**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, 2007
            Commission
                File No.
            0-24866








MICROTEK
      MEDICAL HOLDINGS, INC.


(Exact
      name of Registrant as specified in its charter)








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





13000
      DEERFIELD PARKWAY, SUITE 300


ALPHARETTA,GA30004


(Address
      of principal executive offices)





(678)
      896-4400


(Registrant's
      telephone number, including area code)











Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      at least the past 90 days.     Yes  xNo o





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




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


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





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





Class
            Outstanding
                at November 6, 2007Common
                Stock, $.001 par value
            43,672,049















**INDEX**





**PART
                I:**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                Statements:Unaudited
                Condensed Consolidated Balance Sheets as of September 30, 2007 and
                December 31, 2006Unaudited
                Condensed Consolidated Statements of Operations and Comprehensive
                Income
                for the Three Months ended September 30, 2007 and September 30, 2006
                and
                for the Nine Months ended September 30, 2007 and September 30,
                2006Unaudited
                Condensed Consolidated Statements of Cash Flows for the Nine Months
                ended
                September 30, 2007 and September 30, 2006Notes
                to Unaudited Condensed Consolidated Financial
                Statements




Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                OperationsItem
                3.
            Quantitative
                and Qualitative Disclosures About Market RiskItem
                4.
            Controls
                and Procedures








**PART
                II:**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                ProceedingsItem
                1A.
            Risk
                FactorsItem
                2.
            Unregistered
                Sales of Equity Securities and Use of ProceedsItem
                3.
            Defaults
                Upon Senior SecuritiesItem
                4.
            Submission
                of Matters to a Vote of Security HoldersItem
                5.
            Other
                InformationItem
                6.
            Exhibits




















2




















**PART
      I**


**FINANCIAL
      INFORMATION**


**Item
      1.   Financial Statements**





**MICROTEK
                MEDICAL HOLDINGS, INC.**Unaudited
                Condensed Consolidated Balance Sheets(in
                thousands)**Assets**
            
            **September
                30, 2007**
            
            
            **December
                31, 2006**Current
                assets:Cash
                and cash equivalents
            
            $
            19,014
            
            
            $
            17,059Accounts
                receivable, net of allowances of $1,768
              and
                $1,626, respectively
            
            
            22,082
            
            
            
            18,182Other
                receivables
            
            
            1,366
            
            
            
            1,540Inventories
            
            
            39,318
            
            
            
            35,654Deferred
                income taxes
            
            
            4,353
            
            
            
            3,368Prepaid
                expenses and other current assets
            
            
            1,904
            
            
            
            2,003Total
                current assets
            
            
            88,037
            
            
            
            77,806Property
                and equipment
            
            
            33,490
            
            
            
            32,189Less
                accumulated depreciation
            
            
            (25,712
            )
            
            
            (24,181
            )Property
                and equipment, net
            
            
            7,778
            
            
            
            8,008Goodwill
            
            
            35,677
            
            
            
            34,803Other
                intangible assets, net
            
            
            12,758
            
            
            
            12,204Deferred
                income taxes
            
            
            12,036
            
            
            
            16,192Other
                assets
            
            
            6,944
            
            
            
            7,153Total
                assets
            
            $
            163,230
            
            
            $
            156,166**Liabilities
                and Shareholders’ Equity**Current
                liabilities:Accounts
                payable
            
            $
            9,628
            
            
            $
            11,735Accrued
                expenses
            
            
            7,146
            
            
            
            6,672Income
                taxes payable
            
            
            255
            
            
            
            353Current
                portion of long-term debt
            
            
            140
            
            
            
            173Total
                current liabilities
            
            
            17,169
            
            
            
            18,933Long-term
                debt, excluding current portion
            
            
            670
            
            
            
            721Deferred
                income taxes
            
            
            1,128
            
            
            
            769Other
                long-term liabilities, excluding current portion
            
            
            2,869
            
            
            
            3,507Total
                liabilities
            
            
            21,836
            
            
            
            23,930Shareholders’
                equity:Common
                stock
            
            
            46
            
            
            
            45Additional
                paid-in capital
            
            
            220,425
            
            
            
            218,759Accumulated
                deficit
            
            
            (74,785
            )
            
            
            (81,859
            )Accumulated
                other comprehensive income, net
              of
                income taxes of ($228) and ($178), respectively
            
            
            1,777
            
            
            
            733147,463
            
            
            
            137,678Treasury
                shares, at cost
            
            
            (6,069
            )
            
            
            (5,442
            )Total
                shareholders’ equity
            
            
            141,394
            
            
            
            132,236Total
                liabilities and shareholders’ equity
            
            $
            163,230
            
            
            $
            156,166




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****September
                30, 2007**
            
            
            **September
                30, 2006**
            
            
            **September
                30, 2007**
            
            
            **September
                30, 2006**Net
                revenues
            
            $
            39,222
            
            
            $
            35,108
            
            
            $
            114,903
            
            
            $
            104,849Cost
                of goods sold
            
            
            22,881
            
            
            
            21,368
            
            
            
            66,701
            
            
            
            63,399Gross
                profit
            
            
            16,341
            
            
            
            13,740
            
            
            
            48,202
            
            
            
            41,450Operating
                expenses:Selling,
                general and administrative
            
            
            12,041
            
            
            
            10,782
            
            
            
            36,399
            
            
            
            31,324Research
                and development
            
            
            396
            
            
            
            159
            
            
            
            1,135
            
            
            
            448Amortization
                of intangibles
            
            
            393
            
            
            
            254
            
            
            
            1,072
            
            
            
            722Total
                operating expenses
            
            
            12,830
            
            
            
            11,195
            
            
            
            38,606
            
            
            
            32,494Income
                from operations
            
            
            3,511
            
            
            
            2,545
            
            
            
            9,596
            
            
            
            8,956Interest
                income
            
            
            128
            
            
            
            129
            
            
            
            359
            
            
            
            328Interest
                expense
            
            
            (77
            )
            
            
            (16
            )
            
            
            (146
            )
            
            
            (37
            )Equity
                in earnings of investee
            
            
            61
            
            
            
            80
            
            
            
            194
            
            
            
            203Foreign
                currency exchange gain
            
            
            593
            
            
            
            -
            
            
            
            796
            
            
            
            -Income
                before income taxes
            
            
            4,216
            
            
            
            2,738
            
            
            
            10,799
            
            
            
            9,450Income
                tax provision
            
            
            1,732
            
            
            
            1,090
            
            
            
            3,725
            
            
            
            3,397Net
                income
            
            $
            2,484
            
            
            $
            1,648
            
            
            $
            7,074
            
            
            $
            6,053Other
                comprehensive income (loss):Foreign
                currency translation gain, net of income taxes of ($17), ($46), ($53)
                and
                ($112), respectively
            
            
            709
            
            
            
            219
            
            
            
            1,050
            
            
            
            1,036Unrealized
                loss on available for sale securities, net of income taxes of $5,
                $24, $3,
                and $38, respectively
            
            
            (9
            )
            
            
            (39
            )
            
            
            (6
            )
            
            
            (61
            )Comprehensive
                income
            
            $
            3,184
            
            
            $
            1,828
            
            
            $
            8,118
            
            
            $
            7,028Net
                income per common share –
              Basic
                and Diluted
            
            $
            0.06
            
            
            $
            0.04
            
            
            $
            0.16
            
            
            $
            0.14Basic
                weighted average number of commonshares
                outstanding
            
            
            43,535
            
            
            
            43,434
            
            
            
            43,463
            
            
            
            43,581Diluted
                weighted average number of commonshares
                outstanding
            
            
            45,166
            
            
            
            44,431
            
            
            
            44,584
            
            
            
            44,574




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**
            
            
            **Nine
                months ended****September
                30, 2007**
            
            
            **September
                30, 2006**Cash
                flows from operating activities:Net
                income
            
            $
            7,074
            
            
            $
            6,053Adjustments
                to reconcile net income to net cash provided byoperating
                activities:Depreciation
            
            
            1,522
            
            
            
            1,517Amortization
                of intangibles
            
            
            1,072
            
            
            
            722Provision
                for doubtful accounts
            
            
            250
            
            
            
            419Deferred
                income taxes
            
            
            3,178
            
            
            
            3,093Equity
                in earnings of investee
            
            
            (194
            )
            
            
            (203
            )Other
            
            
            6
            
            
            
            (3
            )Changes
                in operating assets and liabilities, net of
              acquisitions
            
            
            (5,093
            )
            
            
            (3,282
            )**Net
                cash provided by operating activities**
            
            ****
            **7,815**
            
            
            ****
            **8,316**Cash
                flows from investing activities:Purchase
                of and deposits for property and equipment
            
            
            (1,212
            )
            
            
            (1,204
            )Acquisition
                of Samco, net of cash acquired
            
            
            -
            
            
            
            (2,346
            )Acquisition
                of Ceres Medical, net of cash acquired
            
            
            -
            
            
            
            (483
            )Acquisition
                of Europlak, net of cash acquired
            
            
            (96
            )
            
            
            -Acquisition
                of Eurobiopsy, net of cash acquired
            
            
            (141
            )
            
            
            -Proceeds
                from dispositions
            
            
            31
            
            
            
            6**Net
                cash used in investing activities**
            
            ****
            **(1,418**
            **)**
            
            ****
            **(4,027**
            **)**Cash
                flows from financing activities:Borrowings
                under line of credit agreement
            
            
            96,359
            
            
            
            91,080Repayments
                under line of credit agreement
            
            
            (96,359
            )
            
            
            (92,311
            )Changes
                in bank overdraft
            
            
            (4,660
            )
            
            
            (1,018
            )Repayments
                under notes payable
            
            
            (141
            )
            
            
            (343
            )Proceeds
                from exercise of stock options
            
            
            946
            
            
            
            68Repurchase
                of treasury stock
            
            
            (627
            )
            
            
            (2,001
            )Proceeds
                from issuance of common stock
            
            
            721
            
            
            
            571**Net
                cash used in financing activities**
            
            ****
            **(3,761**
            **)**
            
            ****
            **(3,954**
            **)**Effect
                of exchange rate changes on cash
            
            
            (681
            )
            
            
            396Net
                increase in cash and cash equivalents
            
            
            1,955
            
            
            
            731Cash
                and cash equivalents at beginning of period
            
            
            17,059
            
            
            
            14,765**Cash
                and cash equivalents at end of period**
            
            **$**
            **19,014**
            
            
            **$**
            **15,496**




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.  As described in Note 8 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.  Subject to the terms
      and conditions of this licensing agreement, OTI no longer sells OREX products
      to
      the nuclear power industry.





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 unaudited condensed 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, 2006 (the “Annual Report”).





**2.**
            **PENDING
                ACQUISITION TRANSACTION**





On
      August
      7, 2007, the Company and Ecolab Inc. (Ecolab) entered into a definitive
      agreement and plan of merger whereby Ecolab will acquire the Company in a cash
      transaction.  Under the terms of the agreement, the Company’s
      shareholders will receive $6.30 for each share of common stock outstanding
      as of
      the closing date of the transaction, which is expected to occur as soon as
      practicable following the Company’s meeting of shareholders scheduled for
      November 9, 2007, subject to obtaining the required approval of shareholders
      at
      that meeting.  Completion of the transaction is contingent upon
      various conditions, which are more fully set forth in the merger agreement,
      including, among other things, approval of the transaction by the Company’s
      shareholders and other customary closing conditions.





**3.**
            **CRITICAL
                ACCOUNTING POLICIES AND
                ESTIMATES**




The
      Company's discussion of results of operations and financial condition relies
      on
      its consolidated financial statements that are prepared based on certain
      critical accounting policies that require management to make judgments and
      estimates that are subject to varying degrees of uncertainty.  The Company
      believes that investors need to be aware of these policies and how they impact
      its financial statements as a whole, as well as its related discussion and
      analysis presented herein.  While the Company believes that these
      accounting policies are based on sound measurement criteria, actual future
      events can and often do result in outcomes that can be materially different
      from
      these estimates or forecasts.  The accounting policies and related risks
      described in the Company's Annual Report on Form 10-K for the year ended
      December 31, 2006 are those that depend most heavily on these judgments and
      estimates.  During the three months and nine months ended September
      30, 2007, there have been no material changes to any of the Company’s critical
      accounting policies.




6




**4.**
            **NEWLY
                ISSUED ACCOUNTING
                STANDARDS**





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, *Accounting for Uncertainty in Income Taxes – An interpretation of
      FASB Statement No. 109***(“FIN 48”) which clarifies the
      accounting and disclosure requirements for uncertainty in tax positions, as
      defined.  The Company’s adoption of the provisions of FIN 48 on
      January 1, 2007 had no impact on the Company’s consolidated financial
      statements.  The Company examined its tax positions for all open tax
      years through December 31, 2006 and the full benefit of each tax position has
      been recognized in the financial statements in accordance with FIN
      48.  On any future tax positions, the Company intends to record
      interest and penalties, if any, as a component of interest expense and general
      and administrative expenses, respectively.  The Company’s tax years
      are open for U.S. Federal purposes from 2004 through 2006.  Certain
      U.S. state tax years remain open for 2003 and 2006
      filings.  International statutes vary widely and the open years range
      from 2004 through 2006.  Taxing authorities have the ability to review
      prior tax years to the extent of net operating loss and tax credit carryforwards
      to open tax years.





In
                September 2006, the Financial Accounting Standards Board (“FASB”) issued
                SFAS No. 158, *Employer’s Accounting for Defined Benefit Pension and
                Other Postretirement Plans – an amendment of FASB Statements No. 87, 88,
                106, and 132(R)* (“SFAS No. 158”).  SFAS No. 158 requires
                companies to recognize the funded status of defined benefit pension
                and
                other postretirement plans as a net asset or liability in its statement
                of
                financial position and to recognize changes in that funded status
                in the
                year in which the changes occur through comprehensive income to the
                extent
                that those changes are not included in the net periodic
                cost.  The funded status of a defined benefit pension plan is
                measured as the difference between the fair value of plan assets
                and the
                projected benefit obligation under the plan.  Additionally, SFAS
                No. 158 requires companies to measure the funded status of a plan
                as of
                the company’s fiscal year-end, with limited exceptions, and expands
                financial statement disclosures.  The Company adopted all
                requirements of SFAS No. 158 with respect to its international defined
                benefit pension plan on December 31, 2006, except for the funded
                status
                measurement date requirement which will be adopted on December 31,
                2008,
                as allowed under SFAS No. 158.





In
      September 2006, the FASB issued SFAS No. 157, *Fair Value Measurement*
      (“SFAS No. 157”).  SFAS No. 157 defines fair value, establishes a
      framework for the measurement of fair value, and enhances disclosures about
      fair
      value measurements but does not require any new fair value
      measures.  SFAS No. 157 is effective for fair value measures already
      required or permitted by other standards for fiscal years beginning after
      November 15, 2007.  The Company is required to adopt SFAS No. 157 on
      January 1, 2008.  SFAS No. 157 is required to be applied
      prospectively, except for certain financial instruments.  Any
      transition adjustment will be recognized as an adjustment to opening retained
      earnings in the year of adoption.  The Company is currently evaluating
      the impact of adopting SFAS No. 157 on its consolidated results of operations
      and financial position.





On
      February 15, 2007, the FASB issued SFAS No. 159, *The Fair Value
      Option for Financial Assets and Financial Liabilities — Including an Amendment
      of FASB Statement No. 115***(“SFAS No.
      159”).  SFAS No. 159 permits an entity to irrevocably elect to report
      selected financial assets and liabilities at fair value, with subsequent changes
      in fair value reported in earnings.  The election may be applied on an
      instrument-by-instrument basis.  SFAS No. 159 also establishes
      additional presentation and disclosure requirements for items measured using
      the
      fair value option.  SFAS No. 159 is effective for all financial statements
      issued for fiscal years beginning after November 15, 2007.  The
      Company has not yet determined whether it will adopt SFAS No. 159.





**5.**
            **STOCK-BASED
                COMPENSATION**




The
      Company follows the provisions of SFAS No. 123(R), *Share-Based Payment,*and related interpretations (collectively, “SFAS No. 123(R)”) to account
      for stock-based compensation.  SFAS No. 123(R) supersedes Accounting
      Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to
      Employees*,**and revises guidance in SFAS No. 123,
*Accounting for Stock-Based Compensation*.  SFAS No. 123(R)
      establishes accounting requirements for share-based compensation to employees
      and carries forward prior guidance on accounting for awards to
      non-employees.  Specifically, SFAS No. 123(R) requires that
      compensation expense be recognized in the financial statements for share-based
      awards based on the grant date fair value of those awards.  SFAS No.
      123(R) also requires the benefits of tax deductions in excess of recognized
      compensation expense to be reported as a financing cash flow activity, rather
      than as an operating cash flow activity as previously required.






7





Pursuant
      to SFAS No. 123(R), the Company recognizes stock-based compensation expense
      based on the grant-date fair value of its share-based awards granted subsequent
      to December 31, 2005 that are expected to vest.  Compensation expense
      is recognized on a straight-line basis over the requisite service period, which
      is generally commensurate with the vesting term.  Compensation expense
      is recognized immediately for share-based awards that are fully vested on the
      date of the grant.  During the three months and nine months ended
      September 30, 2007, there were no stock option grants issued and no compensation
      expense recognized in the Company’s financial statements related to share-based
      awards.  For the three months and nine months ended September 30,
      2006, compensation expense recognized in the Company’s financial statements
      related to share-based awards totaled approximately $19,000.  For the
      three months and nine months ended September 30, 2007 and 2006, the Company
      did
      not record any excess tax benefits generated from stock option exercises because
      of the Company’s significant net operating loss carryforwards for Federal income
      tax purposes.





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





Pursuant
      to the Company’s Credit Agreement (see Note 12), the Company is not permitted to
      pay any dividends and does not anticipate paying any cash dividends in the
      foreseeable future.  Therefore, an expected dividend yield of zero is
      assumed for purposes of the Company’s Black Scholes
      calculations.  Pre-vesting forfeiture rates are estimated based on the
      Company’s historical experience and expectations about future
      forfeitures.  Expected price volatility is determined using a weighted
      average of daily historical volatility of the Company’s stock price over the
      corresponding expected option life.  The average risk-free interest
      rate is determined using the Federal Reserve nominal rates in effect as of
      the
      date of grant for U.S. Treasury zero-coupon bonds with maturities similar to
      those of the expected term of the share-based award being valued.  The
      expected term of stock options is determined using historical data.





***Stock-Based
      Employee Compensation Plans***.  At September 30, 2007, the
      Company has two stock-based employee compensation plans: the 1992 Stock Option
      Plan (the “1992 Plan”) and the 1999 Stock Option Plan (the “1999
      Plan”).





The
      1992
      Plan was adopted on April 28, 1992 and, as amended, authorized the issuance
      of
      up to 4,800,000 shares of common stock to certain employees, consultants and
      directors of the Company under incentive and/or nonqualified options and/or
      alternate rights.  An alternate right is defined as the right to
      receive an amount of cash or shares of stock having an aggregate market value
      equal to the appreciation in the market value of a stated number of shares
      of
      the Company’s common stock from the alternate right grant date to the exercise
      date.  Options and/or rights under the 1992 Plan were granted through
      April 27, 2002 at prices not less than 100 percent of the market value at
      the date of grant.  Options and/or rights become exercisable based
      upon a vesting schedule determined by the 1992 Plan Committee and become fully
      exercisable upon a change in control, as defined.  Options expire not
      more than ten years from the date of grant and alternate rights expire at the
      discretion of the 1992 Plan Committee.  At September 30, 2007,
      currently exercisable options for 719,337 shares were outstanding under the
      1992
      Plan.  There were no alternate rights issued under the 1992
      Plan.  The expiration of the 1992 Plan on April 27, 2002 does not
      affect options currently outstanding.





The
      1999
      Plan was approved by the shareholders on May 27, 1999, and as amended on May
      19,
      2004, authorizes the issuance of up to 5,345,000 shares of common stock to
      certain employees, consultants and directors of the Company under incentive
      and/or nonqualified options, stock appreciation rights (“SARs”) and other stock
      awards (collectively, “Stock Awards”).  Stock Awards under the 1999
      Plan may be granted at prices not less than 100 percent of the market value
      at
      the date of grant.  Options and/or SARs become exercisable based upon
      a vesting schedule determined by the 1999 Plan Committee and become fully
      exercisable upon a change in control, as defined.  Options expire not
      more than ten years from the date of grant and SARs and other stock awards
      expire at the discretion of the 1999 Plan Committee.  The 1999 Plan is
      unlimited in duration.  At September 30, 2007, currently exercisable
      options for 2,856,500 shares were outstanding under the 1999 Plan.







8




At
      September 30, 2007, there were 1,607,100 shares available for future grants
      under the Company’s stock option plans.





A
      summary
      of option activity during the nine months ended September 30, 2007 is as
      follows:





**Shares**
            
            
            **Weighted
                Average**
              **Exercise
                Price**Outstanding
                and Exercisable – December 31, 2006
            
            
            3,990,806
            
            
            $
            2.97Granted
            
            
            -
            
            
            
            -Exercised
            
            
            (378,969
            )
            
            
            2.49Canceled
            
            
            (36,000
            )
            
            
            4.69Outstanding
                and Exercisable – September 30, 2007
            
            
            3,575,837
            
            
            $
            3.01





The
      following table summarizes information pertaining to options outstanding and
      exercisable at September 30, 2007:





**Range
                of**
              **Exercise****Prices**
            **Number**
              **Outstanding
                and Exercisable**
            **Average****Remaining**
              **Contractual****Life
                (Years)**
            
            **Weighted****Average**
              **Exercise****Price**$0.72
                - $1.50
            350,011
            3.4
            
            $     1.39$1.66
                - $2.28
            1,272,581
            3.8
            
            1.96$2.35
                - $3.59
            431,745
            4.6
            
            3.01$3.60
                - $3.99
            748,000
            6.6
            
            3.72$4.00
                - $5.02
            773,500
            6.1
            
            4.773,575,837
            4.9
            
            $     3.01





The
      aggregate intrinsic value of options outstanding and exercisable was
      approximately $18.1 million at September 30, 2007.  There were 153,500
      options and 378,969 options exercised during the three months and nine months
      ended September 30, 2007, respectively.  There were no options
      exercised during the three months ended September 30, 2006 and 60,750 options
      exercised during the nine months ended September 30, 2006.  The total
      intrinsic value of options exercised during the three months and nine months
      ended September 30, 2007 was approximately $582,000 and $1.0 million,
      respectively, and $152,000 for the nine months ended September 30, 2006, as
      determined as of the date of exercise.  Cash received from option
      exercises totaled $363,000 and $946,000 during the three months and nine months
      ended September 30, 2007, respectively, and $68,000 during the nine months
      ended
      September 30, 2006.





***Employee
      Stock Purchase Plan***.  In March 1999, the Company adopted
      an Employee Stock Purchase Plan (the “1999 ESPP”) which authorized the issuance
      of up to 700,000 shares of common stock.  At December 31, 2006, there
      were 104,633 shares available for future issuance under the 1999
      ESPP.  In May 2007, the Company’s shareholders approved the 2007
      Employee Stock Purchase Plan (the “2007 ESPP”) which authorizes the issuance of
      up to 500,000 shares of common stock, plus the 104,633 shares available for
      purchase under the 1999 ESPP.  Under the 2007 ESPP, eligible employees
      may contribute up to ten percent of their compensation toward the purchase
      of
      common stock at each year-end.  The employee purchase price is derived
      from a formula based on fair market value of the Company’s common
      stock.  Compensation cost associated with the rights granted under the
      2007 ESPP is estimated based on fair market value.  At September 30,
      2007, there were 604,633 shares available for future issuance under the 2007
      ESPP.






9




**6.**
              **STOCK
                  REPURCHASE PROGRAM**




In
      August
      2006, the Board of Directors amended the Company’s existing stock repurchase
      program to authorize the repurchase of an aggregate of 4.0 million shares over
      an indefinite period, including approximately 1.7 million shares previously
      repurchased under the program.  During the nine months ended September
      30, 2007, the Company repurchased 141,100 shares under this program for
      approximately $627,000, at an average repurchase price of approximately $4.44
      per share.  There were no repurchases under this program during the
      three months ended September 30, 2007.  During the three months and
      nine months ended September 30, 2006, the Company repurchased 315,000 shares
      and
      550,241 shares, respectively, under this program for approximately $1.1 million
      and $2.0 million, respectively, an average repurchase price of approximately
      $3.55 per share and $3.64 per share, respectively.  As of September
      30, 2007, the Company had repurchased approximately 2.1 million shares for
      an
      aggregate repurchase price of approximately $5.6 million.




**7.**
            **ACQUISITIONS**




Each
      of
      the following described 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 consolidated
      financial statements from their respective acquisition date.





Effective
      March 1, 2006, Microtek acquired KMMS Holdings, Ltd. and its European
      manufacturing and distribution operations (collectively, “Samco”) for
      approximately $2.3 million in cash, including acquisition costs.  The
      purchase price was allocated to the assets acquired and liabilities assumed
      based on their respective estimated fair values as follows (in
      thousands):





Purchase
                consideration in cash
            
            
            
            
            $
            2,256Allocated
                to:Accounts
                receivable
            
            $
            347Inventories
            
            
            787Property
                and equipment
            
            
            273Identifiable
                intangible assets
            
            
            739Accounts
                payable and other accrued liabilities
            
            
            (628
            )Total
                allocation
            
            
            
            
            
            
            1,518Goodwill
            
            
            
            
            
            $
            738





Identifiable
      intangible assets related to the Samco acquisition include customer lists of
      approximately $429,000 (useful life of approximately nine years), a non-compete
      agreement of $155,000 (useful life of five years), trade name of $52,000 (useful
      life of 15 years) and other intangible assets of approximately $103,000 (useful
      life of five years).





Effective
      July 1, 2006, Microtek acquired substantially all of the assets of Ceres
      Medical, LLC (Ceres Medical), a marketer of a small line of products sold
      primarily to cardiology and interventional radiology specialties, for
      approximately $492,000 in cash.  The purchase price allocation was
      finalized during the quarter ended June 30, 2007, and based on the estimated
      fair values of the assets acquired and liabilities assumed, is as follows (in
      thousands):











10











Purchase
                consideration in cash
            
            
            
            
            $
            492Allocated
                to:Accounts
                receivable
            
            $
            46Inventories
            
            
            46Property
                and equipment
            
            
            6Identifiable
                intangible assets
            
            
            176Accounts
                payable and other accrued liabilities
            
            
            (47
            )Total
                allocation
            
            
            
            
            
            
            227Goodwill
            
            
            
            
            
            $
            265





Identifiable
      intangible assets related to the Ceres Medical acquisition include customer
      lists of $72,000 (useful life of five years) and a non-compete agreement for
      $104,000 (useful life of five years).  The terms of the related
      purchase agreement also provide for additional cash consideration up to $550,000
      if future contribution margins from the acquired product line exceed certain
      levels, as defined in the agreement, through 2011.  The additional
      consideration will be recorded when it is determinable that the payment of
      such
      amounts is probable and is expected to result in additional
      goodwill.





Microtek
      acquired all of the stock of Europlak, a surgeon-owned marketer of minimally
      invasive surgical products and devices primarily in urology, gastroenterology
      and related surgical specialties on October 2, 2006.  Europlak is
      located in France and currently generates substantially all of its revenues
      from
      French customers.  The purchase price allocation was finalized during
      the quarter ended September 30, 2007, and based on the estimated fair values
      of
      the assets acquired and liabilities assumed, is as follows (in
      thousands):





Purchase
                consideration in cash
            
            
            
            
            $
            6,817Allocated
                to:Accounts
                receivable
            
            $
            1,020Inventories
            
            
            575Prepaid
                expenses and other assets
            
            
            145Property
                and equipment
            
            
            427Identifiable
                intangible assets
            
            
            5,596Accounts
                payable and other accrued liabilities
            
            
            (1,141
            )Deferred
                tax liability
            
            
            (273
            )Bank
                overdrafts and other loans payable
            
            
            (1,591
            )Total
                allocation
            
            
            
            
            
            
            4,758Goodwill
            
            
            
            
            
            $
            2,059





Identifiable
      intangible assets related to the Europlak acquisition include patents and
      licenses of approximately $3.8 million (average useful life of ten years),
      customer lists of $320,000 (useful life of five years), non-compete agreements
      of $512,000 (useful life of twenty years) and other intangible assets of
      approximately $965 thousand (useful life of ten years).  The terms of
      the Europlak agreement also provide for additional cash consideration up to
      approximately $12.4 million through 2021 if certain revenue hurdles, as defined
      in the agreement, are achieved.  The additional consideration will be
      recorded when it is determinable that the payment of such amounts is probable
      and is expected to result in additional goodwill.





On
      December 15, 2006, Microtek acquired all of the stock of Eurobiopsy, a company
      focused on the design, development, manufacture and commercialization of a
      line
      of endoscope biopsy forceps.  Similar to Europlak, Eurobiopsy is
      located in France and currently generates substantially all of its revenues
      from
      French customers.  The purchase price of approximately $140 thousand
      in cash, including certain acquisition costs, is expected to be allocated to
      the
      assets acquired and liabilities assumed, primarily accounts receivable,
      inventories, identifiable intangibles, accounts payable, other accrued
      liabilities and notes payable, based on the respective estimated fair values
      of
      those assets and liabilities, with the excess allocated to
      goodwill.






11





The
      Company is currently evaluating the fair value of the assets acquired in the
      Eurobiopsy acquisition, principally other identifiable intangible assets and
      goodwill.  The preliminary allocation of the total purchase price for
      this acquisition is subject to revision in 2007 based on the final determination
      of these fair values.





The
      following unaudited pro forma financial information for the three months and
      nine months ended September 30, 2007 and 2006 reflect the Company’s results of
      operations as if these acquisitions had been completed on January 1, 2006 (in
      thousands, except per share data):





**Three
                months ended**
              **September
                30,**
            
            
            **Nine
                months ended**
              **September
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                revenues
            
            $
            39,222
            
            
            $
            36,789
            
            
            $
            114,903
            
            
            $
            110,718Net
                income
            
            $
            2,484
            
            
            $
            1,712
            
            
            $
            7,074
            
            
            $
            6,311Net
                income per share – basic
            
            $
            0.06
            
            
            $
            0.04
            
            
            $
            0.16
            
            
            $
            0.14Net
                income per share – diluted
            
            $
            0.06
            
            
            $
            0.04
            
            
            $
            0.16
            
            
            $
            0.14





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





**8.**
            **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 received license royalties equal to $75,000 per quarter
      through September 30, 2007.  Thereafter and generally until the
      expiration of the underlying patents related to the products or services
      generating the subject royalties, the Company will receive license royalties
      equal to the greater of: (i) generally 5% of net sales, as defined in the
      agreement, or (ii) $300,000 per year.  The royalty rate is subject to
      downward adjustment in certain events with respect to net sales of certain
      products.  In September 2004, the Company also entered into an
      exclusive three-year supply agreement (the “Supply Agreement”) under which the
      Company agreed to provide certain sourcing and supply chain management services
      to ETI, and ETI agreed to purchase a total of approximately $4.8 million of
      inventory over the term of the Supply Agreement.  For these services,
      the Company received management fees totaling $2.7 million, $600,000 of which
      was received at the signing of the Supply Agreement and the remainder of which
      was paid in quarterly installments of $175,000 beginning December 31, 2004
      and
      ending 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 subsequent management fees
      collected from ETI, was recognized into income ratably over the term of the
      Supply Agreement as nuclear finished goods inventories on hand were sold to
      ETI.  During the first quarter of 2007, the nuclear finished goods
      inventories were fully depleted, and the Company had fulfilled all of its
      responsibilities to ETI under the Supply Agreement.  At December 31,
      2006, amounts recognized into income exceeded cash receipts from ETI by
      approximately $294,000, which amount was recorded in the accompanying unaudited
      condensed consolidated balance sheet in prepaid expenses and other current
      assets.





**9.**
            **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 10 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, including interest at 5%, was
      repaid ratably as the raw material inventories purchased by GRI in the
      transaction were consumed by GRI.  The final note payment was received
      in August 2006.  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 recognized into income as the raw material inventories
      purchased by GRI in the transaction were sold by GRI.  During the
      three months and nine months ended September 30, 2006, approximately $11,000
      and
      $13,000, respectively, of this deferred gain was recognized into
      income.  At September 30, 2006, all remaining deferred gain on this
      transaction had been fully recognized into income.







12


**10.**
            **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 $945,000 and $751,000 at September 30, 2007 and December 31,
      2006,
      respectively.  The Company recorded $61,000 and $194,000 of income
      during the three months and nine months ended September 30, 2007, respectively,
      and $80,000 and $203,000 of income during the three months and nine months
      ended
      September 30, 2006, respectively, related to this investment.





**11.**
            **INVENTORIES**





Inventories
      are stated at the lower of cost or market.  The first-in first-out
      (“FIFO”) 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, 2007 and December 31, 2006 as follows (in thousands):





**September
                30, 2007**
            
            
            **December
                31, 2006**Raw
                materials
            
            $
            14,193
            
            
            $
            13,317Work-in-progress
            
            
            1,407
            
            
            
            1,397Finished
                goods
            
            
            23,718
            
            
            
            20,940Total
                inventories
            
            $
            39,318
            
            
            $
            35,654





**12.**
            **LONG-TERM
                DEBT**





*The
      Credit Agreement.*The Company maintains a credit agreement with
      a Bank (the “Credit Agreement”).  As amended to date, the Credit
      Agreement provides for a $23.5 million revolving credit facility, which matures
      on June 30, 2008.  Borrowing availability under the revolving credit
      facility is based on the lesser of (i) a percentage of eligible accounts
      receivable and inventory or (ii) $23.5 million, less any outstanding letters
      of
      credit issued under the Credit Agreement.  Revolving credit borrowings
      bear interest at a floating rate approximating the Bank’s prime rate plus an
      interest margin (8.5% at September 30, 2007).  Borrowing availability
      under the revolving facility at September 30, 2007 and December 31, 2006 totaled
      $19.9 million and $17.4 million, respectively.  There were no
      outstanding borrowings under the revolving credit facility as of September
      30,
      2007 or December 31, 2006.  Borrowings under the Credit Agreement are
      collateralized by the Company’s accounts receivable, inventory, equipment, the
      Company’s stock of its subsidiaries and certain of the Company’s plants and
      offices.





The
      Credit Agreement contains certain restrictive covenants, including the
      maintenance of certain financial ratios, and places limitations on acquisitions,
      dispositions, capital expenditures and additional indebtedness.  In
      addition, the Company is not permitted to pay any dividends.  At
      September 30, 2007 and December 31, 2006, 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,
      2007 or December 31, 2006.  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 a long-term lease
      arrangement which totaled $8,000 and $19,000 at September 30, 2007 and December
      31, 2006, respectively.  In addition, as a result of the Company’s
      Europlak and Eurobiopsy acquisitions in October and December 2006, respectively,
      the Company assumed two notes payable to banks with amounts outstanding at
      September 30, 2007 of approximately $802,000 and $0, respectively, and $836,000
      and $39,000, respectively, at December 31, 2006.  The first of these
      notes payable bears interest at 4.25 percent and is payable in monthly
      installments of principal and interest through March 2013.  The second
      note payable was subject to interest at a floating rate and was repaid in full
      in August 2007.







13




The
      carrying value of long-term debt at September 30, 2007 and December 31, 2006
      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.





**13.**
            **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 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,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Basic
                Shares
            
            
            43,535
            
            
            
            43,434
            
            
            
            43,463
            
            
            
            43,581Dilutive
                Shares (due to stock options)
            
            
            1,631
            
            
            
            997
            
            
            
            1,121
            
            
            
            993Diluted
                Shares
            
            
            45,166
            
            
            
            44,431
            
            
            
            44,584
            
            
            
            44,574





For
      the
      nine months ended September 30, 2007, options to purchase 250,000 shares 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.  There
      were no  antidilutive shares for the three months ended September 30,
      2007.  For the three months and nine months ended September 30, 2006,
      there were approximately 1.6 million antidilutive shares.





**14.**
            **GEOGRAPHIC
                CONCENTRATIONS**




A
      significant portion of the Company’s products are manufactured at its facilities
      in the Dominican Republic, Mexico, the Netherlands, Malta, France or at GRI’s
      facilities in China.  Included in the Company’s consolidated balance
      sheet at September 30, 2007 and December 31, 2006 are the net assets of the
      Company’s sales, manufacturing and distribution facilities located in the United
      Kingdom and the Dominican Republic which totaled $19.3 million and $17.5
      million, respectively.  Additionally, at September 30, 2007 and
      December 31, 2006, the net assets of the Company’s sales, manufacturing and
      distribution operations in the Netherlands, Malta, Germany and France totaled
      $33.6 million and $28.4 million, respectively.  The Company’s
      Dominican Republic and Mexico facilities are engaged in manufacturing operations
      only and do not sell products to external customers.




Total
      international sales by the Company were $10.9 million and $31.7 million for
      the
      three and nine months ended September 30, 2007, respectively, and $8.9 million
      and $27.4 million for the three months and nine months ended September 30,
      2006,
      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




**15.**
            **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, was previously 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 surgical products to healthcare professionals for use in environments
      such
      as operating rooms and ambulatory surgical centers.  Traditionally a
      category leader in disposable equipment drapes, specialty patient drapes and
      fluid control drapes, Microtek offers a diverse product line which has been
      designed to improve patient care and to address risk reduction and cross
      contamination concerns for virtually every medical specialty in a healthcare
      facility, from interventional radiology, cardiology and angiography to
      orthopedics, neurology, OB/GYN, urology and other clinical
      environments.  Additionally, Microtek is also a prominent contract
      manufacturer for some of the most technologically advanced healthcare equipment
      companies in the world.





Microtek
      has established a broad product selling system through multiple channels
      including distributors, directly through its own sales force, original equipment
      manufacturers, and private label customers.  Additionally, Microtek
      has a strong presence as a branded component supplier to custom procedure tray
      companies.





Through
      its acquisition of certain businesses of International Medical Products, B.V.
      and affiliates (collectively, “IMP”) on May 28, 2004, Microtek added to its
      operations the development, manufacture, marketing and distribution in Europe
      of
      high quality dip-molded medical devices (primarily ultrasound probe covers),
      other equipment covers, cardiac thoracic drain systems, gynecological devices
      and wound care products.  Microtek’s acquisition in March 2006 of the
      European manufacturing and distribution operations of Samco added additional
      European manufacturing capacity, primarily in Malta, and an expanded sales
      presence in Germany.  In July 2006, Microtek acquired substantially
      all of the assets of Ceres Medical, a marketer of a small line of products
      sold
      primarily to cardiology and interventional radiology specialties within the
      U.S.  In October 2006, Microtek acquired all of the stock of Europlak,
      a marketer of minimally invasive surgical products and devices primarily to
      urology, gastroenterology and related surgical specialties.  In
      December 2006, Microtek acquired all of the stock of Eurobiopsy, a company
      focused on the design, development, manufacture and commercialization of a
      line
      of endoscope biopsy forceps.





In
      September 2004, the Company entered into an agreement (the “License Agreement”)
      with Eastern Technologies, Inc. (“ETI”) which grants to 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
      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’s responsibilities to ETI under the
      Supply Agreement were fulfilled during the first quarter of
      2007.  Except for activities under the License Agreement, the Company
      is not actively engaged in any business development efforts associated with
      the
      Company’s OREX products and processing technologies.





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







15


**Pending
      Acquisition**





On
      August
      7, 2007, the Company and Ecolab entered into a definitive agreement and plan
      of
      merger whereby Ecolab will acquire the Company in a cash
      transaction.  Under the terms of the agreement, the Company’s
      shareholders will receive $6.30 for each share of common stock outstanding
      as of
      the closing date of the transaction, which is expected to occur as soon as
      practicable following the Company’s meeting of shareholders scheduled for
      November 9, 2007, subject to obtaining the required approval of shareholders
      at
      that meeting.  Completion of the transaction is contingent upon
      various conditions, which are more fully set forth in the merger agreement,
      including, among other things, approval of the transaction by the Company’s
      shareholders and other customary closing conditions.





**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, 2007 and 2006 (in thousands):





**Three
                months ended**
              **September
                30, 2007**
            
            
            **Three
                months ended**
              **September
                30, 2006****Amount
                ($)**
            
            
            **%
                of Net Revenues**
            
            
            **Amount
                ($)**
            
            
            **%
                of Net Revenues**Net
                revenues
            
            $
            39,222
            
            
            
            100.0
            %
            
            $
            35,108
            
            
            
            100.0
            %Gross
                profit
            
            
            16,341
            
            
            
            41.7
            %
            
            
            13,740
            
            
            
            39.1
            %Operating
                expenses
            
            
            12,830
            
            
            
            32.7
            %
            
            
            11,195
            
            
            
            31.9
            %Income
                from operations
            
            
            3,511
            
            
            
            9.0
            %
            
            
            2,545
            
            
            
            7.2
            %Net
                income
            
            
            2,484
            
            
            
            6.3
            %
            
            
            1,648
            
            
            
            4.7
            %





**Nine
                months ended**
              **September
                30, 2007**
            
            
            **Nine
                months ended**
              **September
                30, 2006****Amount
                ($)**
            
            
            **%
                of Net Revenues**
            
            
            **Amount
                ($)**
            
            
            **%
                of Net Revenues**Net
                revenues
            
            $
            114,903
            
            
            
            100.0
            %
            
            $
            104,849
            
            
            
            100.0
            %Gross
                profit
            
            
            48,202
            
            
            
            42.0
            %
            
            
            41,450
            
            
            
            39.5
            %Operating
                expenses
            
            
            38,606
            
            
            
            33.6
            %
            
            
            32,494
            
            
            
            31.0
            %Income
                from operations
            
            
            9,596
            
            
            
            8.4
            %
            
            
            8,956
            
            
            
            8.5
            %Net
                income
            
            
            7,074
            
            
            
            6.2
            %
            
            
            6,053
            
            
            
            5.8
            %





**Three
      Months and Nine Months Ended September 30, 2007 Compared to Three Months and
      Nine Months Ended September 30, 2006**





**Net
      Revenues.**  Consolidated net revenues for the three months and
      nine months ended September 30, 2007 (the “2007 Quarter” and the “2007 Period”,
      respectively) of $39.2 million and $114.9 million, respectively, increased
      by
      approximately $4.1 million, or 11.7 percent, and $10.1 million, or 9.6 percent,
      over consolidated net revenues of $35.1 million reported for the three months
      ended September 30, 2006 (the “2006 Quarter”) and $104.8 million reported for
      the nine months ended September 30, 2006 (the “2006 Period”).







16




For
      the
      2007 Quarter and 2007 Period, Microtek’s net revenues of $39.1 million and
      $114.1 million, respectively, increased $4.4 million, or 12.9 percent, and
      $10.3
      million, or 9.9 percent, respectively, from $34.7 million and $103.8 million
      reported for the respective 2006 quarter and year-to-date periods.





The
      following tables depict Microtek’s domestic and international revenues and the
      relative percentage of each to Microtek’s total revenues for the 2007 Quarter
      and 2006 Quarter and for the 2007 Period and 2006 Period (in
      millions):





**Three
                months ended**
              **September
                30, 2007**
            
            
            **Three
                months ended**
              **September
                30, 2006****Amount**
            
            
            **%
                of Total**
            
            
            **Amount**
            
            
            **%
                of Total**Domestic
            
            $
            28.2
            
            
            
            72.1
            %
            
            $
            25.8
            
            
            
            74.4
            %International
            
            
            10.9
            
            
            
            27.9
            %
            
            
            8.9
            
            
            
            25.6
            %Total
            
            $
            39.1
            
            
            
            100.0
            %
            
            $
            34.7
            
            
            
            100.0
            %





**Nine
                months ended**
              **September
                30, 2007**
            
            
            **Nine
                months ended**
              **September
                30, 2006****Amount**
            
            
            **%
                of Total**
            
            
            **Amount**
            
            
            **%
                of Total**Domestic
            
            $
            82.4
            
            
            
            72.2
            %
            
            $
            76.4
            
            
            
            73.6
            %International
            
            
            31.7
            
            
            
            27.8
            %
            
            
            27.4
            
            
            
            26.4
            %Total
            
            $
            114.1
            
            
            
            100.0
            %
            
            $
            103.8
            
            
            
            100.0
            %





Microtek’s
      domestic revenues are generated through two primary channels or customer
      categories: domestic branded and contract manufacturing (commonly referred
      to as
      OEM).  Included in the Company’s OEM revenues are sales of products to
“non-branded” or private label customers.  Domestic branded revenues
      were 65.6 percent of total domestic revenues in the 2007 Quarter, as compared
      to
      68.3 percent in the 2006 Quarter.  OEM revenues were 34.4 percent and
      31.7 percent of total domestic revenues in the 2007 Quarter and 2006 Quarter,
      respectively.  For the 2007 Period, domestic branded revenues were
      67.4 percent of total domestic revenues, as compared to 65.3 percent for the
      2006 Period.  OEM revenues were 32.6 percent and 34.7 percent of total
      domestic revenues in the 2007 Period and 2006 Period, respectively.





Domestic
      branded revenues in the 2007 Quarter and 2007 Period increased over the 2006
      Quarter and 2006 Period by $913 thousand, or 5.2 percent, and $5.6 million,
      or
      11.3 percent, respectively.  The primary contributors to the improved
      domestic branded revenues in the 2007 Quarter were the Company’s core equipment
      draping revenues which grew $524 thousand, or 7.1 percent, and the Company’s
      specialty product revenues (including Microtek’s CleanOp product sales and its
      specialty procedure patient drapes) which grew $435 thousand, or 4.5 percent,
      as
      compared to the 2006 Quarter.  Additionally, the Company’s surgical
      product offerings in orthopedics and cardiology increased by approximately
      $163
      thousand during the 2007 Quarter.  For the 2007 Period, specialty
      product revenues increased by $3.4 million, or 12.6 percent; core equipment
      draping revenues grew by $1.9 million, or 8.9 percent; and orthopedic and
      cardiology revenues increased by approximately $602 thousand (primarily as
      a
      result of the Ceres Medical acquisition in July 2006), as compared to the 2006
      Period.





For
      the
      2007 Quarter, OEM revenues increased by $1.5 million, or 18.7 percent, primarily
      as a result of a $1.6 million, or 27.7 percent, increase in contract
      manufacturing revenues as compared to the 2006 Quarter.  For the 2007
      Period, OEM revenues increased by $347 thousand, or 1.3 percent, over the 2006
      Period as a 4.0 percent increase in contract manufacturing revenues was offset
      by lower woundcare and triad product revenues.  OEM revenues can be
      volatile as they are heavily dependent on customer demand and the buying
      patterns of the Company’s OEM partners.  In 2006, the Company began
      strategically evaluating its OEM business to diversify its customer base and
      improve the overall profitability of its OEM accounts.  Business was
      curtailed where targeted profitability levels were not being met.  The
      Company also began pursuing new OEM customers with a targeted marketing
      campaign focused on the Company's global OEM capabilities.  As a
      result of this process, the Company believes it lessened its dependence on
      a few
      large customers, secured more profitable, higher technological OEM opportunities
      and broadened its OEM customer base.





Overall,
      Microtek’s total domestic revenues in the 2007 Quarter and 2007 Period increased
      by approximately $2.4 million, or 9.5 percent, and $6.0 million, or 7.8 percent,
      over the 2006 Quarter and 2006 Period, respectively.







17




Microtek’s
      international net revenues for the 2007 Quarter increased by $2.0 million,
      or
      22.7 percent, to $10.9 million as compared to the 2006 Quarter.  This
      revenue improvement was driven primarily by an increase of approximately $874
      thousand, or 21.5 percent, in the Company’s Netherlands-based revenues, which
      includes its businesses in Malta and Germany, and an increase of $589 thousand,
      or 12.2 percent, in the Company’s United Kingdom and other international
      revenues.  Additionally, approximately $553 thousand of the
      quarter-over-quarter revenue increase is attributable to the Europlak and
      Eurobiopsy businesses which were acquired in October 2006 and December 2006,
      respectively.  Microtek’s international net revenues for the 2007
      Period totaled $31.7 million, an increase of approximately $4.3 million, or
      15.7
      percent, over the 2006 Period.  This increase resulted from a
      relatively equal measure of organic growth in the Company’s international
      businesses (approximately $2.2 million) and revenues related to the acquisition
      of the Company’s Europlak and Eurobiopsy businesses (approximately $2.1
      million.  The Company believes that its international markets continue
      to represent key areas for future growth.





OTI’s
      net
      revenues, consisting primarily of sales of finished goods inventories to ETI
      and
      royalties under the license agreement of $75 thousand per quarter, totaled
      $75
      thousand and $776 thousand in the 2007 Quarter and 2007 Period, respectively,
      as
      compared to $421 thousand in the 2006 Quarter and $1.0 million in the 2006
      Period.  As of March 31, 2007, the Company’s OTI finished goods
      inventories were fully depleted.  Pursuant to the Company’s September
      2004 licensing agreement with ETI, the Company expects that the OTI division’s
      future revenues will include license royalties equal to the greater of: (i)
      generally 5% of ETI’s net sales, as defined in the agreement, or (ii) $300,000
      per year.





**Gross
      Margin.**  The Company’s gross profit was $16.3 million, or
      41.7 percent of net revenues, in the 2007 Quarter, as compared to $13.7 million,
      or 39.1 percent of net revenues, for the 2006 Quarter.  For the 2007
      Period, the Company’s gross profit was $48.2 million, or 42.0 percent of net
      revenues, versus $41.5 million, or 39.5 percent of net revenues for the 2006
      Period.  The Company attributes the improvement in its gross margins
      in the 2007 Quarter and 2007 Period to favorable changes in the Company’s sales
      mix, particularly the increase in the Company’s higher margin domestic branded
      revenues relative to its OEM revenues in the 2007 Period as compared to the
      2006
      Period, leverage from additional sales volume, contribution from certain higher
      margin international product lines acquired in 2006, recent domestic branded
      pricing programs and successful manufacturing cost
      initiatives.  Additionally, gross margin improvement in the 2007
      Quarter and 2007 Period was realized through favorable product and customer
      sales mix changes within the domestic branded and OEM channels, primarily strong
      core equipment draping revenue growth in the domestic branded business and
      successful OEM business rationalization and profitability improvement
      initiatives.





**Operating
      Expenses.**  Operating expenses for the 2007 Quarter of $12.8
      million represented 32.7 percent of net revenues, as compared to operating
      expenses of $11.2 million, or 31.9 percent of net revenues, in the 2006
      Quarter.  For the 2007 Period, operating expenses totaled $38.6
      million, or 33.6 percent of net revenues, as compared to $32.5 million, or
      31.0
      percent of net revenues in the 2006 Period.





Selling,
      general and administrative (“SG&A”) expenses in the 2007 Quarter and 2007
      Period were $12.0 million and $36.4 million, respectively, as compared to $10.8
      million in the 2006 Quarter and $31.3 million in the 2006 Period.  As
      a percentage of net revenues, the Company’s SG&A expenses in the 2007
      Quarter and 2007 Period were 30.7 percent and 31.7 percent, respectively, versus
      30.7 percent of net revenues in the 2006 Quarter and 29.9 percent of net
      revenues in the 2006 Period.





For
      the
      2007 Quarter and 2007 Period, domestic SG&A expenses increased by
      approximately $519 thousand and $2.6 million, respectively, over the 2006
      Quarter and 2006 Period.  For the 2007 Quarter, domestic sales and
      marketing expenses decreased by $226 thousand primarily due to favorable results
      of changes in the Company’s incentive-based compensation arrangements offset
      slightly by higher advertising, sales promotion and travel expenses in the
      2007
      Quarter as compared to the 2006 Quarter.  For the 2007 Period,
      domestic sales and marketing expenses increased by $571 thousand over the 2006
      Period as a result of higher salaries and benefits, a significant portion of
      which are variable in relation to domestic branded sales volumes, direct hiring
      and training expenses for new sales personnel, sales fees and travel and related
      expenses.  Domestic distribution expenses, which consist primarily of
      variable distribution freight, increased by $174 thousand and $471 thousand
      in
      the 2007 Quarter and 2007 Period, respectively.  Domestic general and
      administrative expenses increased by $571 thousand and $1.6 million in the
      2007
      Quarter and 2007 Period, respectively, as a result of normal inflationary
      increases in general and administrative salaries and benefits and higher
      professional fees related primarily to the proposed merger transaction with
      Ecolab.







18




For
      the
      2007 Quarter and 2007 Period, SG&A expenses of the Company’s international
      operations based in the Netherlands, Malta, Germany and France increased
      approximately $740 thousand and $2.5 million, respectively.  Included
      in these increases for the 2007 Quarter and 2007 Period are incremental SG&A
      expenses related to the October 2006 Europlak acquisition and the December
      2006
      Eurobiopsy acquisition of approximately $737 thousand and $2.3 million,
      respectively.  Excluding Europlak and Eurobiopsy, international
      SG&A expenses in the 2007 Quarter were consistent with the 2006 Quarter and
      for the 2007 Period increased by approximately $126 thousand primarily as a
      result of additional investments in the Company’s sales, marketing and
      administrative infrastructure in the Netherlands.





Research
      and development expenses of $396 thousand and $1.1 million for the 2007 Quarter
      and 2007 Period, respectively, increased from $159 thousand in the 2006 Quarter
      and $448 thousand in the 2006 Period primarily as a result of the Company’s
      research and development activities related to Europlak which was acquired
      in
      the fourth quarter of 2006 and to Microtek’s ongoing research and development
      efforts which center on new product development, as well as product enhancements
      and product line extensions.





Amortization
      of intangibles in the 2007 Quarter and 2007 Period was $393 thousand and $1.1
      million, respectively, up from $254 thousand in the 2006 Quarter and $722
      thousand in the 2006 Period.  The increases in amortization expense in
      the 2007 Quarter and 2007 Period are associated primarily with intangibles
      acquired in the Samco, Ceres Medical, Europlak and Eurobiopsy transactions
      completed in 2006.





**Income
      from Operations.**  Income from operations for the 2007 Quarter
      and 2007 Period was $3.5 million, or 9.0 percent of net revenues, and $9.6
      million, or 8.4 percent of net revenues, respectively.  For the 2006
      Quarter and 2006 Period, income from operations was $2.5 million, or 7.2 percent
      of net revenues, and $9.0 million, or 8.5 percent of net revenues,
      respectively.





**Interest
      Expense and Interest Income.**Interest expense for the 2007
      Quarter and 2007 Period of $77 thousand and $146 thousand, respectively,
      increased from $16 thousand in the 2006 Quarter and $37 thousand in the 2006
      Period primarily as a result of interest expense related to long-term debt
      acquired in the Europlak and Eurobiopsy acquisitions in the fourth quarter
      of
      2006.  Interest income in the 2007 Quarter totaled $128 thousand, as
      compared to $129 thousand for the 2006 Quarter.  For the 2007 Period,
      interest income totaled $359 thousand, an increase over interest income for
      the
      2006 Period of $328 thousand primarily as a result of higher average cash and
      cash equivalent balances in the 2007 Period.





**Other
      Income/Expense, Net.**  Other income and expense include the
      Company’s equity in earnings of its investee, GRI, and foreign currency exchange
      gains 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.  The Company
      recorded foreign currency exchange gains of approximately $593 thousand in
      the
      2007 Quarter and $796 thousand in the 2007 Period.  There were no such
      foreign currency exchange gains recorded in the 2006 Quarter or 2006
      Period.  In the 2007 Quarter and 2007 Period, the Company’s equity in
      earnings of its investee, GRI, were $61 thousand and $194 thousand,
      respectively, as compared to $80 thousand in the 2006 Quarter and $203 thousand
      in the 2006 Period.





**Income
      Taxes.**  The Company’s provisions for income taxes in the 2007
      Quarter and 2007 Period reflect income tax expense of $1.7 million and $3.7
      million, respectively, consisting of current and deferred Federal, state and
      foreign income tax expense.  For the 2006 Quarter and 2006 Period, the
      Company recorded income tax expense of $1.1 million and $3.4 million,
      respectively.





**Net
      Income.**  The resulting net income for the 2007 Quarter and
      2007 Period was $2.5 million, or $0.06 per diluted share, and $7.1 million,
      or
      $0.16 per diluted share, respectively, as compared to $1.6 million, or $0.04
      per
      diluted share in the 2006 Quarter and $6.1 million, or $0.14 per diluted share
      in the 2006 Period.





**Liquidity
      and Capital Resources**





As
      of
      September 30, 2007 and December 31, 2006, the Company’s cash and cash
      equivalents totaled $19.0 million and $17.1 million,
      respectively.  The Company’s cash flow activity in the 2007 Period and
      2006 Period was as follows (in thousands):







19


**Nine
                months ended September 30,****2007**
            
            
            **2006**Cash
                provided by operating activities
            
            $
            7,815
            
            
            $
            8,316Cash
                used in investing activities
            
            
            (1,418
            )
            
            
            (4,027
            )Cash
                used in financing activities
            
            
            (3,761
            )
            
            
            (3,954
            )





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





During
      the 2007 Period, the Company’s operating activities generated cash of
      approximately $7.8 million as a result of net income from operations, net of
      deferred income taxes, depreciation and amortization, of $12.8 million and
      a
      $2.4 million increase in accounts payable, offset by other working capital
      management requirements, including an increase in receivables and inventory
      of
      $2.6 million and $3.4 million, respectively, an increase in other current and
      long term assets of $1.1 million, and a decrease in accrued expenses and other
      liabilities of $396 thousand.  The Company’s receivables and inventory
      have increased as a result of the Company’s expanding operations and, with
      respect to inventories, the impact of certain purchasing strategies to ensure
      a
      continuous supply of certain inventory items as the Company seeks to transfer
      additional manufacturing processes offshore to the Dominican Republic and to
      China.





During
      the 2006 Period, the Company’s operating activities generated cash of
      approximately $8.3 million and consisted primarily of net income from
      operations, net of deferred income taxes, depreciation and amortization, of
      $11.4 million, an increase in accounts payable of $732 thousand, an increase
      in
      accrued compensation of $1.5 million, an increase in other liabilities of $173
      thousand and a decrease in prepaid expenses and other assets of $494
      thousand.  Offsetting these sources of cash were a $947 thousand
      increase in accounts receivable, net of allowances, and an increase of $4.8
      million in inventories.





Cash
      used
      in investing activities in the 2007 Period totaled $1.4 million as a result
      of
      additional cash consideration of $96 thousand and $141 thousand paid with
      respect to the Europlak and Eurobiopsy acquisitions, respectively, and purchases
      of capital property and equipment of $1.2 million and an offsetting $31 thousand
      in proceeds from the disposal of property and equipment.  Investing
      activities in the 2006 Period of $4.0 million included cash consideration of
      approximately $2.3 million and $483 thousand for the Samco and Ceres Medical
      acquisitions, respectively, purchases of capital property and equipment of
      $1.2
      million, and proceeds from the disposition of property and equipment of $6
      thousand.





During
      the 2007 Period, financing activities used approximately $3.8 million in
      cash.  Financing cash outflows in the 2007 Quarter included a decrease
      in the Company’s bank overdraft of approximately $4.7 million, repayments of
      long-term debt obligations of $141 thousand, and repurchases of treasury stock
      of $627 thousand.  Financing cash inflows included proceeds from the
      exercise of stock options and other stock issuances of approximately $1.7
      million.  Cash used in financing activities for the 2006 Period of
      $4.0 million included net repayments of borrowings under the Company’s Credit
      Agreement of $1.2 million, repayments of other long-term debt agreements of
      $343
      thousand, a decrease in the Company’s bank overdraft of approximately $1.0
      million and repurchase of treasury stock of $2.0 million, offset by $639
      thousand from the exercise of stock options and other stock
      issuances.





The
      Company maintains a $23.5 million credit agreement (as amended to date, the
      “Credit Agreement”) with the JP Morgan Chase Bank (the “Bank”), consisting of a
      revolving credit facility maturing on June 30, 2008.  Borrowing
      availability under the revolving credit facility is based on the lesser of
      (i) a
      percentage of eligible accounts receivable and inventories or (ii) $23.5
      million, less any outstanding letters of credit issued under the Credit
      Agreement.  There were no outstanding borrowings under the revolving
      credit facility at September 30, 2007 or December 31, 2006.  As of
      September 30, 2007, the Company had total borrowing availability under the
      revolving facility of $19.9 million.  As of November 6, 2007, the
      Company had a total borrowing availability of approximately $19.3 million and
      no
      outstanding borrowings under the facility.  Revolving credit
      borrowings bear interest at a floating rate approximating the Bank’s prime rate
      plus an interest margin (8.5% at November 6, 2007).  At September 30,
      2007, the Company was in compliance with its financial covenants under the
      Credit Agreement.





Based
      on
      its current business plan, the Company expects that cash and cash equivalents
      on
      hand, the Company’s credit facility, as amended, and funds budgeted to be
      generated from operations will be adequate to meet its liquidity and capital
      requirements for the next year.  However, currently unforeseen future
      developments, potential acquisitions and increased working capital requirements
      may require additional debt financing or issuance of common stock in 2007 and
      subsequent years.







20


**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.  Where possible, the
      Company seeks to pass these increased costs to its customers by increasing
      prices, but such efforts may not be successful due to competitive pricing
      pressures.  The Company seeks to offset these increased costs in part
      through cost savings measures in other areas.





**Recent
      Accounting Pronouncements**





**Accounting
      for Uncertainty in Income Taxes.**  In June 2006, the FASB
      issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes –
An interpretation of FASB Statement No. 109* (“FIN 48”) which clarifies the
      accounting and disclosure requirements for uncertainty in tax positions, as
      defined.  The Company’s adoption of the provisions of FIN 48 on
      January 1, 2007 had no impact on the Company’s consolidated financial
      statements.  The Company examined its tax positions for all open tax
      years through December 31, 2006 and the full benefit of each tax position has
      been recognized in the financial statements in accordance with FIN
      48.  On any future tax positions, the Company intends to record
      interest and penalties, if any, as a component of interest expense and general
      and administrative expenses, respectively.  The Company’s tax years
      are open for U.S. Federal purposes from 2004 through 2006.  Certain
      U.S. state tax years remain open for 2003 and 2006
      filings.  International statutes vary widely and the open years range
      from 2003 through 2006.  Taxing authorities have the ability to review
      prior tax years to the extent of net operating loss and tax credit carryforwards
      to open tax years.





**Employer’s
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans.**In September 2006, the FASB issued SFAS No. 158,*Employer’s Accounting for Defined Benefit Pension and Other Postretirement
      Plans– an amendment of FASB Statements No. 87, 88, 106, and 132(R)*(“SFAS
      No. 158”).  SFAS No. 158 requires companies to recognize the funded
      status of defined benefit pension and other postretirement plans as a net asset
      or liability in its statement of financial position and to recognize changes
      in
      that funded status in the year in which the changes occur through comprehensive
      income to the extent that those changes are not included in the net periodic
      cost.  The funded status of a defined benefit pension plan is measured
      as the difference between the fair value of plan assets and the projected
      benefit obligation under the plan.  Additionally, SFAS No. 158
      requires companies to measure the funded status of a plan as of the company’s
      fiscal year-end, with limited exceptions, and expands financial statement
      disclosures.  The Company adopted all requirements of SFAS No. 158
      with respect to its international defined benefit pension plan as of December
      31, 2006, except for the funded status measurement date requirement which will
      be adopted on December 31, 2008, as allowed under SFAS No. 158.




**Fair
      Value Measurement.**  In September 2006, the FASB issued SFAS
      No. 157, *Fair Value Measurement* (“SFAS No. 157”).  SFAS No.
      157 defines fair value, establishes a framework for the measurement of fair
      value, and enhances disclosures about fair value measurements but does not
      require any new fair value measures.  SFAS No. 157 is effective for
      fair value measure already required or permitted by other standards for fiscal
      years beginning after November 15, 2007.  The Company is required to
      adopt SFAS No. 157 on January 1, 2008.  SFAS No. 157 is required to be
      applied prospectively, except for certain financial instruments.  Any
      transition adjustment will be recognized as an adjustment to opening retained
      earnings in the year of adoption.  The Company is currently evaluating
      the impact of adopting SFAS No. 157 on its consolidated results of operations
      and financial position.





**Fair
      Value Option for Financial Assets and Financial
      Liabilities.**On February 15, 2007, the FASB issued SFAS
      No. 159, *The Fair Value Option for Financial Assets and Financial
      Liabilities — Including an Amendment of FASB Statement
      No. 115***(“SFAS No. 159”).  SFAS No. 159
      permits an entity to irrevocably elect to report selected financial assets
      and
      liabilities at fair value, with subsequent changes in fair value reported in
      earnings.  The election may be applied on an instrument-by-instrument
      basis.  SFAS No. 159 also establishes additional presentation and
      disclosure requirements for items measured using the fair value option.
 SFAS No. 159 is effective for all financial statements issued for fiscal
      years beginning after November 15, 2007.  The Company has not yet
      determined whether it will adopt SFAS No. 159.







21


**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, statements regarding the completion and timing of the
      proposed transaction with Ecolab; 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,
      Malta and China; the Company’s expectation about the composition and amount of
      revenues to be received by the Company’s OTI division; and the Company’s current
      expectation that cash and cash equivalents on hand, the Company’s existing
      credit facility and funds budgeted to be generated from operations will be
      adequate to meet its liquidity and capital requirements for the next
      year*.*





The
      Company’s actual results could differ materially from such forward-looking
      statements and such results will be affected by risks described in the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2006, filed with
      the
      Securities and Exchange Commission.  These risks include, without
      limitation, the following:  low barriers to entry for competitive
      products could cause the Company to reduce the prices for its products or lose
      customers; large purchasers of the Company’s products regularly negotiate for
      reductions in prices for the Company’s products, which may reduce the Company’s
      profits; because a few distributors control much of the delivery of hospital
      supplies to hospitals, the Company relies significantly on these distributors
      in
      connection with the sale of the Company’s branded products; the Company’s
      relatively small sales and marketing force may place the Company at a
      competitive disadvantage to its competition; the Company’s contract
      manufacturing division relies upon a small number of customers, the loss of
      any
      of which could have a material adverse impact on the Company; the inability
      of
      the Company to complete acquisitions of businesses at an attractive cost could
      adversely affect the Company’s growth; if the Company is successful in acquiring
      businesses, the failure to successfully integrate those businesses could
      adversely affect the Company; the Company’s growing international operations
      subject the Company’s operating results to numerous additional risks; markets in
      which the Company competes are highly competitive, which may adversely affect
      the Company’s growth and operating results; the Company’s products are subject
      to extensive governmental regulations, compliance or non-compliance with which
      could adversely affect the Company; the Company’s strategies to protect its
      proprietary assets may be ineffective, allowing increased competition with
      the
      Company; fluctuations in the value of the dollar against foreign currencies
      have
      in the past and may in the future adversely affect the Company’s operating
      results; and the Company’s expenses for raw materials and product distribution
      are adversely affected by increases in the price for petroleum*.* The
      Company does not undertake to update its forward-looking statements to reflect
      future events or circumstances.





**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, the Netherlands, Malta, Germany and France
      are measured using the foreign subsidiary’s local currency as the functional
      currency.  Revenues and expenses of such subsidiaries are translated
      into U.S. dollars at average exchange rates prevailing during the
      period.  Assets and liabilities are translated at the rates of
      exchange on the balance sheet date.  The resulting translation gain
      and loss adjustments are recorded directly as a separate component of
      shareholders’ equity.  Foreign currency translation adjustments, net
      of applicable taxes, resulted in gains of $709 thousand and $1.1 million for
      the
      three months and nine months ended September 30, 2007, respectively, and $219
      thousand and $1.0 million for the three months and nine months ended September
      30, 2006, respectively.





Transaction
      gains and losses that arise from exchange rate fluctuations on transactions
      denominated in a currency other than the subsidiary’s functional currency are
      included in the results of operations as incurred.  Included in the
      Company’s results of operations for three months and nine months ended September
      30, 2007 were foreign currency exchange gains of approximately $593 thousand
      and
      $796 thousand, respectively, resulting 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.  There were no such foreign currency exchange gains or
      losses recorded for the three months and six months ended September 30,
      2006.







22


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





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





The
      Company’s cash and cash equivalents are short-term, highly liquid investments
      with original maturities of three months or less.  As a result of the
      short-term nature of the Company’s cash and cash equivalents, a change of market
      interest rates does not materially impact interest income accruing on these
      investments or, consequently, the Company’s operating results or cash
      flow.  From time to time, the Company may be impacted by the general
      level of U.S. interest rates due to the effect that changes in those rates
      have
      on the Company's interest expense.  At September 30, 2007, the Company
      had repaid all of its borrowings under its Credit Agreement which bear interest
      at a floating rate approximating the prime rate.  Other indebtedness
      of the Company at September 30, 2007 which bears interest at a floating rate
      was
      not material.  An increase or decrease in the Company's average
      interest rate of ten percent would have had an immaterial impact on the
      Company’s recorded interest expense during the three months and nine months
      ended September 30, 2007.





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.





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.







23


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





**PART
      II**


**OTHER
      INFORMATION**





**Item
      1.   Legal Proceedings**





Not
      applicable.





**Item
      1A.   Risk Factors**





See
      the
      risk factors described in the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2006.





**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.




**Item
      3.   Default Upon Senior Securities**





Not
      applicable.





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





None.





**Item
      5.   Other Information**





Not
      applicable.





**Item
      6.   Exhibits**





Exhibit
                No.
            Description2.1(1)
            Merger
                Agreement dated August 7, 2007 among Ecolab Inc., Magic Acquisition
                Inc.
                and Microtek Medical Holdings, Inc.3.1(2)
            Articles
                of Incorporation of Isolyser Company,
                Inc.






24


3.3(3)
              Amended
                  and Restated Bylaws of Microtek Medical Holdings, Inc.4.1(4)
              Specimen
                  Certificate of Common Stock4.2(5)
              First
                  Amended and Restated Shareholder Protection Rights Agreement dated
                  as of
                  December 20, 2006 between Microtek Medical Holdings, Inc. and
                  Computershare Investor Services, LLC31.1
              Certification
                  of Chief Executive Officer31.2
              Certification
                  of Chief Financial Officer32.1
              Certification
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  200232.2
              Certification
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002





-----------------





(1)
            Incorporated
                by reference to Exhibit 2.1 of the Company's Current Report on Form
                8-K
                dated August 7, 2007.(2)
            Incorporated
                by reference to Exhibit 3.1 of the Company's Annual Report on Form
                10-K
                for the year ended December 31, 2004.(3)
            Incorporated
                by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K
                dated October 23, 2007.(4)
            Incorporated
                by reference to Exhibit 4.1 of the Company’s Quarterly Report on Form 10-Q
                for the quarter ended June 30, 2006.(5)
            Incorporated
                by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K
                dated December 20, 2006.








25


**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 7, 2007.








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











26