**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**FORM
      10-Q**





**QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**











For
                Quarter Ended
            June
                30, 2006
            Commission
                File No.0-24866








MICROTEK
      MEDICAL HOLDINGS, INC.


(Exact
      name of Registrant as specified in its charter)








Georgia
            58-1746149(State
                or other jurisdiction of
            (IRS
                Employerincorporation
                or organization)
            Identification
                No.)





13000
      DEERFIELD PARKWAY, SUITE 300


ALPHARETTA,
      GA 30004


(Address
      of principal executive offices)





(678)
      896-4400


(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
      at least the past 90 days. Yes x   No o





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


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





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





Indicate
      the number of shares outstanding of each of the issuer's classes of common
      equity, as of the latest practicable date.





Class
            Outstanding
                at August 4, 2006Common
                Stock, $.001 par value
            43,546,064














**INDEX**




**PART
                  I:**
              **FINANCIAL
                  INFORMATION**Item
                  1.
              Financial
                  Statements:Unaudited
                Condensed Consolidated Balance Sheets as
                of June 30, 2006 and December 31, 2005Unaudited
                  Condensed Consolidated Statements
                  of Operations and Comprehensive Income for the Three Months ended
                  June 30,
                  2006 and June 30, 2005 and for the Six Months ended June 30, 2006
                  and June
                  30, 2005Unaudited
                  Condensed Consolidated Statements of Cash
                  Flows for the Six Months ended June 30, 2006 and June 30,
                  2005Notes
                  to Unaudited Condensed Consolidated Financial
                  StatementsItem
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of OperationsItem
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  RiskItem
                  4.
              Controls
                  and Procedures**PART
                  II:**
              **OTHER
                  INFORMATION**Item
                  1.
              Legal
                  ProceedingsItem
                  1A.
              Risk
                  FactorsItem
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  ProceedsItem
                  3.
              Defaults
                  Upon Senior SecuritiesItem
                  4.
              Submission
                  of Matters to a Vote of Security
                  HoldersItem
                  5.
              Other
                  InformationItem
                  6.
              Exhibits





2
 **Index**













**PART
      I**


**FINANCIAL
      INFORMATION**


**Item
      1. Financial Statements**





**MICROTEK
                MEDICAL HOLDINGS,
                INC.**Unaudited
                Condensed Consolidated Balance Sheets(in
                thousands)**Assets**
            
            **June
                30, 2006**
            
            **December
                31, 2005**Current
                assets:Cash
                and cash equivalents
            
            $
            15,116
            
            $
            14,765Accounts
                receivable, net of allowances of $1,720and
                $1,635, respectively
            
            
            19,730
            
            
            19,530Other
                receivables
            
            
            757
            
            
            908Inventories
            
            
            36,875
            
            
            31,043Deferred
                income taxes
            
            
            3,541
            
            
            3,007Prepaid
                expenses and other current assets
            
            
            1,757
            
            
            2,480Total
                current assets
            
            
            77,776
            
            
            71,733Property
                and equipment
            
            
            30,246
            
            
            29,125Less
                accumulated depreciation
            
            
            (23,159
            )
            
            (22,132
            )Property
                and equipment, net
            
            
            7,087
            
            
            6,993Goodwill
            
            
            31,961
            
            
            30,956Other
                intangible assets, net
            
            
            6,606
            
            
            6,041Deferred
                income taxes
            
            
            17,169
            
            
            19,812Other
                assets
            
            
            6,673
            
            
            5,223Total
                assets
            
            $
            147,272
            
            $
            140,758**Liabilities
                and Shareholders’ Equity**Current
                liabilities:Accounts
                payable
            
            $
            8,026
            
            $
            6,903Accrued
                expenses
            
            
            5,775
            
            
            4,539Income
                taxes payable
            
            
            702
            
            
            717Current
                portion of long-term debt
            
            
            180
            
            
            420Total
                current liabilities
            
            
            14,683
            
            
            12,579Long-term
                debt, excluding current portion
            
            
            11
            
            
            1,249Other
                long-term liabilities, excluding current portion
            
            
            3,664
            
            
            2,864Total
                liabilities
            
            
            18,358
            
            
            16,692Shareholders’
                equity:Common
                stock
            
            
            45
            
            
            45Additional
                paid-in capital
            
            
            218,389
            
            
            217,858Accumulated
                deficit
            
            
            (85,369
            )
            
            (89,774
            )Accumulated
                other comprehensive loss, netof
                income taxes of ($103) and ($51), respectively
            
            
            (22
            )
            
            (817
            )133,043
            
            
            127,312Treasury
                shares, at cost
            
            
            (4,129
            )
            
            (3,246
            )Total
                shareholders’ equity
            
            
            128,914
            
            
            124,066Total
                liabilities and shareholders’ equity
            
            $
            147,272
            
            $
            140,758




See
        notes
        to unaudited condensed consolidated financial statements.





3
 **Index**





**MICROTEK
                MEDICAL HOLDINGS,
                INC.**Unaudited
                Condensed Consolidated Statements of Operations and Comprehensive
                Income(in
                thousands, except per share data)**Three
                months ended**
            
            **Six
                months ended****June
                30, 2006**
            
            **June
                30, 2005**
            
            **June
                30, 2006**
            
            **June
                30, 2005**Net
                revenues
            
            $
            36,058
            
            $
            34,506
            
            $
            69,741
            
            $
            68,249Cost
                of goods sold
            
            
            21,986
            
            
            21,032
            
            
            42,031
            
            
            41,031Gross
                profit
            
            
            14,072
            
            
            13,474
            
            
            27,710
            
            
            27,218Operating
                expenses:Selling,
                general and administrative
            
            
            10,585
            
            
            10,384
            
            
            20,542
            
            
            20,933Research
                and development
            
            
            145
            
            
            218
            
            
            289
            
            
            471Amortization
                of intangibles
            
            
            254
            
            
            237
            
            
            468
            
            
            483Total
                operating expenses
            
            
            10,984
            
            
            10,839
            
            
            21,299
            
            
            21,887Loss
                on disposition of assets
            
            
            -
            
            
            (156
            )
            
            -
            
            
            (156
            )Income
                from operations
            
            
            3,088
            
            
            2,479
            
            
            6,411
            
            
            5,175Interest
                income
            
            
            105
            
            
            64
            
            
            199
            
            
            82Interest
                expense
            
            
            (10
            )
            
            (91
            )
            
            (21
            )
            
            (168
            )Equity
                in earnings of investee
            
            
            90
            
            
            29
            
            
            123
            
            
            135Foreign
                currency exchange loss
            
            
            -
            
            
            (46
            )
            
            -
            
            
            (423
            )Income
                before income taxes
            
            
            3,273
            
            
            2,435
            
            
            6,712
            
            
            4,801Income
                tax provision
            
            
            1,118
            
            
            236
            
            
            2,307
            
            
            501Net
                income
            
            $
            2,155
            
            $
            2,199
            
            $
            4,405
            
            $
            4,300Other
                comprehensive income (loss):Foreign
                currency translation gain (loss), net of income taxes
            
            
            458
            
            
            (859
            )
            
            817
            
            
            (1,149
            )Unrealized
                gain (loss) on available for salesecurities,
                net of income taxes
            
            
            (28
            )
            
            69
            
            
            (22
            )
            
            40Comprehensive
                income
            
            $
            2,585
            
            $
            1,409
            
            $
            5,200
            
            $
            3,191Net
                income per common share - Basic and Diluted
            
            $
            0.05
            
            $
            0.05
            
            $
            0.10
            
            $
            0.10Basic
                weighted average number of commonshares
                outstanding
            
            
            43,639
            
            
            43,301
            
            
            43,656
            
            
            43,273Diluted
                weighted average number of commonshares
                outstanding
            
            
            44,668
            
            
            44,432
            
            
            44,647
            
            
            44,440




See
        notes
        to unaudited condensed consolidated financial statements.


4
 **Index**







**MICROTEK
                MEDICAL HOLDINGS,
                INC.**Unaudited
                Condensed Consolidated Statements of Cash Flows(in
                thousands)**Six
                months ended**
            
            **Six
                months ended****June
                30, 2006**
            
            **June
                30, 2005**Cash
                flows from operating activities:Net
                income
            
            $
            4,405
            
            $
            4,300Adjustments
                to reconcile net income to net cash provided byoperating
                activities:Depreciation
            
            
            1,024
            
            
            1,076Amortization
                of intangibles
            
            
            468
            
            
            483Provision
                for doubtful accounts
            
            
            307
            
            
            346Deferred
                income taxes
            
            
            2,057
            
            
            162Equity
                in earnings of investee
            
            
            (123
            )
            
            (135
            )Other
            
            
            (3
            )
            
            (29
            )Changes
                in operating assets and liabilities, net ofacquisitions
            
            
            (1,360
            )
            
            (3,157
            )**Net
                cash provided by operating activities**
            
            
            **6,775**
            
            
            **3,046**Cash
                flows from investing activities:Purchase
                of and deposits for property and equipment
            
            
            (831
            )
            
            (673
            )Acquisition
                of Samco, net of cash acquired
            
            
            (2,274
            )
            
            -Proceeds
                from dispositions of equipment
            
            
            6
            
            
            215**Net
                cash used in investing activities**
            
            
            **(3,099**
            **)**
            
            **(458**
            **)**Cash
                flows from financing activities:Borrowings
                under line of credit agreement
            
            
            60,731
            
            
            55,579Repayments
                under line of credit agreement
            
            
            (61,962
            )
            
            (58,082
            )Changes
                in bank overdraft
            
            
            (1,764
            )
            
            (1,531
            )Repayments
                under notes payable
            
            
            (247
            )
            
            (247
            )Proceeds
                from exercise of stock options
            
            
            68
            
            
            65Repurchase
                of treasury stock
            
            
            (883
            )
            
            -Proceeds
                from issuance of common stock
            
            
            463
            
            
            468**Net
                cash used in financing activities**
            
            
            **(3,594**
            **)**
            
            **(3,748**
            **)**Effect
                of exchange rate changes on cash
            
            
            269
            
            
            (16
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            351
            
            
            (1,176
            )Cash
                and cash equivalents at beginning of period
            
            
            14,765
            
            
            8,964**Cash
                and cash equivalents at end of period**
            
            **$**
            **15,116**
            
            **$**
            **7,788**




See
        notes
        to unaudited condensed consolidated financial statements.





5
 **Index**


**MICROTEK
      MEDICAL HOLDINGS, INC.**


**Notes
      to Unaudited Condensed Consolidated Financial Statements**








**1.**
            **NATURE
                OF BUSINESS AND BASIS OF
                PRESENTATION**





Microtek
      Medical Holdings, Inc. and subsidiaries (the “Company”) manufactures and
      supplies innovative product solutions for patient care, occupational safety
      and
      management of infectious and hazardous waste for the healthcare market, which
      represents one business segment. The Company markets its products to hospitals
      and other end users through a broad distribution system consisting of multiple
      channels including distributors, directly through its own sales force, original
      equipment manufacturers, and private label customers. The Company also markets
      certain of its products through custom procedure tray companies. Substantially
      all of the Company’s revenues are generated by its primary operating unit,
      Microtek Medical, Inc. (“Microtek”), a subsidiary of the Company. As described
      in Note 6 to these unaudited condensed consolidated financial statements, in
      September 2004, the Company entered into an agreement which grants to Eastern
      Technologies, Inc. a worldwide exclusive license to manufacture, use and sell
      the Company’s OREX materials and processing technology in the nuclear industry
      and homeland security industry, and for certain other industrial
      applications.





The
      unaudited condensed consolidated financial statements include the accounts
      of
      the Company and its wholly owned subsidiaries. All significant intercompany
      balances and transactions have been eliminated in consolidation.





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with Rule 10-01 of Regulation S-X for interim financial
      statements required to be filed with the Securities and Exchange Commission
      and
      do not include all information and footnotes required by generally accepted
      accounting principles for complete financial statements. In
      the
      opinion of management, the information furnished reflects all adjustments
      (consisting only of normal recurring adjustments) necessary for a fair
      presentation of the financial position, results of operations and cash flows
      for
      the interim periods presented. Results for the interim periods are not
      necessarily indicative of results to be expected for the full year. The
      consolidated financial statements herein should be read in conjunction with
      the
      consolidated financial statements and notes thereto contained in the Company's
      Annual Report on Form 10-K for the year ended December 31, 2005 (the “Annual
      Report”).





**2.**  **CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**




The
      Company's discussion of results of operations and financial condition relies
      on
      its consolidated financial statements that are prepared based on certain
      critical accounting policies that require management to make judgments and
      estimates that are subject to varying degrees of uncertainty. The
      Company believes that investors need to be aware of these policies and how
      they
      impact its financial statements as a whole, as well as its related discussion
      and analysis presented herein. While the Company believes that these accounting
      policies are based on sound measurement criteria, actual future events can
      and
      often do result in outcomes that can be materially different from these
      estimates or forecasts. The accounting policies and related risks described
      in
      the Company's Annual Report on Form 10-K for the year ended December 31, 2005
      are those that depend most heavily on these judgments and estimates. During
      the
      three months and six months ended June 30, 2006, there have been no material
      changes to any of the Company’s critical accounting policies.




**3.**
            **STOCK-BASED
                COMPENSATION**




***Adoption
      of New Accounting Pronouncement.*** Effective
      January 1, 2006, the Company adopted the provisions of SFAS No. 123(R),
“ *Share-Based
      Payment”,* and
      related interpretations (collectively, “SFAS No. 123(R)”) to account for
      stock-based compensation using the modified prospective transition method and
      therefore will not restate its prior period results. SFAS No. 123(R) supersedes
      Accounting Principles Board (“APB”) Opinion No. 25, “ *Accounting
      for Stock Issued to Employees”* and
      revises guidance in SFAS No. 123, “ *Accounting
      for Stock-Based Compensation”* .
      SFAS
      No. 123(R) establishes accounting requirements for share-based compensation
      to
      employees and carries forward prior guidance on accounting for awards to
      non-employees. Specifically, SFAS No. 123(R) requires that compensation expense
      be recognized in the financial statements for share-based awards based on the
      grant date fair value of those awards. SFAS No. 123(R) also requires the
      benefits of tax deductions in excess of recognized compensation expense to
      be
      reported as a financing cash flow activity, rather than as an operating cash
      flow activity as previously required.







6
 **Index**




The
      Company’s initial adoption of SFAS No. 123(R)’s fair value method on January 1,
      2006 did not have an impact on the Company’s results of operations or overall
      financial position. However, the future impact of the adoption of SFAS No.
      123(R) on the Company’s results of operations cannot be predicted at this time
      because it will depend on levels of future grants of share-based payments.





Pursuant
      to SFAS No. 123(R)’s modified prospective transition method, the Company
      recognizes stock-based compensation expense based on the grant-date fair value
      of any new share-based awards granted subsequent to December 31, 2005 that
      are
      expected to vest. Compensation expense is recognized on a straight-line basis
      over the requisite service period, which is generally commensurate with the
      vesting term. Compensation expense is recognized immediately for share-based
      awards that are fully vested on the date of the grant. For the three months
      and
      six months ended June 30, 2006, compensation expense recognized in the Company’s
      financial statements related to share-based awards totaled approximately
      $19,000. For the three months and six months ended June 30, 2006, the Company
      did not record any excess tax benefits generated from stock option exercises
      because of the Company’s significant net operating loss carryforwards for
      Federal income tax purposes.





Prior
      to
      January 1, 2006, the Company accounted for its share-based payments to employees
      under the intrinsic value recognition and measurement principles of APB Opinion
      No. 25 and related interpretations, including Financial Accounting Standards
      Board (“FASB”) Interpretation No. 44, *Accounting
      for Certain Transactions Involving Stock Compensation, an interpretation of
      APB
      Opinion No. 25* .
      Accordingly, no stock-based employee compensation cost was reflected in the
      Company’s results of operations as all options granted under the Company’s stock
      options plans had an exercise price equal to the market value of the underlying
      common stock on the date of the grant. Prior to its adoption of SFAS 123(R),
      the
      Company followed the disclosure requirements of SFAS 148, *Accounting
      for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
      Statement No. 123* and
      accordingly provided pro forma disclosures of net income and net income per
      basic and diluted share as if the fair-value-based method had been applied
      to
      all outstanding and unvested awards for each period presented.





The
      following table illustrates the effect on net income and net income per basic
      and diluted share as if the Company had applied the fair value recognition
      provisions of SFAS No. 123 to its stock-based employee compensation plans for
      the three months and six months ended June 30, 2005 (in thousands, except per
      share data).




**Three
                  months ended**
                **June
                  30, 2005**
              
              **Six
                  months ended****June 30, 2005**Net
                  income, as reported
              
              $
              2,199
              
              $
              4,300Deduct:
                  Total stock-based employeecompensation
                  expense determined underfair
                  value based method for all awards,net
                  of related tax effects
              
              
              (305
              )
              
              (573
              )Pro
                  forma net income
              
              $
              1,894
              
              $
              3,727Net
                  income per share:Basic
                  and Diluted - as reported
              
              $
              0.05
              
              $
              0.10Basic
                  - pro forma
              
              $
              0.04
              
              $
              0.09Diluted
                  - pro forma
              
              $
              0.04
              
              $
              0.08
 
 The
        Company uses the Black-Scholes option pricing model to determine the fair
        value
        of the Company’s share-based awards under SFAS No. 123 (R), which is the same
        valuation technique previously used for pro forma disclosures under SFAS
        No.
        123. The Black-Scholes option valuation model was developed for use in
        estimating the fair value of traded options which have no vesting restrictions
        and are fully transferable. In addition, option valuation models require
        the
        input of highly subjective assumptions including the expected stock price
        volatility. Because the Company’s employee stock options have characteristics
        significantly different from those of traded options, and because changes
        in the
        subjective input assumptions can materially affect the fair value estimate,
        in
        management’s opinion, the existing models do not necessarily provide a reliable
        single measure of the fair value of its employee stock options.







7
 **Index**




The
      following table summarizes the assumptions used to compute the stock-based
      compensation expense and pro forma information for stock option grants issued
      during the three months and six months ended June 30, 2006 and 2005.





**Three
                months ended**
              **June
                30,**
            
            **Six
                months ended**
              **June
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Dividend
                yield
            
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %Forfeiture
                rate
            
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %Expected
                volatility
            
            
            40.6
            %
            
            42.9
            %
            
            40.6
            %
            
            42.6
            %Risk
                free interest rate
            
            
            5.0
            %
            
            4.0
            %
            
            5.0
            %
            
            4.1
            %Expected
                term, in years
            
            
            5.0
            
            
            9.3
            
            
            5.0
            
            
            9.3





Pursuant
      to the Company’s Credit Agreement (see Note 10), the Company is not permitted to
      pay any dividends and does not anticipate paying any cash dividends in the
      foreseeable future. Therefore, an expected dividend yield of zero is assumed
      for
      purposes of the Company’s Black Scholes calculations. Pre-vesting forfeiture
      rates are estimated based on the Company’s historical experience and
      expectations about future forfeitures. The
      Company has assumed a pre-vesting forfeiture rate of zero for the three months
      and six months ended June 30, 2006 because all options issued during these
      periods were to members of the Company’s Board of Directors who have
      historically exercised their options prior to expiration. Expected
      price volatility is determined using a weighted average of daily historical
      volatility of the Company’s stock price over the corresponding expected option
      life. The average risk-free interest rate is determined using the Federal
      Reserve nominal rates in effect as of the date of grant for U.S. Treasury
      zero-coupon bonds with maturities similar to those of the expected term of
      the
      share-based award being valued. The expected term of stock options is determined
      using historical data.





The
      weighted average grant date fair value of options granted during the three
      months and six months ended June 30, 2006 was $1.59 per option. The weighted
      average grant date fair value of options granted during the three months and
      six
      months ended June 30, 2005 was $2.08 and $2.09 per option, respectively.





***Stock-Based
      Employee Compensation Plans*** .
      At June
      30, 2006, the Company has two stock-based employee compensation plans: the
      1992
      Stock Option Plan (the “1992 Plan”) and the 1999 Stock Option Plan (the “1999
      Plan”).





The
      1992
      Plan was adopted on April 28, 1992 and, as amended, authorized the issuance
      of
      up to 4,800,000 shares of common stock to certain employees, consultants and
      directors of the Company under incentive and/or nonqualified options and/or
      alternate rights. An alternate right is defined as the right to receive an
      amount of cash or shares of stock having an aggregate market value equal to
      the
      appreciation in the market value of a stated number of shares of the Company’s
      common stock from the alternate right grant date to the exercise date. Options
      and/or rights under the 1992 Plan were granted through April 27, 2002 at
      prices not less than 100 percent of the market value at the date of grant.
      Options and/or rights become exercisable based upon a vesting schedule
      determined by the 1992 Plan Committee and become fully exercisable upon a change
      in control, as defined. Options expire not more than ten years from the date
      of
      grant and alternate rights expire at the discretion of the 1992 Plan Committee.
      At June 30, 2006, currently exercisable options for 821,806 shares were
      outstanding under the 1992 Plan. There were no alternate rights issued under
      the
      1992 Plan. The expiration of the 1992 Plan on April 27, 2002 does not affect
      options currently outstanding.





The
      1999
      Plan was approved by the shareholders on May 27, 1999, and as amended on May
      19,
      2004, authorizes the issuance of up to 5,345,000 shares of common stock to
      certain employees, consultants and directors of the Company under incentive
      and/or nonqualified options, stock appreciation rights (“SARs”) and other stock
      awards (collectively, “Stock Awards”). Stock Awards under the 1999 Plan may be
      granted at prices not less than 100 percent of the market value at the date
      of
      grant. Options and/or SARs become exercisable based upon a vesting schedule
      determined by the 1999 Plan Committee and become fully exercisable upon a change
      in control, as defined. Options expire not more than ten years from the date
      of
      grant and SARs and other stock awards expire at the discretion of the 1999
      Plan
      Committee. The 1999 Plan is unlimited in duration. At June 30, 2006, currently
      exercisable options for 3,218,750 shares were outstanding under the 1999 Plan.







8
 **Index**




On
      December 20, 2005, the Company accelerated the vesting of all unvested stock
      options previously awarded to the Company’s employees. The primary purpose of
      the accelerated vesting was to eliminate future compensation expense of
      approximately $1.6 million that the Company would have otherwise recognized
      in
      its consolidated statement of operations with respect to these options upon
      the
      adoption of SFAS 123(R) on January 1, 2006. As a result of this action, options
      to purchase approximately 950,000 shares of the Company’s common stock at
      exercise prices ranging from $1.90 to $4.72 per share and having a weighted
      average exercise price of $3.96 per share became exercisable immediately. The
      exercise prices and number of shares subject to the accelerated options were
      unchanged.





A
      summary
      of option activity during the six months ended June 30, 2006 is as follows:





**Shares**
            
            
            **Weighted
                Average**
              **Exercise
                Price**Outstanding
                - December 31, 2005
            
            
            4,144,306
            
            $
            2.96Granted
            
            
            17,000
            
            
            3.57Exercised
            
            
            (60,750
            )
            
            1.11Canceled
            
            
            (60,000
            )
            
            4.06Outstanding
                - June 30, 2006
            
            
            4,040,556
            
            $
            2.98





At
      June
      30, 2006 and December 31, 2005, exercisable options under the Company’s stock
      option plans were 4,040,556 and 4,144,306, respectively, at weighted average
      exercise prices of $2.98 and $2.96, respectively. At June 30, 2006, there were
      1,561,100 shares available for future grants under the Company’s stock option
      plans.




The
      following table summarizes information pertaining to options outstanding and
      exercisable at June 30, 2006:





**Range
                of**
              **Exercise**
              **Prices**
            
            **Number**
              **Outstanding**
            
            **Average**
              **Remaining**
              **Contractual**
              **Life
                (Years)**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Number**
              **Exercisable**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**$0.72
                - $1.50
            
            
            470,011
            
            
            4.8
            
            $
            1.33
            
            
            470,011
            
            $
            1.33$1.66
                - $2.28
            
            
            1,280,081
            
            
            5.1
            
            
            1.96
            
            
            1,280,081
            
            
            1.96$2.35
                - $3.59
            
            
            649,464
            
            
            5.1
            
            
            2.98
            
            
            649,464
            
            
            2.98$3.60
                - $3.99
            
            
            825,000
            
            
            7.9
            
            
            3.72
            
            
            825,000
            
            
            3.72$4.00
                - $5.02
            
            
            816,000
            
            
            7.3
            
            
            4.77
            
            
            816,000
            
            
            4.774,040,556
            
            
            6.1
            
            $
            2.98
            
            
            4,040,556
            
            $
            2.98





The
      aggregate intrinsic value of options outstanding and exercisable was
      approximately $4.2 million at June 30, 2006. The total intrinsic value of
      options exercised in the three months and six months ended June 30, 2006,
      determined as of the date of exercise, was $60,000 and $152,000, respectively.
      Cash received from option exercises for the three months and six months ended
      June 30, 2006 was $37,000 and $68,000, respectively.







9
 **Index**




***Employee
      Stock Purchase Plan*** .
      In
      March 1999, the Company adopted an Employee Stock Purchase Plan (the “1999
      ESPP”) which authorizes the issuance of up to 700,000 shares of common stock.
      Under the 1999 ESPP, eligible employees may contribute up to ten percent of
      their compensation toward the purchase of common stock at each year-end. The
      employee purchase price is derived from a formula based on fair market value
      of
      the Company’s common stock. Compensation cost associated with the rights granted
      under the 1999 ESPP is estimated based on fair market value. At June 30, 2006
      and December 31, 2005, there were 182,143 shares available for future issuance
      under the 1999 ESPP.





**4.**  **STOCK
      REPURCHASE PROGRAM**




In
      December 2005, the Board of Directors amended the Company’s existing stock
      repurchase program to authorize the repurchase of an aggregate of 2.0 million
      shares through December 31, 2006. During the three months and six months ended
      June 30, 2006, the Company repurchased 235,241 shares under this program for
      approximately $883,000, an average repurchase price of approximately $3.75
      per
      share. There were no shares repurchased under this program during the three
      months and six months ended June 30, 2005. As of June 30, 2006, the Company
      had
      repurchased approximately 1.6 million shares for an aggregate repurchase price
      of approximately $3.7 million.




**5.**  **ACQUISITION**




Effective
      March 1, 2006, Microtek acquired KMMS Holdings, Ltd. and its European
      manufacturing and distribution operations (collectively, “Samco”) for
      approximately $2.3 million in cash, including acquisition costs. Based on
      estimated fair values and other information currently available, the preliminary
      allocation of the total purchase price is summarized as follows (in thousands):





Purchase
                consideration in cash
            
            
            
            
            $
            2,274Allocated
                to:Accounts
                receivable
            
            $
            341Inventories
            
            
            774Property
                and equipment
            
            
            269Accounts
                payable and other accrued liabilities
            
            
            (623
            )Total
                allocation
            
            
            
            
            
            761Other
                intangible assets and goodwill
            
            
            
            
            $
            1,513





The
      Company is currently evaluating the fair value of the other assets acquired,
      principally other identifiable intangible assets and goodwill. The preliminary
      allocation of the total purchase price is subject to revision based on the
      final
      determination of these fair values.





The
      Samco
      acquisition was accounted for as a business combination pursuant to SFAS No.
      141, *Business
      Combinations* .
      Accordingly, Samco’s results of operations are reflected in the Company’s
      unaudited condensed consolidated financial statements from the acquisition
      date.
      The following unaudited pro forma financial information for the three months
      and
      six months ended June 30, 2006 and 2005 reflects the Company’s results of
      operations as if the Samco acquisition had been completed on January 1, 2005
      (in
      thousands, except per share data):





**Three
                months ended**
              **June
                30,**
            
            **Six
                months ended**
              **June
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**Net
                revenues
            
            $
            36,058
            
            $
            35,325
            
            $
            70,384
            
            $
            69,887Net
                income
            
            $
            2,155
            
            $
            2,295
            
            $
            4,484
            
            $
            4,492Net
                income per share - basic and diluted
            
            $
            0.05
            
            $
            0.05
            
            $
            0.10
            
            $
            0.10





The
      pro
      forma financial information above is based on estimates and assumptions which
      management believes are reasonable. However, the pro forma results are not
      necessarily indicative of the operating results that would have occurred had
      the
      Samco acquisition been consummated as of the date indicated, nor are they
      necessarily indicative of future operating results.






10
 **Index**




**6.**  **LICENSE
      AGREEMENT**





In
      September 2004, the Company entered into an agreement (the “License Agreement”)
      which grants to Eastern Technologies, Inc. (“ETI”) a worldwide exclusive license
      to manufacture, use and sell the Company’s OREX materials and processing
      technology in the nuclear industry and homeland security industry, and for
      certain other industrial applications. Under the terms of the License Agreement,
      the Company will receive license royalties equal to $75,000 per quarter for
      the
      first three years of the agreement. Thereafter and generally until the
      expiration of the underlying patents related to the products or services
      generating the subject royalties, the Company will receive license royalties
      equal to the greater of: (i) generally 5% of net sales, as defined in the
      agreement, or (ii) $300,000 per year. The royalty rate is subject to downward
      adjustment in certain events with respect to net sales of certain products.
      The
      Company also entered into an exclusive three-year supply agreement (the “Supply
      Agreement”) under which the Company has agreed to provide certain sourcing and
      supply chain management services to ETI, and ETI has agreed to purchase a total
      of approximately $4.8 million of inventory over the term of the Supply
      Agreement. For these services, the Company will receive management fees totaling
      $2.7 million, $600,000 of which was received at the signing of the Supply
      Agreement. The balance of the management fees are payable in quarterly
      installments of $175,000 beginning December 31, 2004 and at the end of each
      quarter thereafter until September 30, 2007. The cash payment of $600,000 was
      recorded as deferred revenue (included in accrued expenses, a current liability)
      upon receipt. This amount, together with all future management fees collected
      from ETI, will be recognized into income ratably over the term of the Supply
      Agreement as nuclear finished goods inventories on hand are sold to ETI. At
      June
      30, 2006 and December 31, 2005, amounts recognized into income exceeded cash
      receipts from ETI by approximately $465,000 and $618,000, respectively, which
      amounts were recorded in the accompanying
      unaudited condensed consolidated balance sheet in
      prepaid expenses and other current assets.





**7.**  **SALE
      OF INVENTORIES TO RELATED PARTY**





In
      September 2004, the Company entered into an agreement with Global Resources
      International, Inc. (“GRI”), a related party as described in Note 8 below, for
      the sale of certain of its raw material inventories used in the manufacture
      of
      finished goods for sale to the nuclear industry. At closing, the Company
      received cash proceeds of $200,000 and a promissory note in the amount of $1.051
      million. The promissory note bears interest at 5% and is to be repaid ratably
      as
      the raw material inventories purchased by GRI in the transaction are consumed
      by
      GRI, with payments of principal in an amount not less than 25% of the original
      principal amount per year. The total gain on the sale of these raw material
      inventories approximated $467,000. Of this total gain, approximately $91,000,
      an
      amount commensurate with the Company’s relative ownership interest in GRI, was
      deferred and is being recognized into income as the raw material inventories
      purchased by GRI in the transaction are sold by GRI. Approximately $10,000
      and
      $26,000 of this deferred gain was recognized into income during the three months
      and six months ended June 30, 2005. During the three months and six months
      ended
      June 30, 2006, approximately $2,000 of this deferred gain was recognized into
      income. At June 30, 2006, the deferred gain to be recognized into income in
      future periods amounted to approximately $11,000.





**8.**  **INVESTMENT
      IN AFFILIATED COMPANY**





In
      May
      2000, the Company and certain of its affiliates and employees organized GRI.
      From its manufacturing facilities located in China, GRI provides certain
      material sourcing and manufacturing of various Microtek’s products where such
      supply arrangements are advantageous to Microtek based on favorable pricing
      and
      other considerations. The Company and a non-executive member of the Company’s
      management own 19.5 percent and 30 percent, respectively, of GRI. Accordingly,
      the Company accounts for its investment in GRI under the equity method. The
      Company’s investment in GRI was approximately $625,000 and $502,000 at June 30,
      2006 and December 31, 2005, respectively. The Company recorded $90,000 and
      $123,000 of income during the three months and six months ended June 30, 2006,
      respectively, and $29,000 and $135,000 of income during the three months and
      six
      months ended June 30, 2005, respectively, related to this investment.






11
 **Index**





**9.**  **INVENTORIES**





Inventories
      are stated at the lower of cost or market. The first-in first-out (“FIFO”)
      valuation method is used to determine the cost of inventories. Cost includes
      material, labor and manufacturing overhead for manufactured and assembled goods
      and materials only for goods purchased for resale. Inventories are summarized
      by
      major classification at June 30, 2006 and December 31, 2005 as follows (in
      thousands):





**June
                30, 2006**
            
            **December
                31, 2005**Raw
                materials
            
            $
            14,755
            
            $
            12,381Work-in-progress
            
            
            2,244
            
            
            1,716Finished
                goods
            
            
            19,876
            
            
            16,946Total
                inventories
            
            $
            36,875
            
            $
            31,043





At June
      30,
      2006 and December 31, 2005, OREX inventories approximated $680 thousand and
      $1.0
      million, respectively, and consisted primarily of finished goods.





**10.**  **LONG-TERM
      DEBT**





*The
      Credit Agreement.* The
      Company maintains a credit agreement with a Bank (the “Credit Agreement”). As
      amended to date, the Credit Agreement provides for a $23.5 million revolving
      credit facility, which matures on June 30, 2008. Borrowing availability under
      the revolving credit facility is based on the lesser of (i) a percentage of
      eligible accounts receivable and inventory or (ii) $23.5 million, less any
      outstanding letters of credit issued under the Credit Agreement. Revolving
      credit borrowings bear interest at a floating rate approximating the Bank’s
      prime rate plus an interest margin (8.5% at June 30, 2006). Borrowing
      availability under the revolving facility at June 30, 2006 and December 31,
      2005
      totaled $16.5 million and $15.4 million, respectively. There were no outstanding
      borrowings under the revolving credit facility as of June 30, 2006. Outstanding
      borrowings under the revolving credit facility totaled $1.2 million at December
      31, 2005. Borrowings under the Credit Agreement are collateralized by the
      Company’s accounts receivable, inventory, equipment, the Company’s stock of its
      subsidiaries and certain of the Company’s plants and offices.





The
      Credit Agreement contains certain restrictive covenants, including the
      maintenance of certain financial ratios, and places limitations on acquisitions,
      dispositions, capital expenditures and additional indebtedness. In addition,
      the
      Company is not permitted to pay any dividends. At
      June
      30, 2006 and December 31, 2005, the Company was in compliance with its financial
      covenants under the Credit Agreement.





The
      Credit Agreement provides for the issuance of up to $1.0 million in letters
      of
      credit. There were no outstanding letters of credit at June 30, 2006 or December
      31, 2005. The Credit Agreement also provides for a fee of 0.3% per annum on
      the
      unused commitment, an annual collateral monitoring fee of $35,000 and an
      outstanding letter of credit fee of 2.0% per annum.





*Other
      Long-Term Debt.* The
      Company is obligated under certain long-term lease arrangements and notes
      payable which aggregated $44,000 and $145,000 at June 30, 2006 and December
      31,
      2005, respectively. In addition, in conjunction with the acquisition of
      substantially all of the assets of Plasco, Inc. in November 2003, the Company
      signed a promissory note in the original principal amount of $1.1 million.
      This
      principal amount was reduced in December 2003 to $866,000 as a result of
      adjustments made to the original purchase price. This note payable, as adjusted,
      bears interest at 6%, is payable in quarterly installments of principal and
      interest beginning in March 2004 through October 2006, and amounted to $147,000
      and $293,000 at June 30, 2006 and December 31, 2005, respectively. This note
      payable arrangement is subordinated to the Credit Agreement.





The
      carrying value of long-term debt at June 30, 2006 and December 31, 2005
      approximates fair value based on interest rates that are believed to be
      available to the Company for debt with similar prepayment provisions provided
      for in the existing debt agreements.





12
 **Index**




**11.**  **EARNINGS
      PER SHARE**




Earnings
      per share is calculated in accordance with SFAS No. 128, *Earnings
      Per Share* ,
      which
      requires dual presentation of basic and diluted earnings per share on the face
      of the income statement for all entities with complex capital structures. Basic
      per
      share income is computed using the weighted average number of common shares
      outstanding for the period. Diluted per share income is computed including
      the
      dilutive effect of all contingently issuable shares. Dilutive potential common shares are calculated
      in
      accordance with the treasury stock method, which assumes that proceeds from
      the
      exercise of all options are used to repurchase common shares at market value.
      The number of shares remaining after the exercise proceeds are exhausted
      represents the potentially dilutive effect of the options. The following table
      reflects the weighted average number of shares used to calculate basic and
      diluted earnings per share for the periods presented (in
      thousands):





**Three
                months ended**
              **June
                30,**
            
            **Six
                months ended**
              **June
                30,****2006**
            **2005**
            
            **2006**
            **2005**Basic
                Shares
            
            43,639
            43,301
            
            43,656
            43,273Dilutive
                Shares (due to stock options)
            
            1,029
            1,131
            
            991
            1,167Diluted
                Shares
            
            44,668
            44,432
            
            44,647
            44,440





For
      the
      three months and six months ended June 30, 2006, options to purchase 1.1 million
      and 1.6 million shares, respectively, were not included in the computation
      of
      diluted net income per share because the exercise price of the options was
      greater than the average market price of the common shares, and therefore,
      the
      effect would be antidilutive. For the three months and six months ended June
      30,
      2005, there were 1.8 million and 1.1 million antidilutive shares,
      respectively.




**12.**  **GEOGRAPHIC
        CONCENTRATIONS**




A
      significant portion of the Company’s products are manufactured at its facilities
      in the Dominican Republic, Mexico, the Netherlands and Malta or at GRI’s
      facilities in China. Included in the Company’s consolidated balance sheet at
      June 30, 2006 and December 31, 2005 are the net assets of the Company’s sales,
      manufacturing and distribution facilities located in the United Kingdom and
      the
      Dominican Republic which totaled $18.8 million and $17.4 million, respectively.
      Additionally, at June 30, 2006 and December 31, 2005, the net assets of the
      Company’s sales, manufacturing and distribution operations in the Netherlands,
      Malta and Germany totaled $16.3 million and $13.2 million, respectively. The
      Company’s Dominican Republic and Mexico facilities are engaged in manufacturing
      operations only and do not sell products to external customers. Total
      international sales by the Company were $9.7 million and $18.5 million for
      the
      three months and six months ended June 30, 2006, respectively, and $8.9 million
      and $17.3 million for the three months and six months ended June 30, 2005,
      respectively.




The
      Company’s operations are subject to various political, economic and other risks
      and uncertainties inherent in the countries in which the Company operates.
      Among
      other risks, the Company’s operations are subject to the risks of restrictions
      on transfer of funds; export duties, quotas, and embargoes; domestic and
      international customs and tariffs; changing taxation policies; foreign exchange
      restrictions; and political conditions and governmental
      regulations.




**13.**  **COMMITMENTS
      AND CONTINGENCIES**





The
      Company is involved in routine litigation and proceedings in the ordinary course
      of business. Management believes that pending litigation matters will not have
      a
      material adverse effect on the Company’s consolidated financial position or
      results of operations.





**14.** **SUBSEQUENT
      EVENT**





Effective
      July 1, 2006, Microtek acquired substantially all of the assets of Ceres
      Medical, LLC (Ceres Medical), a marketer of a small line of products sold
      primarily to cardiology and interventional radiology specialties. The purchase
      price of approximately $485,000 in cash, including certain acquisition costs,
      is
      expected to be allocated to the assets acquired, primarily accounts receivable,
      inventories and identifiable intangibles, based on those assets’ respective
      estimated fair values, with the excess allocated to goodwill. The terms of
      the
      related purchase agreement also provide for additional cash consideration up
      to
      $550,000 if future contribution margins from the acquired product line exceed
      certain levels, as defined in the agreement, through 2011. The additional
      consideration will be recorded when it is determinable that the payment of
      such
      amounts is probable and is expected to result in additional goodwill.





13
 **Index**




**15.**  **NEWLY
      ISSUED ACCOUNTING STANDARD**





In
      June
      2006, the Financial Accounting Standards Board issued Interpretation No. 48,
      “Accounting for Uncertainty in Income Taxes - An interpretation of FASB
      Statement No. 109,” or FIN 48, which clarifies the accounting and disclosure
      requirements for uncertainty in tax positions, as defined. We are currently
      evaluating the provisions of FIN 48, which is effective for fiscal years
      beginning after December 15, 2006.





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





**General**





The
      Company conducts substantially all of its operations through its subsidiary,
      Microtek Medical, Inc. ("Microtek"). OREX Technologies International ("OTI"),
      a
      division of the Company, focused on the commercialization of the Company's
      OREX
      degradable products and disposal technologies to the nuclear power generating
      industry until this business was licensed to a third party in September
      2004.





Microtek,
      a market leading healthcare company within its area of focus, manufactures
      and
      sells infection control products, fluid control products, safety products and
      other products to healthcare professionals for use in environments such as
      operating rooms and ambulatory surgical centers. Microtek's core product line
      consists of a large variety of disposable equipment drapes and specialty patient
      drapes. Microtek has established a broad distribution system through multiple
      channels including distributors, directly through its own sales force, original
      equipment manufacturers, and private label customers. Additionally, Microtek
      has
      a strong presence as a branded component supplier to custom procedure tray
      companies. Through its acquisition of certain businesses of International
      Medical Products, B.V. and affiliates (collectively, “IMP”) on May 28, 2004,
      Microtek added to its operations the development, manufacture, marketing and
      distribution in Europe of high quality dip-molded medical devices (primarily
      ultrasound probe covers), other equipment covers, cardiac thoracic drain
      systems, gynecological devices and wound care products. Microtek’s acquisition
      in March 2006 of the European manufacturing and distribution operations of
      Samco
      added additional European manufacturing capacity, primarily in Malta, and an
      expanded OEM sales presence in Germany.





OTI’s
      most recent efforts have focused primarily on the commercialization of its
      OREX
      degradable products and technology for disposing of such products in the nuclear
      power generating industry. In September 2004, the Company entered into an
      agreement (the “License Agreement”) which grants to Eastern Technologies, Inc.
      (“ETI”) a worldwide exclusive license to manufacture, use and sell the Company’s
      OREX materials and processing technology in the nuclear industry and the
      homeland security industry and for certain other industrial applications.
      Concurrent with the signing of the License Agreement, the Company also entered
      into an exclusive three-year supply agreement (the “Supply Agreement”) under
      which the Company has agreed to provide certain sourcing and supply chain
      management services and to sell a total of approximately $4.8 million of
      inventory to ETI over the term of the Supply Agreement.





The
      Company provides healthcare professionals with innovative product solutions
      that
      encompass a high level of patient care and prevention of cross infection. The
      Company intends to maintain this business by continually improving its existing
      capabilities and simultaneously developing and acquiring new business
      opportunities while maintaining its customer focus and providing the highest
      levels of customer support. The Company seeks to increase sales and earnings
      from its infection control business by completing strategic acquisitions,
      enhancing marketing and distribution efforts both domestically and
      internationally, introducing new products, increasing direct sales
      representation, employing tele-sales agents for added sales coverage, and
      capitalizing on low-cost manufacturing opportunities primarily in the Dominican
      Republic and China.





14
 **Index**




**Results
      of Operations**





The
      following tables set forth certain unaudited income statement data, including
      amounts expressed as a percentage of net revenues, for the three months and
      six
      months ended June 30, 2006 and 2005 (in thousands):




**Three
                  months ended**
                **June
                  30, 2006**
              
              **Three
                  months ended**
                **June
                  30, 2005****Amount
                  ($)**
              
              **%
                  of Net Revenues**
              
              **Amount
                  ($)**
              
              **%
                  of Net Revenues**Net
                  revenues
              
              $
              36,058
              
              
              100.0
              %
              $
              34,506
              
              
              100.0
              %Gross
                  profit
              
              
              14,072
              
              
              39.0
              %
              
              13,474
              
              
              39.0
              %Selling,
                  general and administrative expenses
              
              
              10,585
              
              
              29.4
              %
              
              10,384
              
              
              30.1
              %Income
                  from operations
              
              
              3,088
              
              
              8.6
              %
              
              2,479
              
              
              7.2
              %Net
                  income
              
              $
              2,155
              
              
              6.0
              %
              $
              2,199
              
              
              6.4
              %


**Six
                months ended**
              **June
                30, 2006**
            
            **Six
                months ended**
              **June
                30, 2005****Amount
                ($)**
            
            **%
                of Net Revenues**
            
            **Amount
                ($)**
            
            **%
                of Net Revenues**Net
                revenues
            
            $
            69,741
            
            
            100.0
            %
            $
            68,249
            
            
            100.0
            %Gross
                profit
            
            
            27,710
            
            
            39.7
            %
            
            27,218
            
            
            39.9
            %Selling,
                general and administrative expenses
            
            
            20,542
            
            
            29.5
            %
            
            20,933
            
            
            30.7
            %Income
                from operations
            
            
            6,411
            
            
            9.2
            %
            
            5,175
            
            
            7.6
            %Net
                income
            
            $
            4,405
            
            
            6.3
            %
            $
            4,300
            
            
            6.3
            %





**Three
      and Six Months Ended June 30, 2006 Compared to Three and Six Months Ended June
      30, 2005**





**Net
      Revenues.** Consolidated net revenues for the three months and six months ended June 30,
      2006 (the “2006 Quarter” and the “2006 Period”, respectively) of $36.1 million
      and $69.7 million, respectively, increased by approximately $1.6 million, or
      4.5
      percent, and $1.5 million, or 2.2 percent, over consolidated net revenues of
      $34.5 million reported for the three months ended June 30, 2005 (the “2005
      Quarter”) and $68.2 million reported for the six months ended June 30, 2005 (the
“2005 Period”). For the 2006 Quarter and 2006 Period, Microtek’s net revenues
      totaled $35.7 million and $69.1 million, respectively, up from $33.2 million
      and
      $65.3 million in the respective 2005 quarter and year-to-date periods. Excluding
      revenue contribution from the Samco transaction (which was approximately $1.0
      million in the 2006 Quarter and $1.5 million in the 2006 Period), Microtek’s net
      revenues increased approximately $1.5 million and $2.4 million, respectively,
      representing growth of approximately 4.4 percent and 3.7 percent over the 2005
      Quarter and 2005 Period, respectively.





The
      following tables depict Microtek’s domestic and international revenues and the
      relative percentage of each to Microtek’s total revenues for the 2006 Quarter
      and 2005 Quarter and for the 2006 Period and 2005 Period (in
      millions):





**Three
                months ended**
              **June
                30, 2006**
            
            **Three
                months ended**
              **June
                30, 2005********Amount**
            
            ******%
                of Total**
            
            ******Amount**
            
            ******%
                of Total**Domestic
            
            $
            26.0
            
            
            72.7
            %
            $
            24.3
            
            
            73.3
            %International
            
            
            9.7
            
            
            27.3
            %
            
            8.9
            
            
            26.7
            %Total
            
            $
            35.7
            
            
            100.0
            %
            $
            33.2
            
            
            100.0
            %








15
 **Index**


**Six
                months ended**
              **June
                30, 2006**
            
            **Six
                months ended**
              **June
                30, 2005********Amount**
            
            ******%
                of Total**
            
            ******Amount**
            
            ******%
                of Total**Domestic
            
            $
            50.6
            
            
            73.2
            %
            $
            48.0
            
            
            73.5
            %International
            
            
            18.5
            
            
            26.8
            %
            
            17.3
            
            
            26.5
            %Total
            
            $
            69.1
            
            
            100.0
            %
            $
            65.3
            
            
            100.0
            %





Microtek’s
      domestic revenues are generated through two primary channels or customer
      categories: domestic branded and contract manufacturing (commonly referred
      to as
      OEM). Domestic branded revenues were 63.1 percent and OEM revenues were 36.9
      percent of total domestic revenues in the 2006 Quarter, as compared to 63.0
      percent and 37.0 percent, respectively, in the 2005 Quarter. For the 2006
      Period, domestic branded revenues were 63.8 percent and OEM revenues were 36.2
      percent of total domestic revenues, as compared to 64.5 percent and 35.5
      percent, respectively, in the 2005 Period. Included in the Company’s OEM
      revenues are sales of products to “non-branded” or private label customers.





Domestic
      branded revenues in the 2006 Quarter and 2006 Period increased by $1.1 million
      (or 6.9 percent) and $1.4 million (or 4.4 percent), respectively, as compared
      to
      the 2005 Quarter and 2005 Period. These increases are primarily the result
      of a
      $630 thousand, or 24.7 percent, increase in CleanOp product revenues and an
      increase in safety product sales of approximately $301 thousand in the 2006
      Quarter and an increase in CleanOp product revenues of approximately $988
      thousand, or 19.2 percent, in the 2006 Period. For the 2006 Quarter and 2006
      Period, OEM revenues increased by $579 thousand, (or 6.4 percent) and $1.3
      million (or 7.7 percent), respectively, as a result of substantial improvements
      in private label revenues which offset lower woundcare and triad product
      revenues in the 2006 Quarter and 2006 Period, as compared to the same 2005
      periods. Overall, Microtek’s total domestic revenues in the 2006 Quarter and
      2006 Period increased by approximately $1.7 million, or 6.7 percent, and $2.6
      million, or 5.6 percent, from the 2005 Quarter and 2005 Period,
      respectively.





Microtek’s
      international net revenues for the 2006 Quarter and 2006 Period increased by
      approximately $870 thousand, or 9.8 percent, over the 2005 Quarter and by
      approximately $1.2 million, or 7.0 percent, over the 2005 Period to $9.7 million
      and $18.5 million, respectively, primarily as a result of the revenues related
      to the March 2006 acquisition of Samco.





OTI’s
      net
      revenues, consisting primarily of sales of finished goods inventories to ETI
      and
      royalties under the license agreement of $75 thousand per quarter, totaled $314
      thousand and $601 thousand in the 2006 Quarter and 2006 Period, respectively,
      as
      compared to $1.3 million and $3.0 million in the 2005 Quarter and 2005 Period,
      respectively. The decreases in OTI’s net revenues of $960 thousand and $2.4
      million in the 2006 Quarter and 2006 Period, respectively, relate to the
      anticipated slowing of sales to ETI as the Company’s finished goods inventories
      have been depleted since the inception of the license agreement. As a result
      of
      the September 2004 licensing transaction, the Company expects that future OTI
      division revenues will consist of license royalties totaling $75 thousand per
      quarter through September 2007 and sales of finished goods inventories to ETI,
      including a pro rata share of management fee income, aggregating approximately
      $7.5 million over the three-year term of the Supply Agreement.





**Gross
      Margin.** The
      Company’s consolidated gross profit was $14.1 million, or 39.0 percent of net
      revenues, in the 2006 Quarter, as compared to $13.5 million, or 39.0 percent
      of
      net revenues, for the 2005 Quarter. For the 2006 Period, the Company’s
      consolidated gross profit was $27.7 million, or 39.7 percent of net revenues,
      versus $27.2 million, or 39.9 percent of net revenues for the 2005 Period.
      The
      Company attributes its ability to maintain its gross margin percentage for
      the
      2006 Quarter and 2006 Period at approximately the same percentage as the 2005
      Quarter and 2005 Period, respectively, to improved productivity and cost control
      and other manufacturing process improvements which have helped mitigate the
      impacts of changes in the Company’s sales mix and rising prices for fuel and
      other petroleum-based products which result in increases in raw material and
      freight costs.





**Operating
      Expenses.** Consolidated operating expenses for the 2006 Quarter and the 2006 Period of
      $11.0 million and $21.3 million, respectively, represented 30.5 percent of
      net
      revenues, as compared to consolidated operating expenses of $10.8 million (31.4
      percent of net revenues) and $21.9 million (32.1 percent of net revenues) in
      the
      2005 Quarter and 2005 Period, respectively.





16
 **Index**




Consolidated
      selling, general and administrative (“SG&A”) expenses in the 2006 Quarter
      and 2006 Period were $10.6 million and $20.5 million, respectively, as compared
      to $10.4 million in the 2005 Quarter and $20.9 million in the 2005 Period.
      As a
      percentage of net revenues, the Company’s consolidated SG&A expenses were
      29.4 percent in the 2006 Quarter and 29.5 percent in the 2006 Period, as
      compared to 30.1 percent and 30.7 percent in the 2005 Quarter and 2005 Period,
      respectively.





Microtek’s
      SG&A expenses increased by $214 thousand in the 2006 Quarter and decreased
      by $357 thousand in the 2006 Period, versus the comparable 2005 periods. For
      the
      2006 Quarter and 2006 Periods, decreases in domestic SG&A expenses of $359
      thousand and $1.2 million, respectively, were offset by higher SG&A expenses
      of the Company’s Netherlands, Malta and Germany operations of approximately $573
      thousand in the 2006 Quarter and approximately $882 thousand in the 2006 Period.
      Domestically, Microtek’s SG&A expense reductions were realized primarily as
      a result of the second quarter 2005 closure of the Company’s Gurnee, Illinois
      facilities (resulted in savings of approximately $425 thousand and $854 thousand
      in the 2006 Quarter and 2006 Period, respectively) and from the 2005 realignment
      of the Company’s domestic branded sales and marketing force, net of increased
      selling costs associated with the Company’s increased revenues (resulted in a
      decrease in sales and marketing expenses of approximately $285 thousand and
      $851
      thousand for the 2006 Quarter and 2006 Period, respectively). Offsetting these
      SG&A expense savings were increases in distribution and general and
      administrative expenses (primarily variable distribution freight, general and
      administrative salaries and benefits and professional fees) of $351 thousand
      and
      $466 thousand in the 2006 Quarter and 2006 Period, respectively. The increases
      in SG&A expenses of the Company’s Netherlands, Malta and Germany operations
      totaling $572 thousand and $882 thousand in the 2006 Quarter and 2006 Period,
      respectively, resulted primarily from additional investments in the Company’s
      sales, marketing and administrative infrastructure in the Netherlands during
      2006 and from SG&A expenses in the 2006 Quarter and 2006 Period of
      approximately $281 thousand and $427 thousand, respectively, related to the
      Samco businesses which were acquired in March 2006.





SG&A
      expenses of the Company’s OTI division, consisting primarily of franchise taxes
      and miscellaneous administrative costs, totaled $18 thousand and $33 thousand
      in
      the 2006 Quarter and 2006 Period, respectively, a decrease of approximately
      $13
      thousand and $35 thousand as compared to the 2005 Quarter and 2005 Period,
      respectively.





Consolidated
      research and development expenses of $145 thousand and $289 thousand for the
      2006 Quarter and 2006 Period, respectively, decreased from $218 thousand in
      the
      2005 Quarter and $471 thousand in the 2005 Period primarily as a result of
      the
      Company’s more focused research and development program which has reduced
      spending for Microtek’s research and development activities by approximately $34
      thousand in the 2006 Quarter and $118 thousand in the 2006 Period, as compared
      to the same 2005 periods. OTI’s research and development expenses, consisting
      primarily of expenses related to maintenance and protection of OTI’s
      intellectual property, decreased by approximately $39 thousand and $64 thousand
      in the 2006 Quarter and 2006 Period, respectively, as compared to the same
      2005
      periods.





Consolidated
      amortization of intangibles in the 2006 Quarter was $254 thousand, up from
      $237
      thousand in the 2005 Quarter primarily as a result of amortization expense
      associated with certain intangibles acquired in the March 2006 Samco
      acquisition. For the 2006 Period, consolidated amortization expense decreased
      $15 thousand from the 2005 Period to $468 thousand as the impact of amortization
      expense associated with the Samco acquisition intangibles was offset by the
      fact
      that certain of Microtek’s intangibles, primarily patent related expenses, are
      now fully amortized.





**Income
      from Operations.** Consolidated income from operations for the 2006 Quarter improved 24.6 percent
      to $3.1 million, or 8.6 percent of net revenues, versus $2.5 million, or 7.2
      percent of net revenues, in the 2005 Quarter. For the 2006 Quarter, Microtek’s
      income from operations was approximately $3.0 million, a 44.3 percent
      improvement over income from operations of $2.1 million recorded in the 2005
      Quarter. The Company’s OTI division reported income from operations in the 2006
      Quarter of $78 thousand, compared to income from operations of $393 thousand
      in
      the 2005 Quarter.





For
      the
      2006 Period, consolidated income from operations improved 23.9 percent to $6.4
      million, or 9.2 percent of net revenues, versus $5.2 million, or 7.6 percent
      of
      net revenues, in the 2005 Period. Microtek’s income from operations for the 2006
      Period was approximately $6.3 million, a 48.9 percent improvement over income
      from operations of $4.2 million in the 2005 Period. OTI’s income from operations
      for the 2006 Period totaled $126 thousand, compared to income from operations
      of
      $954 thousand in the 2005 Period.





17
 **Index**




**Interest
      Expense and Interest Income.** Consolidated
      interest expense for the 2006 Quarter and 2006 Period was $10 thousand and
      $21
      thousand, respectively, as compared to $91 thousand in the 2005 Quarter and
      $168
      thousand in the 2005 Period. The decreases in consolidated interest expense
      in
      the 2006 Quarter and 2006 Period resulted primarily from lower average
      borrowings under the Company’s Credit Agreement. Interest income of $105
      thousand and $199 thousand in the 2006 Quarter and 2006 Period, respectively,
      increased from $64 thousand in the 2005 Quarter and $82 thousand in the 2005
      Period as a result of higher interest rates applicable to the Company’s cash and
      cash equivalents, higher average cash and cash equivalent balances and interest
      income attributable to the GRI promissory note related to the September 2004
      sale of certain raw material inventories.





**Other
      Income/Expense, Net.** Other
      income and expense include the Company’s equity in earnings of its investee,
      GRI, and foreign currency exchange gains and losses resulting from the
      translation of certain intercompany transactions of the Company’s Netherlands
      subsidiaries which were denominated in a currency other than the functional
      currency of those subsidiaries. For the 2005 Quarter and 2005 Period, the
      Company recorded foreign currency exchange losses of approximately $46 thousand
      and $423 thousand, respectively. There were no such foreign currency exchange
      losses in the 2006 Quarter and 2006 Period. Changes made to the structure of
      these intercompany transactions during the second quarter of 2005 have
      significantly minimized the occurrence of these foreign currency exchange losses
      in future periods. In the 2006 Quarter and 2006 Period, the Company’s equity in
      earnings of its investee, GRI, were $90 thousand and $123 thousand,
      respectively, as compared to $29 thousand for the 2005 Quarter and $135 thousand
      for the 2005 Period.





**Income
      Taxes.** The
      Company’s provision for income taxes in the 2006 Quarter and 2006 Period
      reflects income tax expense of $1.1 million and $2.3 million, respectively,
      consisting of current and deferred Federal, state and foreign income tax
      expense. For the 2005 Quarter and 2005 Period, the Company’s provision for
      income taxes reflects income tax expense of $236 thousand and $501 thousand,
      respectively, consisting only of current state and foreign income taxes.





The
      Company has significant net operating loss carryforwards (“NOL’s”) for Federal
      and state income tax purposes. Until the third quarter of 2005, the Company
      had
      recorded a valuation allowance with respect to a portion of these NOL’s. As
      described in the discussion of the Company’s critical accounting policies
      contained in its Annual Report, the Company reviews on a quarterly basis its
      estimates of future taxable income over the period during which these NOL’s are
      scheduled to expire to determine the amount of valuation allowance necessary,
      if
      any. This review at the end of the third quarter of 2005 resulted in the
      elimination of the Company’s valuation allowance with respect to its NOL’s for
      Federal income tax purposes. Beginning with the fourth quarter of 2005, the
      Company began to record an expense for Federal income taxes in its quarterly
      financial statements, which results in recording income tax expenses at higher
      amounts than previously recorded by the Company. The Company, however, continues
      to offset its obligation to pay Federal income taxes with its Federal NOL’s
      which will reduce the Company’s cash payments for income taxes substantially
      below the amount which the Company is required to record for its income tax
      expenses in its financial statements.





**Net
      Income.** The
      resulting net income for the 2006 Quarter and 2006 Period was $2.2 million,
      or
      $0.05 per diluted share, and $4.4 million, or $0.10 per diluted share,
      respectively. Net income for the 2005 Quarter and 2005 Period was $2.2 million,
      or $0.05 per diluted share, and $4.3 million, or $0.10 per diluted share,
      respectively.





**Liquidity
      and Capital Resources**





As
      of
      June 30, 2006 and December 31, 2005, the Company’s cash and cash equivalents
      totaled $15.1 million and $14.8 million, respectively. The Company’s cash flow
      activity in the 2006 Period and 2005 Period was as follows (in
      thousands):





**Six
                months ended June 30,****2006**
            
            **2005**Cash
                provided by operating activities
            
            $
            6,775
            
            $
            3,046Cash
                used in investing activities
            
            
            (3,099
            )
            
            (458
            )Cash
                used in financing activities
            
            
            (3,594
            )
            
            (3,748
            )





18
 **Index**




The
      Company’s principal sources of liquidity have been net cash from operating
      activities and borrowings under the Company’s Credit Agreement. The Company’s
      liquidity requirements arise primarily from the funding of the Company’s working
      capital needs, obligations under the indebtedness incurred in connection with
      acquisitions and capital investment in property and equipment.





During
      the 2006 Period, the Company’s operating activities generated cash of
      approximately $6.8 million and consisted primarily of net income from
      operations, net of deferred income taxes, depreciation and amortization of
      approximately $8.0 million, an increase in accounts payable of $2.4 million,
      an
      increase in accrued compensation of $985 thousand, an increase in other
      liabilities of $678 thousand and a decrease in prepaid expenses and other assets
      of $285 thousand. Offsetting these sources of cash were a $535 thousand increase
      in accounts receivable, net of allowances, and an increase of $4.9 million
      in
      inventories. The increase in inventories in the 2006 Period was due to certain
      purchasing strategies employed by the Company to ensure a continuous supply
      of
      certain inventory items as the Company seeks to transfer additional
      manufacturing processes offshore to the Dominican Republic and to China.





During
      the 2005 Period, the Company’s operating activities generated cash of $3.0
      million and consisted primarily of net income from operations, net of deferred
      taxes, depreciation and amortization, of approximately $6.0 million and
      increases in accounts payable of approximately $756 thousand. Offsetting these
      sources of cash were a $1.2 million increase in accounts receivable, net of
      allowances, an increase in other assets of approximately $445 thousand,
      decreases in accrued compensation and other liabilities of $955 thousand and
      a
      $974 thousand increase in inventories.





Cash
      used
      in investing activities in the 2006 Period totaled $3.1 million as a result
      of
      cash consideration of approximately $2.3 million for the Samco acquisition
      and
      purchases of capital property and equipment of $831 thousand. Investing
      activities in the 2005 Period used $458 thousand in cash which was the net
      effect of purchases of capital property and equipment of $673 thousand and
      proceeds from dispositions of approximately $215 thousand.





During
      the 2006 Period, financing activities used approximately $3.6 million in cash.
      Financing cash outflows in the 2006 Period included net repayments of borrowings
      under the Company’s Credit Agreement of $1.2 million, repayments of other
      long-term debt agreements of $247 thousand, a decrease in the Company’s bank
      overdraft of approximately $1.8 million and repurchases of treasury stock of
      approximately $883 thousand. Financing cash inflows included proceeds from
      the
      exercise of stock options and other stock issuances of $531 thousand. Cash
      used
      in financing activities for the 2005 Period of $3.7 million consisted of net
      repayments of borrowings under the Company’s Credit Agreement of $2.5 million,
      repayments of other long-term debt agreements of $247 thousand and a decrease
      in
      the Company’s bank overdraft of approximately $1.5 million, offset by
      approximately $533 thousand from the exercise of stock options and other stock
      issuances.





The
      Company maintains a $23.5 million credit agreement (as amended to date, the
      “Credit Agreement”) with the JP Morgan Chase Bank (the “Bank”), consisting of a
      revolving credit facility maturing on June 30, 2008. Borrowing availability
      under the revolving credit facility is based on the lesser of (i) a percentage
      of eligible accounts receivable and inventories or (ii) $23.5 million, less
      any
      outstanding letters of credit issued under the Credit Agreement. There were
      no
      outstanding borrowings under the revolving credit facility at June 30, 2006.
      Outstanding borrowings under the revolving credit facility totaled $1.2 million
      at December 31, 2005. As of June 30, 2006, the Company had total borrowing
      availability under the revolving facility of $16.5 million. As of August 4,
      2006, the Company had no borrowings under the revolving facility and a total
      borrowing availability of approximately $17.6 million. Revolving credit
      borrowings bear interest at a floating rate approximating the Bank’s prime rate
      plus an interest margin (8.5% at August 4, 2006). At June 30, 2006, the Company
      was in compliance with its financial covenants under the Credit
      Agreement.





Based
      on
      its current business plan, the Company expects that cash and cash equivalents
      on
      hand, the Company’s credit facility, as amended, and funds budgeted to be
      generated from operations will be adequate to meet its liquidity and capital
      requirements for the next year. However, currently unforeseen future
      developments, potential acquisitions and increased working capital requirements
      may require additional debt financing or issuance of common stock in 2006 and
      subsequent years.








19
 **Index**




**Off-Balance
      Sheet Arrangements**





The
      Company does not have any off-balance sheets arrangements that have or are
      reasonably likely to have a current or future effect on the Company’s financial
      condition, changes in financial condition, revenues or expenses, results of
      operations, liquidity, capital expenditures or capital resources that are
      material to investors.





**Inflation**





Inflation
      has not had a material effect on the Company’s operations in the past. Recently,
      rising petroleum prices have increased the Company’s costs of raw materials and
      distribution expenses included in the Company’s selling, general and
      administrative expenses. The Company has not yet passed these increased costs
      to
      its customers by increasing prices and may not be able to do so due to
      competitive pricing pressures. The Company seeks to offset these increased
      costs
      in part through cost savings measures in other areas.





**Recent
      Accounting Pronouncements**





**Stock-Based
      Compensation.** Effective
      January 1, 2006, the Company adopted the provisions of SFAS No. 123(R),
“ *Share-Based
      Payment”,* and
      related interpretations (collectively, “SFAS No. 123(R)”) to account for
      stock-based compensation using the modified prospective transition method and
      therefore will not restate its prior period results. SFAS No. 123(R) supersedes
      Accounting Principles Board (“APB”) Opinion No. 25, “ *Accounting
      for Stock Issued to Employees”* and
      revises guidance in SFAS No. 123, “ *Accounting
      for Stock-Based Compensation”* .
      SFAS
      No. 123(R) establishes accounting requirements for share-based compensation
      to
      employees and carries forward prior guidance on accounting for awards to
      non-employees. Specifically, SFAS No. 123(R) requires that compensation expense
      be recognized in the financial statements for share-based awards based on the
      grant date fair value of those awards. SFAS No. 123(R) also requires the
      benefits of tax deductions in excess of recognized compensation expense to
      be
      reported as a financing cash flow activity, rather than as an operating cash
      flow activity as previously required.





The
      Company’s initial adoption of SFAS No. 123(R)’s fair value method on January 1,
      2006 did not have an impact on the Company’s results of operations or overall
      financial position. However, the future impact of the adoption of SFAS No.
      123(R) on the Company’s results of operations cannot be predicted at this time
      because it will depend on levels of future grants of share-based payments.





Pursuant
      to SFAS No. 123(R)’s modified prospective transition method, the Company
      recognizes stock-based compensation expense based on the grant-date fair value
      of any new share-based awards granted subsequent to December 31, 2005 that
      are
      expected to vest. Compensation expense is recognized on a straight-line basis
      over the requisite service period, which is generally commensurate with the
      vesting term. Compensation expense is recognized immediately for share-based
      awards that are fully vested on the date of the grant. For the three months
      and
      six months ended June 30, 2006, compensation expense recognized in the Company’s
      financial statements related to share-based awards totaled approximately
      $19,000. For the three months and six months ended June 30, 2006, the Company
      did not record any excess tax benefits generated from stock option exercises
      because of the Company’s significant net operating loss carryforwards for
      Federal income tax purposes.


.


Prior
      to
      January 1, 2006, the Company accounted for its share-based payments to employees
      under the intrinsic value recognition and measurement principles of APB Opinion
      No. 25 and related interpretations, including Financial Accounting Standards
      Board (“FASB”) Interpretation No. 44, *Accounting
      for Certain Transactions Involving Stock Compensation, an interpretation of
      APB
      Opinion No. 25* .
      Accordingly, no stock-based employee compensation cost was reflected in the
      Company’s results of operations as all options granted under the Company’s stock
      options plans had an exercise price equal to the market value of the underlying
      common stock on the date of the grant. Prior to its adoption of SFAS 123(R),
      the
      Company followed the disclosure requirements of SFAS 148, *Accounting
      for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
      Statement No. 123* and
      accordingly provided pro forma disclosures of net income and net income per
      basic and diluted share as if the fair-value-based method had been applied
      to
      all outstanding and unvested awards for each period presented.





As
      permitted under SFAS No. 123(R), the Company uses the Black-Scholes option
      pricing model to determine the fair value of the Company’s share-based awards
      under SFAS No. 123 (R), which is the same valuation technique previously used
      for pro forma disclosures under SFAS No. 123. The Black-Scholes option valuation
      model, like other option valuation models, requires the input of highly
      subjective assumptions including the expected stock price volatility. Because
      the Company’s employee stock options have characteristics significantly
      different from those of traded options, and because changes in the subjective
      input assumptions can materially affect the fair value estimate, in management’s
      opinion, the existing models do not necessarily provide a reliable single
      measure of the fair value of its employee stock options.





20
 **Index**




The
      guidance in SFAS No. 123(R) is relatively new and best practices are not well
      established. The application of these principles may be subject to further
      interpretation and refinement over time. There are significant differences
      among
      valuation models and there is a possibility that the Company will adopt
      different valuation models in the future. This may result in a lack of
      comparability with other companies that use different models, methods and
      assumptions and in a lack of consistency in future periods.





**Accounting
      for Uncertainty in Income Taxes.** In June
      2006, the Financial Accounting Standards Board issued Interpretation No. 48,
      “Accounting for Uncertainty in Income Taxes - An interpretation of FASB
      Statement No. 109,” or FIN 48, which clarifies the accounting and disclosure
      requirements for uncertainty in tax positions, as defined. We are currently
      evaluating the provisions of FIN 48, which is effective for fiscal years
      beginning after December 15, 2006.





**Forward
      Looking Statements**





Statements
      made in this Quarterly Report include forward-looking statements made under
      the
      provisions of the Private Securities Litigation Reform Act of 1995 including,
      but not limited to, the effect of newly issued accounting standards on the
      Company’s consolidated financial statements described in the notes to the
      unaudited condensed consolidated financial statements; the Company’s ability to
      grow its business by continually improving its existing capabilities and
      simultaneously developing and acquiring new business opportunities while
      maintaining its customer focus and providing the highest levels of customer
      support; the Company’s ability to increase sales and earnings from its infection
      control business by completing strategic acquisitions, enhancing marketing
      and
      distribution efforts both domestically and internationally, introducing new
      products, increasing direct sales representation, employing tele-sales agents
      for added sales coverage, and capitalizing on low-cost manufacturing
      opportunities in the Dominican Republic and China; the Company’s expectation
      about the composition and amount of revenues to be received by the Company’s OTI
      division; the Company’s expectations concerning its future income tax expenses
      and income tax cash payments; and the Company’s current expectation that cash
      and cash equivalents on hand, the Company’s existing credit facility and funds
      budgeted to be generated from operations will be adequate to meet its liquidity
      and capital requirements for the next year.





The
      Company’s actual results could differ materially from such forward-looking
      statements and such results will be affected by risks described in the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2005, filed with
      the
      Securities and Exchange Commission. These risks include, without limitation,
      the
      following: low barriers to entry for competitive products could cause the
      Company to reduce the prices for its products or lose customers; large
      purchasers of the Company’s products regularly negotiate for reductions in
      prices for the Company’s products, which may reduce the Company’s profits;
      because a few distributors control much of the delivery of hospital supplies
      to
      hospitals, the Company relies significantly on these distributors in connection
      with the sale of the Company’s branded products; the Company’s relatively small
      sales and marketing force may place the Company at a competitive disadvantage
      to
      its competition; the Company’s contract manufacturing division relies upon a
      small number of customers, the loss of any of which could have a material
      adverse impact on the Company; the inability of the Company to complete
      acquisitions of businesses at an attractive cost could adversely affect the
      Company’s growth; if the Company is successful in acquiring businesses, the
      failure to successfully integrate those businesses could adversely affect the
      Company; the Company’s growing international operations subject the Company’s
      operating results to numerous additional risks; markets in which the Company
      competes are highly competitive, which may adversely affect the Company’s growth
      and operating results; the Company’s products are subject to extensive
      governmental regulations, compliance or non-compliance with which could
      adversely affect the Company; the Company’s strategies to protect its
      proprietary assets may be ineffective, allowing increased competition with
      the
      Company; fluctuations in the value of the dollar against foreign currencies
      have
      in the past and may in the future adversely affect the Company’s operating
      results; and the Company’s expenses for raw materials and product distribution
      are adversely affected by increases in the price for petroleum *.* The
      Company does not undertake to update its forward-looking statements to reflect
      future events or circumstances.





21
 **Index**




**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk**





The
      Company's operating results and cash flows are subject to fluctuations from
      changes in foreign currency exchange rates and interest rates.





The
      financial position and results of operations of the Company’s foreign
      subsidiaries in the United Kingdom, Netherlands, Malta and Germany are measured
      using the foreign subsidiary’s local currency as the functional currency.
      Revenues and expenses of such subsidiaries are translated into U.S. dollars
      at
      average exchange rates prevailing during the period. Assets and liabilities
      are
      translated at the rates of exchange on the balance sheet date. The resulting
      translation gain and loss adjustments are recorded directly as a separate
      component of shareholders’ equity. Foreign currency translation adjustments, net
      of applicable taxes, resulted in gains of $458 thousand and $817 thousand for
      the three months and six months ended June 30, 2006, respectively. For the
      three
      months and six months ended June 30, 2005, foreign currency translation
      adjustments, net of applicable taxes, resulted in losses of $859 thousand and
      $1.1 million, respectively.





Transaction
      gains and losses that arise from exchange rate fluctuations on transactions
      denominated in a currency other than the subsidiary’s functional currency are
      included in the results of operations as incurred. Included in the Company’s
      results of operations for three months and six months ended June 30, 2005 were
      foreign currency exchange losses of approximately $46 thousand and $423
      thousand, respectively, resulting from the translation of certain intercompany
      transactions of the Netherlands subsidiaries which were denominated in a
      currency other than the functional currency of those subsidiaries. The effect
      of
      foreign currency transactions was not material to the Company’s results of
      operations for the three months and six months ended June 30, 2006. The Company
      believes that changes made to the structure of these intercompany transactions
      during the second quarter of 2005 have significantly minimized the occurrence
      of
      foreign currency exchange losses arising from the translation of these
      intercompany transactions in future periods.





Currency
      translations and transactions that are billed and paid in foreign currencies
      could be adversely affected in the future by the relationship of the U.S. dollar
      and the functional currencies of the Company’s foreign subsidiaries with foreign
      currencies.





The
      Company is also subject to fluctuations in the value of the Dominican peso
      relative to the U.S. dollar. As the value of the Dominican peso increases with
      respect to the U.S. dollar, the costs of the Company’s inventory increase
      because the Company manufactures a material portion of its inventory at its
      facilities located in the Dominican Republic. The appreciation of the Dominican
      peso relative to the U.S. dollar in the future could adversely affect the
      Company’s operating results.





The
      Company’s cash and cash equivalents are short-term, highly liquid investments
      with original maturities of three months or less. As a result of the short-term
      nature of the Company’s cash and cash equivalents, a change of market interest
      rates does not materially impact interest income accruing on these investments
      or, consequently, the Company’s operating results or cash flow. The Company's
      greatest sensitivity with respect to the general level of U.S. interest rates
      relates to the effect that changes in those rates have on the Company's interest
      expense. At June 30, 2006, the Company had repaid all of its borrowings under
      its Credit Agreement which bear interest at a floating rate approximating the
      prime rate. An increase or decrease in the Company's average interest rate
      of
      ten percent would have had an immaterial impact on the Company’s recorded
      interest expense during the three months and six months ended June 30, 2006.





The
      Company does not use derivative instruments for trading purposes or to hedge
      its
      market risks, and the use of such instruments would be subject to strict
      approvals by the Company’s senior officers. Therefore, the Company’s exposure
      related to such derivative instruments is not expected to be material to the
      Company’s financial position, results of operations or cash flows.





**Item
      4. Controls and Procedures**





**(a)**
            *Evaluation
                of disclosure controls and procedures.*Under
                the supervision and with the participation of the Company’s management,
                including the Company’s President and Chief Executive Officer and its
                Chief Financial Officer, the Company carried out an evaluation (the
                “Evaluation”) of the effectiveness of the Company’s “disclosure controls
                and procedures” (as defined in the Securities Exchange Act of 1934 Rules
                13a-15(e) and 15d-15(e)). Based upon the Evaluation, the Company’s
                President and Chief Executive Officer and its Chief Financial Officer
                have
                concluded that the Company’s disclosure controls and procedures are
                effective at the reasonable assurance level as of the end of the
                quarter
                for which this report is being filed to ensure that (i) information
                required to be disclosed by the Company in reports that it files
                or
                submits under the Securities Exchange Act of 1934 is recorded, processed,
                summarized and reported within the time periods specified in the
                SEC’s
                rules and forms and (ii) such information is accumulated and communicated
                to the Company’s management, including the Company’s President and Chief
                Executive Officer and its Chief Financial Officer, as appropriate,
                to
                allow timely decisions regarding required
                disclosure.





22
 **Index**




The
      Company is committed to a continuing process of identifying, evaluating and
      implementing improvements to the effectiveness of the Company’s disclosure and
      internal controls and procedures. The Company’s management, including its
      President and Chief Executive Officer and its Chief Financial Officer, does
      not
      expect that the Company’s controls and procedures will prevent all errors. A
      control system, no matter how well conceived and operated, can provide only
      reasonable, not absolute, assurance that the objectives of the control system
      are met. Because of the inherent limitations in all control systems, no
      evaluation of controls can provide absolute assurance that all control issues
      within the Company have been detected. These inherent limitations include the
      realities that judgments in decision-making can be faulty and that breakdowns
      can occur because of a simple error or mistake. Additionally, controls can
      be
      circumvented by the individual acts of some persons, by collusion of two or
      more
      people, or by management override of the control. The design of any system
      of
      controls is also based in part upon certain assumptions about the likelihood
      of
      future events, and there can be no assurance that any design will succeed in
      achieving its stated goals under all potential future conditions. Over time,
      controls may become inadequate because of changes in conditions, or the degree
      of compliance with the policies or procedures may deteriorate. Because of the
      inherent limitations in any control system, misstatements due to error or
      violations of law may occur and not be detected. The Company has, however,
      designed its disclosure controls and procedures to provide, and believes that
      such controls and procedures do provide, reasonable assurance that information
      required to be disclosed by the Company in reports that it files or submits
      under the Securities Exchange Act of 1934 is recorded, processed, summarized
      and
      reported within the time periods specified in the SEC’s rules and forms. The
      disclosure in this paragraph about inherent limitations of control systems
      does
      not modify the conclusions set forth in the immediately preceding paragraph
      of
      the Company’s President and Chief Executive Officer and its Chief Financial
      Officer concerning the effectiveness of the Company’s disclosure controls and
      procedures.





**(b)**
            *Changes
                in internal controls.*There
                have not been any changes in the Company’s internal controls over
                financial reporting identified in connection with the Evaluation
                that
                occurred during the Company’s last quarter that has materially affected
                or, to the knowledge of management, is reasonably likely to materially
                affect the Company’s internal controls.





**PART
      II**


**OTHER
      INFORMATION**





**Item
      1. Legal Proceedings**





Not
      applicable.





**Item
      1A. Risk Factors**





See
      the
      risk factors described in the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2005.





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





During
      the quarter for which this report is filed, there were no material modifications
      in the instruments defining the rights of shareholders. During the quarter
      for
      which this report is filed, none of the rights evidenced by the shares of the
      Company's common stock were materially limited or qualified by the issuance
      or
      modification of any other class of securities.





23
 **Index**




**Purchases
      of Equity Securities by the Issuer and Affiliated
      Purchasers**





In
      February 2000, the Board of Directors authorized the repurchase of up to five
      percent (5%) of the Company’s outstanding common stock from time to time in open
      market or private transactions. As amended to date, the Company’s share
      repurchase program authorizes the repurchase of up to an aggregate of 2,000,000
      shares. As of June 30, 2006, the Company had repurchased 1,616,755 shares for
      an
      aggregate repurchase price of $3.7 million. The program expires on December
      31,
      2006, unless extended. The following table summarizes the Company’s share
      repurchases during the Company’s second quarter of 2006:





Period
            
            Total
                Number of Shares Purchased
            
            Average
                Price Paid per Share
            
            Total
                Number of Shares Purchased as Part of Publicly Announced Repurchase
                Plans
            
            Maximum
                Number of Shares that May Yet Be Purchased Under the Repurchase
                PlansApril
                1 to 30, 2006
            
            
            -
            
            $
            -
            
            
            -
            
            
            618,486May
                1 to 31, 2006
            
            
            160,241
            
            $
            3.74
            
            
            160,241
            
            
            458.245June
                1 to 30, 2006
            
            
            75,000
            
            $
            3.79
            
            
            75,000
            
            
            383,245Total
            
            
            235,241
            
            $
            3.75
            
            
            235,241
            
            
            383,245







**Item
      3. Default Upon Senior
      Securities**





Not
      applicable.





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





During
      the period covered by this report, the Company filed with the Securities and
      Exchange Commission and delivered to its shareholders the Company’s Proxy
      Statement for its Annual Meeting of Shareholders held May 18, 2006.





(a)
      The
      Company’s annual meeting of shareholders was held on May 18, 2006.


(b)
      The
      nominees for the Board of Directors or the Company are identified
      below.


(c)
      With
      respect to the election of directors, the inspector of election tabulated the
      following votes:





Nominee
                for Office
            
            Number
                of Votes For
            
            Number
                of Votes Withheld
            
            AbstentionKenneth
                F. Davis
            
            36,897,699
            
            2,151,813
            
            -Michael
                E. Glasscock, III
            
            37,206,089
            
            1,843,423
            
            -Rosdon
                Hendrix
            
            36,896,495
            
            2,153,017
            
            -Dan
                R. Lee
            
            37,121,603
            
            1,927,909
            
            -Gene
                R. McGrevin
            
            37,191,905
            
            1,857,607
            
            -Marc
                R. Sarni
            
            37,218,069
            
            1,831,443
            
            -Ronald
                L. Smorada
            
            37,236,069
            
            1,813,443
            
            -





**Item
      5. Other Information**





Not
      applicable.





**Item
      6. Exhibits**





Exhibit
      No.  Description





3.1 (1)  Articles
      of Incorporation of Isolyser Company, Inc.





3.3 (2)  Amended
      and Restated Bylaws of Microtek Medical Holdings, Inc.





24
 **Index**




4.1  Specimen
        Certificate of Common Stock




10.1 (3)  Director
      Compensation as Adjusted Effective May 18, 2006




31.1  Certification
        of Chief Executive Officer
 
 31.2  Certification
        of Chief Financial Officer
 
 32.1  Certification
        pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 32.2  Certification
        pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





(1)
            Incorporated
                by reference to Exhibit 3.1 of the Company's Annual Report on Form
                10-K
                for the year ended December 31,
                2004.





(2)
            Incorporated
                by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K
                dated May 18, 2006.





(3)
            Incorporated
                by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K
                dated May 18, 2006.





25
 **Index**


**SIGNATURES**








Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      caused this quarterly report on Form 10-Q to be signed on its behalf by the
      undersigned thereunto duly authorized on August 8, 2006.








MICROTEK
                MEDICAL HOLDINGS, INC.By: 
                /s/ Dan R. LeeDan
                R. LeeChairman,
                President and Chief Executive Officer(principal
                executive officer)By: 
                /s/ Roger G. WilsonRoger
                G. WilsonChief
                Financial Officer(principal
                financial officer)











26
 **Index**