# 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 | September 30, 2005 | 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
 incorporation or organization) | (IRS Employer
Identification No.)

13000 DEERFIELD
PARKWAY, SUITE 300 ALPHARETTA, GA 30004 
(Address of principal executive offices)

(678) 896-4000 
(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

Indicate by check mark  whether  the
 registrant  is an  accelerated  filer (as  defined in Rule 12b-2 of the  Exchange Act).
   
Yes X    No

Indicate by check mark  whether the
 registrant  is a shell  company  (as defined in Rule 12b-2 of the  Exchange  Act).   
Yes     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 November 4, 2005
|----------------------------- | -------------------------------
|                              |                                
|Common Stock, $.001 par value | 43,407,356                     

---

# INDEX

|PART I: |  | FINANCIAL
INFORMATION
|------- |  | ---------------------

|Item 1. |  | Financial
Statements:
|------- |  | ---------------------

| | Unaudited
Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004
| | ----------------------------------------------------------------------------------------------

| | Unaudited
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three
Months ended September 30, 2005 and September 30, 2004 and for the Nine Months ended
September 30, 2005 and September 30, 2004
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Unaudited
Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30,
2005               and September 30, 2004
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | Notes
to Unaudited Condensed Consolidated Financial Statements
| | --------------------------------------------------------------

|Item 2. |  | Management's
Discussion and Analysis of Financial Condition and Results of Operations
|------- |  | -------------------------------------------------------------------------------------

|Item 3. |  | Quantitative
and Qualitative Disclosures About Market Risk
|------- |  | ----------------------------------------------------------

|Item 4. |  | Controls
and Procedures
|------- |  | -----------------------

|PART II: |  | OTHER
INFORMATION
|-------- |  | -----------------

|Item 1. |  | Legal
Proceedings
|------- |  | -----------------

|Item 2. |  | Unregistered
Sales of Equity Securities and Use of Proceeds
|------- |  | -----------------------------------------------------------

|Item 3. |  | Defaults
Upon Senior Securities
|------- |  | -------------------------------

|Item 4. |  | Submission
of Matters to a Vote of Security Holders
|------- |  | ---------------------------------------------------

|Item 5. |  | Other
Information
|------- |  | -----------------

|Item 6. |  | Exhibits
|------- |  | --------

2

---

# PART I 
FINANCIAL INFORMATION

# Item 1.   Financial
Statements

MICROTEK MEDICAL
HOLDINGS, INC.Unaudited Condensed
Consolidated Balance Sheets 
(in thousands)

|Assets                                                 | September 30, 2005 | December 31, 2004
|------------------------------------------------------ | ------------------ | -----------------
|Current assets:                                        |                    |                  
|Cash and cash equivalents                              |                    |                  
|Accounts receivable, net of allowances of $1,407       |                    |                  
|and $1,025, respectively                               |                    |                  
|Other receivables                                      |                    |                  
|Inventories                                            |                    |                  
|Deferred income taxes                                  |                    |                  
|Prepaid expenses and other current assets              |                    |                  
|                                                       |                    |                  
|Total current assets                                   |                    |                  
|                                                       |                    |                  
|Property and equipment                                 |                    |                  
|Less accumulated depreciation                          |                    |                  
|                                                       |                    |                  
|Property and equipment, net                            |                    |                  
|                                                       |                    |                  
|Goodwill                                               |                    |                  
|Other intangible assets, net                           |                    |                  
|Deferred income taxes                                  |                    |                  
|Other assets                                           |                    |                  
|                                                       |                    |                  
|Total assets                                           |                    |                  
|                                                       |                    |                  
|Liabilities and Shareholders' Equity                   |                    |                  
|Current liabilities:                                   |                    |                  
|Accounts payable                                       |                    |                  
|Accrued expenses                                       |                    |                  
|Income taxes payable                                   |                    |                  
|Current portion of long-term debt                      |                    |                  
|                                                       |                    |                  
|Total current liabilities                              |                    |                  
|                                                       |                    |                  
|Long-term debt, excluding current portion              |                    |                  
|Other long-term liabilities, excluding current portion |                    |                  
|                                                       |                    |                  
|Total liabilities                                      |                    |                  
|                                                       |                    |                  
|Shareholders' equity:                                  |                    |                  
|Common stock                                           |                    |                  
|Additional paid-in capital                             |                    |                  
|Accumulated deficit                                    |                    |                  
|Accumulated other comprehensive income (loss), net     |                    |                  
|of income taxes of $87 and $187, respectively          |                    |                  
|                                                       |                    |                  
|                                                       |                    |                  
|Treasury shares, at cost                               |                    |                  
|                                                       |                    |                  
|Total shareholders' equity                             |                    |                  
|                                                       |                    |                  
|Total liabilities and shareholders' equity             |                    |                  
|                                                       |                    |                  

See notes to unaudited condensed
consolidated financial statements.

3

---

MICROTEK MEDICAL
HOLDINGS, INC.Unaudited Condensed
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share data)

|                                             | Three months ended | Nine months ended
|-------------------------------------------- | ------------------ | -----------------
|
|Net revenues                                 |                    |                  
|Cost of goods sold                           |                    |                  
|                                             |                    |                  
|Gross profit                                 |                    |                  
|Operating expenses:                          |                    |                  
|Selling, general and administrative          |                    |                  
|Research and development                     |                    |                  
|Amortization of intangibles                  |                    |                  
|                                             |                    |                  
|Total operating expenses                     |                    |                  
|                                             |                    |                  
|Gain (loss) on dispositions                  |                    |                  
|                                             |                    |                  
|Income from operations                       |                    |                  
|Interest income                              |                    |                  
|Interest expense                             |                    |                  
|Equity in earnings of investee               |                    |                  
|Foreign currency exchange gain (loss)        |                    |                  
|                                             |                    |                  
|Income before income taxes                   |                    |                  
|Income tax (benefit) expense                 |                    |                  
|                                             |                    |                  
|Net income                                   |                    |                  
|                                             |                    |                  
|Other comprehensive income (loss):           |                    |                  
|Foreign currency translation gain            |                    |                  
|(loss), net of income taxes                  |                    |                  
|Unrealized gain (loss) on available for sale |                    |                  
|securities, net of income taxes              |                    |                  
|                                             |                    |                  
|Comprehensive income                         |                    |                  
|                                             |                    |                  
|Net income per common share - Basic          |                    |                  
|                                             |                    |                  
|Net income per common share - Diluted        |                    |                  
|                                             |                    |                  
|Weighted average number of common shares     |                    |                  
|outstanding:                                 |                    |                  
|Basic                                        |                    |                  
|                                             |                    |                  
|Diluted                                      |                    |                  
|                                             |                    |                  

See notes to unaudited condensed
consolidated financial statements.

4

---

MICROTEK MEDICAL
HOLDINGS, INC.Unaudited Condensed
Consolidated Statements of Cash Flows 
(in thousands)

|                                                            | Nine months ended
September 30, 2005 | Nine months ended
September 30, 2004
|----------------------------------------------------------- | ------------------------------------ | ------------------------------------
|Cash flows from operating activities:                       |                                      |                                     
|Net income                                                  |                                      |                                     
|Adjustments to reconcile net income to net cash provided by |                                      |                                     
|operating activities:                                       |                                      |                                     
|Depreciation                                                |                                      |                                     
|Amortization of intangibles                                 |                                      |                                     
|Provision for doubtful accounts                             |                                      |                                     
|Deferred income taxes                                       |                                      |                                     
|Equity in earnings of investee                              |                                      |                                     
|Other                                                       |                                      |                                     
|Changes in operating assets and liabilities, net of         |                                      |                                     
|acquisitions                                                |                                      |                                     
|                                                            |                                      |                                     
|Net cash provided by operating activities                   |                                      |                                     
|                                                            |                                      |                                     
|Cash flows from investing activities:                       |                                      |                                     
|Purchase of and deposits for property and equipment         |                                      |                                     
|Acquisition of OrthoPlast                                   |                                      |                                     
|Acquisition of International Medical Products               |                                      |                                     
|Proceeds from dispositions of equipment                     |                                      |                                     
|                                                            |                                      |                                     
|Net cash used in investing activities                       |                                      |                                     
|                                                            |                                      |                                     
|Cash flows from financing activities:                       |                                      |                                     
|Borrowings under line of credit agreement                   |                                      |                                     
|Repayments under line of credit agreement                   |                                      |                                     
|Changes in bank overdraft                                   |                                      |                                     
|Repayments under notes payable                              |                                      |                                     
|Proceeds from exercise of stock options                     |                                      |                                     
|Proceeds from issuance of common stock                      |                                      |                                     
|                                                            |                                      |                                     
|Net cash provided by (used in) financing activities         |                                      |                                     
|                                                            |                                      |                                     
|Effect of exchange rate changes on cash                     |                                      |                                     
|                                                            |                                      |                                     
|Net increase (decrease) in cash and cash equivalents        |                                      |                                     
|Cash and cash equivalents at beginning of period            |                                      |                                     
|                                                            |                                      |                                     
|Cash and cash equivalents at end of period                  |                                      |                                     
|                                                            |                                      |                                     
|Supplemental disclosures of noncash investing and financing |                                      |                                     
|activities:                                                 |                                      |                                     
|Tax benefits related to stock options                       |                                      |                                     
|                                                            |                                      |                                     
|Notes receivable from sale of inventories                   |                                      |                                     
|                                                            |                                      |                                     

See notes to unaudited condensed
consolidated financial statements.

5

---

# 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. The Companys revenues are generated through two operating
units, Microtek Medical, Inc. (Microtek), a subsidiary of the Company, and
OREX Technologies International (OTI), an operating division. Microtek is the
core business of the Company. Since 2002, OTI has focused on commercializing its OREX
patented technology in the nuclear industry. As described in Note 5 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, 2004 (the Annual Report).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Certain
reclassifications have been made to the 2004 unaudited condensed consolidated financial
statements to conform to the classifications used in 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|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 are those that depend most heavily on these judgments and estimates. During
the three and nine months ended September 30, 2005, there have been no material changes
to any of the Companys critical accounting policies.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | NEWLY
ISSUED ACCOUNTING STANDARDS
|-- |  | ---------------------------------

| | In
November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4.SFAS No. 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs and wasted materials (spoilage)
should be recognized as current period charges in all circumstances. In addition, SFAS
No. 151 requires that allocation of fixed production overhead to inventory be based on
the normal capacity of the production facilities. SFAS No. 151 is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The Company is
currently evaluating the impact, if any, that the adoption of SFAS No. 151 will have on
the Companys consolidated financial position, results of operations and cash flows.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6

---

| | In
December 2004, the FASB issued SFAS No. 123(R), Share-Based Paymentwhich revised
SFAS No. 123, Accountingfor 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 public companies recognize compensation expense in an amount equal
to the fair value of the share-based payments. SFAS No. 123(R) is effective with respect
to the Company beginning with the first quarter of 2006. SFAS No. 123(R) permits
companies to adopt its requirements using either the modified prospective method
or the modified retrospective method. The Company is still evaluating which
transition method to utilize. As permitted by SFAS No. 123, the Company currently
accounts for share-based payments to employees using Accounting Principles Board (APB)
Opinion No. 25s intrinsic value method and, as such, recognizes no compensation
expense for employee stock options. Accordingly, the adoption of SFAS No. 123(R)s
fair value method will have an impact on the Companys results of operations,
although it will have no significant impact on the Companys overall financial
position. The impact of adopting SFAS No. 123(R) cannot be predicted at this time because
it will depend on levels of share-based payments granted in the future. However, had the
Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net
income and diluted net income per share in Note 11 to these unaudited condensed
consolidated financial statements. 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 required under
current literature. This requirement will reduce net operating cash flows and increase
net financing cash flows in periods after adoption. The Company cannot estimate what
those amounts will be in the future because they depend on, among other things, when
employees exercise stock options.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an
amendment of APB OpinionNo. 29, Accounting for Nonmonetary Transactions.SFAS
No. 153 amends the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged and more broadly provides for exceptions
regarding exchanges of nonmonetary assets that do not have commercial substance. SFAS No.
153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The Companys adoption of SFAS No. 153 in the third quarter of
2005 did not have a material impact on the Companys consolidated financial
position, results of operations and cash flows.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | ACQUISITIONS
|-- |  | ------------

| | Each
of the following acquisitions was accounted for as a business combination in accordance
with SFAS No. 141, Business Combinations. Accordingly, the results of operations
related to the acquired assets have been included in the accompanying unaudited condensed
consolidated financial statements from their respective acquisition date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
March 1, 2004, Microtek acquired substantially all of the assets of Ortho/Plast, Inc. (OrthoPlast),
a marketer of a small line of orthopedic products. The purchase price of approximately
$419,000 in cash, including certain acquisition costs, was allocated to accounts
receivable, inventories, property and equipment and identifiable intangibles (principally
trademarks and customer list) based on those assetsrespective estimated fair
values, with the excess allocated to goodwill. The amount allocated to goodwill was not
significant. The terms of the related purchase agreement also provide for additional cash
consideration up to $600,000 if future revenues from the Companys orthopedic
product line exceed certain targeted levels, as defined in the agreement, through 2009.
The additional consideration will be recorded when it is determinable that such target
revenues are probable of being met and is expected to result in additional goodwill. The
acquisition of OrthoPlast on March 1, 2004, did not have a material impact on the Companys
consolidated results of operations for the three months and nine months ended September
30, 2005 or 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
May 28, 2004, Microtek acquired selected fixed assets and inventories related to certain
businesses of International Medical Products, B.V. and affiliates (collectively, IMP)
from Cardinal Health for approximately $9.6 million in cash, including acquisition costs,
and an accrued liability for certain employee costs of 400,000 EURO, or approximately
$491,000. The purchase price was allocated to the assets acquired and liability assumed,
based on their respective estimated fair values, as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

---

|                               |  | 
|------------------------------ |  | 
|Purchase price paid as:        |  | 
|Cash                           |  | 
|Accrued employee liability     |  | 
|                               |  | 
|Total purchase consideration   |  | 
|Allocated to:                  |  | 
|Inventories                    |  | 
|Property and equipment         |  | 
|Identifiable intangible assets |  | 
|                               |  | 
|Total allocation               |  | 
|                               |  | 
|Goodwill                       |  | 
|                               |  | 

| | Identifiable
intangible assets included customer lists of approximately $2.3 million (useful life of
15 years), non-compete agreements of approximately $219,000 (useful life of five years)
and other intangible assets of approximately $362,000 (useful life of four years).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following unaudited pro forma financial information for the three months and nine months
ended September 30, 2005 and 2004 reflects the Companys results of operations as if
the IMP acquisition had been completed on January 1, 2004 (in thousands, except per share
data):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | Three months ended
September 30, | Nine months ended
September 30,
|------------------------------ | -------------------------------- | -------------------------------
|
|Net revenues                   |                                  |                                
|Net income                     |                                  |                                
|Net income per share - basic   |                                  |                                
|Net income per share - diluted |                                  |                                

| | The
pro forma financial information 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 IMP acquisition been consummated
as of the date indicated, nor are they necessarily indicative of future operating
results.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. |  | 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 product or service 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 September 30, 2005, amounts
recognized into income exceeded cash receipts from ETI by approximately $588,000, which
amount was recorded in the accompanying unaudited condensed consolidated balance sheet in
prepaid expenses and other current assets. At December 31, 2004, cash receipts from ETI
exceeded amounts recognized into income by $221,000, which amount was recorded in the
accompanying unaudited condensed consolidated balance sheet in accrued expenses (current
liability).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

---

|6. |  | 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 7 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 $37,000 and $63,000 of
this deferred gain was recognized into income during the three months and nine months
ended September 30, 2005, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. |  | 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
$499,000 and $300,000 at September 30, 2005 and December 31, 2004, respectively. The
Company recorded $64,000 and $199,000 of income during the three months and nine months
ended September 30, 2005, respectively, and $84,000 and $108,000 of income during the
three months and nine months ended September 30, 2004, respectively, related to this
investment.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8. |  | 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
September 30, 2005 and December 31, 2004 as follows (in thousands):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  | September 30, 2005 | December 31, 2004
|----------------- | ------------------ | -----------------
|Raw materials     |                    |                  
|Work-in-progress  |                    |                  
|Finished goods    |                    |                  
|                  |                    |                  
|Total inventories |                    |                  
|                  |                    |                  

| | At
September 30, 2005 and December 31, 2004, OREX inventories approximated $1.4 million and
$3.8 million, respectively, and consisted primarily of finished goods.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9. |  | 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 (7.0% at
September 30, 2005). Borrowing availability under the revolving facility at September 30,
2005 and December 31, 2004 totaled $16.9 million and $16.3 million, respectively. There
were outstanding borrowings under the revolving credit facility of $455,000 at September
30, 2005 and $4.5 million at December 31, 2004. 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

| | 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 September 30, 2005 and December 31, 2004, 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 September 30, 2005 or December 31, 2004.
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 $194,000 and $343,000 at September 30, 2005 and
December 31, 2004, 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 $366,000 and $586,000 at September 30, 2005 and December 31, 2004,
respectively. This note payable arrangement is subordinated to the Credit Agreement.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
carrying value of long-term debt at September 30, 2005 and December 31, 2004 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10. |  | 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
September 30, | Nine months ended
September 30,
|-------------------------------------- | -------------------------------- | -------------------------------
|
|Basic Shares                           |                                  |                                
|Dilutive Shares (due to stock options) |                                  |                                
|                                       |                                  |                                
|Diluted Shares                         |                                  |                                
|                                       |                                  |                                

| | For
the three and nine months ended September 30, 2005, options to purchase approximately 1.0
million and 1.1 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 nine months ended September 30, 2004, there were
1.1 million and 796,000 antidilutive shares, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

---

|11. |  | STOCK-BASED
COMPENSATION PLANS
|--- |  | ------------------------------

| | The
Company accounts for its stock-based employee compensation plans under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. Accordingly, no stock-based employee
compensation cost is reflected in net income, as all options granted under the Companys
stock option plans had an exercise price equal to the market value of the underlying
common stock on the date of the grant.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pro
forma information regarding interim net income and earnings per share is required by SFAS
No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure, an
amendment of FASB Statement No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method. The fair value for
these options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        | Three months ended
September 30, | Nine months ended
September 30,
|----------------------- | -------------------------------- | -------------------------------
|
|Dividend yield          |                                  |                                
|Expected volatility     |                                  |                                
|Risk free interest rate |                                  |                                
|Forfeiture rate         |                                  |                                
|Expected life, in years |                                  |                                

| | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table illustrates the effect on net income and net income per share as if the
Company had applied the fair value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, to its stock-based employee compensation plans (in
thousands, except per share data).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        | Three months ended
September 30, | Nine months ended
September 30,
|--------------------------------------- | -------------------------------- | -------------------------------
|
|Net income, as reported                 |                                  |                                
|Deduct:  Total stock-based employee     |                                  |                                
|compensation expense determined under   |                                  |                                
|fair value based method for all awards, |                                  |                                
|net of related tax effects              |                                  |                                
|                                        |                                  |                                
|Pro forma net income                    |                                  |                                
|                                        |                                  |                                
|Net income per share:                   |                                  |                                
|Basic - as reported                     |                                  |                                
|                                        |                                  |                                
|Diluted - as reported                   |                                  |                                
|                                        |                                  |                                
|Basic - pro forma                       |                                  |                                
|                                        |                                  |                                
|Diluted - pro forma                     |                                  |                                
|                                        |                                  |                                

11

---

|12. |  | STOCK
REPURCHASE PROGRAM
|--- |  | ------------------------

| | In
December 2004, 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, 2005. No shares were repurchased during the three months and nine
months ended September 30, 2005 and 2004. As of September 30, 2005, the Company had
repurchased approximately 1.3 million shares for an aggregate repurchase price of
approximately $2.7 million.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13. |  | GEOGRAPHIC
CONCENTRATIONS
|--- |  | -------------------------

| | A
significant portion of the Companys products are manufactured at its facilities in
the Dominican Republic, Mexico and the Netherlands or at GRIs facilities in China.
Included in the Companys consolidated balance sheet at September 30, 2005 and
December 31, 2004 are the net assets of the Companys manufacturing and distribution
facilities located in the United Kingdom and the Dominican Republic which total $16.4
million and $14.3 million, respectively. Additionally, at September 30, 2005 and December
31, 2004, the net assets of the Companys manufacturing and distribution operations
in the Netherlands totaled $13.1 million and $15.0 million, respectively. Only the Companys
facilities in the United Kingdom and the Netherlands sell products to external customers.
Total international sales by the Company were $7.9 million and $25.2 million for the
three months and nine months ended September 30, 2005, respectively, and $7.7 million and
$16.1 million for the three months and nine months ended September 30, 2004,
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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14. |  | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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.

12

---

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 grow 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 in the Dominican
Republic and China.

# 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 nine months ended September 30, 2005 and 2004:

|                                    | Three months ended
September 30, 2005 | Three months ended
September 30, 2004
|----------------------------------- | ------------------------------------- | -------------------------------------
|
|Net revenues                        |                                       |                                      
|Gross profit                        |                                       |                                      
|Selling, general and administrative |                                       |                                      
|expenses                            |                                       |                                      
|Income from operations              |                                       |                                      
|Net income                          |                                       |                                      

|                                    | Nine months ended
September 30, 2005 | Nine months ended
September 30, 2004
|----------------------------------- | ------------------------------------ | ------------------------------------
|
|Net revenues                        |                                      |                                     
|Gross profit                        |                                      |                                     
|Selling, general and administrative |                                      |                                     
|expenses                            |                                      |                                     
|Income from operations              |                                      |                                     
|Net income                          |                                      |                                     

# Three Months and Nine
Months Ended September 30, 2005 Compared to Three Months and Nine Months Ended September
30, 2004

Net Revenues. Net revenues for
the three months ended September 30, 2005 (the 2005 Quarter) were $33.5
million, a decrease of approximately $500 thousand or 1.5 percent from the $34.0 million
of net revenues reported for the three months ended September 30, 2004 (the 2004
Quarter). Net revenues for the nine months ended September 30, 2005 (the 2005
Period) were $101.7 million, an increase of $8.3 million, or 8.9 percent, over the
$93.4 million of net revenues reported for the nine months ended September 30, 2004 (the
2004 Period). Approximately $6.6 million of the increased revenues in the 2005
Period were attributable to businesses acquired in the IMP transaction on May 28, 2004.

13

---

For the 2005 Quarter, Microteks
net revenues totaled $32.5 million, an increase of $1.2 million or 3.8 percent over
Microteks net revenues of $31.3 million in the 2004 Quarter. During the 2005 Period,
Microteks net revenues increased by $10.1 million, or 11.5 percent, to $97.8 million
from $87.7 million in net revenues reported for the 2004 Period. Excluding revenue
contribution from the IMP transaction (which was $10.9 million and $4.3 million in the
2005 Period and 2004 Period, respectively), Microteks revenue growth in the 2005
Period totaled $3.4 million or 4.1 percent over the 2004 Period.

The following tables depict
Microteks domestic and international revenues and the relative percentage of each to
Microteks total revenues for the 2005 Quarter and 2004 Quarter and for the 2005
Period and 2004 Period:

|              | Three months ended
September 30, 2005 | Three months ended
September 30, 2004
|------------- | ------------------------------------- | -------------------------------------
|
|Domestic      |                                       |                                      
|International |                                       |                                      
|              |                                       |                                      
|Total         |                                       |                                      
|              |                                       |                                      

|              | Nine months ended
September 30, 2005 | Nine months ended
September 30, 2004
|------------- | ------------------------------------ | ------------------------------------
|
|Domestic      |                                      |                                     
|International |                                      |                                     
|              |                                      |                                     
|Total         |                                      |                                     
|              |                                      |                                     

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 65.0
percent and OEM revenues were 35.0 percent of total domestic revenues in the 2005 Quarter
as compared to 69.1 percent and 30.9 percent, respectively, in the 2004 Quarter. For the
2005 Period, domestic branded revenues comprised 64.7 percent and OEM revenues comprised
35.3 percent of total domestic revenues, respectively, versus 66.7 percent and 33.3
percent, respectively for the 2004 Period. Included in the Companys OEM revenues are
sales of products to non-branded or private label customers. Previously, sales
of the Companys branded products to custom procedure tray assemblers (also known as
kitpackers) were included in the Companys OEM channel revenues. Beginning January 1,
2005, kitpacker sales are now included in the Companys domestic branded channel so
that the Companys domestic branded sales force can better monitor and promote end
user awareness of and loyalty to the Companys products which are included in these
kits. Revenues attributable to the domestic branded and OEM channels in the 2004 Quarter
and 2004 Period have been restated to conform to channel classification used in the 2005
Quarter and 2005 Period.

Domestic branded revenues in the 2005
Quarter and 2005 Period decreased by $344 thousand, or 2.1 percent, and $831 thousand, or
1.7 percent, respectively, from the same prior year periods. The lack of growth in the
2005 Quarter and 2005 Period are the result of the consolidation of two large kit
companies during 2004 and pricing and other competitive pressures experienced by the
Company in 2005. For the 2005 Quarter and 2005 Period, OEM revenues increased by $1.3
million, or 17.6 percent, and $1.8 million, or 7.4 percent, respectively, as a result of
substantial improvements in private label revenues which offset lower woundcare revenues
in both the 2005 Quarter and 2005 Period and, in the 2005 Period, lower triad product
revenues. Overall, Microteks total domestic revenues in the 2005 Quarter and 2005
Period increased by approximately $1 million from the 2004 Quarter and 2004 Period,
respectively.

Microteks international net
revenues for the 2005 Quarter and 2005 Period, including revenues related to the IMP
business of $3.4 million and $10.9 million, respectively, increased by $255 thousand, or
3.3 percent, over the 2004 Quarter to $7.9 million and by $9.1 million, or 56.7 percent,
over the 2004 Period to $25.2 million. International revenues, excluding the impact of IMP
revenues, increased by approximately $224 thousand, or 5.2 percent, in the 2005 Quarter
versus the 2004 Quarter and by approximately $2.5 million, or 21.2 percent, in the 2005
Period versus the 2004 Period.

14

---

OTIs net revenues in the 2005
Quarter and 2005 Period totaled $982 thousand and $4.0 million, respectively, and
consisted primarily of sales of finished goods inventories to ETI and royalties under the
license agreement of $75 thousand and $225 thousand, respectively. OTIs net revenues
in the 2004 Quarter and 2004 Period were $2.7 million and $5.7 million, respectively, and
included a $1.2 million sale of raw material inventories related to the September 2004
licensing of the Companys OREX technology to ETI. 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 decreased $1.0 million, or 7.9 percent, in the
2005 Quarter to $11.9 million. For the 2005 Period, the Companys consolidated gross
profit increased $2.9 million, or 7.9 percent, to $39.2 million. The Companys
consolidated gross margin percentage for the 2005 Quarter and 2005 Period was 35.7 percent
and 38.5 percent, respectively, as compared to 38.2 percent in the 2004 Quarter and 38.9
percent in the 2004 Period. The revenue mix changes resulting from the strong growth in
OEM and international revenues, coupled with the decreases in the domestic branded
revenues, significantly pressured gross margins in the 2005 Quarter and 2005 Period.
Additionally, the strengthening of the Dominican peso versus the U.S. dollar significantly
increased our manufacturing expenses in the Dominican Republic and rising prices for fuel
and petroleum-based products resulted in increases in raw material and freight costs.

Operating Expenses.
Consolidated operating expenses for the 2005 Quarter were $10.4 million, or 31.1 percent
of net revenues, as compared to $10.7 million, or 31.5 percent of net revenues, in the
2004 Quarter. For the 2005 Period, consolidated operating expenses were $32.3 million, or
31.8 percent of net revenues, versus $30.3 million, or 32.4 percent of net revenues, for
the 2004 Period.

Consolidated selling, general and
administrative expenses in the 2005 Quarter and 2005 Period were $10.0 million and $30.9
million, respectively, as compared to $10.3 million in the 2004 Quarter and $29.0 million
in the 2004 Period. As a percentage of net revenues, the Companys consolidated
selling, general and administrative expenses were 29.9 percent in the 2005 Quarter and
30.4 percent in the 2005 Period, as compared to 30.2 percent in the 2004 Quarter and 31.0
percent in the 2004 Period.

In the 2005 Quarter and 2005 Period,
Microteks selling, general and administrative expenses decreased by $44 thousand and
increased by $2.9 million from the 2004 Quarter and 2004 Period, respectively. For the
2005 Quarter and 2005 Period, selling, general and administrative expense savings from the
second quarter 2005 closure of the Companys Gurnee, Illinois facilities totaled
approximately $647 thousand and $1.2 million, respectively. These expense savings were
substantially offset by increased distribution costs ($190 thousand for the 2005 Quarter
and $667 thousand for the 2005 Period), increased administrative costs ($193 thousand for
the 2005 Quarter and $683 thousand for the 2005 Period), and increased selling, general
and administrative expenses of the IMP businesses ($225 thousand for the 2005 Quarter and
$2.1 million for the 2005 Period), and, for the 2005 Period, an increase in
Microteks sales and marketing expense of $684 thousand, as compared to the
corresponding expenses of the Company in the prior year period. Microtek attributes the
increase in distribution expenses in the 2005 Quarter and 2005 Period to higher shipping
and air freight costs resulting from rising petroleum prices. Higher professional fees,
information technology expenses and certain expenses associated with the relocation of the
Companys corporate headquarters to Atlanta, Georgia contributed to the increase in
administrative expenses in the 2005 Quarter and 2005 Period. Salaries and benefits and
other variable selling costs associated with Microteks increased healthcare revenues
contributed to the 2005 Period increase in sales and marketing expenses.

Following the ETI transaction in
September 2004, the Company has substantially reduced the selling, general and
administrative expenses of its OTI division. During the 2005 Quarter and 2005 Period,
OTIs selling, general and administrative expenses, consisting primarily of franchise
taxes and miscellaneous administrative costs, totaled $166 thousand and $234 thousand,
respectively. These amounts represent decreases of $196 thousand and $906 thousand from
the 2004 Quarter and 2004 Period, respectively.

Consolidated research and development
expenses of $172 thousand for the 2005 Quarter and $643 for the 2005 Period decreased from
$304 thousand in the 2004 Quarter and $812 thousand in the 2004 Period as a result of the
Companys more focused research and development program which has reduced spending
for Microteks research and development activities in 2005. Subsequent to the ETI
transaction concluded in September 2004, OTIs research and development expenses
consist primarily of expenses related to maintenance and protection of OTIs
intellectual property.

15

---

Consolidated amortization of
intangibles in the 2005 Quarter and 2005 Period was $243 thousand and $726 thousand,
respectively, versus $159 thousand in the 2004 Quarter and $465 thousand in the 2004
Period. The increases in the 2005 Quarter and 2005 Period resulted primarily from the
amortization of intangibles acquired in the IMP acquisition in May 2004.

Income from Operations. Income
from operations for the 2005 Quarter was $1.5 million, or 4.6 percent of net revenues,
versus $2.5 million, or 7.3 percent of net revenues, in the 2004 Quarter. Income from
operations for the 2005 Period was $6.7 million, or 6.6 percent of net revenues, versus
$6.3 million, or 6.7 percent of net revenues, in the 2004 Period. Included in income from
operations in the 2005 Period were disposition losses of approximately $139 thousand
related to the closure of the Companys manufacturing facilities in Gurnee, Illinois
and the transition of those operations to the Dominican Republic. Included in income from
operations for the 2004 Quarter and 2004 Period was a gain of $215 thousand related to the
disposition of property and equipment.

For the 2005 Quarter and 2005 Period,
Microteks income from operations was $1.4 million and $5.6 million, respectively, as
compared to income from operations of $2.1 million recorded in the 2004 Quarter and $5.8
million for the 2005 Period.

The Companys OTI division
reported income from operations in the 2005 Quarter and 2005 Period of $173 thousand and
$1.1 million, respectively, compared to income from operations of $418 thousand in the
2004 Quarter and $432 thousand in the 2004 Period. Included in income from operations in
the 2004 Quarter and 2004 Period was a gain of approximately $215 thousand related to the
disposition of property and equipment. The increase in OTIs income from operations
in the 2005 Period is attributable to the ETI transaction concluded in September 2004
which stabilized gross margins at approximately 38 percent and eliminated a significant
portion of OTIs selling, general and administrative expenses.

Interest Expense and Interest
Income.Consolidated interest expense for the 2005 Quarter and 2005 Period was $41
thousand and $209 thousand, respectively, as compared to $95 thousand in the 2004 Quarter
and $236 thousand in the 2004 Period. The decreases in consolidated interest expense in
the 2005 Quarter and 2005 Period resulted primarily from lower average borrowings under
the Companys Credit Agreement. Interest income of $40 thousand and $122 thousand in
the 2005 Quarter and 2005 Period, respectively, increased from $11 thousand in the 2004
Quarter and $42 thousand in the 2004 Period as a result of higher interest rates
applicable to the Companys cash and cash equivalents 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 are
denominated in a currency other than the functional currency of those subsidiaries. For
the 2005 Quarter, the Company recorded foreign currency exchange gains of approximately $7
thousand. For the 2005 Period, the Company recorded foreign currency exchange losses of
approximately $416 thousand. There were no such foreign currency exchange gains or losses
in the 2004 Quarter or 2004 Period. The Company believes that changes made to the
structure of these intercompany transactions during the second quarter of 2005 will
significantly minimize the occurrence of these foreign currency exchange losses in future
periods. In the 2005 Quarter and 2005 Period, the Companys equity in earnings of its
investee, GRI, were $64 thousand and $199 thousand, respectively, as compared to $84
thousand for the 2004 Quarter and $108 thousand for the 2004 Period.

Income Taxes. The
Companys provision for income taxes in the 2005 Quarter reflects a net income tax
benefit of $6.3 million, consisting of a $6.5 million net non-cash deferred income tax
benefit due primarily to the decrease in the Companys valuation allowance associated
with its deferred tax assets, and the offsetting state, foreign and Federal alternative
minimum tax expense of $225 thousand. For the 2005 Period, the Companys provision
for income taxes reflects a net income tax benefit of $5.8 million, consisting of a $6.3
million net non-cash deferred income tax benefit and the offsetting state, foreign and
Federal alternative minimum tax expense of $564 thousand.

The non-cash deferred income tax
benefit recorded during the 2005 Quarter results from the elimination of the
Companys valuation allowance for its Federal net operating loss carryforwards. 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 carryforwards are scheduled to expire to
determine the amount of the valuation allowance. This review at the end of the 2005
Quarter resulted in recording the net non-cash deferred income tax benefit during the 2005
Quarter. The Company expects to record an expense for Federal income taxes in its
quarterly financial statements beginning with the fourth quarter of 2005, which will
result in recording income tax expenses at higher amounts than previously recorded by the
Company. The Company, however, continues to have the benefit of offsetting its obligations
to pay taxes with its Federal net operating loss carryforwards 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.

16

---

For the 2004 Quarter and 2004 Period,
the Companys provision for income taxes was $287 thousand and $578 thousand,
respectively, consisting entirely of the Companys state and foreign tax provisions
for the 2004 Quarter and 2004 Period.

Net Income. The resulting net
income for the 2005 Quarter and 2005 Period was $7.9 million, or $0.18 per diluted share,
and $12.2 million, or $0.27 per diluted share, respectively. Net income for the 2004
Quarter and 2004 Period was $2.2 million, or $0.05 per diluted share, and $5.6 million, or
$0.13 per diluted share, respectively. Excluding the non-cash deferred income tax benefits
in the 2005 Quarter and 2005 Period of $6.5 million and $6.3 million, respectively, would
cause the Companys net income in the 2005 Quarter and 2005 Period to be $1.4 million
and $5.8 million, or $0.03 and $0.13 per diluted share, respectively.

# Liquidity and Capital
Resources

As of September 30, 2005 and December
31, 2004, the Companys cash and cash equivalents totaled $9.1 million and $9.0
million, respectively. The Companys cash flow activity in the 2005 Period and 2004
Period was as follows (in thousands):

|                                      | Nine months ended September 30,
|------------------------------------- | -------------------------------
|
|Cash provided by operating activities |                                
|Cash used in investing activities     |                                
|Cash provided by (used in) financing  |                                
|activities                            |                                

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 its obligations under the indebtedness incurred in connection with acquisitions,
capital investment in property and equipment and funding of the Companys working
capital needs.

During the 2005 Period, the
Companys operating activities generated cash of $5.9 million and consisted primarily
of net income from operations, net of deferred income taxes, depreciation and amortization
of $2.4 million and a $2.1 million decrease in inventories. Offsetting these sources of
cash were a $1.0 million increase in accounts receivable, net of allowances, a $1.1
million increase in prepaid expenses and other assets, a $1.9 million decrease in accounts
payable, and decreases in accrued compensation and other liabilities of $63 thousand.
During the 2004 Period, the Companys operating activities generated cash of
approximately $9.6 million which consisted primarily of net income, depreciation and
amortization of $2.1 million, a $1.7 million decrease in inventories, and a $3.0 million
increase in accounts payable, accrued compensation and other liabilities offset by a $2.4
million increase in accounts receivables, net of allowances.

Cash used in investing activities in
the 2005 Period totaled $644 thousand as a result of purchases of capital property and
equipment of $859 thousand which was offset by proceeds from dispositions of $215
thousand. Investing activities in the 2004 Period used approximately $10.9 million in
cash, including purchases of capital property and equipment of $1.4 million and cash
consideration of $419 thousand and $9.6 million for the OrthoPlast and IMP acquisitions,
respectively, which were offset by proceeds from dispositions of equipment of $600
thousand.

During the 2005 Period, financing
activities used $5.1 million in cash. Financing cash inflows in the 2005 Period included
proceeds from the exercise of stock options and other stock issuances of $674 thousand.
Financing cash outflows for the 2005 Period included net repayments of borrowings under
the Companys Credit Agreement of $4.1 million, repayments of other long-term debt
agreements of $369 thousand and a decrease in the Companys bank overdraft of
approximately $1.3 million. Cash provided by financing activities for the 2004 Period of
$661 thousand consisted of $968 thousand from the exercise of stock options and $555
thousand from other stock issuances and the offsetting financing cash outflows for net
credit facility repayments of $291 thousand, the repayment of other long-term debt
agreements of $345 thousand and a decrease in the Companys bank overdraft of $226
thousand.

17

---

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.
Outstanding borrowings under the revolving credit facility were $455 thousand and $4.5
million at September 30, 2005 and December 31, 2004, respectively. As of September 30,
2005, the Company had additional borrowing availability under the revolving facility of
$16.5 million. As of November 4, 2005, the Company had repaid all of its borrowings under
the revolving facility and had a total borrowing availability under the revolving facility
of approximately $17.0 million. Revolving credit borrowings bear interest at a floating
rate approximating the Banks prime rate plus an interest margin (7.0% at November 4,
2005). At September 30, 2005, the Company was in compliance with its financial covenants
under the Credit Agreement.

Based on its current business plan,
the Company expects that cash equivalents and short-term investments 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 2005 and subsequent years.

# 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.

# 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 equivalents and short term investments 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
including, without limitation, those described under Risk Factors under the captions:
Low Barriers to Entry for Competitive Products, Potential Erosion of
Profit Margins, Reliance upon Distributors, Small Sales and
Marketing Force, Disruption of Sales and Marketing Group, Reliance
upon Large Customers, Risks of Completing Acquisitions, Risks of
Successfully Integrating Acquisitions, Reliance on International
Operations, Reliance upon Microtek, Reliance upon Licensee for
OTIs Operating Results, Dependence on Key Personnel,
Competition, Product Liability, Regulatory Risks,
Risks of Obsolescence, Risks Affecting Protection of Technologies,
Stock Price Volatility, Risks of Accounting for Income Taxes,
Foreign Currency Risks, Risks for Increases in Costs of Raw Materials
and Distribution Expenses and Anti-takeover Provisions. The Company does
not undertake to update the Companys forward-looking statements to reflect future
events or circumstances.

18

---

# 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 and the
Netherlands 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 losses of $120 thousand and $10 thousand for the three months ended
September 30, 2005 and 2004, respectively, and a loss of $1.3 million and a gain of $21
thousand for the nine months ended September 30, 2005 and 2004, 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 operations for three months and nine months ended September 30, 2005
was a foreign currency exchange gain of approximately $7 thousand and a foreign currency
exchange loss of approximately $416 thousand which resulted from the translation of
certain intercompany transactions of the Netherlands subsidiaries which are 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 nine months ended September 30, 2004. The Company believes that changes
made to the structure of these intercompany transactions during the second quarter of 2005
will significantly minimize 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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 September 30, 2005, the Company had long-term debt
totaling $455 thousand that bears interest at a floating rate approximating the Prime
Rate. Because these rates are variable, an increase or decrease in the Companys
average interest rate of ten percent, or approximately 48 basis points, would have
increased or decreased interest expense by approximately $12 thousand during the nine
months ended September 30, 2005.

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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

---

| | 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 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. The Company
made no repurchases of equity securities during the quarter ended September 30, 2005.

# Item 3.   Default Upon
Senior Securities

Not applicable.

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

None.

20

---

# 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.
| | ------- |  | --------------------------------------------------------------

| | 4.1(3) |  | Specimen
Certificate of Common Stock
| | ------ |  | ------------------------------------

| | 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 (File No. 33-83474).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Incorporated by reference to Exhibit 3.1 of the Companys Quarterly Report
               on Form 10-Q for the quarter ended March 31, 2004
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference to the Companys Registration Statement on Form
               S-1 (File No. 33-83474).
|--- |  | -----------------------------------------------------------------------------------------------------------------

21

---

# 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 November
8, 2005.

| | MICROTEK MEDICAL HOLDINGS, INC.                                                         
| | ----------------------------------------------------------------------------------------
| |                                                                                         
| | By: /s/ Dan R. Lee                                                                      
| | Dan R. Lee
Chairman, President and Chief Executive Officer
(principal executive officer)
| |                                                                                         
| | By: /s/ Roger G. Wilson                                                                 
| | Roger G. Wilson
Chief Financial Officer
(principal financial officer)                   

22