covidien Industries, Inc., Becton, Dickinson and Company, Kord Products Inc., and Parter Medical Products, Inc., are competitors, Medical Action’s sales represent an insignificant share of the domestic market.

Healthcare Reform

In recent years, several comprehensive healthcare reform proposals were introduced in the U.S. Congress. The intent of the proposals was, generally, to expand healthcare coverage for the uninsured and reduce the growth of total healthcare expenditures. While none of the proposals were adopted, healthcare reform may again be addressed by the current U.S. Congress. While the Company cannot predict whether any healthcare reform legislation will be approved or what effect, if any, that such healthcare reform legislation will have on the Company or its operations, the Company believes that based on the intent of such proposals, healthcare legislation may have some beneficial effects on its business by increasing the availability of healthcare.

Regulation

As a manufacturer of medical devices, the Company is subject to regulation by, among other governmental entities, the U.S. Food and Drug Administration (“FDA”) and the corresponding agencies of the states and foreign countries in which the Company sells its products. These regulations govern the introduction of new medical devices, the observance of certain standards with respect to the manufacture, testing and labeling of such devices, the maintenance of certain records, the tracking of devices and other matters. All medical devices are required to be registered with the FDA. The Company must update its establishment and listing information on an annual basis.

Pursuant to the Food, Drug and Cosmetic Act (“FDC Act”), medical devices intended for human use are classified into three categories, Classes I, II and III, on the basis of the controls deemed necessary by the FDA to reasonably assure their safety and effectiveness. Class I devices are subject to general controls (for example, labeling, premarket notification and adherence to good manufacturing practice regulations) and Class II devices are subject to general and special controls (for example, performance standards, post-market surveillance, patient registries and FDA guidelines). Generally, Class III devices are those which must receive premarket approval (“PMA”) from the FDA to ensure their safety and effectiveness (for example, life-sustaining, life-supporting and implantable devices, or new devices which have not been found substantially equivalent to legally marketed devices), Class I devices, unless exempt, and Class II devices require premarket notification clearance pursuant to Section 510(k) of the FDC Act. Class III devices are required to have a PMA. A 510(k) premarket notification clearance indicates that the FDA agrees with an applicant’s determination that the product for which clearance has been sought is substantially equivalent to another medical device that has been previously marketed. The Company manufactures and sells products under all three categories; Class I, II and III. To date, all of the Company’s products have received 510(k) clearances or are exempt from the 510(k) clearance process.

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In addition to requiring clearance or approval for new products, the FDA may require clearance or approval prior to marketing products that are modifications of existing products. The FDC Act provides that new 510(k) clearances are required when, among other things, there is a major change or modification in the intended use of the device or a change or modification to a legally marketed device that could significantly affect its safety or effectiveness. A manufacturer is expected to make the initial determination as to whether a proposed change to a cleared device or to its intended use is of a kind that would necessitate the filing of a new 510(k) notification.

The Company is also required to register with the FDA as a device manufacturer and to comply with the FDA’s Good Manufacturing Practices under the Quality System Regulations (“GMP/QSR”). These regulations require that the Company manufacture its products and maintain its records in a prescribed manner with respect to manufacturing, testing and control activities. The Company’s manufacturing, quality control and quality assurance procedures and documents are inspected and evaluated periodically by the FDA.

The European Union has promulgated rules, under the Medical Devices Directive, or MDD, which require medical devices to bear the “CE mark”. The CE mark is an international symbol of adherence to quality assurance standards. The Company received EN ISO 13485:2003 certification for its Arden, North Carolina manufacturing facility and has instituted all the systems necessary to meet the Medical Device Directive, thus acquiring the ability to affix the CE mark to certain products.

Sales, Marketing and Customers

The Company’s products are presently marketed and sold primarily to acute care facilities throughout the United States through a network of direct sales personnel. In addition, the Company has expanded its target markets to include physician, dental and veterinary offices, out-patient surgery centers and long-term care facilities.

The Company’s sales representatives typically attempt to establish and maintain direct contact with medical professionals that directly utilize the Company’s products. As medical product purchases are typically made on a centralized basis by hospital purchasing departments, and increasingly by healthcare networks, sales representatives must also maintain relationships with purchasing department personnel. The Company has approximately fifty-four (54) direct sales personnel throughout the United States engaged in the sales and marketing of the Company’s products.

In addition to the field sales personnel focused on the United States acute care market, Medical Action has senior sales and marketing professionals focused on group purchasing organizations, government sales, large integrated delivery networks and with national and regional distributors.

The Company’s distribution network is comprised of hospital distributors, alternate care distributors, physician distributors, veterinary distributors, dental distributors and industrial safety distributors covering the entire United States and certain international marketplaces. The Company’s products are typically purchased pursuant to purchase orders or supply agreements in which the purchaser specifies whether such products are to be supplied through a distributor or directly by the Company. The Company records sales upon the shipment of inventory to the distributor, at which time title passes to the distributor.

No individual customer or affiliated group of customer accounts accounted for more than 37% of the Company’s net sales in any of the past three fiscal years. Nevertheless, sales to Owens & Minor, Inc. and Cardinal Health Inc., diversified

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distribution companies (the “Distributors”) accounted for approximately 37% and 21%, respectively, for the fiscal year ended March 31, 2008, 37% and 22%, respectively, for the fiscal year ended March 31, 2007, and 33% and 19%, respectively, for the fiscal year ended March 31, 2006. Although the Distributors may be deemed in a technical sense to be major purchasers of the Company’s products, the Distributors typically serve as a distributor under a purchase order or supply agreement between the customer and the Company, and does not purchase for its own account. The Company, therefore, does not believe it is appropriate to categorize the Distributors as actual customers.

Management believes that the continuing pressure to utilize low-cost, disposable medical products has significantly expanded the use of custom procedure trays, which contain the necessary items designed for use in specific procedures by surgical teams. Many of the custom tray suppliers are vertically integrating the packaging process by buying bulk, non-sterile operating room towels, laparotomy sponges and other products manufactured by the Company to place in these custom trays. The trays are then sterilized, saving valuable nursing time and the costs associated with individual product packaging.

The Company believes it has established an efficient system for marketing its products throughout the United States, and intends to utilize these existing sales methods and channels to market new products as they are developed or acquired.

In addition to branded sales to the United States healthcare market, the Company generates revenue to OEM customers in the healthcare, laboratory and non-medical markets. Moreover, Medical Action provides and sells products to international markets via independent in country distribution networks, supported by operations in the United States, Brazil and China.

Research and Development

The Company is continually conducting research and developing new products utilizing a team approach that involves its engineering, manufacturing and marketing resources. Although the Company has developed a number of its own products, most of its research and development efforts have historically been directed towards product improvement and enhancements of previously developed or acquired products. Product development expenses were approximately $898,000, $788,000 and $599,000 for the fiscal years ended March 31, 2008, 2007, and 2006, respectively.

Employees

As of June 1, 2008, the Company had approximately 716 full-time employees with 475 in manufacturing and distribution, 72 in marketing and sales, and 169 in administration. Except for 199 employees in the Company’s Gallaway, Tennessee facility, which are represented by the Service Employees International Union (“SEIU”), none of the Company’s employees are represented by a labor union. The Company has entered into an agreement with the SEIU for the three (3) year period ending February 2010. The Company believes that its employee relations are good.

Backlog

The Company does not believe that its backlog figures are necessarily indicative of its business since most hospitals and health related facilities order their products on a continuous basis and not pursuant to any contractual arrangements. Since typical shipment times range from two to five days, the Company must maintain sufficient inventories of all products at all times.

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Raw Materials and Manufacturing

The principal raw materials used by the Company are a four-ply mesh gauze laparotomy sponge, cotton huck towel and various types of plastic resin. Other materials and supplies used by the Company include gauze, gauze sponges, injection molded and thermoformed plastics, medical instruments, various types of antiseptics and wound dressings, aluminum, foam, medical grade magnets and a variety of packaging material. Several of these raw materials are supplied from vendors outside the United States.

Medical Action’s variety of suppliers for raw materials and components necessary for the manufacture of its products, as well as its long term relationships with such suppliers, help to ensure the stability in its manufacturing process. Historically, we have not been materially affected by interruptions with such suppliers. However, if a supplier of significant raw materials, component parts, finished goods or services were to terminate its relationship with the Company, or otherwise cease supplying raw materials, component parts, finished goods or services consistent with past practices, the Company’s ability to meet its obligations to its customers may be disrupted. A disruption with respect to numerous products, or with respect to a few significant products, could have a material adverse effect on the Company’s business and financial condition. During the past few years, world events have caused the cost of oil and natural gas prices to increase to historical new heights, causing the cost of resin, the principal raw material in the manufacture of our plastic products, to unprecedented levels.

The Company presently purchases its principal cotton raw materials primarily from the Peoples Republic of China and to a lesser extent, India and is currently sourcing instruments from Pakistan, a portion of its thermoform plastics from Taiwan, packaging material from the United Kingdom and needle counters from the People’s Republic of China. From time to time, the Company has purchased certain of its raw materials from a number of other countries including Mexico and the Dominican Republic. Some of the Company’s products are purchased as components or in final form, which are shipped to the Company’s manufacturing facility in Arden, North Carolina, where they are packaged. The Company’s sterilization pouches and minor procedure kits and trays are predominantly manufactured and/or assembled in the Company’s Arden, North Carolina manufacturing facility. The Company utilizes outside contract sterilization facilities for its products.

In the Company’s Clarksburg, West Virginia facility, where the Company manufactures its containment systems for medical waste, three (3) types of plastic resin are utilized in the various processes: (i) linear low density polyethylene, (ii) high density polyethylene and (iii) film extrusion polypropylene.

In the manufacture of collection systems, resin is extruded through the die where it emerges in a gelatinous state. The extruder and die are positioned under a cooling tower where the emerging plastic is pressed closed and air is blown into it creating a cylindrical column. The column is then pulled up the tower and back down over conveying rollers, and is threaded through a printer, bag machine, triangle folder, separator and air folder into an individually folded bag.

The Company’s sharps containers, currently manufactured by a third-party, are also manufactured from either polypropylene or polyethylene resin and are produced either by extrusion blow-molding or by high pressure injection molding. In extrusion blow molding, the resin is melted by friction and applied heat in a long tube with a precisely flighted revolving auger, delivering the molten plastic through an extruder die to form a hollow tube. As the tube exits the extruder, a 2-part blow mold whose internal cavity is in the shape of the finished product, closes around the tube and high pressure is

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introduced to form the finished product. In injection molding, a similar barrel and screw auger system plasticizes the resin before injecting the molten plastic into 2-part precision molds. These molds are closed under very high pressure, forcing the plastic to fill all of the voids in the mold and taking the shape of the finished part, then rapidly cooled with water running through the mold structure before being ejected for packaging.

Our Gallaway, Tennessee facility primarily manufactures and/or distributes disposable plastic patient utensils, primarily used in hospital admission kits, as well as other collection, measuring and containment products. These products are manufactured with homopolymer and copolymer polypropylene, high density polyethylene and linear low density polyethylene, primarily utilizing either injection molded plastic process or extrusion blow molding. In addition, the Gallaway facility purchases contract manufactured or private labeled finished products for distribution to its customers. These products include stainless and reusable plastic containers and utensils manufactured domestically, as well as various measuring and collection products procured from the People’s Republic of China.

The Company’s Northglenn, Colorado facility produces plastic disposable laboratory and OR products including Petri dishes, bowls, culture tubes and specimen containers, as well as supporting the Tennessee facility with patient utensils. These are also manufactured utilizing the plastic injection molding process and utilize polystyrene, polyethylene and polypropylene. The facility distributes directly to the laboratory distributor and media pour markets and transfers patient utensil products to Tennessee for distribution consolidation. The Company has transfered the Colorado facility manufacturing and product lines to the Tennessee facility and closed the Colorado facility in June 2008.

Available Information

The Company files annual, quarterly and current reports and other information with the SEC. These materials can be inspected and copied at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of these materials may also be obtained by mail at prescribed rates from the SEC’s Public Reference Room at the above address. Information about the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the SEC’s Internet site is http://www.sec.gov.

The Company makes available, free of charge, on its Internet website, located at http://www.medical-action.com, its most recent Annual Report on Form 10-K, its most recent Quarterly Report on Form 10-Q, any current reports on Form 8-K filed since the Company’s most recent Annual Report on Form 10-K and any amendments to such reports as soon as reasonably practicable following the electronic filing of such report with the SEC. In addition, the Company provides electronic or paper copies of its filings free of charge upon request.

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ITEM 1A – RISK FACTORS

Our business, operations and financial condition are subject to certain risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, our actual financial results will vary, and may vary materially from those anticipated, estimated, projected or expected. Among the key factors that may have a direct bearing on our business, operations or financial condition are identified below:

Our integration of the acquisition of Medegen is ongoing and we may incur substantial costs to achieve, and may not be able to realize, the anticipated cost savings, synergies or revenue enhancements from integrating Medegen’s operations with our current business.

The integration of Medegen’s operations, including the consolidation of Medegen’s Colorado manufacturing facility into our Gallaway, Tennessee facility, has caused Medical Action to experience material negative consequences to its business, financial condition and results of operations. The integration and consolidation of Medegen will continue to be a costly and time-consuming process that will involve a number of risks, including, but not limited to:

Indemnification for Remediation of Tennessee facility

The Medegen Tennessee facility is comprised of approximately 25 acres in a light industrial park, located in Gallaway, TN and was acquired by Medegen in 1998. As part of its due diligence activities prior to the acquisition of the facility by Medegen, consultants found chlorinated solvents in the groundwater adjacent to the manufacturing plant, which is in the process of being remediated.

Medegen is fully indemnified by the prior owner (“Indemnitor”) for all costs associated with the environmental remediation as well as any claims that may arise, including third party claims. As security for the indemnification obligations, Indemnitor is required, on a quarterly basis, to provide proof of cash balances, marketable securities or available, unused lines of credit equal to the expected cost of all future remediation activities plus $500,000. Now that full-scale remediation has begun, Indemnitor will be required to provide Letters of Credit (“LC”) to secure their future obligations beginning with a $3,000,000 LC in December 2009, dropping $2,000,000 in December 2011 and reducing to $1,000,000 from December 2014 through December 2017. The LC amounts approximate the expected remaining remediation costs at each point in time. No assurance can be given that the Indemnitor will have the financial resources to complete the environmental remediation and/or defend any claims that may arise, that recommended cleanup levels will be achieved over the long term, or that further remedial activities will not be required.

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The Company may be unable to successfully manage growth, particularly if accomplished through acquisitions.

Successful implementation of the Company’s business strategy will require that the Company effectively manage any associated growth. To manage growth effectively, the Company’s management will need to continue to implement changes in certain aspects of the Company’s business, to enhance the Company’s information systems and operations to respond to increased demand, to attract and retain qualified personnel and to develop, train and manage an increasing number of management-level and other employees. Growth could place an increasing strain on the Company’s management, financial, marketing, distribution and other resources, and the Company could experience operating difficulties. Any failure to manage growth effectively could have a material adverse affect on the Company’s results of operations and financial condition.

To the extent that the Company grows through acquisition, it will face the additional challenges of integrating its current operations, culture, management information systems and other characteristics with that of the acquired entity. The Company may incur significant expenses in connection with negotiating and consummating one or more transactions, and it may inherit certain liabilities in connection with the acquisition as a result of its failure to conduct adequate due diligence or otherwise. In addition, the Company may not realize competitive advantages, synergies or other benefits anticipated in connection with such acquisition. If the Company does not adequately identify targets for, or manage issues related to our future acquisitions, such acquisitions may have a negative adverse affect on the Company’s business and financial results.

In addition to the above risks, future acquisitions may result in the dilution of earnings and the amortization or write-off of goodwill and intangible assets, any of which could have a material adverse affect on our business, financial condition or results of operations.

The Company’s business is subject to the risks of international procurement.

A significant portion of the Company’s raw materials and finished goods are purchased from manufacturers in the People’s Republic of China. As a result, the Company’s international procurement operations are subject to the risks associated with such activities including, economic and labor conditions, international trade regulations (including tariffs and anti-dumping penalties), war, international terrorism, civil disobedience, natural disasters, political instability, governmental activities, deprivation of contract and property rights. In particular, since 1978, the Chinese government has been reforming its economic and political systems, and we expect such reforms to continue. Although we believe that these reforms have had a positive effect on the economic development of China and have improved our ability to successfully utilize facilities in China, we cannot be assured that these reforms will continue or that the Chinese government will not take actions that impair these operations in China. In addition, periods of international unrest may impede our ability to procure goods from other countries and could have a material adverse effect on our business and results of operations.

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

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Although the Chinese yuan has traded virtually in a straight line for many years, beginning in fiscal 2006 the Chinese government began to re-value the Chinese yuan against other currencies, including the U.S. dollar. This re-valuation or free floating exchange rate, has caused the price of many items that are sourced from China to increase, which could adversely impact the Company’s cost of goods sold and profitability.

In addition, the U.S. Government in May 2005 exercised a quota on any textile products from China in Category 632 of the Harmonized Tariff Schedule, which included the Company’s patient slippers. The Company anticipates that a similar quota will be exercised in fiscal 2009 on textile products from China in Category 632. The Company has been able to procure a similar product with a different country of origin, although at higher costs than the Company was previously obtaining. An interruption in supply and higher costs, could have a negative adverse effect on the Company’s financial results.

International sales pose additional risks related to competition with larger international companies and established local companies, or possibly higher cost structure and higher credit risks.

We have begun to implement a program to increase significantly our international sales, which for the year ended March 31, 2008, accounted for approximately 3% of our total net sales. We export from the United States and China most of our products sold internationally. Our principal competitors in international markets are a number of much larger companies as well as smaller companies already established in the countries into which we sell or intend to sell our products. Our cost structure is often higher than that of our competitors because of the relatively high cost of transporting product to the local market as well as our competitors’ lower local labor costs in some markets. There is no certainty that we will be able to open local manufacturing facilities, procure products from other suppliers or operate our international sales activities productively.

Our international sales are subject to higher credit risks than sales in the United States. Many of our international distributors are small and may not be well capitalized. Our prices to our international distributors for product shipped to the customers from the United States or China are denominated in U.S. dollars, but their resale prices are set in their local currency. A decline in the value of the local currency in relation to the U.S. dollar may adversely affect their ability to profitably sell in their market the products they buy from us, and may adversely affect their ability to make payment to us for the products they purchase. Legal recourse for non-payment of indebtedness may be uncertain. These factors all contribute to a potential for credit losses.

Continuing pressures to reduce healthcare costs may adversely affect our prices. If we cannot reduce manufacturing costs of existing and new products, our sales may not grow and our profitability may decline.

Increasing awareness of healthcare costs, public interest in healthcare reform and continuing pressure from Medicare, Medicaid and other payers to reduce costs in the healthcare industry, as well as increasing competition from other products, could make it more difficult for us to sell our products at current prices. In the event that the market will not accept current prices for our products, our sales and profits could be adversely affected. We believe that our ability to increase our market share and operate profitably in the long term may depend in part on our ability to reduce manufacturing

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costs on a per unit basis through cost containment and high volume production using highly automated molding and assembly systems. If we are unable to reduce unit manufacturing costs, we may be unable to increase our market share or may lose market share to alternative products, including competitors’ products. Similarly, if we cannot enter a market with new products priced competitively with adequate margins and then reduce unit manufacturing costs of new products as production volumes increase, we may not be able to sell new products profitably or gain any meaningful market share. Any of these results would adversely affect our future results of operations.

If we are unable to compete successfully on the basis of product innovation, quality, convenience, price and rapid delivery with larger companies that have substantially greater resources and larger distribution networks, we may be unable to maintain market share, in which case our sales may not grow and our profitability may be adversely affected.

The market for our products is intensely competitive. We believe that our ability to compete depends upon continued product innovation, the quality, convenience and reliability of our products, access to distribution channels and pricing. The ability to compete effectively depends on our ability to differentiate our products based on safety features, product quality, cost effectiveness, ease of use and convenience, as well as our ability to identify and respond to changing customer needs. We encounter significant competition in our markets both from large established medical device manufacturers and from smaller companies. Many of these firms have introduced competitive products with proprietary features not provided by the conventional products and methods they are intended to replace. Most of our current and prospective competitors have economic and other resources substantially greater than ours and are well established as suppliers to the healthcare industry. There is no assurance that our competitors will not substantially increase resources devoted to the development, manufacture and marketing of products competitive with our products. The successful implementation of such a strategy by one or more of our competitors could materially and adversely affect us.

Covenants in our credit facilities may restrict our financial and operating flexibility.

We currently have two credit facilities;

Our current credit facility requires, and any future credit facilities may also require, that we comply with specified financial covenants relating to interest coverage, debt coverage, minimum consolidated net worth, and earnings before interest, taxes, depreciation and amortization. Our ability to satisfy these financial covenants can be affected by events beyond our control, and we cannot give assurance that we will meet the requirements of these covenants. These restrictive covenants could affect our financial and operational flexibility, including the following:

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Product liability claims could be costly to defend and could expose us to loss.

The use of our products exposes us to an inherent risk of product liability. Patients, healthcare workers or healthcare providers who claim that our products have resulted in injury could initiate product liability litigation seeking large damage awards against us. Costs of the defense of such litigation, even if successful, could be substantial. We maintain insurance against product liability and defense costs in the amount of $16,000,000 per occurrence. There is no assurance that we will successfully defends claims, if any, arising with respect to products or that the insurance we carry will be sufficient. A successful claim against us in excess of insurance coverage could materially and adversely affect us. Furthermore, there is no assurance that product liability insurance will continue to be available to us on acceptable terms.

Future operating results are dependent upon the Company’s ability to obtain a sufficient supply of raw materials, some of which are available only from limited sources - volatility of resin cost.

Although most raw materials essential to the Company’s business are generally available from multiple sources, certain key components (including resin, which is the principal raw material used in the manufacture of collection systems for the containment of medical waste) are currently obtained by the Company from limited sources. If a supplier of significant raw materials including component parts, finished goods or services were to terminate its relationship with the Company, or otherwise cease supplying raw materials, component parts, finished goods or services consistent with past practices, the Company’s ability to meet its obligations to its customers may be disrupted. A disruption with respect to numerous products, or with respect to a few significant products, could have a material adverse affect on the Company’s business and financial condition.

During the past few years, world events have caused the price of oil and natural gas prices to increase to historical new heights, causing the cost of resin to rise to unprecedented levels. The Company anticipates the volatility to continue in fiscal 2009. During the past two fiscal years, the Company has been able from time to time, to increase selling prices for certain of these products to recover a portion of the increased cost. However, selling price increases can take months to implement and there can be no assurance that the Company will be able to pass along future cost increases, if any, to its customers which could also have an adverse impact on the Company’s results of operations and financial condition.

The Company’s success depends largely on its ability to attract and retain key personnel.

Much of the future success of the Company depends on the continued service and availability of skilled personnel, including its Chief Executive Officer, members of its executive team, and those in manufacturing, marketing, finance, and information technology. The Company has relied on its ability to grant stock options as one mechanism for recruiting and retaining this highly skilled talent. Accounting regulations requiring the expensing of stock options may impair the Company’s future ability to provide these incentives without incurring significant compensation costs. There can be no assurance that the Company will continue to successfully attract and retain key personnel.

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Failure of the Company’s information technology systems could adversely affect the Company’s future operating results.

Information technology system failures 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, hindering the planning and procurement of raw materials, or resulting in the unintentional disclosure of customer or Company information. Management has taken steps to address these concerns by its implementation of internal control measures. However, there can be no assurance that a system failure or data security breach will not have a material adverse affect on the Company’s results of operations.

During fiscal 2007, the Company implemented a new software system, mySAP software suite which, during the past fiscal year, was extended to a portion of Medegen’s operations. It is anticipated that the balance of Medegen will be utilizing the mySAP software suite in fiscal 2009. The Company has estimated the effective operational cost for the new software. However, these estimates are based upon several factors including, the hiring and retaining of technical resources, availability of functional business people, accuracy of our current data, and additional requirements resulting from the Medegen acquisition. In the event that such factors are delayed or significantly modified, the cost of the implementation could be significantly increased and have a material effect on the Company’s business and financial condition.

The high level of competition and buying groups place pressure on our profit margins and we may not be able to compete successfully.

The disposable medical device segment of the healthcare industry in which we operate is highly competitive and is experiencing both horizontal and vertical consolidation. All of the products which we sell are available from sources other than us. The high level of competition in our industry places pressure on profit margins. Some of our competitors have greater resources than we have. These competitive pressures could have a material adverse affect on our business, financial condition or results of operations.

Sales to the Company’s three largest distributors accounted for more than 60% of total sales in each of the last three fiscal years. Although the distributors may be deemed in a technical sense to be major purchasers of the Company’s products, they serve, however, as a distributor under a purchase order or supply agreement between the customer and the Company, and do not purchase for their own accounts. The Company, therefore, does not believe it is appropriate to categorize its distributors as actual customers. However, in some cases, distributors compete with the Company on a private label basis, and if successful, sales of certain of the Company’s products could decline which may result in a material affect on the Company’s business and financial condition.

Healthcare reform and the related pressure to contain costs has been the advent of buying groups in the United States. These group purchasing organizations enter into preferred supplier arrangements with one or more manufacturers of medical products in return for price discounts to members of the group purchasing organizations. If we are not able to obtain new preferred supplier commitments for major group purchasing organizations or retain those commitments that we currently have, which are generally terminable by either party for any reason upon the expiration of a defined notice period, our sales and profitability could be adversely affected. However, even if we are able to obtain and retain preferred supplier commitments from buying groups, they may not deliver high levels of compliance by their members, meaning that we may not be able to offset the negative impact of lower per-unit prices or lower margins with increases in unit sales or in market share.

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The Company’s products may be subject to recall or product liability claims.

The Company’s products are used in connection with surgical procedures and in other medical contexts in which it is important that those products function with precision and accuracy. If the Company’s products do not function as designed, or are designed improperly, the Company may be forced by regulatory agencies to withdraw such products from the market. In addition, if medical personnel or their patients suffer injury as a result of any failure of the Company’s products to function as designed, or an inappropriate design, the Company may be subject to lawsuits seeking significant compensatory and punitive damages. Any product recall or lawsuit seeking significant monetary damages may have a material affect on the Company’s business and financial condition.

If a natural or man-made disaster strikes our manufacturing facilities, we may be unable to manufacture our products for a substantial amount of time, which may adversely affect our expected results of operations.

We principally rely on our manufacturing facilities in Arden, North Carolina, Gallaway, Tennessee, and Clarksburg, West Virginia. These facilities may be affected by natural or man-made disasters. These facilities and the manufacturing equipment we use to produce our products would be difficult to replace and could require substantial time to repair or replace. In the event one of our facilities was affected by a disaster, we would be forced to rely on third-party manufacturers. However, third-party manufacturers may not be available or they may be unable to produce our products on the schedule or to the specifications that we require. We currently carry insurance in the aggregate amount of $20 million to protect us against such disasters. However, such insurance may not be sufficient to cover all of our potential losses or may become unavailable on acceptable terms, if available at all.

A significant adverse change in, or failure to comply with, governing regulations could adversely affect the Company’s business.

Substantially all the Company’s products are “devices,” as defined in the Federal Food, Drug and Cosmetic Act (“FDA”), and the manufacture, distribution, record keeping, labeling and advertisement of the Company’s products is subject to regulation by the FDA in the United States and its equivalent regulatory agencies in various foreign countries in which the Company’s products are manufactured, distributed, labeled, offered and sold. Further, the Company is subject to continual review and periodic inspections at its current facilities with respect to the FDA’s Current Good Manufacturing Practices.

As a result of an audit by the FDA of our Arden, North Carolina facility, we received a Warning Letter in January 2008. Medical Action prepared a comprehensive response reiterating its commitment to complying with the Current Good Manufacturing Practice requirements. While we have made several changes to our quality systems and to the organizational structure of the Quality and Regulatory Department, the Company’s business and financial condition could be adversely affected if it is found to be out of compliance with governing regulations. In addition, if such regulations are amended to become more restrictive and costly to comply with, the costs of compliance could adversely affect the Company’s business and financial condition.

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The Company is dependent on manufacturing and logistic services provided by third-parties and related risks.

Many of the Company’s products are manufactured in whole or part by third-party manufacturers, which are located throughout the United States and other parts of the world. While outsourcing arrangements may lower the fixed cost of operations, they also reduce the Company’s direct control of production and distribution. It is uncertain what affect such diminished control will have on the quality or quantity of the products manufactured, or the flexibility of the Company to respond to changing market conditions. The Company also depends on third-party transportation companies to deliver supplies necessary to manufacture our products from vendors to the Company’s various facilities and to move the Company’s products to customers within and outside the United States. The Company’s manufacturing operations, and the operations of the transportation companies on which the Company depends, may be adversely affected by natural disasters and significant human events, such as a war, terrorist attack, riot, strike, slowdown or similar event. Any disruption in the Company’s manufacturing or transportation could materially adversely affect the Company’s ability to meet customer demands or its operations generally.

The cost of designing, implementing and staffing an effective corporate governance program to meet current and proposed regulations could affect the Company’s future operating results.

The corporate governance programs at the Company anticipated much of what is included in the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). We had standards in place for dealing with issues of compliance training, board independence and made use of the lead director concept for committees of the Board of Directors, and an audit committee financial expert. However, as part of its continuing effort “to fill in the blanks” left by Congress, the SEC implemented rules under Section 404 of Sarbanes-Oxley requiring the Company to include in its annual report an internal control report which (i) confirms management’s obligation to establish and maintain adequate internal controls and procedures for financial reporting and (ii) assess, as of year end, the effectiveness of our internal controls and procedures for financial reporting. Due to its broad scope of purpose, the time and expense required to enable the Company to comply with Section 404 could be substantial and affect the Company’s profitability. In addition there is no assurance that proposed rules such as enhanced shareholder access to the Company’s proxy materials, the expensing of stock options, and rules requiring expanded disclosure of the Company’s director nomination process and designation of an audit committee financial expert will not have an adverse effect on the Company’s future operating results.

The Company’s quarterly revenue and operating results may fluctuate for a variety of reasons.

The Company’s profit margins vary among its products and its distribution channels. As a result, the overall profitability of the Company in any given period will depend, in part, on the product, geographic, and channel mix reflected in that period’s net sales.

Changes in accounting rules could adversely affect the Company’s future operating results.

Financial statements are prepared in accordance with U.S. generally accepted accounting principles. These principles are subject to interpretation by various governing bodies, including the Financial Accounting Standards Board

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(“FASB”) and the SEC, who interpret and create appropriate accounting regulations. A change from current accounting regulations, or the interpretations thereof, can have a significant affect on the Company’s results of operations and could impact the manner in which the Company conducts business.

Unanticipated changes in the Company’s tax rates could affect its future results.

The Company’s future effective tax rates could be favorably or unfavorably affected by unanticipated changes in tax laws or their interpretation. In addition, the Company is subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse affect on its operating results and financial condition.

The market price of the Company’s common stock has been, and may continue to be volatile.

The market price of the Company’s common stock has been, and may continue to be, highly volatile for various reasons, including the following:

Anti-Takeover provisions of our charter documents and Delaware law could prevent or delay transactions resulting in a change of control.

Provisions of our certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our board of directors. These provisions:

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ITEM 1B – UNRESOLVED STAFF COMMENTS

None

ITEM 2 – PROPERTIES

The Company owns manufacturing facilities in Gallaway, Tennessee, Arden, North Carolina and Clarksburg, West Virginia. The Company acquired in March 2007, a 28,200 square foot building in Brentwood, New York to serve as the Company’s new corporate headquarters, which is being completely renovated. In addition, the Company leases a manufacturing facility in Northglenn, Colorado which will be vacated in June/July 2008 and general office space in Shanghai, China. Management believes that the Company’s facilities are adequate to meet its current needs and should continue to be adequate for the foreseeable future. Additional information about our facilities is set forth in the following table:

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ITEM 3 – LEGAL PROCEEDINGS

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

ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year.

PART II

ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCK-HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price for the Common Stock

Our Common Stock trades on the NASDAQ Stock Market under the symbol “MDCI”. As of June 6, 2008 there were approximately 500 stockholders of record, which does not include approximately 4,000 beneficial owners of shares held in the names of brokers or other nominees. On January 9, 2007, we announced that our Board of Directors approved a three-for-two stock split affected in the form of a dividend. The stock split became effective on February 9, 2007 and has been retroactively reflected for all periods presented in the table below. The following table sets forth, for the periods indicated, the high and low closing prices per share of Medical Action Common Stock as reported by the NASDAQ Global Select Stock Market^SM.

Dividends

We have never paid cash dividends and do not anticipate paying dividends in the foreseeable future as the Board of Directors intends to retain future earnings for use in our business. Any future determination as to the payment of dividends will depend upon our financial condition, results of operations and such other factors as the Board of Directors deems relevant. In addition, our credit facilities contain covenants limiting the declaration and distribution of a cash dividend.

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Performance Graph

The following graph shows the cumulative total return on our Common Stock against the cumulative total return of the Standard & Poor 500 Stock Index and the Standard & Poor Healthcare (Medical Products and Supplies) Industry for the period of five years commencing April 1, 2003 and ending March 31, 2008.

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Securities Authorized for Issuance under Equity Compensation Plans

The following table shows, as of March 31, 2008, information with respect to compensation plans under which shares of Common Stock are authorized for issuance.

ITEM 6 – SELECTED FINANCIAL DATA

Selected Financial Data

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ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following table sets forth certain operational data (dollars in thousands and as a percentage of net sales) for the fiscal years indicated:

The Company’s revenue increased by 34% to $290,528,000 and its net income increased by 2% to $13,225,000 for the year ended March 31, 2008 over the year ended March 31, 2007. This marks the thirteenth consecutive year of record sales and the eleventh consecutive year of record net income.

Gross profit dollars increased primarily due to increased sales volume resulting from greater domestic market penetration primarily of its minor procedure kits and trays and net sales of products associated with the acquisition of Medegen Medical Products, LLC (“Medegen” or “MMP”) on October 17, 2006.

Gross profit as a percentage of sales decreased primarily due to manufacturing inefficiencies, increased resin costs, increased acquisition costs from foreign suppliers and a change in sales mix from the MMP acquisition, which accounted for approximately $19,951,000 of gross profit at 18.2%. The manufacturing inefficiencies, increased resin costs and increased acquisition costs from foreign suppliers amounted to approximately $10,400,000 for the year ended March 31, 2008. The major causes of the manufacturing inefficiencies were equipment productivity issues in our Tennessee plant and other inefficiencies associated with the consolidation of the MMP manufacturing facilities. The inefficiencies have resulted in backorders and order fulfillment issues on certain products. Additionally, freight expenses have increased due to the backorder and order fulfillment issues. Management anticipates these inefficiencies by the beginning of the second quarter of fiscal 2009. However, no assurance can be given that the backorders and order fulfillment issues will not result in the loss of business. The increase in resin costs and increased acquisition costs from foreign suppliers (predominantly those based in China) also negatively impacted our gross margin percentage. The volatility associated with these costs may continue for the foreseeable future. In the past, we have been able, from time to time, to increase selling prices for certain products subject to such cost volatility as a means to recover a portion of the increases. However, we are unable to give any assurance that we will be successful in passing along future cost increases to our customers, if deemed necessary. The future operating results of the Company are dependent on our ability to manage these factors.

Selling, general and administrative expenses increased primarily due to a full year of expenses associated with the MMP acquisition which occurred on October 17, 2006, increased compensation and related expenses incurred as a result of the Company’s current and anticipated future growth. Selling, general and administrative expenses as a percentage of sales decreased to 13.7% versus 14.1% of sales for the years ended March 31, 2008 and March 31, 2007, respectively.

The major factor affecting the Company’s financial condition during fiscal 2008 was net cash provided by operating

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activities of $19,104,000, which included $3,752,000 of deferred income taxes. This was offset by net cash of $6,270,000 used in investing activities. Investing activities included $5,097,000 of purchases of property and equipment and $1,181,000 of purchase price and related acquisitions costs associated with Medegen. The Company’s financing activities included $1,193,000 in net proceeds from the exercise of stock options and net payments under its credit facility of $12,749,000. These were the major factors in the Company’s increase in working capital of $7,417,000 during the year ended March 31, 2008 and corresponding increase in the Company’s current ratio to 1.6 during the year ended March 31, 2008 from 1.4 during the year ended March 31, 2007. The increase in the current ratio is due primarily to an increase accounts receivable, prepaid income taxes and cash and cash equivalents and a decrease in accounts payable.

FISCAL 2008 COMPARED TO FISCAL 2007

The following table sets forth the major sales variance components for the year ended March 31, 2008 versus March 31, 2007:

Net sales for the fiscal year ended March 31, 2008 increased 34% to $290,528,000 from $217,328,000 for the fiscal year ended March 31, 2007. The increase in net sales of $73,200,000 was primarily attributable to a full year of net sales of disposable patient utensils for the laboratory and medical markets and laboratory products resulting from the Medegen acquisition of approximately $61,315,000, a $11,584,000 or 22% increase in net sales of minor procedure kits and trays; a $1,029,000 or 32% increase in net sales of patient slippers, a $517,000 or 7% increase in protective apparel, and a $384,000 or 11% increase in net sales of patient aids. These increases were partially offset by a $449,000 or 8% decrease in net sales of sterilization products, a $1,069,000 or 9% decrease in net sales of laparotomy sponges and a $239,000 or 1% decrease in net sales of operating room towels. Net sales of minor procedure kits and trays, patient slippers, protective apparel and patient aids increased primarily due to greater domestic market penetration. Net sales of laporatomy sponges and operating room towels decreased due to a shift of sales channels for these products by their inclusion in custom procedural trays and increased competition in the domestic market. Sterilization products decreased due to increased competition in the domestic market.

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Management believes that the decrease in average selling prices of laparotomy sponges, operating room towels, patient slippers and protective apparel was primarily due to increased competition in the domestic market, which it believes will continue in fiscal 2009. The decrease in unit sales of laparotomy sponges, sterilization products and containment systems for medical waste was primarily due to increased competition in the domestic market, which it believes will continue in fiscal 2009. The increase in the average selling prices of certain containment systems products was due to price increases instituted in early fiscal 2008 to recover a portion of the increases in plastic resin. The Company’s international sales for the fiscal year ended March 31, 2008 were $8,888,000 or 3% of the cost of total net sales as compared to $6,587,000 or 3% of total net sales for the fiscal year ended March 31, 2007.

Containment systems for medical waste and the product lines added as a result of the acquisition of Medegen, represents approximately 54% 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. It is anticipated that the Company will purchase in excess of 54,000,000 pounds of resin during fiscal 2009. Each $.01 fluctuation could impact cost of goods sold by $540,000 on an annualized basis.

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 or non-renewal of any of these agreements may result in the significant loss of business or lower average selling prices. In some cases, as these agreements are renewed, the average selling prices could be materially lower.

During fiscal 2008, the Company participated in several reverse auctions and bid processes in order to achieve renewal of certain major group purchasing agreements. This process has resulted in the renewal or extension of nine existing agreements. No new agreements were added and no existing agreements were lost. Several of the renewals were renewed at lower average selling prices and may also result in the attainment of additional business. The Company anticipates continued participation in reverse auctions or similar bid processes as deemed necessary during fiscal 2009.

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

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The following table sets forth sales and cost of sales data for the periods indicated:

Gross profit for the twelve months ended March 31, 2008 increased 20% to $64,452,000 from $53,372,000 for the twelve months ended March 31, 2007. Gross profit as a percentage of net sales for the twelve months ended March 31, 2008 decreased to 22.2% from 24.6% for the twelve months ended March 31, 2007. Gross profit dollars increased primarily due to a full year of net sales of products as a result of the Medegen acquisition and increased sales volume from greater domestic market penetration primarily of its minor procedure kits and trays product line, protective apparel and patient slippers.

Gross profit as a percentage of sales decreased primarily due to manufacturing inefficiencies, increased resin costs, increased acquisition costs from foreign suppliers and a change in sales mix from the MMP acquisition, which accounted for approximately $19,951,000 of gross profit at 18.2%. The manufacturing inefficiencies, increased resin costs and increased acquisition costs from foreign suppliers amounted to approximately $10,400,000 for the year ended March 31, 2008. The major causes of the manufacturing inefficiencies were equipment productivity issues in our Tennessee plant and other inefficiencies associated with the consolidation of the MPP manufacturing facilities. The inefficiencies have resulted in backorders and other fulfillment issues on certain products. Additionally, freight expenses have increased due to the backorder and order fulfillment issues. Management anticipates substantial reductions in these inefficiencies effective the end of the second quarter of fiscal 2009. However, no assurance can be given that the backorders and order fulfillment issues will not result in the loss of business. The increase in resin costs and increased acquisition costs from foreign suppliers (predominately those based in China) also negatively impacted our gross margin percentage. The volatility associated with these costs may continue for the forseeable future. In the past, we have been able, from time to time, to increase selling prices for certain products subject to such cost volatility as a means to recover a portion of the increases. However, we are unable to give any assurance that we will be successful in passing along future cost increases to our customers, if deemed necessary. The future operating results of the Company are dependent on our ability to manage these factors.

Selling, general and administrative expenses for the twelve months ended March 31, 2008 increased 29% to $39,672,000 from $30,722,000 for the twelve months ended March 31, 2007. As a percentage of net sales, selling, general and administrative expenses decreased to 13.7% for the twelve months ended March 31, 2008 from 14.1% for the twelve months ended March 31, 2007. The increases consisted primarily of increased sales and marketing expenses of $3,772,000, increased general and administrative expenses of $2,091,000, increased distribution expenses of $2,337,000 and increased amortization of intangible expenses of $805,000. The increases in expenses were due primarily to a full year of expenses associated with the MMP acquisition.

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Interest expense for the twelve months ended March 31, 2008 increased to $3,406,000 from $1,961,000 for the twelve months ended March 31, 2007. Interest income for the twelve months ended March 31, 2008 decreased to $77,000 from $440,000 for the twelve months ended March 31, 2007. 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 twelve months ended March 31, 2008 as compared to the twelve months ended March 31, 2007. The increase in loan balances was primarily attributable to purchase price and related acquisition costs associated with the MMP acquisition.

Income tax expense increased to $8,227,000 or 38.3% of income before income taxes compared to $8,159,000 or 38.6% of income before income taxes. The primary reason for the decrease in the tax rate was due to a decrease in state income taxes as a result of a change in state apportionment factors and the Company qualifying for the Domestic Production Activities Deduction for a full year.

Net income for the twelve months ended March 31, 2008 increased to $13,225,000 from $12,969,000 for the twelve months ended March 31, 2007. The increase in net income is attributable to the aforementioned increase in net sales and gross profit, which were partially offset by an increase in selling, general and administrative expenses and interest expense and a decrease in interest income.

FISCAL 2007 COMPARED TO FISCAL 2006

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

Net sales for the fiscal year ended March 31, 2007 increased 44% to $217,328,000 from $150,942,000 for the fiscal year ended March 31, 2006. The increase in net sales of $66,386,000 was primarily attributable to net sales of approximately $48,363,000 of disposable patient utensils for the laboratory and medical markets and laboratory products resulting from our acquisition of MMP on October 17, 2006, a $9,942,000 or 23% increase in net sales of minor procedure kits and trays; a $3,441,000 or 8% increase in net sales of containment systems for medical waste; a $3,599,000 or 107% increase in protective apparel, a $555,000 or 2% increase in net sales of operating room towels and a $738,000 or 30% increase in net sales of patient slippers. These increases were partially offset by a $963,000 or 7% decrease in net sales of laparotomy sponges and a $1,106,000 or 25% decrease in net sales of wound care products. Net sales of minor procedure kits and trays, protective apparel, patient slippers and operating room towels increased primarily due to greater domestic market penetration. Net sales of laporatomy sponges and wound care products decreased due to increased competition in the domestic market. 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.

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Management believes that the decrease in average selling prices of laparotomy sponges, operating room towels, patient slippers, patient aids and sterilization products was primarily due to increased competition in the domestic market, which it believes will continue in fiscal 2008. The decrease in unit sales of laparotomy sponges, wound care, sterilization products and patient aids was primarily due to increased competition in the domestic market, which it believes will continue in fiscal 2008. The increase in the average selling prices of certain containment systems products was due to price increases instituted in early fiscal 2007 to recover a portion of increases in plastic resin. The Company’s international sales for the fiscal year ended March 31, 2007 were $6,587,000 or 3% of total net sales as compared to $4,807,000 or 3% of total net sales for the fiscal year ended March 31, 2006.

Containment systems for medical waste and the product lines added as a result of the acquisition of MMP on October 17, 2006, represents approximately 44% 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. It is anticipated that the Company will purchase in excess of 60,700,000 pounds of resin during fiscal 2008. Each $.01 fluctuation could impact cost of goods sold by $607,000 on an annualized basis.

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 or non-renewal of any of these agreements may result in the significant loss of business or lower average selling prices. In some cases, as these agreements are renewed, the average selling prices could be materially lower.

During fiscal 2007, the Company participated in several reverse auctions and bid processes in order to achieve renewal of certain major group purchasing agreements. This process has resulted in the renewal of seven existing agreements and the addition of two new agreements. No existing agreements were lost. Several of the renewals were renewed at lower average selling prices and may also result in the attainment of additional business. The Company anticipates continued participation in reverse auctions or similar bid processes as deemed necessary during fiscal 2008.

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The following table sets forth sales and cost of sales data for the periods indicated:

Gross profit for the twelve months ended March 31, 2007 increased 36% to $53,372,000 from $39,320,000 for the twelve months ended March 31, 2006. Gross profit as a percentage of net sales for the twelve months ended March 31, 2007 decreased to 24.6% from 26.0% for the twelve months ended March 31, 2006. 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, patient slippers 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 $10,475,000 of gross margin at 21.7%.

Selling, general and administrative expenses for the twelve months ended March 31, 2007 increased 46% to $30,722,000 from $20,990,000 for the twelve months ended March 31, 2006. As a percentage of net sales, selling, general and administrative expenses increased to 14.1% for the twelve months ended March 31, 2007 from 13.9% for the twelve months ended March 31, 2006. Selling, general and administrative expenses increased primarily due to increased expenses associated with the MMP acquisition of approximately $6,063,000 and due to increased headcount, which was a major reason for the increased salary and related expenses of $1,552,000. The increased headcount and related salary and expenses were incurred as a result of the Company’s current and anticipated future growth. Also, approximately $1,130,000 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 twelve months ended March 31, 2007 increased to $1,961,000 from $51,000 for the twelve months ended March 31, 2006. Interest income for the twelve months ended March 31, 2007 increased $205,000 to $440,000 from $235,000 for the twelve months ended March 31, 2006. 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 twelve months ended March 31, 2007 as compared to the twelve months ended March 31, 2006. 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.

Income tax expense increased to $8,159,000 or 38.6% of income before income taxes compared to $7,053,000 or 38.1% of income before income taxes. The primary reason for the increase in the tax rate was due to an increase in the statutory rate as a result of the Company’s increased taxable income placing it into a higher tax bracket, reduced deductions for charitable inventory and an increase in state income taxes. This was partially offset by the Company qualifying for the Domestic Production Activities Deduction.

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Net income for the twelve months ended March 31, 2007 increased to $12,969,000 from $11,461,000 for the twelve months ended March 31, 2006. 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:

Current assets have increased $5,700,000 to $64,253,000 at March 31, 2008 from $58,553,000 at March 31, 2007. The increase was primarily attributable to an increase of $3,385,000 in accounts receivable, an increase of $1,638,000 in prepaid income taxes and an increase of $1,277,000 of cash and cash equivalents which was partially offset by a decrease of $857,000 in inventories. The increase in accounts receivable was due primarily to an increase in net sales during the fourth quarter as compared to the prior year. The Company had working capital of $25,137,000 with a current ratio of 1.6 at March 31, 2008 as compared to working capital of $17,719,000 with a current ratio of 1.4 at March 31, 2007. Total borrowings outstanding were $47,906,000 with a debt to equity ratio of .41 at March 31, 2008 as compared to $60,656,000 with a debt to equity ratio of .62 at March 31, 2007. The increase in working capital compared to the prior year was primarily attributable to the increases in accounts receivable, prepaid income taxes and cash and cash equivalents and a decrease in accounts payable.

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 $85,000,000 and is divided into two types of borrowing facilities, (i) a term loan with a principal amount of $65,000,000 which is payable in twenty consecutive equal quarterly installments which commenced on March 31, 2007, and (ii) revolving credit loans, which amounts may be borrowed, repaid and reborrowed up to $20,000,000. As of March 31, 2008, $44,750,000 is outstanding on the term loan and $920,000 is outstanding on the revolving credit loans. The loan amount is collateralized by all of the assets of the Company and contains restrictive covenants, which limits certain transactions, requires maintenance of financial ratios and restricts the payment of dividends. At March 31, 2008, the Company was in compliance with all such covenants and financial ratios.

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The Company has financed its operations primarily through cash flow from operations and borrowings from its existing credit facilities. At March 31, 2008, the Company had cash and cash equivalents balance of $2,104,000 as compared to $827,000 at March 31, 2007. The Company’s operating activities provided cash of $19,104,000 and $12,517,000 for the years ended March 31, 2008 and 2007, respectively. Net cash provided during the year ended March 31, 2008 consisted primarily of net income from operations of $13,225,000, depreciation and amortization of $6,243,000, an increase in deferred income taxes of $3,752,000, stock-based compensation of $1,606,000, tax benefit from exercise of options of $1,383,000 and a decrease in inventories of $857,000. These were partially offset by increases in accounts receivable of $3,433,000, prepaid income taxes of $1,658,000 and other assets of $1,086,000 and a decrease in accounts payable of $2,411,000.

Investing activities used net cash of $6,270,000 and $85,610,000 during the years ended March 31, 2008 and 2007, respectively. The principal use during the year ended March 31, 2007 was for the acquisition of MMP on October 17, 2006. The purchase price and related acquisition costs for MMP was approximately $80,497,000. The Company’s purchases of property and equipment amounted to $5,097,000 and $5,240,000, during the years ended March 31, 2008 and 2007, respectively. Management anticipates incurring approximately $6,700,000 during fiscal 2009 in costs relating to the renovation of a building in Brentwood, NY which was purchased during fiscal 2007 and will serve as the Company’s new corporate headquarters. Additionally, management expects to purchase approximately $5,700,000 in machinery and equipment (predominantly at our Gallaway, Tennessee facility) during fiscal 2009.

Financing activities used net cash of $11,556,000 during the year ended March 31, 2008 compared to $57,852,000 provided for the year ended March 31, 2007. Financing activities during the year ended March 31, 2008 consisted of net payments under the Company’s credit facilities of $12,749,000. Other financing activities included proceeds from the exercise of employee stock options of $1,193,000.

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 its working capital requirements for fiscal 2009.

The Company believes that the relatively moderate rates of inflation in 2008 and 2007 have not had a significant impact on sales and profitability, however the Company has incurred increases in the cost of resin and transportation costs during these periods resulting in pressure on gross margin percentages.

CONTRACTUAL OBLIGATIONS

The following table represents the Company’s future material, long-term contractual obligations as of March 31, 2008:

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None of the Company’s Executive Officers have employment or severance agreements. Mr. Meringolo terminated his Employment Agreement in April 2007 with the mutual consent of the Company. In February 1993, the Company entered into an Employment Agreement with Mr. Paul D. Meringolo which, as amended, covered the five years ending March 31, 2008 and provided for a salary at an annual rate of $250,000, together with cost of living increments, reimbursement of medical expenses not otherwise covered by the Company’s medical plans, up to maximum of $5,000 and the use of a Company automobile. Our Executive Officers serve at the will of the Board, which enables the Company to terminate their employment with discretion as to the terms of any severance arrangement. This is consistent with the Company’s performance-based employment and compensation philosophy.

In lieu of his Employment Agreement, Mr. Meringolo received in fiscal 2008, an annual salary of $500,000 in addition to the reimbursement of medical expenses not otherwise covered by the Company’s medical plans, up to a maximum of $5,000, and the use of a Company automobile, together with a bonus potential of 80% of base salary subject to the achievement of the Company’s performance targets and certain individual/team goals, which will be determined by the Compensation Committee.

The Company has entered into agreements with four of its executive officers and a vice president, which provide certain benefits in the event of a change in control of the Company. A “change in control” of the Company is defined as, in general, the acquisition by any person of beneficial ownership of 20% or more of the voting stock of the Company, certain business combinations involving the Company or a change in a majority of the incumbent members of the Board of Directors, except for changes in the majority of such members approved by such members. If, within two years after a change in control, the Company or, in certain circumstances, the executive, terminates his employment, the executive is entitled to a severance payment equal to three times (i) such executive’s highest annual salary within the five-year period preceding termination plus (ii) a bonus increment equal to the average of the two highest of the last five bonuses paid to such executive. In addition, the executive is entitled to the continuation of all employment benefits for a three-year period, the vesting of all stock options and certain other benefits, including payment of an amount sufficient to offset any “excess parachute payment” excise tax payable by the executive pursuant to the provisions of the Internal Revenue Code or any comparable provision of state law. As of March 31, 2008, the estimated potential aggregate compensation payable to these three executive officers and vice president under the Company’s compensation and benefit plans and arrangements in the event of termination of such executive’s employment following a change in control amounted to approximately $8,700,000.

CRITICAL ACCOUNTING POLICIES

The Company’s significant accounting policies are summarized in Note 1 of its financial statements. While all these significant accounting policies impact its financial condition and results of operations, the Company views certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on the Company’s financial statements and require management to use a greater degree of judgment and/or estimates. Actual results may differ from those estimates. In addition, share and per share amounts for all periods presented in the consolidated financial statements and notes thereto have been retroactively adjusted to reflect the effect of the three-for-two stock split announced in January 2007.

The Company believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on the Company’s consolidated results of operations, financial position or liquidity for the periods presented in this report.

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The accounting policies identified as critical are as follows:

Revenue Recognition – The Company recognizes revenues in accordance with generally accepted accounting principles as outlined in SAB No. 104 which requires that four basic criteria be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) product delivery, including customer acceptance, has occurred or services have been rendered; (3) the price is fixed or determinable and (4) collectability is reasonably assured. The Company believes that its revenue recognition policy is critical because revenue is a very significant component of its results of operations. Decisions relative to criteria (4) regarding collectability are based upon management judgments and should conditions change in the future and cause management to determine this criteria is not met, the Company’s recognized results may be affected.

A large part of the Company’s sales are to distributors who resell the products to the end-user customers. We provide rebates to distributors that sell to end-user customers at prices determined under a contract between the Company and the end-user customer or distributor. The Company deducts all rebates from sales and has a provision for allowances based on historical information for all rebates that have not yet been processed.

Income Taxes – In preparing the Company’s financial statements, income tax expense is calculated for each of the jurisdictions in which the Company has nexus. This process involves estimating actual current taxes due plus assessing temporary differences arising from differing treatment for tax and accounting purposes which are recorded as deferred tax assets and liabilities. Deferred tax assets are periodically evaluated to determine their recoverability, and where their recovery is not likely, a valuation allowance is established and a corresponding additional tax expense is recorded in the Company’s statement of operations. In the event that actual results differ from the Company’s estimates given changes in assumptions, the provision for income taxes could be materially impacted. As of March 31, 2008, no valuation allowance was necessary for the $1,663,000 of Deferred Tax Assets that existed on the Company’s books. The total net deferred tax liability as of March 31, 2008, was $8,057,000.

In accordance with the provisions of SFAS Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”), we recognize in our financial statements only those tax positions that meet the more-likely-than-not-recognition threshold. We establish tax reserves for uncertain tax positions that do not meet this threshold. Interest and penalties associated with income tax matters are included in the provision for income taxes in our consolidated statement of operations. The provisions of FIN 48 did not have a material impact on the Company’s consolidated financial position.

Inventories – The Company values its inventory at the lower of the actual cost to purchase and/or manufacture or the current estimated market value of the inventory. On an ongoing basis, inventory quantities on hand are viewed 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. A significant increase in the demand for the Company’s products could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. Additionally, the Company’s estimates of future product demand may prove to be inaccurate in which case the Company may

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have understated or overstated the provision required for excess and obsolete inventory. Accordingly, future adjustments to the provision may be required. Although every effort is made to ensure the accuracy of the Company’s forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the value of the Company’s inventory and reported operating results. Historically, the Company has not experienced any significant inventory write-downs due to excess and obsolete inventory.

Goodwill and Other Intangibles – Purchase accounting requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair market value of the assets and liabilities purchased, with the excess value, if any, being classified as goodwill. In addition, as described in Note 4 of the Company’s financial statements, as a result of the Company’s acquisitions, values were assigned to intangible assets for trademarks, customer relationships, non-compete agreements and group purchasing organization contracts. Finite useful lives were assigned to these intangibles, if appropriate, and they will be amortized over their remaining life. As with any intangible asset, future write-downs may be required if the value of these assets becomes impaired.

Our goodwill is tested for impairment on an annual basis. Application of the goodwill impairment test requires judgment. The fair value is estimated using a discounted cash flow methodology. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment.

Property, Plant and Equipment – Property, plant and equipment are depreciated over their useful lives. Useful lives are based on management’s estimates of the period that the asset will generate revenue. Any change in conditions that would cause management to change its estimate as to the useful lives of a group or class of assets may significantly impact the Company’s depreciation expense on a prospective basis.

Allowance for Doubtful Accounts – The Company performs ongoing credit evaluations on its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by a review of their current credit information. The Company continuously monitors collections and payments from customers and a provision for estimated credit losses is maintained based upon its historical experience and on specific customer collection issues that have been identified. While such credit losses have historically been within the Company’s expectations and the provisions established, the Company cannot guarantee that the same credit loss rates will be experienced in the future. Concentration risk exists relative to the Company’s accounts receivable, as 60% of the Company’s total accounts receivable balance for fiscal 2008 is concentrated in three distributors. While the accounts receivable related to these distributors may be significant, the Company does not believe the credit loss risk to be significant given the consistent payment history of these distributors.

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IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

ACCOUNTING FOR UNCERTAIN TAX POSITIONS

In July 2006, the FASB issued SFAS Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. FIN 48 also provides guidance on accounting for derecognition, interest and penalties, and classification and disclosure of matters related to uncertainty in income taxes. FIN 48 is effective for fiscal years beginning after December 15, 2006, and, as a result, was effective for us beginning April 1, 2007.

On April 1, 2007 we adopted the provisions of FIN 48. The adoption of the provisions of FIN 48 did not have a material impact on the Company’s consolidated financial position.

We are subject to taxation in the US and various state and local jurisdictions. There are currently no state income tax examinations underway. There is currently an Internal Revenue Service examination in process for the fiscal year ended March 31, 2005. The examination is nearing completion; however, no projections as to the outcome can be made at this time. The Company is no longer subject to US federal income tax examinations by the Internal Revenue Service and most state and local authorities for fiscal years ending prior to March 31, 2004 (certain state authorities may subject the Company to examination up to the period ending March 31, 2003). The Company does, however, have a prior year net operating loss as a result of a previous acquisition which will remain open for the examination.

FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurement. This statement applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. SFAS 157 is effective for the fiscal year beginning November 15, 2007, which for us is the year ending March 31, 2008. In December 2007, the FASB issued FSP FAS 157-b to defer SFAS 157’s effective date for all non-financial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until years beginning after November 15, 2008. Derivatives measured at fair value under FAS 133 were not deferred under FSP FAS 157-b. The adoption of SFAS 157 did not have a material impact on the Company’s financial position or results of operations.

FAIR VALUE OPTIONS FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB SFAS No. 115” (“SFAS 159”).” SFAS 159 permits an entity to measure certain financial assets and financial liabilities at fair value. The statement’s objective is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The new statement establishes presentation and disclosure requirements

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to help financial statement users understand the effect of the entity’s election on its earnings, but does not eliminate disclosure requirements of other accounting standards. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007, and is effective for us as of April 1, 2008. We do not anticipate any financial statement impact upon adoption of SFAS 159.

BUSINESS COMBINATIONS

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how the acquirer of a business recognized and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for the fiscal year beginning after December 15, 2008, which for us is the fiscal year beginning April 1, 2009. We are assessing the impact, if any, which the adoption of SFAS 141R will have on our consolidated financial position, results of operations and cash flows.

NON-CONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS

In December 2007, the FASB issued SFAS No. 160, “Non-Controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, which for us is the fiscal year beginning April 1, 2009. We are assessing the impact, if any, which the adoption of SFAS 160 will have on our consolidated financial position, results of operations and cash flows.

The following management’s discussion and analysis describes material changes in the results of operations of Medical Action Industries Inc. (“Medical Action” or the “Company”) during each of the three years ended March 31, 2008 and the Company’s financial condition at that date. Trends of a material nature are discussed to the extent known and considered relevant. In addition, share and per share amounts for all periods presented have been retroactively adjusted to reflect the effect of the three-for-two stock split distributed on February 9, 2007.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for their effect on an entity’s financial position, financial performance, and cash flows. SFAS No. 161 will be effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008, which for us is the fiscal year beginning April 1, 2009. The Company is evaluating the impact that this statement will have, if any, on its consolidated financial statements.

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ITEM 7A – 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 March 31, 2008, $45,670,000 was outstanding under the credit facility. Changes in the alternate base rates or LIBOR rates during fiscal 2008 will have a positive or negative effect on the Company’s interest expense. Each 1% fluctuation in the interest rate will increase or decrease interest expense for the Company by approximately $46,000 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 March 31, 2008, $2,080,000 was outstanding for these Bonds. The Bonds bear interest at a variable rate determined weekly. During fiscal 2008, the average interest rate on the Bonds approximated 3.5%. Each 1% fluctuation in interest rates will increase or decrease the interest expense on the Bonds by approximately $21,000 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 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Financial Statements and Schedule:

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C onsolidated Balance Sheets    Medical Action Industries Inc.

The accompanying notes are an integral part of these statements.

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C onsolidated Statements of Operations    Medical Action Industries Inc.

The accompanying notes are an integral part of these statements.

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C onsolidated Statements of Shareholders’ Equity    Medical Action Industries Inc.