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Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

Form 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-14643

LOGO

STERIS Corporation

(Exact name of registrant as specified in its charter)


Ohio		34-1482024
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

5960 Heisley Road, Mentor, Ohio		44060-1834
(Address of principal executive offices)		(Zip code)

440-354-2600

(Registrant’s telephone number, including area code)

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

Large Accelerated Filer x Accelerated Filer ¨ 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

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of common shares outstanding as of October 31, 2006: 64,625,708

STERIS Corporation

Form 10-Q

Index


		Page
Part I - Financial Information

Item 1.	Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	39

Part II - Other Information

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 4.	Submission of Matters to a Vote of Security Holders	41

Item 6.	Exhibits	42

	Signature	43

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STERIS CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands)


	September 30, 2006			March 31, 2006
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	44,907		$	72,732
Accounts receivable (net of allowances of $8,217 and $9,037, respectively)		201,497			242,002
Inventories, net		140,955			112,224
Current portion of deferred income taxes, net		13,232			13,021
Prepaid expenses and other current assets		36,995			20,336

Total current assets		437,586			460,315

Property, plant, and equipment, net		393,320			401,536
Goodwill and intangibles, net		333,068			326,529
Other assets		529			593

Total assets	$	1,164,503		$	1,188,973

Liabilities and shareholders’ equity
Current liabilities:
Current portion of long-term indebtedness	$	1,402		$	1,755
Accounts payable		66,559			87,057
Accrued income taxes		9,872			19,821
Accrued payroll and other related liabilities		46,711			50,496
Accrued expenses and other		72,506			75,017

Total current liabilities		197,050			234,146

Long-term indebtedness		147,035			114,480
Deferred income taxes, net		28,633			35,135
Long-term portion of retirement benefit obligations		74,983			74,385

Total liabilities		447,701			458,146

Serial preferred shares, without par value; 3,000 shares authorized; no shares issued or outstanding		—			—
Common shares, without par value; 300,000 shares authorized; issued and outstanding shares of 64,624 and 66,976, respectively		90,308			141,723
Retained earnings		622,650			596,878
Accumulated other comprehensive (loss) income:
Minimum pension liability		(6,214	)		(6,214	)
Cumulative foreign currency translation adjustment		10,058			(1,560	)

Total shareholders’ equity		716,802			730,827

Total liabilities and shareholders’ equity	$	1,164,503		$	1,188,973

See notes to consolidated financial statements.

STERIS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(Unaudited)


	Three Months Ended September 30,						Six Months Ended September 30,
	2006			2005			2006			2005
Revenues:
Product	$	179,375		$	174,846		$	345,134		$	343,992
Service		104,161			98,590			203,469			197,527

Total revenues		283,536			273,436			548,603			541,519

Cost of revenues:
Product		106,347			103,425			201,640			199,385
Service		58,428			56,828			114,827			113,375

Total cost of revenues		164,775			160,253			316,467			312,760
Gross profit		118,761			113,183			232,136			228,759

Operating expenses:
Selling, general, and administrative		82,786			78,648			161,200			159,880
Research and development		8,283			9,096			16,678			16,837
Restructuring expenses		1,158			—			2,263			—

Total operating expenses		92,227			87,744			180,141			176,717

Income from continuing operations		26,534			25,439			51,995			52,042

Non-operating expenses (income):
Interest expense		2,376			1,303			4,145			2,524
Interest and miscellaneous income		(801	)		(365	)		(1,480	)		(2,292	)

Total non-operating expense, net		1,575			938			2,665			232

Income from continuing operations before income tax expense		24,959			24,501			49,330			51,810
Income tax expense		8,599			9,096			18,913			19,473

Net income from continuing operations		16,360			15,405			30,417			32,337

Discontinued operations:
Income from discontinued operations, net of tax		—			1,010			—			1,410
Gain on the sale of discontinued operations, net of tax		—			—			627			—

Net income	$	16,360		$	16,415		$	31,044		$	33,747

Basic earnings per common share:
Income from continuing operations, net of tax	$	0.25		$	0.23		$	0.46		$	0.47
Income from discontinued operations, net of tax	$	—		$	0.01		$	0.01		$	0.02

Net income	$	0.25		$	0.24		$	0.47		$	0.49

Diluted earnings per common share:
Income from continuing operations, net of tax	$	0.25		$	0.23		$	0.46		$	0.47
Income from discontinued operations, net of tax	$	—		$	0.01		$	0.01		$	0.02

Net income	$	0.25		$	0.24		$	0.47		$	0.49

Cash dividends declared per common share outstanding	$	0.04		$	0.04		$	0.08		$	0.08

See notes to consolidated financial statements.

STERIS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Six Months Ended September 30,
	2006			2005
Operating activities:
Net income	$	31,044		$	33,747
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, and amortization		29,677			28,432
Deferred income taxes		(7,158	)		(285	)
Share based compensation		5,785			—
Tax benefit from stock options exercised		—			1,173
Gain on the sale of discontinued operations, net of tax		(627	)		—
Other items		856			(1,113	)
Changes in operating assets and liabilities, excluding the effects of business acquisitions:
Accounts receivable, net		43,568			41,554
Inventories, net		(27,123	)		(13,352	)
Other current assets		(19,382	)		(2,385	)
Accounts payable		(21,287	)		(6,202	)
Accruals and other, net		(17,093	)		5,913
Assets of discontinued operations		—			10,139
Liabilities of discontinued operations		—			(11,970	)

Net cash provided by operating activities		18,260			85,651

Investing activities:
Purchases of property, plant, equipment, and intangibles, net		(21,419	)		(22,665	)
Purchases of property, plant, equipment, and intangibles, net for discontinued operations		—			(72	)
Investments in businesses, net of cash acquired		—			(1,504	)
Proceeds from the sale of discontinued operations		2,927			—

Net cash used in investing activities		(18,492	)		(24,241	)

Financing activities:
Proceeds under credit facilities, net		32,555			1,700
Payments on long-term obligations and capital leases, net		(361	)		(1,932	)
Repurchases of common shares		(59,628	)		(39,394	)
Cash dividends paid to common shareholders		(5,272	)		(5,494	)
Deferred financing fees		—			(217	)
Stock option and other equity transactions, net		1,825			5,992
Tax benefit from stock options exercised		551			—

Net cash used in financing activities		(30,330	)		(39,345	)

Effect of exchange rate changes on cash and cash equivalents		2,737			(530	)

(Decrease) increase in cash and cash equivalents		(27,825	)		21,535
Cash and cash equivalents at beginning of period		72,732			23,547

Cash and cash equivalents at end of period	$	44,907		$	45,082

See notes to consolidated financial statements.

STERIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the Three and Six Months Ended

September 30, 2006 and 2005

(dollars in thousands, except per share amounts)

1. Nature of Operations and Summary of Significant Accounting Policies

Throughout this document, references to “STERIS Corporation,” “STERIS,” or the “Company,” are references to STERIS Corporation and its subsidiaries, except where a different meaning is clearly required by the context. The Company’s fiscal year ends on March 31. References to a particular “year” or “year-end” refer to the Company’s fiscal year.

Nature of Operations

The Company develops, manufactures, and/or markets equipment, consumables, and services for healthcare, pharmaceutical, scientific, research, industrial, and governmental customers throughout the world. The Company operates in three business segments: Healthcare, Life Sciences, and STERIS Isomedix Services.

Interim Financial Statements

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all material adjustments (including normal recurring accruals and adjustments) necessary to present fairly the financial condition, results of operations, and cash flows of the Company for the periods presented.

These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2006, filed with the Securities and Exchange Commission (“SEC”) on June 12, 2006. The Consolidated Balance Sheet at March 31, 2006 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Inter-company accounts and transactions have been eliminated upon consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in certain circumstances that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates and, therefore, operating results for the three and six month periods ended September 30, 2006 are not necessarily indicative of results that may be expected for the full fiscal year ending March 31, 2007.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

STERIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended

September 30, 2006 and 2005

(dollars in thousands, except per share amounts)

Share-Based Compensation

On April 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS No. 123R”), “Share-Based Payment,” and elected to use the modified prospective transition method (see Note 2).

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 158 (“SFAS No. 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132(R),” requiring public companies to fully recognize an asset or liability for the overfunded or underfunded status of their benefit plans and requiring the use of a measurement date that corresponds to the plan sponsor’s year end. The recognition and disclosure provisions of SFAS No. 158 are effective for fiscal years ending after December 15, 2006. The measurement date provision of SFAS No. 158 is effective for fiscal years beginning after December 15, 2008. The Company currently measures plan assets and benefit obligations of its defined benefit pension and postretirement benefit plans as of its fiscal year-end balance sheet date. The Company will adopt the recognition and disclosure provisions of SFAS No. 158 as of March 31, 2007, as required. Management is currently evaluating the requirements of SFAS No. 158 and has not yet determined the impact on the Company’s consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), “Fair Value Measurements,” providing enhanced guidance on the use of fair value to measure assets and liabilities. SFAS No. 157 also provides for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard does not expand the use of fair value, but applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company will adopt SFAS No. 157 as of April 1, 2008, as required. Management is currently evaluating the requirements of SFAS No. 157 and has not yet determined the impact on the Company’s consolidated financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements,” providing interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. SAB 108 is effective for fiscal years beginning after November 15, 2006. The Company will adopt SAB 108 as of April 1, 2007, as required. Management is currently evaluating the requirements of SAB 108 and has not yet determined the impact on the Company’s consolidated financial statements.

In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, Accounting for Income Taxes,” to create a single model to address accounting for uncertainty in tax positions. FIN 48 prescribes a benefit recognition model with a two-step approach, a more-likely-than-not recognition criterion and a measurement attribute that measures the position as the largest amount of tax benefit that is greater than 50% likely of being ultimately realized upon settlement. If it is not more-likely-than-not that the benefit will be sustained on its technical merits, no benefit will be recorded. FIN 48 also requires that the amount of interest expense to be recognized related to uncertain

STERIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended

September 30, 2006 and 2005

(dollars in thousands, except per share amounts)

tax positions be recognized in accordance with applying the applicable statutory rate of interest to the difference between the tax position recognized in accordance with FIN 48 and the amount previously taken or expected to be taken in a tax return. The change in net assets as a result of applying this interpretation will be considered a change in accounting principle with the cumulative effect of the change treated as an offsetting adjustment to the opening balance of retained earnings or goodwill, if allowed under existing accounting standards, in the period of transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 as of April 1, 2007, as required. Management is currently evaluating the requirements of FIN 48 and has not yet determined the impact on the Company’s consolidated financial statements.

Significant Accounting Policies

A detailed description of the Company’s significant and critical accounting policies, estimates, and assumptions is included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2006, filed with the SEC on June 12, 2006. The Company’s significant and critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2006, other than the adoption of SFAS No. 123R as described above.

2. Share-Based Compensation

Under the Company’s long-term incentive plan, up to 6,600,000 shares of common stock have been made available for grant at the discretion of the Compensation Committee of the Board of Directors to officers, directors, and key employees in the form of stock options, restricted shares, and restricted share units. Stock options provide the right to purchase the Company’s common shares at the market price on the date of grant, subject to the terms of option plans and agreements. Stock options granted generally become exercisable to the extent of one-fourth of the optioned shares for each full year of employment following the date of grant and generally expire 10 years after the date of grant, or earlier if an option holder ceases to be employed by the Company. Certain option agreements have provisions that provide for an adjustment to the normal vesting schedule whereby options vest on a prorated basis as defined by specific option agreements in the event of employment termination. Restricted shares and restricted share units cliff vest over an approximately three-year period. As of September 30, 2006, 6,096,325 shares remain available for grant under the long-term incentive plan.

Prior to April 1, 2006, the Company accounted for share-based compensation under the provisions of Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” as permitted by Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation,” as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” and accordingly recognized no compensation expense when the exercise price equaled the market price of the stock on the date of grant.

On April 1, 2006, the Company adopted SFAS No. 123R using the modified prospective transition method. SFAS No. 123R requires the Company to estimate the fair value of share-based awards on the date of the grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of income. The expense is classified as cost of goods sold or selling, general and administrative expenses in a manner consistent with the employee’s compensation and benefits.

STERIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended

September 30, 2006 and 2005

(dollars in thousands, except per share amounts)

Under the modified prospective transition method, compensation cost recognized in the first six months of fiscal 2007 includes (a) compensation cost for all share-based compensation granted, but not yet vested, as of April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based compensation granted on or subsequent to April 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. The Company’s consolidated financial statements as of and for the three and six month periods ended September 30, 2006 reflect the impact of SFAS No. 123R. In accordance with the modified prospective transition method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include the impact of SFAS No. 123R.

The adoption of SFAS No. 123R on April 1, 2006 reduced the Company’s income from continuing operations before income taxes for the second quarter and first half of fiscal 2007 by $3,693 and $5,785, respectively, and reduced net income for the second quarter and first half of fiscal 2007 by $2,268 ($0.03 per basic and diluted share) and $3,553 ($0.05 per basic and diluted share), respectively. The adoption of SFAS No.123R also required the classification of the tax benefit from the exercise of stock options for the six months ended September 30, 2006 of $551 as a financing activity in the cash flow statement, rather than as an operating activity, as previously required. For the six months ended September 30, 2005, the tax benefit from the exercise of stock options recorded as an operating activity in the cash flow statement was $1,173.

The effect of the adoption of SFAS No. 123R on the first half of fiscal 2007 results is not indicative of the effect on the second half of fiscal 2007, as approximately $1,784 of the first half stock compensation was attributable to the accelerated recognition of expense for certain employees that are or will become eligible for retirement during the vesting period.

The following table contains pro forma disclosures regarding the effect on the Company’s net income, earnings per basic common share, and earnings per diluted common share for the second quarter and first half of fiscal 2006 had the Company applied a fair value method of accounting for share-based compensation in accordance with SFAS No. 123.


	Three Months Ended September 30, 2005		Six Months Ended September 30, 2005
Net income:
As reported	$	16,415	$	33,747
Less: Stock-based compensation expense, net of income taxes, assuming the fair value method		1,398		2,874

Pro forma	$	15,017	$	30,873

Earnings per common share:
Basic:
As reported	$	0.24	$	0.49
Pro forma		0.22		0.45
Diluted:
As reported	$	0.24	$	0.49
Pro forma		0.22		0.44

STERIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended

September 30, 2006 and 2005

(dollars in thousands, except per share amounts)

For the purpose of computing pro forma net income, the fair value of option grants was estimated at their grant date using the Black-Scholes-Merton option pricing model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics that are not present in the Company’s option grants. If the model permitted consideration of the unique characteristics of employee stock options, the resulting estimate of the fair value of the stock options could be different.

The following weighted-average assumptions were used for all options granted during the first half of fiscal 2007 and fiscal 2006:


	SFAS No. 123R Expense Fiscal 2007	SFAS No. 123 Pro forma Fiscal 2006
Risk-free interest rate	4.73%	3.95% - 4.40%
Expected life of options	6 years	5 years
Expected dividend yield of stock	0.65%	0.58% - 0.66%
Expected volatility of stock	34.29%	45.00%

The risk-free interest rate is based upon the U.S. Treasury yield curve at the time of grant. The expected life of options is reflective of historical experience, vesting schedules and contractual terms. The expected dividend yield of stock represents the Company’s best estimate of expected future dividend yield. The expected volatility of stock is derived by referring to the Company’s historical stock prices over a timeframe similar to that of the expected life of the grant. The Company has applied an estimated forfeiture rate of 2.2 percent. This rate is calculated based upon historical activity and represents an estimate of the granted options not expected to vest. If actual forfeitures differ from the expected rate, the Company may be required to make additional adjustments to compensation expense in future periods. The expected life and expected forfeiture rate used for options granted in fiscal 2007 to the Company’s Chief Executive Officer (“CEO”) were adjusted based on the terms of the employment agreement between the Company and the CEO entered into in September 2006.

Stock option activity for the first half of fiscal 2007 is as follows:


	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at March 31, 2006	5,706,874		$	21.02
Granted	415,725			24.72
Exercised	(159,662	)		14.78
Forfeited	(61,332	)		25.02

Outstanding at September 30, 2006	5,901,605		$	21.07	6.09	$	126,459

Exercisable at September 30, 2006	4,282,083		$	20.02	5.15	$	85,708

The total intrinsic value of stock options exercised during the first half of fiscal 2007 and fiscal 2006 was $1,464 and $3,151, respectively. Net cash proceeds from the exercise of stock options were $2,381 and $5,983 for the first half of fiscal 2007 and fiscal 2006, respectively. An income tax benefit of $551 and $1,173 was realized from stock option exercises during the first half of fiscal 2007 and fiscal 2006, respectively.

STERIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended

September 30, 2006 and 2005

(dollars in thousands, except per share amounts)

The weighted average grant date fair value of share-based compensation grants was $9.75 and $10.57 for the first half of fiscal 2007 and fiscal 2006, respectively. The weighted average grant date fair value of share-based compensation granted to the CEO was adjusted based on the terms of the employment agreement between the Company and the CEO entered into in September 2006.

A summary of the status of the Company’s nonvested shares as of September 30, 2006 and changes during the first half of fiscal 2007 is presented below:


	Number of Restricted Shares		Number of Restricted Share Units	Weighted- Average Grant Date Fair Value
Nonvested at March 31, 2006	2,200		—	$	27.20
Granted	67,100		20,850		23.17
Vested	(1,470	)	—		27.20
Canceled	—		—		—

Nonvested at September 30, 2006	67,830		20,850	$	23.20

Restricted shares and restricted share units granted were valued based on the closing stock price at the grant date and are estimated to cliff vest over an approximately three-year period based upon the terms of the grants. The total intrinsic value of restricted shares that vested during the first half of fiscal 2007 was $34.

As of September 30, 2006, there was $14,763 of total unrecognized compensation cost related to non-vested share-based compensation granted under the Company’s share-based compensation plans. The cost is expected to be recognized over a weighted average period of 1.21 years.

3. Common Shares

Basic earnings per common share are calculated based upon the weighted average number of common shares outstanding. Diluted earnings per common share are calculated based upon the weighted average number of common shares outstanding plus the dilutive effect of common share equivalents calculated using the treasury stock method. The following is a summary of common shares and common share equivalents outstanding used in the calculations of basic and diluted earnings per common share:


	Three Months Ended September 30,		Six Months Ended September 30,
	2006	2005	2006	2005
	(shares in thousands)
Weighted average common shares outstanding - basic	65,567	68,196	65,882	68,661
Dilutive effect of common share equivalents	552	783	509	771

Weighted average common shares outstanding and common share equivalents - diluted	66,119	68,979	66,391	69,432

STERIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended

September 30, 2006 and 2005

(dollars in thousands, except per share amounts)

Options to purchase the following number of common shares at the following weighted average exercise prices were outstanding but excluded from the computation of diluted earnings per common share because the exercise prices were greater than the average market price for the common shares during the periods:


	Three Months Ended September 30,				Six Months Ended September 30,
	2006		2005		2006		2005
	(shares in thousands)
Number of common share options		2,169		1,495		2,124		1,495
Weighted average exercise price	$	26.75	$	28.44	$	26.80	$	28.44

4. Comprehensive Income

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” establishes standards for reporting comprehensive income. Comprehensive income includes net income as currently reported under U.S. GAAP and other comprehensive income. Other comprehensive income considers the effects of additional economic events that are not required to be recorded in determining net income, but rather are reported as a separate component of shareholders’ equity. The following table illustrates the components of the Company’s comprehensive income:


	Three Months Ended September 30,					Six Months Ended September 30,
	2006		2005			2006		2005
Net income	$	16,360	$	16,415		$	31,044	$	33,747
Foreign currency translation adjustments		2,795		(420	)		11,618		(10,273	)

Total comprehensive income	$	19,155	$	15,995		$	42,662	$	23,474

5. Restructuring

During the three and six months ended September 30, 2006, the Company recorded $1,158 and $2,263, respectively, in restructuring expenses related to the transfer of the Erie, Pennsylvania manufacturing operations to Monterrey, Mexico to improve the Company’s cost structure. The following is a summary of these restructuring expenses for the second quarter and first half of fiscal 2007:


	Three Months Ended September 30, 2006		Six Months Ended September 30, 2006
Asset impairment and accelerated depreciation	$	564	$	1,269
Severance, payroll and other related costs		589		979
Other		5		15

Total restructuring charges	$	1,158	$	2,263

These costs are associated with the Healthcare business segment. Since the inception of the restructuring plan, the Company has incurred restructuring expenses of $27,571, with restructuring expenses of $27,089 and $482 related to the Healthcare and Life Sciences segments, respectively. These charges primarily related to the transfer of manufacturing operations to Monterrey, Mexico.

STERIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended

September 30, 2006 and 2005

(dollars in thousands, except per share amounts)

The Company anticipates incurring approximately an additional $15,700 in restructuring expenses during the remainder of fiscal 2007 and fiscal 2008 in connection with the transfer of the manufacturing operations. Restructuring expenses to be incurred include compensation and benefits, severance, accelerated depreciation and other expenses. The Company did not incur restructuring expenses during the first half of fiscal 2006.

Restructuring expenses have been recognized as incurred as required under the provisions of Statement of Financial Accounting Standards No. 146 (“SFAS No. 146”), “Accounting for Costs Associated with Exit or Disposal Activities.” In addition, the property, plant and equipment associated with the Erie, Pennsylvania facility were assessed for impairment under Statement of Financial Accounting Standards No. 144 (“SFAS No. 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” Asset impairment and accelerated depreciation expenses primarily relate to adjustments to the carrying value and the estimated useful lives of the assets of the Erie facility to reflect their estimated fair value.

Liabilities related to restructuring activities are recorded as current liabilities on the accompanying Consolidated Balance Sheets within “Accrued expenses and other.” The following table summarizes the Company’s liabilities related to restructuring activities:


	March 31, 2006		Fiscal 2007					September 30, 2006
	March 31, 2006		Provision		Payments			September 30, 2006
Severance and termination benefits	$	1,941	$	923	$	(1,385	)	$	1,479
Lease termination obligation		135		—		(74	)		61

Total	$	2,076	$	923	$	(1,459	)	$	1,540

6. Depreciable Assets

Information related to the major categories of the Company’s depreciable assets is as follows:


	September 30, 2006			March 31, 2006
Land and land improvements (1)	$	25,458		$	24,611
Buildings and leasehold improvements		181,583			179,264
Machinery and equipment		262,956			259,820
Information systems		110,642			108,853
Radioisotope		128,260			125,008
Construction in progress (1)		33,065			31,554

Total property, plant, and equipment		741,964			729,110
Less: accumulated depreciation and depletion		(348,644	)		(327,574	)

Property, plant, and equipment, net	$	393,320		$	401,536

(1)	Land is not depreciated. Construction in progress is not depreciated until placed in service.

STERIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended

September 30, 2006 and 2005

(dollars in thousands, except per share amounts)

7. Inventories, Net

Inventories, net are stated at the lower of cost or market. The Company uses the last-in, first-out (“LIFO”) and first-in, first-out (“FIFO”) cost methods. An actual valuation of inventory under the LIFO method is made only at the end of the fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final fiscal year-end LIFO inventory valuation. Inventory costs include material, labor, and overhead. Inventories, net consisted of the following:


	September 30, 2006		March 31, 2006
Raw materials	$	35,344	$	32,121
Work in process		31,324		29,011
Finished goods		74,287		51,092

Inventories, net	$	140,955	$	112,224

8. Debt

Indebtedness was as follows:


	September 30, 2006		March 31, 2006
Private Placement	$	100,000	$	100,000
Credit facility		45,535		12,980
Other debt		2,902		3,255

Total		148,437		116,235
Less: current portion		1,402		1,755

Long-term portion	$	147,035	$	114,480

Additional information regarding the Company’s indebtedness is included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2006, filed with the SEC on June 12, 2006.

STERIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended

September 30, 2006 and 2005

(dollars in thousands, except per share amounts)

9. Additional Consolidated Balance Sheets Information

Additional information related to the Company’s Consolidated Balance Sheets is as follows:


	September 30, 2006		March 31, 2006
Accrued payroll and other related liabilities:
Compensation and related items	$	16,749	$	14,646
Accrued vacation		11,646		12,912
Accrued bonuses		4,939		3,542
Accrued employee commissions		6,359		9,474
Retirement benefit obligations-current portion		7,018		9,922

Total accrued payroll and other related liabilities	$	46,711	$	50,496

Accrued expenses and other:
Deferred revenues	$	21,274	$	19,408
Self-insured risk retention-GRIC		17,629		16,090
Other self-insured risks		930		1,407
Accrued dealer commissions		5,709		6,067
Accrued warranty		5,725		7,226
Other		21,239		24,819

Total accrued expenses and other	$	72,506	$	75,017

10. Income Tax Expense

Income tax expense includes United States federal, state and local, and foreign income taxes, and is based on reported pre-tax income. The effective income tax rates for continuing operations for the three month periods ended September 30, 2006 and 2005 were 34.5% and 37.1%, respectively. For the six month periods ended September 30, 2006 and 2005, the effective income tax rates for continuing operations were 38.3% and 37.6%, respectively. The lower effective income tax rate for the three month period ended September 30, 2006 resulted principally from discrete item adjustments to recognize additional deferred tax assets related to foreign tax credits.

Income tax expense is provided on an interim basis based upon the Company’s estimate of the annual effective income tax rate, adjusted each quarter for discrete items. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the Company’s ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives.

11. Benefit Plans

The Company provides defined benefit pension plans for certain manufacturing and plant administrative personnel throughout the world as determined by collective bargaining agreements or employee benefit standards, including two United States defined benefit pension plans. In addition to providing pension benefits to certain employees, the Company sponsors an unfunded post-retirement medical benefit plan for two groups of United States employees comprised substantially of the same employees who receive pension benefits under the

STERIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended

September 30, 2006 and 2005

(dollars in thousands, except per share amounts)

United States defined benefit pension plans. Benefits under this plan include retiree life insurance and retiree medical insurance, including prescription drug coverage and Medicare supplemental coverage. Additional information regarding the Company’s defined benefit pension plans and other post-retirement medical benefit plan is included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2006, filed with the SEC on June 12, 2006.

During the fourth quarter of fiscal 2006, the Company recorded curtailment and special termination benefit losses associated with the restructuring plan to transfer certain manufacturing operations from Erie, Pennsylvania to Monterrey, Mexico. Fiscal 2007 net periodic benefit costs are reduced as a result of the recognition of these losses.

Components of the net periodic benefit cost of the Company’s defined benefit pension plans and other post-retirement medical benefit plan were as follows:


	Defined Benefit Pension Plans												Other Post- Retirement Plan
	U.S. Qualified						International						Other Post- Retirement Plan
Three Months Ended September 30,	2006			2005			2006			2005			2006		2005
Service cost	$	49		$	222		$	109		$	227		$	—	$	272
Interest cost		693			646			80			120			1,168		1,134
Expected return on plan assets		(680	)		(697	)		(97	)		(125	)		—		—
Net amortization and deferral		67			209			—			—			231		438

Net periodic benefit cost	$	129		$	380		$	92		$	222		$	1,399	$	1,844


	Defined Benefit Pension Plans												Other Post- Retirement Plan
	U.S. Qualified						International						Other Post- Retirement Plan
Six Months Ended September 30,	2006			2005			2006			2005			2006		2005
Service cost	$	98		$	444		$	219		$	380		$	—	$	544
Interest cost		1,385			1,292			160			202			2,337		2,268
Expected return on plan assets		(1,360	)		(1,394	)		(194	)		(210	)		—		—
Net amortization and deferral		134			418			—			—			461		876

Net periodic benefit cost	$	257		$	760		$	185		$	372		$	2,798	$	3,688

It is the Company’s practice to fund amounts for the defined benefit pension plans at least sufficient to meet the minimum requirements set forth in applicable employee benefit laws and local tax laws. In September 2006, the Company contributed $3,125 to its defined benefit pension plans. Liabilities for amounts in excess of these funding levels are included on the accompanying Consolidated Balance Sheets of the Company.

12. Contingencies

The Company may be involved in various patent, product liability, consumer, environmental, tax proceedings and claims, governmental investigations, and other legal and regulatory proceedings that arise from time to time in the ordinary course of business. In accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” the Company records accruals for such contingencies to the extent that the Company concludes that their occurrence is both probable and estimable. The Company considers many factors in making these assessments,

STERIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended

September 30, 2006 and 2005

(dollars in thousands, except per share amounts)

including the professional judgment of experienced members of management and the Company’s legal counsel. The Company has made estimates as to the likelihood of unfavorable outcomes and the amounts of such potential losses. In the opinion of management, the ultimate outcome of these proceedings and claims is not anticipated to have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. Legal and other proceedings are inherently unpredictable and actual results could materially differ from the Company’s estimates. The Company records anticipated recoveries under applicable insurance contracts when assured of recovery.

The Food & Drug Administration (“FDA”) and the United States Department of Justice are continuing to conduct an investigation involving the Company’s SYSTEM 1^® sterile processing system. The Company received requests for documents in connection with the investigation. The Company has been responding to these requests and has been cooperating with the government agencies regarding this matter. There can be no assurance that the ultimate outcome of the investigation will not result in an action by the government agencies or that the government agencies will not initiate administrative proceedings, civil proceedings or criminal proceedings, or any combination thereof, against the Company.

To the extent that management of the Company believes it is probable that a taxing authority will take a sustainable position on a matter contrary to the position taken by the Company, the Company provides tax accruals. If the Company was to prevail in matters for which accruals have been established, or is required to pay amounts in excess of established accruals, the Company’s effective income tax rate in a given financial statement period may be materially impacted.

13. Business Segment Information

The Company operates and reports in three business segments: Healthcare, Life Sciences, and STERIS Isomedix Services. Operating income (loss) for each of the Company’s reportable business segments reflects the full allocation of all distribution, corporate, and research and development expenses to the reportable segments. These allocations are based upon variables such as segment headcount and revenues. The accounting policies for reportable segments are the same as those for the consolidated Company. Segment results for the three and six months ended September 30, 2005 exclude the freeze dryer product line, which has been presented as a discontinued operation, and reflect the reallocation of corporate overhead charges to all business segments. The freeze dryer product line was previously included in the Life Sciences business segment. For the three and six months ended September 30, 2006, revenues from a single customer did not represent ten percent or more of any segment’s revenues. Additional information regarding the Company’s business segments is included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2006, filed with the SEC on June 12, 2006.

STERIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended

September 30, 2006 and 2005

(dollars in thousands, except per share amounts)

Financial information for each of the Company’s reportable business segments is presented in the following table:


	Three Months Ended September 30,					Six Months Ended September 30,
	2006		2005			2006			2005
Revenues:
Healthcare	$	197,094	$	193,995		$	384,225		$	379,755
Life Sciences		52,951		47,441			98,332			97,258
STERIS Isomedix Services		33,491		32,000			66,046			64,506

Total revenues	$	283,536	$	273,436		$	548,603		$	541,519

Operating income (loss):
Healthcare	$	20,426	$	21,995		$	41,539		$	44,549
Life Sciences		275		(1,396	)		(1,038	)		(3,552	)
STERIS Isomedix Services		5,833		4,840			11,494			11,045

Total operating income	$	26,534	$	25,439		$	51,995		$	52,042

Financial information for each of the Company’s geographic areas is presented in the following table. Long-lived assets are those assets that are identified within the operations in each geographic area, including property, plant, equipment, goodwill, intangibles, and other assets.


	Three Months Ended September 30,				Six Months Ended September 30,
	2006		2005		2006		2005
Revenues:
United States	$	224,219	$	221,326	$	435,181	$	439,868
International		59,317		52,110		113,422		101,651

Total revenues	$	283,536	$	273,436	$	548,603	$	541,519


	September 30, 2006		March 31, 2006
Long-lived assets:
United States	$	582,638	$	589,384
International		144,279		139,274

Total long-lived assets	$	726,917	$	728,658

14. Repurchases of Common Shares

On July 27, 2006, the Company announced that its Board of Directors had authorized the Company to repurchase up to 3,000,000 of its common shares, replacing a previous authorization to repurchase up to 3,000,000 shares under which 10,900 shares remained available for repurchase. This share repurchase authorization does not have a stated maturity date.

STERIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended

September 30, 2006 and 2005

(dollars in thousands, except per share amounts)

During the first half of fiscal 2007, the Company repurchased 2,585,300 of its common shares for $59,628, representing an average price of $23.06 per common share. At September 30, 2006, 2,617,300 common shares remained authorized for repurchase and 5,415,895 common shares were held in treasury.

15. Financial and Other Guarantees

The Company generally offers a limited parts and labor warranty on its capital equipment. The specific terms and conditions of those warranties vary depending on the product sold and the country where the Company conducts business. The Company provides for the estimated cost of product warranties at the time product revenues are recognized. Amounts due to customers for the Company’s future performance under these warranties are recorded as a current liability on the accompanying Consolidated Balance Sheets within “Accrued expenses and other.” Factors that affect the Company’s warranty liability include the number and type of installed units, historical and anticipated rates of product failures, and material and service costs per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

Changes in the Company’s warranty liability during the first half of fiscal 2007 were as follows:


Balance, March 31, 2006	$	7,226
Warranties issued during the period		3,559
Settlements made during the period		(5,060	)

Balance, September 30, 2006	$	5,725

The Company also issues product maintenance contracts to its customers that are accounted for in accordance with the requirements of FASB Technical Bulletin No. 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.” Such contracts generally range in terms from one to five years and require the Company to maintain and repair capital products over the maintenance contract term. Amounts due from customers under these contracts are initially recorded as a liability for deferred service contract revenue on the accompanying Consolidated Balance Sheets. The liability recorded for such deferred service revenue was $17,302 and $15,876 as of September 30, 2006 and March 31, 2006, respectively. Such deferred revenues are then amortized on a straight-line basis over the contract term and recognized as service revenues on the accompanying Consolidated Statements of Income. The activity related to the liability for deferred service contract revenues has been excluded from the table presented above.

16. Foreign Currency Forward Contracts

The Company enters into forward contracts to hedge potential foreign currency gains and losses that arise from assets and liabilities denominated in foreign currencies, including inter-company transactions. The Company does not use derivative financial instruments for speculative purposes. These contracts are marked to market, with gains and losses recognized on the accompanying Consolidated Statements of Income within “Selling, general, and administrative expenses.” At September 30, 2006, the Company held foreign currency forward contracts to sell euro and Canadian dollars 12.0 million and 3.0 million, respectively, and to buy Canadian dollars 3.0 million.

17. Business Acquisitions

Pursuant to the terms of the share purchase agreement with respect to Hamo Holding AG (“Hamo”), the final settlement and resolution of certain indemnification claims was made during the first quarter of fiscal 2006.

STERIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the Three and Six Months Ended

September 30, 2006 and 2005

(dollars in thousands, except per share amounts)

Amounts received by the Company amounted to approximately 2.2 million Swiss francs (approximately $1,700) and are included in “Interest and miscellaneous income” on the Consolidated Statements of Income. Hamo was acquired by the Company during fiscal 2004.

18. Business Dispositions

On October 31, 2005, the Company completed the sale of its freeze dryer (lyophilizer) product line to GEA Group of Germany for 20.8 million euros (approximately $25,161). The transaction resulted in an after-tax gain to the Company of $6,861 ($627 recognized in the first half of fiscal 2007 and $6,234 recognized in fiscal 2006). The gain recognized is preliminary because the purchase price is subject to post-closing adjustments. In addition, the Company granted certain indemnifications to the buyer related to potential claims in the areas of income taxes and environmental issues, which expire at various points in the future. The freeze dryer product line, based in Cologne, Germany, was part of the Company’s Life Sciences segment. Goodwill of $5,571 was allocated to the freeze dryer product line in connection with its disposition. This product line is presented in the Company’s financial statements as a discontinued operation. All historical financial information for this product line has been classified as a discontinued operation. Segment results for the three and six months ended September 30, 2005 exclude the freeze dryer product line and reflect the reallocation of corporate overhead charges to all business segments. Revenues, income before income taxes, income tax expense, and net income generated by this discontinued operation prior to its disposition were as follows:


*(dollars in thousands)*	Three Months Ended September 30, 2005		Six Months Ended September 30, 2005
Revenues	$	10,934	$	19,549
Income before income taxes		1,609		2,256
Income tax expense		599		846

Income from discontinued operations	$	1,010	$	1,410

19. Subsequent Events

Subsequent to September 30, 2006, foreign currency contracts to sell euro and Canadian dollars 12.0 million and 3.0 million, respectively, and to buy Canadian dollars 3.0 million matured. Subsequent to September 30, 2006, the Company entered into foreign currency forward contracts to sell euro 8.0 million and buy British pounds 2.0 million.

On October 25, 2006, the Company announced that its Board of Directors had declared a quarterly cash dividend in the amount of $0.05 per common share, payable on December 13, 2006, to shareholders of record as of November 15, 2006.

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

STERIS Corporation

We have reviewed the consolidated balance sheet of STERIS Corporation and subsidiaries as of September 30, 2006, and the related consolidated statements of income and cash flows for the three-month and six-month periods ended September 30, 2006 and 2005. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based upon our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of STERIS Corporation and subsidiaries as of March 31, 2006 and the related consolidated statements of income, shareholders’ equity and cash flows for the year then ended, not presented herein, and in our report dated June 8, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of March 31, 2006, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Cleveland, Ohio

November 3, 2006

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

Financial Measures. In the following sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), the Company, at times, may refer to financial measures that are not required to be presented in the consolidated financial statements under accounting principles generally accepted in the United States. The Company has used the following financial measures that are not required to be presented under accounting principles generally accepted in the United States in the context of this report: backlog, debt to capital, and days sales outstanding. The Company defines these financial measures as follows:

•

Backlog - is defined by the Company as the amount of unfilled capital purchase orders at a point in time. The Company uses this figure as a measure to assist in the projection of short-term financial results and inventory requirements.

•

Debt to capital - is defined by the Company as total debt divided by the sum of total debt and shareholders’ equity. The Company uses this figure as a financial liquidity measure to gauge its ability to borrow, provide strength/protection against creditors, fund growth, develop outside of its current business operations, and measure the risk of the Company’s financial structure.

•

Days sales outstanding (“DSOs”) - is defined by the Company as the average collection period for sales revenues. It is calculated as net accounts receivable divided by the trailing four quarter’s revenues, multiplied by 365. The Company uses this figure to help gauge the quality of its accounts receivable and expected time to collect.

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

•

Free cash flow - is defined by the Company as net cash flows (used in) provided by operating activities as presented in the Consolidated Statements of Cash Flows less purchases of property, plant, equipment, and intangibles, net, which is also presented in the Consolidated Statements of Cash Flows. The Company uses this measure to gauge its ability to fund future growth opportunities, repurchase common shares, and pay cash dividends. The following table reconciles the calculations of the Company’s free cash flow for the six months ended September 30, 2006 and 2005:


*(dollars in thousands)*	Six Months Ended September 30,
*(dollars in thousands)*	2006			2005
Cash flows from operating activities	$	18,260		$	85,651
Purchases of property, plant, equipment and intangibles, net		(21,419	)		(22,737	)

Free cash flow	$	(3,159	)	$	62,914

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

The Company has presented these financial measures because it believes that meaningful analysis of its financial performance is enhanced by an understanding of certain additional factors underlying that performance. These financial measures should not be considered alternatives to measures required by U.S. GAAP. The Company’s calculations of these measures may differ from calculations of similar measures used by other companies.

Revenues - Defined. As required by Regulation S-X, the Company has presented separately on its Consolidated Statements of Income, for each period presented, revenues generated as either product revenues or

service revenues. In discussing revenues, the Company, at times, may refer to revenues in differing detail than that which is required by Regulation S-X. The terminology, definitions, and applications of terms that the Company uses to describe revenues may differ from terms used by other companies. The Company uses the following terms to describe revenues:

•

Revenues - The Company’s revenues are presented net of sales returns and allowances.

•

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

•

Service Revenues - Service revenues are defined by the Company as revenues generated from parts and labor associated with the maintenance, repair, and installation of capital equipment, as well as revenues generated from contract sterilization offered through the Company’s Isomedix Services segment.

•

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

•

Consumable Revenues - Consumable revenues, a subset of product revenues, are defined by the Company as revenues generated from sales of the consumable family of products, which includes STERIS SYSTEM 1^® consumables, sterility assurance products, skin care products, and cleaning consumables.

•

Recurring Revenues - Recurring revenues are defined by the Company as consumable revenues and service revenues.

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

The Company’s revenues are primarily derived from the healthcare and pharmaceutical industries. Much of the growth in its markets is driven by the aging of the population throughout the world, as an increasing number of individuals are entering their prime healthcare consumption years. In addition, each of STERIS’s core industries also are benefiting from specific trends that drive growth. Within the healthcare market, there is increased concern regarding the level of hospital-acquired infections around the world. The pharmaceutical industry has been impacted by increased FDA scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. In the contract sterilization industry, where Isomedix competes, a trend toward the outsourcing of sterilization services continues to drive growth.

Beyond STERIS’s core markets, infection-control issues are becoming a global concern, and emerging threats have gained prominence in the news. Through STERIS’s Life Sciences segment, the Company is actively pursuing new opportunities to adapt its proven technologies to meet the needs of emerging applications such as defense, aerospace, and industrial decontamination. As a result of these efforts, the Company recently announced the grant of United States Environmental Protection Agency label clearance which will allow for the more universal application of its proprietary technologies to combat emerging decontamination needs in various environments.

On January 30, 2006, the Company announced that the manufacturing portion of its Erie, Pennsylvania operations will be transferred to Mexico to reduce production costs and improve the Company’s competitive

position. Plans for other restructuring actions designed to reduce operating costs within the ongoing operations of both the Healthcare and Life Sciences segments also were approved.

During the first half of fiscal 2007, the Company incurred pre-tax expenses of $5.7 million associated with the transfer of its Erie, Pennsylvania manufacturing operations to Monterrey, Mexico. Included in these expenses are $2.3 million classified as restructuring expenses, primarily related to accelerated depreciation of assets, compensation and severance and termination benefits related to the transition.

Fiscal 2007 second quarter and first half revenues were $283.5 million and $548.6 million, respectively, representing increases of 3.7% and 1.3%, respectively, from the same prior year periods. Revenue growth in the second quarter was primarily driven by increases in the Life Sciences and Isomedix Services segments, with only a marginal increase in the Healthcare segment’s revenues. Revenue growth for the first half of fiscal 2007 reflects increases in all three business segments.

The Company’s gross margin percentages were 41.9% and 42.3% for the second quarter and first half of fiscal 2007, representing increases of 50 basis points and 10 basis points, respectively, from the same prior year periods. Gross margins during both fiscal 2007 periods were positively impacted, as price increases and productivity improvements more than offset increases in the costs of labor and materials.

Free cash flow was negative $3.2 million in the first half of fiscal 2007 compared to $62.9 million in the prior year first half. The fiscal 2007 first half negative free cash flow of $3.2 million was a result of working capital changes, including approximately $30.0 million in payments to the IRS for taxes previously recognized and higher inventory levels. The Company’s debt-to-capital ratio increased to 17.2% at September 30, 2006 from 13.7% at March 31, 2006 reflecting increased borrowings utilized to fund working capital changes and common share repurchases. During the first half of fiscal 2007, the Company repurchased approximately 2.6 million common shares at an average purchase price per share of $23.06. The Company also declared and paid quarterly cash dividends of $0.08 per common share in each of the first half of fiscal 2007 and fiscal 2006.

On October 25, 2006, the Company announced that its Board of Directors increased its quarterly cash dividend by 25% and declared a quarterly cash dividend in the amount of $0.05 per common share, payable on December 13, 2006, to shareholders of record as of November 15, 2006.

Additional information regarding the Company’s fiscal 2007 second quarter and first half financial performance is included in the subsection below titled “Results of Operations.”

Matters Affecting Comparability.

Accounting for Share-Based Compensation. On April 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS No. 123R”), “Share-Based Payment,” using the modified prospective transition method. SFAS No. 123R requires the Company to estimate the fair value of share-based awards on the date of the grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of income.

The Company’s consolidated financial statements as of September 30, 2006 and for the three and six month periods then ended reflect the impact of SFAS No. 123R. In accordance with the modified prospective transition method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include the impact of SFAS No. 123R. Total share-based compensation expense for the second quarter and first half of fiscal 2007 was $3.7 million and $5.8 million, respectively, on a pre-tax basis, or $2.3 million ($0.03 per basic and diluted share) and $3.6 million, ($0.05 per basic and diluted share), net of tax.

As of September 30, 2006, there was $14.8 million of total unrecognized compensation cost related to non-vested share-based compensation granted under the Company’s stock option plans. The cost is expected to be recognized over a weighted average period of 1.21 years.

Additional information regarding the Company’s adoption of SFAS No. 123R is included in notes 1 and 2 to the consolidated financial statements.

Business Dispositions. On October 31, 2005, the Company completed the sale of its freeze dryer (lyophilizer) product line to GEA Group of Germany for 20.8 million euros (approximately $25.2 million). The transaction resulted in an after-tax gain to the Company of approximately $6.8 million ($0.6 million recognized in the first half of fiscal 2007 and $6.2 million recognized in fiscal 2006). The gain recognized remains subject to adjustment as transaction costs are finalized. The freeze dryer product line, based in Cologne, Germany, was part of the Company’s Life Sciences segment. All historical financial information for this product line has been classified as a discontinued operation. Segment results for the three and six months ended September 30, 2005 exclude the freeze dryer product line and reflect the reallocation of corporate overhead charges to all business segments.

International Operations. Given the nature of the Company’s global operations, it maintains an inherent exposure to fluctuations in foreign currencies. During the second quarter of fiscal 2007, the Company’s revenues were favorably impacted by $2.1 million, or 0.8%, and income before taxes was unfavorably impacted by $0.8 million, or 3.3%, compared with the same period in fiscal 2006, as a result of foreign currency fluctuations. During the first half of fiscal 2007, the Company’s revenues were favorably impacted by $3.4 million, or 0.6%, and income before taxes was favorably impacted by $1.7 million, or 3.7%, as compared to the same prior year period, as a result of foreign currency fluctuations.

Results of Operations. The following subsections provide information regarding the Company’s results of operations for the second quarter and first half of fiscal 2007 compared with the same fiscal 2006 periods.

Revenues. The following table contains information regarding the Company’s revenues for the second quarter and first half of fiscal 2007 and 2006:


*(dollars in thousands)*	Three Months Ended September 30,				Change		Percent Change		Percent of Total Revenues
*(dollars in thousands)*	2006		2005		Change		Percent Change		2006 (1)		2005 (1)
Capital Revenues	$	115,104	$	113,098	$	2,006	1.8	%	40.6	%	41.4	%
Consumable Revenues		64,271		61,748		2,523	4.1	%	22.7	%	22.6	%

Product Revenues		179,375		174,846		4,529	2.6	%	63.3	%	63.9	%

Service Revenues		104,161		98,590		5,571	5.7	%	36.7	%	36.1	%

Total Revenues	$	283,536	$	273,436	$	10,100	3.7	%	100.0	%	100.0	%

Service Revenues	$	104,161	$	98,590	$	5,571	5.7	%	36.7	%	36.1	%
Consumable Revenues		64,271		61,748		2,523	4.1	%	22.7	%	22.6	%

Recurring Revenues		168,432		160,338		8,094	5.0	%	59.4	%	58.6	%

Capital Revenues		115,104		113,098		2,006	1.8	%	40.6	%	41.4	%

Total Revenues	$	283,536	$	273,436	$	10,100	3.7	%	100.0	%	100.0	%

United States	$	224,219	$	221,326	$	2,893	1.3	%	79.1	%	80.9	%
International		59,317		52,110		7,207	13.8	%	20.9	%	19.1	%

Total Revenues	$	283,536	$	273,436	$	10,100	3.7	%	100.0	%	100.0	%


*(dollars in thousands)*	Six Months Ended September 30,				Change			Percent Change		Percent of Total Revenues
*(dollars in thousands)*	2006		2005		Change			Percent Change		2006 (1)		2005 (1)
Capital Revenues	$	215,157	$	216,074	$	(917	)	-0.4	%	39.2	%	39.9	%
Consumable Revenues		129,977		127,918		2,059		1.6	%	23.7	%	23.6	%

Product Revenues		345,134		343,992		1,142		0.3	%	62.9	%	63.5	%

Service Revenues		203,469		197,527		5,942		3.0	%	37.1	%	36.5	%

Total Revenues	$	548,603	$	541,519	$	7,084		1.3	%	100.0	%	100.0	%

Service Revenues	$	203,469	$	197,527	$	5,942		3.0	%	37.1	%	36.5	%
Consumable Revenues		129,977		127,918		2,059		1.6	%	23.7	%	23.6	%

Recurring Revenues		333,446		325,445		8,001		2.5	%	60.8	%	60.1	%

Capital Revenues		215,157		216,074		(917	)	-0.4	%	39.2	%	39.9	%

Total Revenues	$	548,603	$	541,519	$	7,084		1.3	%	100.0	%	100.0	%

United States	$	435,181	$	439,868	$	(4,687	)	-1.1	%	79.3	%	81.2	%
International		113,422		101,651		11,771		11.6	%	20.7	%	18.8	%

Total Revenues	$	548,603	$	541,519	$	7,084		1.3	%	100.0	%	100.0	%

(1)	Certain percentages may not calculate precisely due to rounding.

Quarter over Quarter Comparison

Revenues increased $10.1 million, or 3.7%, to $283.5 million for the quarter ended September 30, 2006, as compared to $273.4 million for the comparable prior year quarter. As compared to the second quarter of fiscal 2006, recurring revenues increased 5.0%, driven by increases in consumable revenues and service revenues of 4.1% and 5.7%, respectively. Capital revenues increased $2.0 million quarter over quarter as revenues increased internationally to more than offset a decline in the United States.

International revenues increased $7.2 million, or 13.8%, to $59.3 million, for the quarter ended September 30, 2006, as compared to $52.1 million for the comparable prior year quarter. International revenues were positively impacted by capital equipment revenues growth within both the Healthcare and Life Sciences segments with increases of 8.0% and 31.9%, respectively, over the comparable prior year quarter. Recurring revenues also grew within both the Healthcare and Life Sciences segments with increases of 7.9% and 27.6%, respectively, over the comparable prior year quarter.

United States revenues increased $2.9 million, or 1.3%, to $224.2 million, for the quarter ended September 30, 2006, as compared to $221.3 million for the comparable prior year quarter. United States revenues were positively impacted by recurring revenue growth in all three business segments with increases of 3.3%, 4.9%, and 3.5% in the Healthcare, Life Sciences, and Isomedix segments, respectively. The strength in recurring revenues was partially offset by a decline in capital revenues for the Healthcare segment of 3.7%. Strong demand for surgical and critical care products within the Healthcare segment was offset by lower than anticipated shipments of high temperature sterilization equipment in the United States.

Year over Year Comparison

Revenues increased $7.1 million, or 1.3%, to $548.6 million for the first half of fiscal 2007, as compared to $541.5 million during the first half of fiscal 2006. As compared to the first half of fiscal 2006, recurring revenues increased 2.5%, reflecting growth in consumables revenues and service revenues, with increases of 1.6% and 3.0%, respectively. Capital revenues were relatively flat, with a decline of 0.4%.

International revenues for the first half of fiscal 2007 amounted to $113.4 million, an increase of $11.8 million, or 11.6%, as compared to the first half of fiscal 2006. Fiscal 2007 year-to-date international revenues were positively impacted by strong capital revenue growth within both the Healthcare and Life Sciences segments, with increases of 15.4% and 30.2%, respectively.

United States revenues for the first half of fiscal 2007 amounted to $435.2 million, a decrease of $4.7 million, or 1.1%, as compared to the first half of fiscal 2006. Strong underlying demand for the Company’s service offerings and consumable products was offset by a decline in capital revenues in both the Healthcare and Life Sciences segments.

Revenues are further discussed on a segment basis in the section of MD&A titled, “Business Segment Results of Operations.”

Gross Profit. The following table contains information regarding the Company’s gross profit for the three and six months ended September 30, 2006 and 2005:


*(dollars in thousands)*	Three Months Ended September 30,						Change			Percent Change
*(dollars in thousands)*	2006			2005			Change			Percent Change
Gross Profit:
Product	$	73,028		$	71,421		$	1,607		2.3	%
Service		45,733			41,762			3,971		9.5	%

Total Gross Profit	$	118,761		$	113,183		$	5,578		4.9	%

Gross Profit Percentage:
Product		40.7	%		40.8	%
Service		43.9	%		42.4	%

Total Gross Profit Percentage		41.9	%		41.4	%


	Six Months Ended September 30,						Change			Percent Change
	2006			2005			Change			Percent Change
Gross Profit:
Product	$	143,494		$	144,607		$	(1,113	)	-0.8	%
Service		88,642			84,152			4,490		5.3	%

Total Gross Profit	$	232,136		$	228,759		$	3,377		1.5	%

Gross Profit Percentage:
Product		41.6	%		42.0	%
Service		43.6	%		42.6	%

Total Gross Profit Percentage		42.3	%		42.2	%

Gross profit (margin) is impacted by the volume, pricing, and mix of the Company’s products and services, as well as the costs associated with the products and services that are sold. Gross margin for the second quarter of fiscal 2007 amounted to 41.9%, representing an increase of 50 basis points as compared to the same prior year period. For the first half of fiscal 2007, gross margin amounted to 42.3%, representing an increase of 10 basis points as compared to the same prior year period. Gross margins for both fiscal 2007 periods were positively impacted as price increases and productivity improvements more than offset increases in the costs of labor and materials. Gross margins for the second quarter and first half of fiscal 2007 included $0.4 million and $0.6 million, respectively, in share-based compensation expense as a result of the adoption of SFAS No. 123R.

Operating Expenses. The following table contains information regarding the Company’s operating expenses for the three and six months ended September 30, 2006 and 2005:


*(dollars in thousands)*	Three Months Ended September 30,				Change			Percent Change
*(dollars in thousands)*	2006		2005		Change			Percent Change
Operating Expenses:
Selling, General, and Administrative	$	82,786	$	78,648	$	4,138		5.3	%
Research and Development		8,283		9,096		(813	)	-8.9	%
Restructuring Expense		1,158		—		1,158		NM

Total Operating Expenses	$	92,227	$	87,744	$	4,483		5.1	%


	Six Months Ended September 30,				Change			Percent Change
	2006		2005		Change			Percent Change
Operating Expenses:
Selling, General, and Administrative	$	161,200	$	159,880	$	1,320		0.8	%
Research and Development		16,678		16,837		(159	)	-0.9	%
Restructuring Expense		2,263		—		2,263		NM

Total Operating Expenses	$	180,141	$	176,717	$	3,424		1.9	%

NM - Not Meaningful

Significant components of total selling, general, and administrative expenses (“SG&A”) are compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general and administrative expenses. As a percentage of total revenues, SG&A increased 40 basis points to 29.2% for the second quarter of fiscal 2007 and decreased 10 basis points to 29.4% for the first half of fiscal 2007, as compared to the same prior year periods. SG&A in both fiscal 2007 periods was negatively impacted primarily by the inclusion of expenses related to share based compensation.

As a percentage of total revenues, research and development expenses were 2.9% and 3.0% for the three and six month periods ended September 30, 2006, respectively, as compared to 3.3% and 3.1%, respectively, for the same prior year periods. For the three and six month periods ended September 30, 2006, research and development expenses decreased 8.9% and 0.9% to $8.3 million and $16.7 million, respectively, as compared to $9.1 million and $16.8 million, respectively, during the same prior year periods. Research and development expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects. The Company continues to focus research and development efforts on product development, product improvements, and the development of new technological innovations. Research and development efforts are concentrated in the defense and industrial areas, sterile processing combination technologies, and the area of prions, or infectious proteins.

SG&A and research and development expenses for the second quarter and first half of fiscal 2007 included $3.3 million and $5.2 million, respectively, in share-based compensation expense as a result of the adoption of SFAS No. 123R.

In the second quarter and first half of fiscal 2007, the Company recorded $3.3 million and $5.7 million, including $1.2 million and $2.3 million classified as restructuring expenses, respectively, related to the transfer of the Erie, Pennsylvania manufacturing operations to Monterrey, Mexico. The following is a summary of these restructuring expenses for the second quarter and first half of fiscal 2007:


*(dollars in thousands)*	Three Months Ended September 30, 2006		Six Months Ended September 30, 2006
Asset impairment and accelerated depreciation	$	564	$	1,269
Severance, payroll and other related costs		589		979
Other		5		15

Total restructuring charges	$	1,158	$	2,263

These costs are associated with the Healthcare business segment. The Company did not incur restructuring expenses in the second quarter or first half of fiscal 2006. Since the inception of the restructuring plan, the Company has incurred restructuring expenses of $27.6 million, with restructuring expenses of $27.1 million and $0.5 million related to the Healthcare and Life Sciences segments, respectively.

The Company anticipates incurring approximately an additional $15.7 million in restructuring expenses during the remainder of fiscal 2007 and fiscal 2008 in connection with the transfer of the manufacturing operations. Restructuring expenses to be incurred include compensation and benefits, severance, accelerated depreciation and other expenses.

Restructuring expenses have been recognized as incurred as required under the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” In addition, the property, plant and equipment associated with the Erie, Pennsylvania facility were assessed for impairment under Statement of Financial Accounting Standards No. 144 (“SFAS No. 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” Asset impairment and accelerated depreciation expenses primarily results from the reevaluation of the remaining useful lives of other property, plant and equipment associated with the Erie manufacturing operations based on the transfer plan.

The following table summarizes the Company’s liabilities related to restructuring activities:


	March 31, 2006		Fiscal 2007					September 30, 2006
*(dollars in thousands)*	March 31, 2006		Provision		Payments			September 30, 2006
Severance and termination benefits	$	1,941	$	923	$	(1,385	)	$	1,479
Lease termination obligation		135		—		(74	)		61

Total	$	2,076	$	923	$	(1,459	)	$	1,540

Non-Operating Expense, Net. The following table contains information regarding the Company’s non-operating (income) expense, net for the three and six months ended September 30, 2006 and 2005:


*(dollars in thousands)*	Three Months Ended September 30,						Change
*(dollars in thousands)*	2006			2005			Change
Non-Operating Expense, Net:
Interest Expense	$	2,376		$	1,303		$	1,073
Interest and Miscellaneous Income		(801	)		(365	)		(436	)

Total Non-Operating Expense, Net	$	1,575		$	938		$	637


	Six Months Ended September 30,						Change
*(dollars in thousands)*	2006			2005			Change
Non-Operating Expense, Net:
Interest Expense	$	4,145		$	2,524		$	1,621
Interest and Miscellaneous Income		(1,480	)		(2,292	)		812

Total Non-Operating Expense, Net	$	2,665		$	232		$	2,433

Non-operating expense, net consists of interest expense on debt, offset by interest earned on cash, cash equivalents, short-term investment balances, and other miscellaneous income. Interest expense increased $1.1 million and $1.6 million during the second quarter and first half of fiscal 2007 as compared to the prior year periods as a result of higher average debt levels and higher average interest rates during both fiscal 2007 periods. Interest and miscellaneous income increased $0.4 million for the second quarter of fiscal 2007 as compared to the second quarter of fiscal 2006 as a result of interest earned on higher average cash balances in fiscal 2007. For the first half of fiscal 2007, interest and miscellaneous income decreased $0.8 million primarily as a result of the first quarter fiscal 2006 settlement in the amount of $1.7 million primarily reflecting the resolution of certain indemnification claims pursuant to the terms of the share purchase agreement with respect to Hamo, which was acquired by the Company in fiscal 2004.

Income Tax Expense. The following table contains information regarding the Company’s income tax expense and effective income tax rates for the three and six months ended September 30, 2006 and 2005:


	Three Months Ended September 30,						Change			Percent Change
*(dollars in thousands)*	2006			2005			Change			Percent Change
Income Tax Expense	$	8,599		$	9,096		$	(497	)	-5.5	%
Effective Income Tax Rate		34.5	%		37.1	%

	Six Months Ended September 30,						Change			Percent Change
	2006			2005			Change			Percent Change
Income Tax Expense	$	18,913		$	19,473		$	(560	)	-2.9	%
Effective Income Tax Rate		38.3	%		37.6	%

Income tax expense includes United States federal, state and local, and foreign income taxes, and is based on reported pre-tax income. The effective income tax rates for continuing operations for the three and six month periods ended September 30, 2006 were 34.5% and 38.3%, respectively, as compared to 37.1% and 37.6%, respectively, for the same prior year periods. The lower effective income tax rate for the second quarter of fiscal 2007 resulted principally from discrete item adjustments to recognize additional deferred tax assets related to foreign tax credits.

Business Segment Results of Operations. Segment results for the three and six months ended September 30, 2005 exclude the freeze dryer product line and reflect the reallocation of corporate overhead charges to all business segments. Information presented in the following tables and related discussion regarding segment revenues and operating results reflect these changes.

The Company operates and reports in three business segments: Healthcare, Life Sciences, and STERIS Isomedix Services. Additional information regarding the Company’s business segments is included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2006, filed with the SEC on June 12, 2006. The following table contains information regarding business segment revenues for the three and six months ended September 30, 2006 and 2005:


	Three Months Ended September 30,				Change		Percent Change
*(dollars in thousands)*	2006		2005		Change		Percent Change
Revenues:
Healthcare	$	197,094	$	193,995	$	3,099	1.6	%
Life Sciences		52,951		47,441		5,510	11.6	%
STERIS Isomedix Services		33,491		32,000		1,491	4.7	%

Total Revenues	$	283,536	$	273,436	$	10,100	3.7	%


	Six Months Ended September 30,				Change		Percent Change
	2006		2005		Change		Percent Change
Revenues:
Healthcare	$	384,225	$	379,755	$	4,470	1.2	%
Life Sciences		98,332		97,258		1,074	1.1	%
STERIS Isomedix Services		66,046		64,506		1,540	2.4	%

Total Revenues	$	548,603	$	541,519	$	7,084	1.3	%

Healthcare Segment

Healthcare segment revenues represented 69.5% of total revenues for the second quarter of fiscal 2007 compared with 70.9% for the same prior year period. Healthcare revenues increased $3.1 million, or 1.6%, to $197.1 million for the quarter ended September 30, 2006, compared with $194.0 million for the second quarter of fiscal 2006. The increase in Healthcare revenues was driven by strong international sales of surgical and critical care products and a 6.0% increase in United States service revenues. Tempering the Healthcare segment’s revenue growth was a decline in capital revenues of 1.1%, reflecting lower than anticipated shipments of high temperature sterilization equipment in the United States. Consumable revenues increased 1.7%. At September 30, 2006, the Healthcare segment’s backlog amounted to $82.5 million, representing an increase of $15.5 million, or 23.2%, compared to the June 30, 2006 level and an increase of $11.7 million, or 16.6%, compared to the September 30, 2005 level.

Healthcare segment revenues represented 70.0% of total revenues for the first six months of fiscal 2007 compared with 70.1% for the same prior year period. Healthcare revenues increased $4.5 million, or 1.2%, to $384.2 million for the six months ended September 30, 2006, as compared to $379.8 million for the same prior year period. The increase is attributable to service revenue growth of a combined 5.0% in the United States and Canada.

Life Sciences Segment

Life Sciences segment revenues represented 18.7% of total revenues for the second quarter of fiscal 2007 as compared to 17.4% for the comparable prior year quarter. Life Sciences revenues increased $5.5 million, or 11.6%, to $52.9 million for the quarter ended September 30, 2006, as compared to $47.4 million for the second quarter of fiscal 2006. The increase in Life Sciences revenues was driven by increases in capital revenues and consumables revenues of 15.1% and 16.8%, respectively. Capital revenues reflect increases, particularly in the United States and Canadian markets, resulting from strong demand for capital equipment used in pharmaceutical

production facilities. The growth in consumables revenues reflects increases in the United States and European markets. This growth was offset by a very competitive environment in North America for research capital equipment and a decline in defense revenues attributable to a delay in government purchasing commitments. Service revenues also increased 4.6%, primarily due to increases in the United States and European markets of 2.2% and 14.3%, respectively. At September 30, 2006, the Life Sciences segment’s backlog amounted to $44.3 million, decreasing $4.4 million, or 9.1%, compared to the backlog of $48.7 million at June 30, 2006 and decreasing $1.3 million, or 2.9%, compared to the September 30, 2005 level.

Life Sciences segment revenues represented 17.9% of total revenues for the first six months of fiscal 2007 as compared to 18.0% for the comparable prior year period. Life Sciences revenues increased $1.1 million, or 1.1%, to $98.3 million for the first half of fiscal 2007, as compared to $97.2 million for the same prior year period. The increase in Life Sciences revenues was driven by a 4.0% increase in recurring revenues. This growth was partially offset by a 2.8% decline in capital revenues, period over period, associated with the North American research market.

STERIS Isomedix Services Segment

STERIS Isomedix Services segment revenues represented 11.8% of total revenues for the second quarter of fiscal 2007 as compared to 11.7% for the comparable prior year quarter. The segment’s revenues increased $1.5 million, or 4.7% to $33.5 million during the second quarter of fiscal 2007, as compared to $32.0 million during the comparable prior year quarter. The increase in Isomedix revenues resulted from increased demand from medical device customers.

STERIS Isomedix Services segment revenues represented 12.0% of total revenues for the first six months of fiscal 2007 as compared to 11.9% for the comparable prior year period. The segment experienced revenue growth of $1.5 million, or 2.4%, to $66.0 million during the first half of fiscal 2007 as compared to $64.5 million for the same prior year period. The increase in revenues was primarily driven by the second quarter demand from medical device customers.

The following table contains information regarding business segment operating income (loss) for the three and six months ended September 30, 2006 and 2005:


	Three Months Ended September 30,						Change			Percent Change
*(dollars in thousands)*	2006			2005			Change			Percent Change
Operating Income (Loss):
Healthcare	$	20,426		$	21,995		$	(1,569	)	-7.1	%
Life Sciences		275			(1,396	)		1,671		NM
STERIS Isomedix Services		5,833			4,840			993		20.5	%

Total Operating Income	$	26,534		$	25,439		$	1,095		4.3	%


	Six Months Ended September 30,						Change			Percent Change
	2006			2005			Change			Percent Change
Operating Income (Loss):
Healthcare	$	41,539		$	44,549		$	(3,010	)	-6.8	%
Life Sciences		(1,038	)		(3,552	)		2,514		NM
STERIS Isomedix Services		11,494			11,045			449		4.1	%

Total Operating Income	$	51,995		$	52,042		$	(47	)	-0.1	%

NM - Not meaningful

To determine segment operating income (loss), the Company reduces the respective segment’s gross profit by direct expenses and indirect cost allocations, which reflect the full allocation of all distribution, corporate, and research and development expenses. Corporate cost allocations are based on each segment’s portion of revenues, headcount, or other variables in relation to the total Company.

Healthcare Segment

Healthcare segment operating income decreased $1.6 million and $3.0 million for the second quarter and first six months of fiscal 2007, respectively, as compared to the same prior year periods. The segment’s operating margins were 10.4% and 10.8% for the second quarter and first half of fiscal 2007, respectively, representing decreases of 90 basis points in each period compared to prior year periods. Improved pricing and operating efficiencies were more than offset in the second quarter and first half of fiscal 2007 by expenses of $3.3 million and $5.7 million, including $1.2 million and $2.3 million classified as restructuring, respectively, associated with the transfer of manufacturing operations from Erie, Pennsylvania to Monterrey, Mexico and share-based compensation expense of $2.4 million and $3.8 million, respectively, as a result of the adoption of SFAS No. 123R.

Life Sciences Segment

Life Sciences segment had operating income of $0.3 million and an operating loss of $1.0 million for the second quarter and first six months of fiscal 2007, respectively, as compared to losses of $1.4 million and $3.5 million for the same prior year periods. The improvement in operating performance reflects improved leverage of operating expenses. Operating results for the second quarter and first half of fiscal 2007 included share-based compensation expense of $0.8 million and $1.2 million, respectively, as a result of the adoption of SFAS No. 123R.

STERIS Isomedix Services Segment

STERIS Isomedix Services segment operating income increased $1.0 million and $0.4 million for the second quarter and first six months of fiscal 2007, respectively, as compared to the same prior year periods. The segment’s operating margins were 17.4% for both the second quarter and first half of fiscal 2007, representing increases of 230 basis points and 30 basis points, respectively, over the comparable prior year periods. The segment’s margins reflect increased volumes on a relatively fixed cost base. Operating results for the second quarter and first half of fiscal 2007 included share-based compensation expense of $0.5 million and $0.8 million, respectively, as a result of the adoption of SFAS No. 123R.

Liquidity and Capital Resources. The following table summarizes significant components of the Company’s cash flows for the six months ended September 30, 2006 and 2005:

Cash Flows


	Six Months Ended September 30,
*(dollars in thousands)*	2006			2005
Operating activities:
Net income	$	31,044		$	33,747
Non-cash items		28,533			28,207
Changes in assets and liabilities of discontinued operations		—			(1,831	)
Changes in operating assets and liabilities, excluding the effects of business acquisitions		(41,317	)		25,528

Net cash provided by operating activities	$	18,260		$	85,651

Investing activities:
Purchases of property, plant, equipment, and intangibles, net	$	(21,419	)	$	(22,737	)
Investments in businesses, net of cash acquired		—			(1,504	)
Proceeds from the sale of discontinued operations		2,927			—

Net cash used in investing activities	$	(18,492	)	$	(24,241	)

Financing activities:
Proceeds under credit facilities, net	$	32,555		$	1,700
Payments on long-term obligations and capital leases, net		(361	)		(1,932	)
Repurchases of common shares		(59,628	)		(39,394	)
Cash dividends paid to common shareholders		(5,272	)		(5,494	)
Deferred financing fees		—			(217	)
Stock option and other equity transactions, net		2,376			5,992

Net cash used in financing activities	$	(30,330	)	$	(39,345	)

Debt-to-captial ratio		17.2	%		12.8	%
Free cash flow	$	(3,159	)	$	62,914

Net Cash Provided by Operating Activities. Net cash provided by operating activities was $18.3 million for the first six months of fiscal 2007 compared with $85.7 million for the first six months of fiscal 2006. Operating cash flows were derived as follows:

•

Non-cash items- Non-cash items were $28.5 million for the first six months of fiscal 2007 compared with $28.2 million for the first six months of fiscal 2006. Non-cash items include depreciation, depletion, and amortization, changes in deferred income taxes, share-based compensation expense and other items. The most significant component of non-cash items were depreciation, depletion, and amortization. Depreciation, depletion, and amortization amounted to $29.7 million and $28.4 million for the first six months of fiscal 2007 and 2006, respectively. The $1.3 million increase in depreciation, depletion, and amortization, period-over-period, was primarily the result of accelerated depreciation of certain assets driven by the plan to transfer manufacturing operations from Erie, Pennsylvania to Monterrey, Mexico. As a result of adopting SFAS No. 123R, the Company incurred non-cash share-based compensation expense of $5.8 million for the first six months of fiscal 2007. During the first six months of fiscal 2006, the Company granted stock options at the fair value of the underlying shares on the date of the grant and, therefore, recognized no share-based compensation expense as permitted by previous regulations. Deferred tax benefits were $7.2 million and $0.3 million for the first half of fiscal 2007 and fiscal 2006, respectively. The $6.9 million increase in deferred tax, period-over-period, was a result of making tax deposits against expected future settlements and recording the effects of SFAS No. 123R.

•

Working Capital- Excluding the impact of foreign currency translation adjustments, changes to the Company’s working capital amounted to a negative $41.3 million and a positive $25.5 million during the first six months of fiscal 2007 and fiscal 2006, respectively. Information regarding significant components of the Company’s fiscal 2007 first half working capital change is as follows (excluding the impact of foreign currency translation adjustments):

•

Accounts receivable, net- Accounts receivable, net decreased $43.6 million during the first six months of fiscal 2007 as compared to a net decrease of $41.6 million for the same prior year period. Accounts receivable balances are influenced by seasonality and the timing of revenues and customer collections. Accounts receivable days sales outstanding decreased to 63 days at September 30, 2006, from 76 days and 66 days at March 31, 2006 and September 30, 2005, respectively. The decrease in the balance of accounts receivable and DSOs from the March 31, 2006 level is reflective of lower revenues for the second quarter of fiscal 2007 as compared to the fourth quarter of fiscal 2006 due to business seasonality and improvements in collections.

•

Inventories, net- Inventories, net increased $27.1 million during the first six months of fiscal 2007 as compared to an increase of $13.4 million for the same prior year period. With respect to the first six months of fiscal 2007, inventory increases of approximately $14.0 million are associated with the transfer of the Erie, Pennsylvania manufacturing operations to Monterrey, Mexico. The Company increased inventory levels at both the Erie and Monterrey facilities to ensure consistent availability for its customers during the transition. In addition, the increase reflects lower than anticipated sales volumes in the Healthcare segment. The Company established targeted inventory production levels at certain manufacturing facilities in anticipation of third quarter customer demand levels, as reflected in the September 30, 2006 backlog level.

•

Other current assets- Other current assets increased $19.4 million during the first six months of fiscal 2007. The increase was driven by a portion of the tax payment made during the first quarter fiscal 2007 that remains on deposit with the IRS, which is approximately $17.9 million.

•

Accounts payable, net- Accounts payable, net decreased $21.3 million during the first six months of fiscal 2007 as compared to a decrease of $6.2 million for the same prior year period due primarily to varying payment due dates of accounts payable obligations and the Company’s cash management strategies.

•

Accruals and other, net- Accruals and other, net decreased $17.1 million during the first six months of fiscal 2007. Accrued income taxes decreased by approximately $9.9 million during the first six months of fiscal 2007 due to the application of tax payments made in the first quarter to open tax years. Approximately $3.1 million of the fiscal 2007 decrease is a result of a contribution made by the Company to its defined benefit pension plans in September 2006. An additional $3.0 million of the decrease is a result of the first quarter 2007 settlement of a fiscal 2006 accrual for the termination of certain long-term marketing contracts. The fluctuation of accruals and other, net is driven by various factors, including the timing of accruals and payments under the Company’s incentive compensation programs. Accruals under various incentive compensation programs rise during the course of the fiscal year and decline significantly in the first fiscal quarter as payments are made under several compensation programs. Fluctuations in deferred revenues also contribute to an increase or decrease in accruals and other, net.

•

Discontinued operations- The working capital of discontinued operations decreased $1.8 million in the six-month period ended September 30, 2005. The discontinued operations relate to the freeze dryer business, which the Company sold in October 2005.

Net Cash Used In Investing Activities. Cash flows used in investing activities amounted to $18.5 million for the first six months of fiscal 2007 compared with $24.2 million for the first six months of fiscal 2006. Information regarding significant components of the Company’s investing cash flows for the first half of fiscal 2007 and 2006 is as follows:

•

Purchases of property, plant, equipment, and intangibles, net- During the first six months of fiscal 2007, the Company’s capital expenditures amounted to $21.4 million compared with $22.7 million during the same prior year period. Decreased capital spending levels during the first six months of fiscal 2007 resulted primarily from a reduction in material purchases for STERIS Isomedix Services and reductions in capital investments in support of research and development. In addition, capital spending included the cost for a license to distribute an instrument tracking solution in North America.

•

Investment in businesses, net of cash acquired- During first half of fiscal 2006, the company recorded preliminary purchase price adjustments totaling $1.5 million related to the acquisition of Albert Browne Limited and its subsidiaries (“Browne”). The Company acquired Browne in the second quarter of fiscal 2005.

•

Proceeds from the sale of discontinued operations- During the first six months of fiscal 2007, additional proceeds of $2.9 million were received related to the freeze dryer business sold during fiscal 2006.

Net Cash Used In Financing Activities. Net cash used in financing activities amounted to $30.3 million for the first six months of fiscal 2007 compared with $39.3 million for the first six months of fiscal 2006. Information regarding the significant components of the Company’s financing cash flows for the periods presented follows:

•

Net proceeds under credit facilities- Net proceeds from borrowings under credit facilities were $32.6 million in the first six months of fiscal 2007. Proceeds were used to fund share repurchases and working capital changes.

•

Repurchases of common shares- During the first half of fiscal 2007, the Company repurchased 2,585,300 of its common shares at an average purchase price of $23.06 per common share compared with the repurchase of 1,623,300 of its common shares at an average purchase price of $24.27 per common share during the first half of fiscal 2006.

•

Cash dividends paid to common shareholders- During the first six months of fiscal 2007 and fiscal 2006, the Company paid cash dividends totaling $0.08 per outstanding common share. Total cash dividends paid during the first half of fiscal 2007 and fiscal 2006 amounted to $5.3 million and $5.5 million, respectively.

•

Stock option and other equity transactions, net- Cash flows from stock option and other equity transactions, net are primarily derived from the issuance of the Company’s common shares under various employee stock compensation programs. During the first six months of fiscal 2007 and 2006, cash proceeds from the issuance of common shares under these programs totaled $2.4 million and $6.0 million, respectively.

Sources of Credit and Contractual and Commercial Commitments. Information regarding the Company’s sources of credit and contractual and commercial commitments is included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2006, filed with the SEC on June 12, 2006. The Company’s commercial commitments are approximately $27.0 million at September 30, 2006 reflecting a net decline of $4.2 million in surety bonds and other commercial commitments from March 31, 2006. The Company’s contractual commitments have not changed materially from March 31, 2006. The maximum aggregate borrowing limits under the revolving credit facility (“Facility”) described below have not changed since March 31, 2006. At September 30, 2006, the maximum amount available under this Facility was $211.0 million. The maximum aggregate borrowing limit of $275.0 million under the Facility is reduced by outstanding amounts ($45.5 million) and letters of credit issued under a sub-limit within the Facility ($18.5 million).

Additional information regarding the Company’s sources of credit and contractual and commercial commitments is included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2006, filed with the SEC on June 12, 2006.

Cash Requirements. The Company currently intends to fund short-term and long-term capital expenditures, as well as liquidity needs, with existing cash and cash equivalent balances and borrowings under the Facility, as well as cash generated by operations. The Company believes that these sources will be sufficient to meet working capital needs, capital requirements, and commitments for at least the next twelve months. However, the Company’s capital requirements will depend on many factors, including the Company’s rate of sales growth, market acceptance of the Company’s products and services, costs of securing access to adequate manufacturing capacities, the timing and extent of research and development projects, and changes in operating expenses, all of which are subject to uncertainty. To the extent that the Company’s existing sources of cash are insufficient to fund the Company’s future activities, the Company may need to raise additional funds through public or private debt or equity financing. Additional funds may not be available on favorable terms to the Company, or at all.

Critical Accounting Policies, Estimates, and Assumptions. The Company adopted SFAS No. 123R effective April 1, 2006, utilizing the modified prospective method as described in the standard. Under the modified prospective method, compensation cost is recognized for all share-based payments granted after the effective date and for all unvested awards granted prior to the effective date. Prior to adoption, the Company accounted for share-based payments under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company recognized $3.7 million and $5.8 million in total share-based compensation expense during the three and six months ended September 30, 2006, respectively. Total unvested share-based compensation expense was $14.8 million at September 30, 2006 and had a total weighted average remaining term of 1.21 years. See Note 2 to the consolidated financial statements for more information on share-based compensation.

Information related to the Company’s critical accounting policies, estimates, and assumptions is included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2006, filed with the SEC on June 12, 2006. The Company’s critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2006, other than the adoption of SFAS No. 123R as described above.

Contingencies. The Company may be involved in various patent, product liability, consumer, environmental, tax proceedings and claims, governmental investigations, and other legal and regulatory proceedings that arise from time to time in the ordinary course of business. In accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” the Company records accruals for such contingencies to the extent that the Company concludes that their occurrence is both probable and estimable. The Company considers many factors in making these assessments, including the professional judgment of experienced members of management and the Company’s legal counsel. The Company has made estimates as to the likelihood of unfavorable outcomes and the amounts of such potential losses. In the opinion of management, the ultimate outcome of these proceedings and claims is not anticipated to have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. Government proceedings, claims and litigation are inherently unpredictable and actual results could materially differ from the Company’s estimates. The Company records anticipated recoveries under applicable insurance contracts when assured of recovery.

International Operations. Given the nature of the Company’s global operations, it maintains an inherent exposure to fluctuations in foreign currencies. During the second quarter of fiscal 2007, the Company’s revenues were favorably impacted by $2.1 million, or 0.8%, and income before taxes was unfavorably impacted by $0.8 million, or 3.3%, when compared to the same period in fiscal 2006. During the first half of fiscal 2007, the Company’s revenues were favorably impacted by $3.4 million, or 0.6%, and income before taxes was favorably impacted by $1.7 million, or 3.7%, when compared to the same period in fiscal 2006. The Company cannot predict future changes in foreign currency exchange rates or the effect they will have on the Company’s operations.

Forward-Looking Statements. This document may contain statements concerning certain trends, expectations, forecasts, estimates, or other forward-looking information affecting or relating to the Company or its industry that are intended to qualify for the protections afforded “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and other laws and regulations. Forward-looking statements speak only as to the date of this report, and may be identified by the use of forward-looking terms such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “projects,” “targets,” “forecasts,” and “seeks,” or the negative of such terms or other variations on such terms or comparable terminology. Many important factors could cause actual results to differ materially from those in the forward-looking statements including, without limitation, disruption of production or supplies, changes in market conditions, political events, pending or future claims or litigation, competitive factors, technology advances, and changes in government regulations or the application or interpretation thereof. Many of these important factors are outside STERIS’s control. No assurances can be provided as to any future financial results. Unless legally required, the Company does not undertake to update or revise any forward-looking statements even if events make clear that any projected results, express or implied, will not be realized. Other potential risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, (a) the potential for increased pressure on pricing or raw material cost that leads to erosion of profit margins, (b) the possibility that market demand will not develop for new technologies, products or applications, or the Company’s business initiatives will take longer, cost more or produce lower benefits than anticipated, (c) the possibility that application of or compliance with laws, court rulings, regulations, certifications or other requirements or standards may delay or prevent new product introductions, affect the production and marketing of existing products, or otherwise affect Company performance, results, or value, (d) the potential of international unrest, (e) effects of fluctuations in currencies, tax assessments or rates, raw material costs, benefit or retirement plan costs, or other regulatory compliance costs, (f) the possibility of reduced demand, or reductions in the rate of growth in demand, for the Company’s products and services, (g) the possibility that anticipated cost savings may not be achieved, or that transition, labor, competition, timing, execution, regulatory, governmental or other issues or risks associated with the Company’s expansion, transfer or other initiatives may adversely impact Company performance, results, or value, (h) the Company’s ability to identify, select, hire, and transition to a new president and CEO, and (i) those risks described in the Company’s Annual Report on Form 10-K for the year ended March 31, 2006, filed with the SEC on June 12, 2006, under Item 1A, “Risk Factors.”

Availability of Securities and Exchange Commission Filings. The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports, and other information with the SEC. Copies of these materials can be obtained by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or by accessing the SEC’s website at http://www.sec.gov. Information on the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, as soon as reasonably practicable after such materials are filed with or furnished to the SEC, the Company makes copies available to the public, free of charge, on or through the investor relations section of its website at http://www.steris-ir.com. Information on the Company’s website is not incorporated by reference into this report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the ordinary course of business, the Company is subject to interest rate, foreign currency, and commodity risks. Information related to these risks and the Company’s management of these exposures is included in Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2006, filed with the SEC on June 12, 2006. The Company’s exposures to market risks have not changed materially since March 31, 2006.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision of and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report. Based on that evaluation, including the assessment and input of Company management, the CEO and CFO concluded that, as of September 30, 2006, the Company’s disclosure controls and procedures were effective.

There were no changes in the Company’s internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, that occurred during the quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company may be involved in a number of legal proceedings and claims, which the Company believes arise from the ordinary course of its business, given its size, history, complexity, nature of its business, and industries in which it participates. These legal proceedings and claims generally involve a variety of legal theories and allegations, including without limitation, personal injury (e.g., slip and falls, automobile accidents), product liability (e.g., based on the operation or claimed malfunction of products), product exposure (e.g., claimed exposure to chemicals, asbestos, contaminants), property damage (e.g., claimed damage due to leaking equipment, fire), economic loss (e.g., breach of contract, other commercial claims), employment (e.g., wrongful termination), and other claims for damage and relief.

The FDA and the United States Department of Justice are continuing to conduct an investigation involving the Company’s SYSTEM 1^® sterile processing system. The Company received requests for documents in connection with the investigation. The Company has been responding to these requests and has been cooperating with the government agencies regarding this matter. There can be no assurance that the ultimate outcome of the investigation will not result in an action by the government agencies or that the government agencies will not initiate administrative proceedings, civil proceedings or criminal proceedings, or any combination thereof, against the Company.

The Company believes it has adequately reserved for its current litigation and that the ultimate outcome of its pending lawsuits and claims will not have a material adverse effect on the Company’s consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can be no assurance of the ultimate outcome of current or future litigation, proceedings, investigations, or claims or their effect. The Company presently maintains product liability insurance coverage, and other liability coverage in amounts and with deductibles that it believes are prudent.

From time to time, STERIS is also involved in legal proceedings as a plaintiff involving contract, patent protection, and other claims asserted by the Company. Gains, if any, from these proceedings are recognized when they are realized.

The Company believes there have been no material recent developments concerning the Company’s legal proceedings since March 31, 2006 and no new material pending legal proceedings required to be reported.

ITEM 1A. RISK FACTORS

The Company believes there have been no material changes to the risk factors included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006, filed with the SEC on June 12, 2006, that would materially affect its business, results of operations, or financial condition.

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

During the second quarter of fiscal 2007, the Company repurchased 382,700 of its common shares. These repurchases were pursuant to a single repurchase program which was approved by the Company’s Board of Directors and announced on July 27, 2006. This common share repurchase authorization replaced the common share repurchase authorization of January 25, 2006, under which 10,900 shares remained available for repurchase, and does not have a stated maturity date. The following table summarizes the common shares repurchased during the second quarter of fiscal 2007 under the Company’s common share repurchase program:


	(a) Total Number of Shares Purchased	(b) Average Price Paid Per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans
July 1-31	—		—	—	3,000,000
August 1-31 (1)	—		—	—	3,000,000
September 1-30	382,700	$	24.81	382,700	2,617,300

Total	382,700	$	24.81	382,700	2,617,300

(1)	Does not include 500 shares purchased in the open market on August 7, 2006 at an average price of $22.64 per share by an executive officer of the Company who may be deemed to be an affiliated purchaser.

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

The shareholders of the Company voted on the following items at the Annual Meeting of Shareholders held on July 26, 2006:

(a) All of the persons named below were elected as Directors of the Company for a term expiring at the Annual Meeting of Shareholders in 2007. Votes cast for and withheld from each of such persons were as follows:


	FOR	WITHHELD
Cynthia L. Feldmann	61,214,036	759,902
Stephen R. Hardis	37,558,358	24,415,580
Jacqueline B. Kosecoff	61,229,983	743,955
Raymond A. Lancaster	60,522,827	1,451,111
Kevin M. McMullen	57,747,531	4,226,407
J.B. Richey	60,972,435	1,001,503
Mohsen M. Sohi	60,778,502	1,195,436
Les C. Vinney	60,973,159	1,000,779
John P. Wareham	60,780,042	1,193,896
Loyal W. Wilson	60,970,703	1,003,235
Michael B. Wood	61,231,190	742,748

(b) Votes regarding the proposal to approve the STERIS Corporation 2006 Long-Term Equity Incentive Plan were as follows:


FOR	AGAINST	ABSTAIN	BROKER-NON-VOTES
45,709,589	8,252,514	1,084,329	6,927,506

(c) Votes regarding the proposal to ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ended March 31, 2007 were as follows:


FOR	AGAINST	ABSTAIN
61,347,564	235,722	390,651

ITEM 6. EXHIBITS

Exhibits required by Item 601 of Regulation S-K


Exhibit Number		Exhibit Description
3.1		1992 Amended Articles of Incorporation of STERIS Corporation, as amended on May 14, 1996, November 6, 1996, and August 6, 1998 (filed as Exhibit 3.1 to Form 10-K filed for the fiscal year ended March 31, 2000 (Commission File No. 1-14643), and incorporated herein by reference).

3.2		Amended and Restated Regulations of STERIS Corporation (filed as Exhibit 3.2 to Form 10-Q for the fiscal quarter ended September 30, 2004, as originally filed (Commission File No. 1-14643), and incorporated herein by reference).

4.1		Specimen Form of Common Stock Certificate (filed as Exhibit 4.1 to Form 10-K filed for the fiscal year ended March 31, 2002 (Commission File No. 1-14643), and incorporated herein by reference).

4.2		Amended and Restated Rights Agreement, dated as of January 21, 1999, between STERIS Corporation and National City Bank, as successor Rights Agent (filed as Exhibit 4.2 to the Registration Statement on Form 8-A filed April 16, 1999 (Commission File No. 1-14643), and incorporated herein by reference).

4.3		Amendment No. 1, dated June 7, 2002, to Amended and Restated Rights Agreement, dated as of January 21, 1999, between STERIS Corporation and National City Bank, as successor Rights Agent (filed as Exhibit 4.1 to the Registration Statement on Form 8-A/A filed June 10, 2002 (Commission File No. 1-14643), and incorporated herein by reference).

10.1		STERIS Corporation 2006 Long-Term Equity Incentive Plan (filed as Exhibit 10.1 to Form 8-K filed July 28, 2006 (Commission File No. 1-14643) and incorporated herein by reference).*

10.2		STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.3 to Form 8-K filed July 28, 2006 (Commission File No. 1-14643) and incorporated herein by reference).*

10.3		STERIS Corporation Form of Restricted Stock Agreement for Directors (filed as Exhibit 10.5 to Form 8-K filed July 28, 2006 (Commission File No. 1-14643) and incorporated herein by reference).*

10.4		STERIS Corporation Deferred Compensation Plan Document (filed as Exhibit 10.1 to Form 8-K filed September 1, 2006 (Commission File No. 1-14643) and incorporated herein by reference).*

10.5		Adoption Agreement related to STERIS Corporation Deferred Compensation Plan (filed as Exhibit 10.2 to Form 8-K filed September 1, 2006 (Commission File No. 1-14643) and incorporated herein by reference).*

10.6		Employment Agreement, dated as of September 7, 2006, between Les Vinney and STERIS Corporation (filed as Exhibit 10.1 to Form 8-K filed September 11, 2006 (Commission File No. 1-14643) and incorporated herein by reference).*

10.7		STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees.*

10.8		STERIS Corporation Form of Nonqualified Stock Option Agreement for Nonemployee Directors.*

15.1		Letter Re: Unaudited Interim Financial Information.

31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant Section 906 of the Sarbanes-Oxley Act of 2002.

*	A management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.

SIGNATURE

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

STERIS Corporation

/S/ LAURIE BRLAS

Laurie Brlas

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

November 7, 2006

EXHIBIT INDEX


Exhibit Number		Exhibit Description
3.1		1992 Amended Articles of Incorporation of STERIS Corporation, as amended on May 14, 1996, November 6, 1996, and August 6, 1998 (filed as Exhibit 3.1 to Form 10-K filed for the fiscal year ended March 31, 2000 (Commission File No. 1-14643), and incorporated herein by reference).

3.2		Amended and Restated Regulations of STERIS Corporation (filed as Exhibit 3.2 to Form 10-Q for the fiscal quarter ended September 30, 2004, as originally filed (Commission File No. 1-14643), and incorporated herein by reference).

4.1		Specimen Form of Common Stock Certificate (filed as Exhibit 4.1 to Form 10-K filed for the fiscal year ended March 31, 2002 (Commission File No. 1-14643), and incorporated herein by reference).

4.2		Amended and Restated Rights Agreement, dated as of January 21, 1999, between STERIS Corporation and National City Bank, as successor Rights Agent (filed as Exhibit 4.2 to the Registration Statement on Form 8-A filed April 16, 1999 (Commission File No. 1-14643), and incorporated herein by reference).

4.3		Amendment No. 1, dated June 7, 2002, to Amended and Restated Rights Agreement, dated as of January 21, 1999, between STERIS Corporation and National City Bank, as successor Rights Agent (filed as Exhibit 4.1 to the Registration Statement on Form 8-A/A filed June 10, 2002 (Commission File No. 1-14643), and incorporated herein by reference).

10.1		STERIS Corporation 2006 Long-Term Equity Incentive Plan (filed as Exhibit 10.1 to Form 8-K filed July 28, 2006 (Commission File No. 1-14643) and incorporated herein by reference).*

10.2		STERIS Corporation Form of Restricted Stock Agreement for Employees (filed as Exhibit 10.3 to Form 8-K filed July 28, 2006 (Commission File No. 1-14643) and incorporated herein by reference).*

10.3		STERIS Corporation Form of Restricted Stock Agreement for Directors (filed as Exhibit 10.5 to Form 8-K filed July 28, 2006 (Commission File No. 1-14643) and incorporated herein by reference).*

10.4		STERIS Corporation Deferred Compensation Plan Document (filed as Exhibit 10.1 to Form 8-K filed September 1, 2006 (Commission File No. 1-14643) and incorporated herein by reference).*

10.5		Adoption Agreement related to STERIS Corporation Deferred Compensation Plan (filed as Exhibit 10.2 to Form 8-K filed September 1, 2006 (Commission File No. 1-14643) and incorporated herein by reference).*

10.6		Employment Agreement, dated as of September 7, 2006, between Les Vinney and STERIS Corporation (filed as Exhibit 10.1 to Form 8-K filed September 11, 2006 (Commission File No. 1-14643) and incorporated herein by reference).*

10.7		STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees.*

10.8		STERIS Corporation Form of Nonqualified Stock Option Agreement for Nonemployee Directors.*

15.1		Letter Re: Unaudited Interim Financial Information.

31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant Section 906 of the Sarbanes-Oxley Act of 2002.

STERIS Corporation Form of Nonqualified Stock Option Agreement--Employees

Exhibit 10.7

STERIS CORPORATION

NONQUALIFIED STOCK OPTION AGREEMENT FOR EMPLOYEES

This Agreement is between STERIS Corporation (“STERIS”) and [Optionee’s Name] (“Optionee”), with respect to the grant of a Nonqualified Stock Option by STERIS to Optionee pursuant to the STERIS Corporation 2006 Long-Term Equity Incentive Plan (the “Plan”). (Capitalized terms used in this Agreement and not otherwise defined have the meanings assigned to them in the Plan.)

1.	Grant of Option. STERIS hereby grants to Optionee, as of , 20 an option (the “Option”) to purchase all or any number of an aggregate of [Number of Shares Granted] STERIS Common Shares, at an exercise price of $ per share, upon and subject to the terms of this Agreement and the Plan.

Documents Delivered with Agreement. STERIS has delivered to Optionee, along with two copies of this Agreement, the following documents: (a) a copy of STERIS’s Policy Prohibiting the Improper Use of Material Non-Public Information (the “Policy”); (b) a copy of the Plan and its related Prospectus; (c) two execution copies of a Nondisclosure and Noncompetition Agreement to be entered into between STERIS and Optionee (the “Nondisclosure Agreement”); (d) two copies of an acknowledgment form (the “Acknowledgment Form”); and (e) a copy of STERIS’s most recent integrated Annual Report to Shareholders and Form 10-K (the “Annual Report”). By executing this Agreement, Optionee acknowledges receipt of these documents.

Terms and Conditions of Option. The Option is a Nonqualified Option and shall not be treated as an Incentive Stock Option. Except as otherwise provided in this Agreement, the Option shall be subject to all of the terms and conditions of the Plan. As a condition to the effectiveness of the Option, Optionee must return to STERIS signed copies of (a) this Agreement and (b) the Nondisclosure Agreement, and (c) the Acknowledgment Form. If Optionee violates the terms of the Policy, the Plan, or this Agreement, the Nondisclosure Agreement, or any agreement with similar terms previously entered into (collectively “Prior Agreements”), any and all options to purchase Common Shares that were granted by STERIS to Optionee (including the Option granted by this Agreement or any Prior Agreements) shall be forfeited, void, and of no further force and effect.

4.	Term of Option. Unless earlier terminated pursuant to Section 11 of the Plan, the Option shall terminate at the close of business on, and shall not be exercisable at any time after, , 20 .

Vesting. So long as Optionee remains in the employ of STERIS, but subject to the terms of this Agreement and the Plan (including Section 11 thereof, the rules of which shall apply to this Agreement, including as described in Section 16 of this Agreement), the Option shall vest and first become exercisable in equal increments (excluding any fractional shares) as follows:

[TO BE PROVIDED]

Exercise of Vested Option. Except as otherwise provided in Section 11 of the Plan, the rules of which shall apply to this Agreement, including as described in Section 16 of this Agreement, the Option shall be exercisable only while Optionee is in the employ of STERIS. To the extent exercisable under the Agreement, the Option may be exercised from time to time in whole or in part.

Method of Exercise. A request to exercise the Option requires delivery of (a) the Option Price payable in cash or by check acceptable to the Company or by wire transfer of immediately available funds, or by such other methods as may be approved by the Board or the Chief Executive Officer or his delegatee or delegatees, as applicable and (b) a written notice to STERIS identifying this Agreement and specifying the number of Common Shares as to which the Option is being exercised. Subject to the terms of the Plan and this Agreement, STERIS shall deliver to Optionee certificates representing the Option shares as soon as administratively feasible following such exercise.

8.	Certain Determinations. Application, violation, or other interpretation of the terms of this Agreement, the Plan, the Policy, any Prior Agreement, or any STERIS policy shall be determined by the Board or the Chief

Executive Officer or his delegatee or delegatees, if applicable, in its sole discretion, and its determination shall be final and binding on Optionee and STERIS.

Termination of the Plan; No Right to Future Grants; No Right of Employment; Extraordinary Item of Compensation. By entering into this Agreement, Optionee acknowledges: (a) that the Plan is discretionary in nature and may be suspended or terminated by STERIS at any time; (b) that each grant of an Option is a one-time benefit which does not create any contractual or other right to receive future grants of Options, or benefits in lieu of Options; (c) that all determinations with respect to any such future grants, including, but not limited to, the times when the Option shall be granted, the number of shares subject to each Option, the Option Price, and the time or times when each Option shall be exercisable, will be at the sole discretion of STERIS; (d) that Optionee’s participation in the Plan shall not create a right to further employment with Optionee’s employer and shall not interfere with the ability of Optionee’s employer to terminate Optionee’s employment relationship at any time with or without cause; (e) that Optionee’s participation in the Plan is voluntary; (f) that the value of the Options is an extraordinary item of compensation which is outside the scope of Optionee’s employment contract, if any; (g) that the Option is not part of normal and expected compensation for purposes of any other employee benefit plan or program of STERIS, including for purposes of calculating any severance, resignation, redundancy, end of service, bonus, long-service, pension or retirement benefits or similar payments; (h) that the right to purchase stock ceases upon termination of employment for any reason except as may otherwise be explicitly provided in the Plan or this Agreement; (i) that the future value of the shares is unknown and cannot be predicted with certainty; (j) that, where Optionee’s employer is a Subsidiary or affiliate of STERIS, the Option has been granted to Optionee in Optionee’s status as an employee of such Subsidiary or affiliate, and can in no event be understood or interpreted to mean that STERIS is Optionee’s employer or that Optionee has an employment relationship with STERIS; and (k) that if the underlying shares do not increase in value, the Option will have no value.

10.

Employee Data Privacy. By entering into the Agreement, and as a condition of the grant of the Option, Optionee consents to the collection, use and transfer of personal data as described in this Section 10. Optionee understands that STERIS and its Subsidiaries hold certain personal information about Optionee, including, but not limited to, Optionee’s name, home address and telephone number, date of birth, social insurance number, salary, nationality, job title, any shares of stock or directorships held in STERIS, details of all Options or other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in Optionee’s favor, for the purpose of managing and administering the Plan (“Data”). Optionee further understands that STERIS and/or its Subsidiaries will transfer Data among themselves as necessary for the purposes of implementation, administration and management of the Optionee’s participation in the Plan, and that STERIS and/or its Subsidiaries may each further transfer Data to any third parties assisting STERIS in the implementation, administration and management of the Plan (“Data Recipients”). Optionee understands that these Data Recipients may be located in Optionee’s country of residence, the European Economic Area, and in countries outside the European Economic Area, including the United States. Optionee authorizes the Data Recipients to receive, possess, use, retain and transfer Data in electronic or other form, for the purposes of implementing, administering and managing the Plan, including any transfer of such Data, as may be necessary or appropriate for the administration of the Plan and/or the subsequent holding of shares of stock on Optionee’s behalf, to a broker or third party with whom the shares acquired on exercise may be deposited. Optionee understands that he or she may, at any time, review the Data, require any necessary amendments to it or withdraw the consent herein by notifying STERIS in writing. Optionee further understands that withdrawing consent may affect Optionee’s ability to participate in the Plan, at the sole discretion of the Board or the Chief Executive Officer or his delegatee or delegatees, if applicable.

11.

Relation to Plan. This Agreement is subject to the terms and conditions of the Plan. In the event of any inconsistency between the provisions of this Agreement and the Plan, the Plan shall govern. All terms used herein with initial capital letters and not otherwise defined herein that are defined in the Plan shall have the meanings assigned to them in the Plan.

12.	Amendments. Any amendment to the Plan shall be deemed to be an amendment to this Agreement to the extent that the amendment is applicable hereto; provided, however, that no amendment shall adversely affect the rights of Optionee under this Agreement without Optionee’s consent.

13.

Severability. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid or unenforceable, the remainder of this Agreement and the application of such provision to any other person or circumstances shall not be affected, and the provisions so held to be invalid or unenforceable shall be reformed to the extent (and only to the extent) necessary to make it enforceable and valid.

14.	Governing Law. This Agreement shall be governed by and construed in accordance with the internal substantive laws of the State of Ohio, without giving effect to any principle of law that would result in the application of the law of any other jurisdiction.

15.

Miscellaneous. Nothing contained in this Agreement shall be understood as conferring on Optionee any right to continue as an employee of STERIS or any Subsidiary or affiliate. STERIS reserves the right to correct any clerical, typographical, or other error in this Agreement or otherwise with respect to this grant. This Agreement shall inure to the benefit of and be binding upon its parties and their respective heirs, executors, administrators, successors, and assigns, but the Option shall not be transferable by Optionee other than as provided in Section 17 of the Plan.

16.

Application of Section 11 of the Plan. Pursuant to Section 11 of the Plan, the Board hereby consents to the Optionee’s Qualifying Retirement if, at the time that the Optionee terminates service with the Company, the Optionee satisfies the requirements of Section 11(b)(iii) of the Plan other than the requirement of the Board having consented thereto (which consent is hereby given).

[SIGNATURES ON THE FOLLOWING PAGE]

IN WITNESS WHEREOF, STERIS has caused this Agreement to be executed on its behalf by its duly authorized officer, and Optionee has executed this Agreement, all as of the day and year first written above.

STERIS Corporation Form of Nonqualified Stock Option Agmt--Nonemployee Directors

Exhibit 10.8

STERIS CORPORATION

NONQUALIFIED STOCK OPTION AGREEMENT FOR NONEMPLOYEE DIRECTORS

1.	Grant of Option. STERIS hereby grants to Optionee, as of , 20 an option (the “Option”) to purchase all or any number of an aggregate of [Number of Shares Granted] STERIS Common Shares, at an exercise price of $ per share, upon and subject to the terms of this Agreement and the Plan.

4.	Term of Option. Unless earlier terminated pursuant to Section 11 of the Plan, the Option shall terminate at the close of business on, and shall not be exercisable at any time after, , 20 .

[TO BE PROVIDED]

8.	Certain Determinations. Application, violation, or other interpretation of the terms of this Agreement, the Plan, the Policy, any Prior Agreement, or any STERIS policy shall be determined by the Board or

the Chief Executive Officer or his delegatee or delegatees, if applicable, in its sole discretion, and its determination shall be final and binding on Optionee and STERIS.

10.

11.

12.	Amendments. Any amendment to the Plan shall be deemed to be an amendment to this Agreement to the extent that the amendment is applicable hereto; provided, however, that no amendment shall adversely affect the rights of Optionee under this Agreement without Optionee’s consent.

13.

14.	Governing Law. This Agreement shall be governed by and construed in accordance with the internal substantive laws of the State of Ohio, without giving effect to any principle of law that would result in the application of the law of any other jurisdiction.

15.

16.

[SIGNATURES ON THE FOLLOWING PAGE]

Letter Re: Unaudited Interim Financial Information

Exhibit 15.1

LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION

Board of Directors and Shareholders

STERIS Corporation

We are aware of the incorporation by reference in the following Registration Statements and related Prospectuses of our report dated November 3, 2006 relating to the unaudited consolidated interim financial statements of STERIS Corporation and subsidiaries that are included in its Form 10-Q for the quarter ended September 30, 2006:


Registration Number		Description

333-137167		Form S-8 Registration Statement – STERIS Corporation Deferred Compensation Plan

333-136239		Form S-8 Registration Statement — STERIS Corporation 2006 Long-Term Equity Incentive Plan

333-40058		Form S-8 Registration Statement — Nonqualified Stock Option Agreement between STERIS Corporation and Les C. Vinney

333-40082		Form S-8 Registration Statement — Nonqualified Stock Option Agreement between STERIS Corporation and Laurie Brlas and the Nonqualified Stock Option Agreement between STERIS Corporation and David L. Crandall

333-65155		Form S-8 Registration Statement — STERIS Corporation 1998 Long-Term Incentive Compensation Plan

333-55839		Form S-8 Registration Statement — Nonqualified Stock Option Agreement between STERIS Corporation and John Masefield and the Nonqualified Stock Option Agreement between STERIS Corporation and Thomas J. DeAngelo

333-32005		Form S-8 Registration Statement — STERIS Corporation 1997 Stock Option Plan

333-06529		Form S-3 Registration Statement — STERIS Corporation

333-01610		Post-effective Amendment to Form S-4 on Form S-8 — STERIS Corporation

33-91444		Form S-8 Registration Statement — STERIS Corporation 1994 Equity Compensation Plan

33-91442		Form S-8 Registration Statement — STERIS Corporation 1994 Nonemployee Directors Equity Compensation Plan

33-55976		Form S-8 Registration Statement — STERIS Corporation 401(k) Plan

33-55258		Form S-8 Registration — STERIS Corporation Amended and Restated Non-Qualified Stock Option Plan

33-63770		Form S-8 Registration Statement — Nonqualified Stock Option Agreement between STERIS Corporation and Charles L. Immel and Restricted Shares Agreement between STERIS Corporation and Charles L. Immel

333-09733		Form S-8 Registration Statement — STERIS Corporation 401(k) Plan.

333-63774		Form S-8 Registration Statement — Nonqualified Stock Option Agreement between STERIS Corporation and Peter A. Burke

333-101308		Form S-8 Registration Statement — STERIS Corporation 2002 Stock Option Plan

333-91302		Form S-8 Registration Statement — Nonqualified Stock Option Agreement between STERIS Corporation and Mark D. McGinley

/s/ ERNST & YOUNG LLP

Cleveland, Ohio

November 3, 2006

Section 302 CEO Certification

Exhibit 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

I, Les C. Vinney, certify that:

I have reviewed this quarterly report on Form 10-Q of STERIS Corporation;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2006

/S/ LES C. VINNEY

Les C. Vinney

President and Chief Executive Officer

Section 302 CFO Certification

Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

I, Laurie Brlas, certify that:

I have reviewed this quarterly report on Form 10-Q of STERIS Corporation;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2006

/S/ LAURIE BRLAS

Laurie Brlas

Senior Vice President and

Chief Financial Officer

Section 906 CEO & CFO Certification

Exhibit 32.1

Certification Pursuant to 18 U.S.C. § 1350 as Adopted

Pursuant to § 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the Form 10-Q of STERIS Corporation (the “Company”) for the quarter ended September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies, that, to such officer’s knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.



		/S/ LES C. VINNEY
Name:		Les C. Vinney
Title:		President and Chief Executive Officer (Principal Executive Officer)



		/S/ LAURIE BRLAS
Name:		Laurie Brlas
Title:		Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Dated: November 7, 2006

STERIS Corporation

Name:

Title:

[Optionee’s Name]