# 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 | March 31, 2005 | Commission File No.    0-24866
|----------------- | -------------- | ------------------------------

MICROTEK MEDICAL
HOLDINGS, INC.(Exact name of
Registrant as specified in its charter)

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

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

(678) 896-4000
(Registrants telephone number, including area code)

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

Yes  [X]    No  [_]

Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes  [X]    No  [_]

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

|Class                         | Outstanding at May 6, 2005
|----------------------------- | --------------------------
|                              |                           
|Common Stock, $.001 par value | 43,290,033                

---

# INDEX

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

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

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

| | Unaudited
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three
Months ended March 31, 2005 and March 31, 2004
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | Unaudited
Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2005
and March 31, 2004
| | ----------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

2

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# PART I 
FINANCIAL INFORMATION

# Item 1.   Financial
Statements

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

|Assets                                                 | March 31, 2005 | December 31, 2004
|------------------------------------------------------ | -------------- | -----------------
|Current assets:                                        |                |                  
|Cash and cash equivalents                              |                |                  
|Accounts receivable, net                               |                |                  
|Other receivables                                      |                |                  
|Inventories                                            |                |                  
|Prepaid expenses and other assets                      |                |                  
|                                                       |                |                  
|Total current assets                                   |                |                  
|                                                       |                |                  
|Property and equipment                                 |                |                  
|Less accumulated depreciation                          |                |                  
|                                                       |                |                  
|Property and equipment, net                            |                |                  
|                                                       |                |                  
|Intangible assets, net                                 |                |                  
|Deferred income taxes                                  |                |                  
|Other assets                                           |                |                  
|                                                       |                |                  
|Total assets                                           |                |                  
|                                                       |                |                  
|Liabilities and Shareholders' Equity                   |                |                  
|Current liabilities:                                   |                |                  
|Accounts payable                                       |                |                  
|Accrued expenses                                       |                |                  
|Current portion of long-term debt                      |                |                  
|                                                       |                |                  
|Total current liabilities                              |                |                  
|                                                       |                |                  
|Long-term debt, excluding current portion              |                |                  
|Other long-term liabilities, excluding current portion |                |                  
|                                                       |                |                  
|Total liabilities                                      |                |                  
|                                                       |                |                  
|Shareholders' equity:                                  |                |                  
|Common stock                                           |                |                  
|Additional paid-in capital                             |                |                  
|Accumulated deficit                                    |                |                  
|Accumulated other comprehensive income, net of         |                |                  
|income taxes                                           |                |                  
|                                                       |                |                  
|                                                       |                |                  
|Treasury shares, at cost                               |                |                  
|                                                       |                |                  
|Total shareholders' equity                             |                |                  
|                                                       |                |                  
|Total liabilities and shareholders' equity             |                |                  
|                                                       |                |                  

See notes to unaudited condensed
consolidated financial statements.

3

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

|                                                 | Three months ended
March 31, 2005 | Three months ended
March 31, 2004
|------------------------------------------------ | --------------------------------- | ---------------------------------
|Net revenues                                     |                                   |                                  
|Cost of goods sold                               |                                   |                                  
|                                                 |                                   |                                  
|Gross profit                                     |                                   |                                  
|                                                 |                                   |                                  
|Operating expenses:                              |                                   |                                  
|Selling, general and administrative              |                                   |                                  
|Research and development                         |                                   |                                  
|Amortization of intangibles                      |                                   |                                  
|                                                 |                                   |                                  
|Total operating expenses                         |                                   |                                  
|                                                 |                                   |                                  
|Income from operations                           |                                   |                                  
|                                                 |                                   |                                  
|Interest income                                  |                                   |                                  
|Interest expense                                 |                                   |                                  
|Equity in earnings of investee                   |                                   |                                  
|Foreign currency exchange loss                   |                                   |                                  
|                                                 |                                   |                                  
|Income before income taxes                       |                                   |                                  
|                                                 |                                   |                                  
|Income tax provision                             |                                   |                                  
|                                                 |                                   |                                  
|                                                 |                                   |                                  
|Net income                                       |                                   |                                  
|                                                 |                                   |                                  
|Other comprehensive income (loss):               |                                   |                                  
|Foreign currency translation gain (loss), net    |                                   |                                  
|of income taxes                                  |                                   |                                  
|Unrealized loss on available for sale            |                                   |                                  
|securities, net of income taxes                  |                                   |                                  
|                                                 |                                   |                                  
|Comprehensive income                             |                                   |                                  
|                                                 |                                   |                                  
|Net income per common share -                    |                                   |                                  
|Basic and Diluted                                |                                   |                                  
|                                                 |                                   |                                  
|Basic weighted average number of common shares   |                                   |                                  
|outstanding                                      |                                   |                                  
|                                                 |                                   |                                  
|Diluted weighted average number of common shares |                                   |                                  
|outstanding                                      |                                   |                                  
|                                                 |                                   |                                  

See notes to unaudited condensed
consolidated financial statements.

4

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

|                                                            | Three months ended
March 31, 2005 | Three months ended
March 31, 2004
|----------------------------------------------------------- | --------------------------------- | ---------------------------------
|Cash flows from operating activities:                       |                                   |                                  
|Net income                                                  |                                   |                                  
|                                                            |                                   |                                  
|Adjustments to reconcile net income to net cash provided by |                                   |                                  
|operating activities:                                       |                                   |                                  
|Depreciation                                                |                                   |                                  
|Amortization of intangibles                                 |                                   |                                  
|Provision for doubtful accounts                             |                                   |                                  
|Other                                                       |                                   |                                  
|Changes in operating assets and liabilities, net of         |                                   |                                  
|acquisitions                                                |                                   |                                  
|                                                            |                                   |                                  
|Net cash provided by operating activities                   |                                   |                                  
|                                                            |                                   |                                  
|Cash flows from investing activities:                       |                                   |                                  
|Purchase of and deposits for property and equipment         |                                   |                                  
|Acquisition of OrthoPlast                                   |                                   |                                  
|                                                            |                                   |                                  
|Net cash used in investing activities                       |                                   |                                  
|                                                            |                                   |                                  
|Cash flows from financing activities:                       |                                   |                                  
|Borrowings under line of credit agreement                   |                                   |                                  
|Repayments under line of credit agreement                   |                                   |                                  
|Changes in bank overdraft                                   |                                   |                                  
|Repayments under notes payable                              |                                   |                                  
|Proceeds from exercise of stock options                     |                                   |                                  
|Proceeds from issuance of common stock                      |                                   |                                  
|                                                            |                                   |                                  
|Net cash used in financing activities                       |                                   |                                  
|                                                            |                                   |                                  
|Effect of exchange rate changes on cash                     |                                   |                                  
|                                                            |                                   |                                  
|Net increase (decrease) in cash and cash equivalents        |                                   |                                  
|Cash and cash equivalents at beginning of period            |                                   |                                  
|                                                            |                                   |                                  
|Cash and cash equivalents at end of period                  |                                   |                                  
|                                                            |                                   |                                  

See notes to unaudited condensed
consolidated financial statements.

5

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# MICROTEK MEDICAL
HOLDINGS, INC. 
Notes to Unaudited Condensed Consolidated Financial Statements

|1. |  | NATURE
OF BUSINESS AND BASIS OF PRESENTATION
|-- |  | --------------------------------------------

| | Microtek
Medical Holdings, Inc. and subsidiaries (the Company) manufactures and
supplies innovative product solutions for patient care, occupational safety and
management of infectious and hazardous waste for the healthcare market, which represents
one business segment. The Company markets its products to hospitals and other end users
through a broad distribution system consisting of multiple channels including
distributors, directly through its own sales force, original equipment manufacturers, and
private label customers. The Company also markets certain of its products through custom
procedure tray companies. The Companys revenues are generated through two operating
units, Microtek Medical, Inc. (Microtek), a subsidiary of the Company, and
OREX Technologies International (OTI), an operating division. Microtek is the
core business of the Company. Since 2002, OTI has focused on commercializing its OREX
patented technology in the nuclear industry. As described in Note 5 to these unaudited
condensed consolidated financial statements, in September 2004, the Company entered into
an agreement which grants to Eastern Technologies, Inc. a worldwide exclusive license to
manufacture, use and sell the Companys OREX materials and processing technology in
the nuclear industry and homeland security industry, and for certain other industrial
applications.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X for interim financial statements required to
be filed with the Securities and Exchange Commission and do not include all information
and footnotes required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the information furnished reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position, results of operations and cash flows for the
interim periods presented. Results for the interim periods are not necessarily indicative
of results to be expected for the full year. The consolidated financial statements herein
should be read in conjunction with the consolidated financial statements and notes
thereto contained in the Companys Annual Report on Form 10-K for the year ended
December 31, 2004 (the Annual Report).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
|-- |  | ------------------------------------------

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

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

| | In
November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4.SFAS No. 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs and wasted materials (spoilage)
should be recognized as current period charges in all circumstances. In addition, SFAS
No. 151 requires that allocation of fixed production overhead to inventory be based on
the normal capacity of the production facilities. SFAS No. 151 is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The Company does not
expect that the adoption of SFAS No. 151 will have a significant effect on the Companys
consolidated financial position, results of operations or cash flows.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6

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

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

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

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

| | Effective
March 1, 2004, Microtek acquired substantially all of the assets of Ortho/Plast, Inc. (OrthoPlast),
a marketer of a small line of orthopedic products. The purchase price of approximately
$419,000 in cash, including certain acquisition costs, was allocated to accounts
receivable, inventories, property and equipment and identifiable intangibles (principally
trademarks and customer list) based on those assetsrespective estimated fair
values, with the excess allocated to goodwill. The amount allocated to goodwill was not
significant. The terms of the related purchase agreement also provide for additional cash
consideration up to $600,000 if future revenues from the Companys orthopedic
product line exceed certain targeted levels, as defined in the agreement, through 2009.
The additional consideration will be recorded when it is determinable that such target
revenues are probable of being met and is expected to result in additional goodwill. The
acquisition of OrthoPlast on March 1, 2004, did not have a material impact on the Companys
consolidated results of operations for the three months ended March 31, 2005 or 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

7

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

| | Identifiable
intangible assets included customer lists of approximately $2.3 million (useful life of
15 years), non-compete agreements of approximately $219,000 (useful life of five years)
and other intangible assets of approximately $362,000 (useful life of four years). The
preliminary allocation of the purchase price is subject to adjustment in 2005 when
finalized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following unaudited pro forma financial information for the three months ended March 31,
2005 and 2004 reflects the Companys results of operations as if the IMP acquisition
had been completed on January 1, 2004 (in thousands, except per share data):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         | Three months ended
|---------------------------------------- | ------------------
|
|Net revenues                             |                   
|Net income                               |                   
|Net income per share - basic and diluted |                   

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

|5. |  | LICENSE
AGREEMENT
|-- |  | -----------------

| | In
September 2004, the Company entered into an agreement (the License Agreement)
which grants to Eastern Technologies, Inc. (ETI) a worldwide exclusive
license to manufacture, use and sell the Companys OREX materials and processing
technology in the nuclear industry and homeland security industry, and for certain other
industrial applications. Under the terms of the License Agreement, the Company will
receive license royalties equal to $75,000 per quarter for the first three years of the
agreement. Thereafter and generally until the expiration of the underlying patents
related to the product or service generating the subject royalties, the Company will
receive license royalties equal to the greater of: (i) generally 5% of net sales, as
defined in the agreement, or (ii) $300,000 per year. The royalty rate is subject to
downward adjustment in certain events with respect to net sales of certain products. The
Company also entered into an exclusive three-year supply agreement (the Supply
Agreement) under which the Company has agreed to provide certain sourcing and
supply chain management services to ETI, and ETI has agreed to purchase a total of
approximately $4.8 million of inventory over the term of the Supply Agreement. For these
services, the Company will receive management fees totaling $2.7 million, $600,000 of
which was received at the signing of the Supply Agreement. The balance of the management
fees are payable in quarterly installments of $175,000 beginning December 31, 2004 and at
the end of each quarter thereafter until September 30, 2007. The cash payment of $600,000
was recorded as deferred revenue (included in accrued expenses, a current liability) upon
receipt. This amount, together with all future management fees collected from ETI, will
be recognized into income ratably over the term of the Supply Agreement as nuclear
finished goods inventories on hand are sold to ETI. At March 31, 2005, amounts recognized
into income exceeded cash receipts from ETI by approximately $184,000, which amount was
recorded in the accompanying unaudited condensed consolidated balance sheet in prepaid
expenses and other current assets. At December 31, 2004, cash receipts from ETI exceeded
amounts recognized into income by $221,000, which amount was recorded in the accompanying
unaudited condensed consolidated balance sheet in accrued expenses (current liability).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

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|6. |  | SALE
OF INVENTORIES TO RELATED PARTY
|-- |  | ------------------------------------

| | In
September 2004, the Company entered into an agreement with Global Resources
International, Inc. (GRI), a related party as described in Note 7 below, for
the sale of certain of its raw material inventories used in the manufacture of finished
goods for sale to the nuclear industry. At closing, the Company received cash proceeds of
$200,000 and a promissory note in the amount of $1.051 million. The promissory note bears
interest at 5% and is to be repaid ratably as the raw material inventories purchased by
GRI in the transaction are consumed by GRI, with payments of principal in an amount not
less than 25% of the original principal amount per year. The total gain on the sale of
these raw material inventories approximated $467,000. Of this total gain, approximately
$91,000, an amount commensurate with the Companys relative ownership interest in
GRI, was deferred and is being recognized into income as the raw material inventories
purchased by GRI in the transaction are sold by GRI. During the three months ended March
31, 2005, approximately $16,000 of this deferred gain was recognized into income.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. |  | INVESTMENT
IN AFFILIATED COMPANY
|-- |  | --------------------------------

| | In
May 2000, the Company and certain of its affiliates and employees organized GRI. From its
manufacturing facilities located in China, GRI provides certain material sourcing and
manufacturing of various Microteks products where such supply arrangements are
advantageous to Microtek based on favorable pricing and other considerations. The Company
and a non-executive member of the Companys management own 19.5 percent and 30
percent, respectively, of GRI. Accordingly, the Company accounts for its investment in
GRI under the equity method. The Companys investment in GRI was approximately
$406,000 and $300,000 at March 31, 2005 and December 31, 2004, respectively. The Company
recorded $106,000 and $2,000 of income during the three months ended March 31, 2005 and
2004, respectively, related to this investment.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8. |  | INVENTORIES
|-- |  | -----------

| | Inventories
are stated at the lower of cost or market. The first-in first-out (FIFO)
valuation method is used to determine the cost of inventories. Cost includes material,
labor and manufacturing overhead for manufactured and assembled goods and materials only
for goods purchased for resale. Inventories are summarized by major classification at
March 31, 2005 and December 31, 2004 as follows (in thousands):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | At
March 31, 2005 and December 31, 2004, OREX inventories approximated $2.8 million and $3.8
million, respectively, and consisted primarily of finished goods.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|9. |  | LONG-TERM
DEBT
|-- |  | --------------

| | The
Credit Agreement.The Company maintains a credit agreement with a Bank (the Credit
Agreement). As amended to date, the Credit Agreement provides for a $23.5 million
revolving credit facility, which matures on June 30, 2006. 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
the Companys option, at either a floating rate approximating the Banks prime
rate plus an interest margin (6.25% at March 31, 2005) or LIBOR plus an interest margin
(4.41% at March 31, 2005). Borrowing availability under the revolving facility at March
31, 2005 and December 31, 2004 totaled $16.4 million and $16.3 million, respectively.
There were outstanding borrowings under the revolving credit facility of $5.0 million at
March 31, 2005 and $4.5 million at December 31, 2004. Borrowings under the Credit
Agreement are collateralized by the Companys accounts receivable, inventory,
equipment, the Companys stock of its subsidiaries and certain of the Companys
plants and offices.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

| | The
Credit Agreement contains certain restrictive covenants, including the maintenance of
certain financial ratios, earnings before interest, taxes, depreciation and amortization (EBITDA)
and net worth, and places limitations on acquisitions, dispositions, capital expenditures
and additional indebtedness. In addition, the Company is not permitted to pay any
dividends. At March 31, 2005 and December 31, 2004, the Company was in compliance with
its financial covenants under the Credit Agreement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Credit Agreement provides for the issuance of up to $1.0 million in letters of credit.
There were no outstanding letters of credit at March 31, 2005 or December 31, 2004. The
Credit Agreement also provides for a fee of 0.375% per annum on the unused commitment, an
annual collateral monitoring fee of $35,000 and an outstanding letter of credit fee of
2.0% per annum.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
Long-Term Debt.The Company is obligated under certain long-term lease arrangements
and notes payable which aggregated $294,000 and $343,000 at March 31, 2005 and December
31, 2004, respectively. In addition, in conjunction with the acquisition of substantially
all of the assets of Plasco, Inc. in November 2003, the Company originally signed a
promissory note in the principal amount of $1.1 million. This principal amount was
reduced in December 2003 to $866,000 as a result of adjustments made to the original
purchase price. This note payable, as adjusted, bears interest at 6%, is payable in
quarterly installments of principal and interest beginning in March 2004 through October
2006, and amounted to $512,000 and $586,000 at March 31, 2005 and December 31, 2004,
respectively. This note payable arrangement is subordinated to the Credit Agreement.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
carrying value of long-term debt at March 31, 2005 and December 31, 2004 approximates
fair value based on interest rates that are believed to be available to the Company for
debt with similar prepayment provisions provided for in the existing debt agreements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10. |  | EARNINGS
PER SHARE
|--- |  | ------------------

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

|                                       | Three months ended March 31,
|-------------------------------------- | ----------------------------
|
|Basic Shares                           |                             
|Dilutive Shares (due to stock options) |                             
|                                       |                             
|Diluted Shares                         |                             
|                                       |                             

| | For
the three months ended March 31, 2005, options to purchase approximately 1,095,000 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 March 31, 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

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

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

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

|                        | Three months ended
March 31,
|----------------------- | ----------------------------
|
|Dividend yield          |                             
|Expected volatility     |                             
|Risk free interest rate |                             
|Forfeiture rate         |                             
|Expected life, in years |                             

| | The
Black-Scholes option valuation model was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Companys employee stock
options have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the fair value
estimate, in managements opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|                                        | Three months ended
March 31,
|--------------------------------------- | ----------------------------
|
|Net income, as reported                 |                             
|Deduct:  Total stock-based employee     |                             
|compensation expense determined under   |                             
|fair value based method for all awards, |                             
|net of related tax effects              |                             
|                                        |                             
|Pro forma net income                    |                             
|                                        |                             
|Net income per share:                   |                             
|Basic - as reported                     |                             
|                                        |                             
|Diluted - as reported                   |                             
|                                        |                             
|Basic - pro forma                       |                             
|                                        |                             
|Diluted - pro forma                     |                             
|                                        |                             

11

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

| | In
December 2004, the Board of Directors amended the Companys existing stock
repurchase program to authorize the repurchase of an aggregate of 2.0 million shares
through December 31, 2005. No shares were repurchased during the three months ended March
31, 2005 and 2004. As of March 31, 2005, the Company had repurchased approximately 1.3
million shares for an aggregate repurchase price of approximately $2.7 million.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | A
significant portion of the Companys products are manufactured at its facilities in
the Dominican Republic, Mexico and the Netherlands or at GRIs facilities in China.
Included in the Companys consolidated balance sheet at March 31, 2005 and December
31, 2004 are the net assets of the Companys manufacturing and distribution
facilities located in the United Kingdom and the Dominican Republic which total $16.7
million and $14.3 million, respectively. Additionally, at March 31, 2005 and December 31,
2004, the net assets of the Companys manufacturing and distribution operations in
the Netherlands totaled $14.9 million and $15.0 million, respectively. Only the Companys
facilities in the United Kingdom and the Netherlands sell products to external customers.
Total international sales by the Company were $8.4 million and $3.8 million for the three
months ended March 31, 2005 and March 31, 2004, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|14. |  | COMMITMENTS
AND CONTINGENCIES
|--- |  | -----------------------------

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

# Item 2.  Managements
Discussion and Analysis of Financial Condition and Results of Operations

# General

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

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

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

12

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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 and China.

# Results of Operations

The following table sets forth
certain unaudited income statement data, including amounts expressed as a percentage of
net revenues, for the three months ended March 31, 2005 and 2004:

|                                    | Three months ended March
31, 2005 | Three months ended March
31, 2004
|----------------------------------- | --------------------------------- | ---------------------------------
|
|Net revenues                        |                                   |                                  
|Gross profit                        |                                   |                                  
|Selling, general and administrative |                                   |                                  
|expenses                            |                                   |                                  
|Income from operations              |                                   |                                  
|Net income                          |                                   |                                  

# Three Months Ended March
31, 2005 Compared to Three Months Ended March 31, 2004

Net Revenues. Net revenues for
the three months ended March 31, 2005 (the 2005 Quarter) were $33.7 million,
an increase of $4.4 million or 15.2 percent from the $29.3 million of net revenues
reported for the three months ended March 31, 2004 (the 2004 Quarter).
Approximately $3.9 million of the increased revenues in the 2005 Quarter were attributable
to businesses acquired in the IMP transaction.

For the 2005 Quarter, Microteks
net revenues totaled $32.0 million, an increase of $4.7 million or 17.4 percent over
Microteks net revenues of $27.3 million in the 2004 Quarter. Excluding revenues
attributable to businesses acquired in the IMP transaction, Microteks net revenues
grew by $873 thousand, or 3.2 percent, over the 2004 Quarter. The following table depicts
Microteks domestic and international revenues and the relative percentage of each to
Microteks total revenues for the 2005 Quarter and 2004 Quarter:

|              | Three months ended
March 31, 2005 | Three months ended
March 31, 2004
|------------- | --------------------------------- | ---------------------------------
|
|Domestic      |                                   |                                  
|International |                                   |                                  
|              |                                   |                                  
|Total         |                                   |                                  
|              |                                   |                                  

Microteks domestic revenues are
generated through two primary channels or customer categories: branded hospital and
contract manufacturing (commonly referred to as OEM). Branded hospital revenues were 66.1
percent and OEM revenues were 33.9 percent of total domestic revenues in the 2005 Quarter
as compared to 63.9 percent and 36.1 percent, respectively, in the 2004 Quarter. Included
in the Companys OEM revenues are sales of products to non-branded or
private label customers. Previously, sales of the Companys branded products to
custom procedure tray assemblers (also known as kitpackers) were included in the
Companys OEM channel revenues. Beginning January 1, 2005, kitpacker sales are now
included in the Companys branded hospital channel so that the Companys branded
hospital sales force can better monitor and promote end user awareness of and loyalty to
the Companys branded products which are included in these kits. Revenues
attributable to the branded hospital and OEM channels in the 2004 Quarter have been
restated to conform to channel classification used in the 2005 Quarter.

13

---

Microteks domestic revenues in
the 2005 Quarter of $23.6 million were essentially the same as those recorded in the 2004
Quarter as branded hospital revenue growth in the 2005 Quarter of $600 thousand, or
approximately 4 percent, was offset by a decrease in OEM revenues of approximately $500
thousand from the 2004 Quarter to the 2005 Quarter. The Companys newly formed
Preventek revenue category (which includes Microteks CleanOp and safety product
lines) demonstrated growth of approximately 12 percent in the 2005 Quarter over the 2004
Quarter, and its Venodyne product line grew approximately 34 percent in the 2005 Quarter
as compared to the 2004 Quarter. The net decrease in OEM revenues in the 2005 Quarter as
compared to the 2004 Quarter resulted from a customers decision in mid-2004 to take
certain production in-house which was offset by improved private label revenues in the
2005 Quarter.

Microteks international net
revenues for the 2005 Quarter, including $3.9 million in revenues related to the IMP
businesses, increased by $4.6 million over the 2004 Quarter to $8.4 million. International
revenues, excluding the impact of IMP revenues, increased by approximately $771 thousand,
or 20.4 percent, in the 2005 Quarter versus the 2004 Quarter.

OTIs net revenues in the 2005
Quarter totaled $1.7 million and consisted primarily of sales of finished goods
inventories to ETI and license royalties of $75 thousand. OTIs net revenues in the
2004 Quarter were $2.0 million. Subsequent to the ETI transaction which was completed at
the end of the third quarter of 2004, the Company expects that future OTI division
revenues will consist of license royalties totaling $75 thousand per quarter through
September 2007 and sales of finished goods inventories to ETI, including a pro rata share
of management fee income, aggregating approximately $7.5 million over the three-year term
of the Supply Agreement.

Gross Margin. The
Companys consolidated gross profit increased $2.2 million, or 19.0 percent, in the
2005 Quarter to $13.7 million primarily as a result of increased revenues. The
Companys consolidated gross margin for the 2005 Quarter was 40.7 percent, as
compared to 39.4 percent in the 2004 Quarter. Following the ETI transaction and for the
three-year term of the Supply Agreement, OTIs revenues, consisting of sales of
finished goods inventories, including a pro rata share of management fee income, and
license royalties, are expected to generate gross margins of approximately 36 percent and
are not expected to have a material dilutive impact on the Companys consolidated
gross margins.

Operating Expenses.
Consolidated operating expenses for the 2005 Quarter were $11.0 million, or 32.7 percent
of net revenues, as compared to $9.7 million, or 33.0 percent of net revenues, in the 2004
Quarter. The net increase in the absolute dollar amount of operating expenses in the 2005
Quarter resulted primarily from selling, general and administrative expenses related to
the recently acquired IMP businesses, higher distribution and other variable selling costs
associated with increasing revenues, increased accounting and audit expenses and
amortization of intangibles acquired in the IMP acquisition in May 2004.

Consolidated selling, general and
administrative expenses were $10.5 million or 31.3 percent of net revenues in the 2005
Quarter, versus $9.3 million or 31.6 percent of net revenues in the 2004 Quarter. The $1.2
million increase in the absolute dollar amount of selling, general and administrative
expenses is attributable to higher variable distribution and selling expenses as a result
of the Companys increased revenues and included a $350 thousand increase in
distribution expenses, a $680 thousand increase in sales and marketing expenses and a $260
thousand increase in general and administrative expenses. Of these amounts, selling,
general and administrative expenses related to recently acquired IMP businesses totaled
approximately $908 thousand. In addition, accounting and audit expenses recorded in the
2005 Quarter related to the Companys internal control and other Sarbanes Oxley
compliance efforts totaled approximately $205 thousand. During the 2005 Quarter, selling,
general and administrative expenses of the Companys OTI division consisted primarily
of franchise taxes and miscellaneous administrative costs and totaled approximately $38
thousand, as compared to $400 thousand in the 2004 Quarter. OTIs selling, general
and administrative expenses in the 2004 Quarter included sales commissions, warehousing
and distribution costs and other administrative costs. As a result of the ETI transaction
concluded in September 2004, the Company expects to eliminate substantially all of its OTI
division selling, general and administrative expenses in future periods.

Consolidated research and development
expenses in the 2005 Quarter of $253 thousand were consistent with research and
development expenses of $262 thousand recorded in the 2004 Quarter.

14

---

Consolidated amortization of
intangibles in the 2005 Quarter was $246 thousand, an increase of $98 thousand as compared
to amortization expense recorded in the 2004 Quarter. This increase resulted primarily
from the amortization of intangibles acquired in the IMP acquisition in May 2004.

Income from Operations. Income
from operations for the 2005 Quarter was $2.7 million, or 8.0 percent of net revenues,
versus $1.9 million, or 6.4 percent of net revenues, in the 2004 Quarter. For the 2005
Quarter, Microteks income from operations of $2.1 million increased by approximately
$478 thousand, or 28.9 percent, from $1.7 million in income from operations recorded in
the 2004 Quarter primarily as a result of income from operations generated by the
Companys Netherlands operations which was partially offset by accounting and audit
expenses related to Sarbanes-Oxley compliance. The Companys OTI division reported
income from operations in the 2005 Quarter of $561 thousand versus income from operations
of $215 thousand in the 2004 Quarter. The increase in OTIs income from operations is
attributable to the ETI transaction concluded in September 2004 which stabilized gross
margins at approximately 36 percent and eliminated a significant portion of OTIs
selling, general and administrative expenses.

Interest Expense and Interest
Income.Consolidated interest expense and interest income in the 2005 Quarter of $77
thousand and $18 thousand, respectively, were consistent with consolidated interest
expense and interest income of $71 thousand and $17 thousand, respectively, recorded in
the 2004 Quarter.

Other Income/Expense, Net.
Included in other expenses in the 2005 Quarter were foreign currency exchange losses of
approximately $377 thousand which resulted from the translation of certain transactions of
the Companys Netherlands subsidiaries which are denominated in a currency other than
the functional currency of those subsidiaries. There were no such foreign currency
exchange losses in the 2004 Quarter. The Companys equity in earnings of its
investee, GRI, was $106 thousand in the 2005 Quarter, as compared to $2 thousand for the
2004 Quarter.

Income Taxes. The
Companys provision for income taxes in the 2005 Quarter reflects income tax expense
of $265 thousand, consisting entirely of the Companys state and foreign tax
provisions for 2005 Quarter. This compares to income tax expense approximately $96
thousand for the 2004 Quarter.

Net Income. The resulting net
income for the 2005 Quarter was $2.1 million, or $0.05 per diluted share, as compared to
$1.7 million, or $0.04 per diluted share, reported for the 2004 Quarter.

# Liquidity and Capital
Resources

As of March 31, 2005 and December 31,
2004, the Companys cash and cash equivalents totaled $8.8 million and $9.0 million,
respectively. The Companys cash flow activity in the 2005 Quarter and the 2004
Quarter was as follows (in thousands):

|                                      | Three months ended
March 31,
|------------------------------------- | ----------------------------
|
|Cash provided by operating activities |                             
|Cash used in investing activities     |                             
|Cash used in financing activities     |                             

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

During the 2005 Quarter, the
Companys operating activities generated cash of $240 thousand and consisted
primarily of net income from operations, depreciation, amortization and increases in
accounts payable. Offsetting these sources of cash were a $197 thousand increase in
accounts receivable, net of allowances, decreases in accrued compensation and other
current liabilities of $758 thousand and a $2.0 million increase in inventories. The
increase in inventories was due to certain purchasing strategies employed by the Company
during the 2005 Quarter to ensure a continuous supply of certain inventory items and to
facilitate a smooth transition of the Companys Plasco manufacturing operations from
Gurnee, Illinois to the Dominican Republic in the second quarter of 2005. During the 2004
Quarter, cash provided by operating activities was attributable to net income from
operations, depreciation, amortization and a balanced working capital activities which
matched a $1.6 million increase in accounts receivables and a $1.0 million decrease in
accrued compensation and other liabilities against a $1.2 million decrease in inventories
and other assets and a $1.4 million increase in accounts payable.

15

---

Investing activities in the 2005
Quarter used $284 thousand in cash and consisted of purchases of capital property and
equipment. Cash used in investing activities in the 2004 Quarter consisted of cash
consideration of $413 thousand for the OrthoPlast acquisition and $390 thousand in capital
property and equipment additions.

During the 2005 Quarter, financing
activities used $346 thousand in cash. Financing cash inflows in the 2005 Quarter included
net borrowings under the Companys Credit Agreement of $483 thousand and proceeds
from the exercise of stock options and other stock issuances of $339 thousand. Offsetting
these inflows in the 2005 Quarter were repayments of other long-term debt agreements of
$123 thousand and a decrease in the Companys bank overdraft of approximately $1.0
million. Cash used in financing activities for the 2004 Quarter of $1.1 million consisted
of net repayments under the Companys Credit Agreement of $1.5 million, repayments
under other long-term debt agreements of $119 thousand and a decrease in the
Companys bank overdraft of $418 thousand. Offsetting these amounts were proceeds
from the exercise of stock options and other stock issuances of $952 thousand.

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, 2006. Borrowing availability under the revolving credit facility is based on the
lesser of (i) a percentage of eligible accounts receivable and inventories or (ii) $23.5
million, less any outstanding letters of credit issued under the Credit Agreement.
Outstanding borrowings under the revolving credit facility were $5.0 million and $4.5
million at March 31, 2005 and December 31, 2004, respectively. As of March 31, 2005, the
Company had additional borrowing availability under the revolving facility of $11.4
million. As of May 6, 2005, the Companys total borrowing availability under the
revolving facility was $17.2 million, of which the Company had borrowed $4.7 million.
Revolving credit borrowings bear interest, at the Companys option, at either a
floating rate approximating the Banks prime rate plus an interest margin (6.5% at
May 6, 2005) or LIBOR plus an interest margin (4.41% at May 6, 2005). At March 31, 2005,
the Company was in compliance with its financial covenants under the Credit Agreement.

Based on its current business plan,
the Company expects that cash equivalents and short term investments on hand, the
Companys credit facility, as amended, and funds budgeted to be generated from
operations will be adequate to meet its liquidity and capital requirements for the next
year. However, currently unforeseen future developments, potential acquisitions and
increased working capital requirements may require additional debt financing or issuance
of common stock in 2005 and subsequent years.

# Off-Balance Sheet
Arrangements

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

# Forward Looking
Statements

Statements made in this Quarterly
Report include forward-looking statements made under the provisions of the Private
Securities Litigation Reform Act of 1995 including, but not limited to, the effect of
newly issued accounting standards on the Companys consolidated financial statements
described in the notes to the unaudited condensed consolidated financial statements; the
Companys ability to maintain its business by continually improving its existing
capabilities and simultaneously developing and acquiring new business opportunities while
maintaining its customer focus and providing the highest levels of customer support; the
Companys ability to increase sales and earnings from its infection control business
by completing strategic acquisitions, enhancing marketing and distribution efforts both
domestically and internationally, introducing new products, increasing direct sales
representation, employing tele-sales agents for added sales coverage, and capitalizing on
low-cost manufacturing opportunities in the Dominican Republic and China; the
Companys expectation about the composition and amount of revenues to be received by
the Companys OTI division; the Companys expectation about the gross margin
contribution of the Companys OTI division; the Companys expectation that it
will eliminate substantially all of the OTI divisions selling, general and
administrative expenses in future periods; the Companys ability to ensure a
continuous supply of certain inventory items and smooth transition of the Plasco
operations to the Dominican Republic in the second quarter of 2005; and the Companys
current expectation that cash equivalents and short term investments on hand, the
Companys existing credit facility and funds budgeted to be generated from operations
will be adequate to meet its liquidity and capital requirements for the next year. The
Companys actual results could differ materially from such forward-looking statements
and such results will be affected by risks described in the Companys Annual Report
including, without limitation, those described under Risk Factors under the captions:
Low Barriers to Entry for Competitive Products, Potential Erosion of
Profit Margins, Reliance upon Distributors, Small Sales and
Marketing Force, Disruption of Sales and Marketing Group, Reliance
upon Large Customers, Risks of Completing Acquisitions, Risks of
Successfully Integrating Acquisitions, Reliance on International
Operations, Reliance upon Microtek, Reliance upon Licensee for
OTIs Operating Results, Dependence on Key Personnel,
Competition, Product Liability, Regulatory Risks,
Risks of Obsolescence, Risks Affecting Protection of Technologies,
Stock Price Volatility, Risks of Accounting for Income Taxes,
Foreign Currency Risks, Risks for Increases in Costs of Raw Materials
and Distribution Expenses and Anti-takeover Provisions. The Company does
not undertake to update the Companys forward-looking statements to reflect future
events or circumstances.

16

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# Item 3.  Quantitative and
Qualitative Disclosures about Market Risk

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

The financial position and results of
operations of the Companys foreign subsidiaries in the United Kingdom and the
Netherlands are measured using the foreign subsidiarys local currency as the
functional currency. Revenues and expenses of such subsidiaries are translated into U.S.
dollars at average exchange rates prevailing during the period. Assets and liabilities are
translated at the rates of exchange on the balance sheet date. The resulting translation
gain and loss adjustments are recorded directly as a separate component of
shareholders equity. Foreign currency translation adjustments, net of applicable
taxes, resulted in a loss of $290,000 and a gain of $64,000 for the three months ended
March 31, 2005 and 2004, respectively.

Transaction gains and losses that
arise from exchange rate fluctuations on transactions denominated in a currency other than
the subsidiarys functional currency are included in the results of operations as
incurred. Foreign currency exchange losses included in operations for three months ended
March 31, 2005 were approximately $377,000 and resulted from the translation of certain
transactions of the Netherlands subsidiaries which are denominated in a currency other
than the functional currency of those subsidiaries. The effect of foreign currency
transactions was not material to the Companys results of operations for the three
months ended March 31, 2004.

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

The Companys cash and cash
equivalents are short-term, highly liquid investments with original maturities of three
months or less. As a result of the short-term nature of the Companys cash and cash
equivalents, a change of market interest rates does not materially impact interest income
accruing on these investments or, consequently, the Companys operating results or
cash flow. The Companys greatest sensitivity with respect to the general level of
U.S. interest rates relates to the effect that changes in those rates have on the
Companys interest expense. At March 31, 2005, the Company had long-term debt
totaling $5.0 million that bears interest at a floating rate approximating the Prime Rate
or LIBOR. Because these rates are variable, an increase or decrease in the Companys
average interest rate of ten percent, or approximately 40 basis points, would have
increased or decreased interest expense by approximately $5,000 during the three months
ended March 31, 2005.

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

17

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

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

# PART II 
OTHER INFORMATION

# Item 1.   Legal Proceedings

Not applicable.

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

During the quarter for which this
report is filed, there were no material modifications in the instruments defining the
rights of shareholders. During the quarter for which this report is filed, none of the
rights evidenced by the shares of the Companys common stock were materially limited
or qualified by the issuance or modification of any other class of securities. The Company
made no repurchases of equity securities during the quarter ended March 31, 2005.

18

---

# Item 3.   Default Upon
Senior Securities

Not applicable.

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

None.

# Item 5.   Other Information

As described in the Companys
Current Report on Form 8-K dated March 3, 2005 filed under Items 1.01, 1.02 and 5.02, the
Company offered to enter into a separation and release agreement (the Severance
Agreement) with the Companys former Executive Vice President of Sales and
Marketing. A copy of that Severance Agreement, as subsequently finalized and executed by
the parties, is filed herewith.

# Item 6.   Exhibits

| | Exhibit No. |  | Description
| | ----------- |  | -----------

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

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

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

| | 10.1 |  | Separation
 Agreement  and Full  Release of All Claims  between  Microtek  Medical  Holdings,  Inc.
and Barbara J.                      Osborne
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

| | 31.1 |  | Certification
of Chief Executive Officer
| | ---- |  | ----------------------------------------

| | 31.2 |  | Certification
of Chief Financial Officer
| | ---- |  | ----------------------------------------

| | 32.1 |  | Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ---- |  | -----------------------------------------------------------------------

| | 32.2 |  | Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ---- |  | -----------------------------------------------------------------------

---

| |  | (1) |  | Incorporated
by reference to Exhibit 3.1 of the Companys Annual Report on                Form
10-K for the year ended December 31, 2004 (File No. 33-83474).
| |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

19

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# 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 May 10,
2005.

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

20