**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C.  20549**


**FORM
      10-Q**





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


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**








For
                Quarter Ended
            June
                30, 2007
            Commission
                File No.  0-24866











MICROTEK
      MEDICAL HOLDINGS, INC.


(Exact
      name of Registrant as specified in its charter)








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





13000
      DEERFIELD PARKWAY, SUITE 300


ALPHARETTA,GA30004


(Address
      of principal executive offices)





(678)
      896-4400


(Registrant's
      telephone number, including area code)











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





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


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





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





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





Class
            Outstanding
                at August 6, 2007Common
                Stock, $.001 par value
            43,493,447











**INDEX**





**PART
                I:**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                Statements:Unaudited
                Condensed Consolidated Balance Sheets as of June 30, 2007 and December
                31,
                2006Unaudited
                Condensed Consolidated Statements of Operations and Comprehensive
                Income
                for the Three Months ended June 30, 2007 and June 30, 2006 and for
                the Six
                Months ended June 30, 2007 and June 30, 2006Unaudited
                Condensed Consolidated Statements of Cash Flows for the Six Months
                ended
                June 30, 2007 and June 30, 2006Notes
                to Unaudited Condensed Consolidated Financial
                StatementsItem
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                OperationsItem
                3.
            Quantitative
                and Qualitative Disclosures About Market RiskItem
                4.
            Controls
                and Procedures**PART
                II:**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                ProceedingsItem
                1A.
            Risk
                FactorsItem
                2.
            Unregistered
                Sales of Equity Securities and Use of ProceedsItem
                3.
            Defaults
                Upon Senior SecuritiesItem
                4.
            Submission
                of Matters to a Vote of Security HoldersItem
                5.
            Other
                InformationItem
                6.
            Exhibits








2


**PART
      I**


**FINANCIAL
      INFORMATION**


**Item
      1.   Financial Statements**





**MICROTEK
                MEDICAL HOLDINGS, INC.**Unaudited
                Condensed Consolidated Balance Sheets(in
                thousands)**Assets**
            
            **June
                30, 2007**
            
            
            **December
                31, 2006**Current
                assets:Cash
                and cash equivalents
            
            $
            17,181
            
            
            $
            17,059Accounts
                receivable, net of allowances of $1,875
              and
                $1,626, respectively
            
            
            22,276
            
            
            
            18,182Other
                receivables
            
            
            1,317
            
            
            
            1,540Inventories
            
            
            39,368
            
            
            
            35,654Deferred
                income taxes
            
            
            4,290
            
            
            
            3,368Prepaid
                expenses and other current assets
            
            
            1,628
            
            
            
            2,003Total
                current assets
            
            
            86,060
            
            
            
            77,806Property
                and equipment
            
            
            32,843
            
            
            
            32,189Less
                accumulated depreciation
            
            
            (25,176
            )
            
            
            (24,181
            )Property
                and equipment, net
            
            
            7,667
            
            
            
            8,008Goodwill
            
            
            34,919
            
            
            
            34,803Other
                intangible assets, net
            
            
            12,638
            
            
            
            12,204Deferred
                income taxes
            
            
            13,280
            
            
            
            16,192Other
                assets
            
            
            6,513
            
            
            
            7,153Total
                assets
            
            $
            161,077
            
            
            $
            156,166**Liabilities
                and Shareholders’ Equity**Current
                liabilities:Accounts
                payable
            
            $
            12,351
            
            
            $
            11,735Accrued
                expenses
            
            
            6,110
            
            
            
            6,672Income
                taxes payable
            
            
            366
            
            
            
            353Current
                portion of long-term debt
            
            
            147
            
            
            
            173Total
                current liabilities
            
            
            18,974
            
            
            
            18,933Long-term
                debt, excluding current portion
            
            
            670
            
            
            
            721Deferred
                income taxes
            
            
            442
            
            
            
            769Other
                long-term liabilities, excluding current portion
            
            
            3,261
            
            
            
            3,507Total
                liabilities
            
            
            23,347
            
            
            
            23,930Shareholders’
                equity:Common
                stock
            
            
            46
            
            
            
            45Additional
                paid-in capital
            
            
            219,945
            
            
            
            218,759Accumulated
                deficit
            
            
            (77,269
            )
            
            
            (81,859
            )Accumulated
                other comprehensive income, net
              of
                income taxes of ($216) and ($178), respectively
            
            
            1,077
            
            
            
            733143,799
            
            
            
            137,678Treasury
                shares, at cost
            
            
            (6,069
            )
            
            
            (5,442
            )Total
                shareholders’ equity
            
            
            137,730
            
            
            
            132,236Total
                liabilities and shareholders’ equity
            
            $
            161,077
            
            
            $
            156,166




See
        notes
        to unaudited condensed consolidated financial statements.


3





**MICROTEK
                MEDICAL HOLDINGS, INC.**Unaudited
                Condensed Consolidated Statements of Operations and Comprehensive
                Income(in
                thousands, except per share data)**Three
                months ended**
            
            
            **Six
                months ended****June
                30, 2007**
            
            
            **June
                30, 2006**
            
            
            **June
                30, 2007**
            
            
            **June
                30, 2006**Net
                revenues
            
            $
            38,505
            
            
            $
            36,058
            
            
            $
            75,681
            
            
            $
            69,741Cost
                of goods sold
            
            
            22,136
            
            
            
            21,986
            
            
            
            43,820
            
            
            
            42,031Gross
                profit
            
            
            16,369
            
            
            
            14,072
            
            
            
            31,861
            
            
            
            27,710Operating
                expenses:Selling,
                general and administrative
            
            
            12,241
            
            
            
            10,585
            
            
            
            24,358
            
            
            
            20,542Research
                and development
            
            
            347
            
            
            
            145
            
            
            
            739
            
            
            
            289Amortization
                of intangibles
            
            
            372
            
            
            
            254
            
            
            
            679
            
            
            
            468Total
                operating expenses
            
            
            12,960
            
            
            
            10,984
            
            
            
            25,776
            
            
            
            21,299Income
                from operations
            
            
            3,409
            
            
            
            3,088
            
            
            
            6,085
            
            
            
            6,411Interest
                income
            
            
            120
            
            
            
            105
            
            
            
            231
            
            
            
            199Interest
                expense
            
            
            (53
            )
            
            
            (10
            )
            
            
            (69
            )
            
            
            (21
            )Equity
                in earnings of investee
            
            
            101
            
            
            
            90
            
            
            
            133
            
            
            
            123Foreign
                currency exchange gain
            
            
            108
            
            
            
            -
            
            
            
            203
            
            
            
            -Income
                before income taxes
            
            
            3,685
            
            
            
            3,273
            
            
            
            6,583
            
            
            
            6,712Income
                tax provision
            
            
            1,181
            
            
            
            1,118
            
            
            
            1,993
            
            
            
            2,307Net
                income
            
            $
            2,504
            
            
            $
            2,155
            
            
            $
            4,590
            
            
            $
            4,405Other
                comprehensive income (loss):Foreign
                currency translation gain, net of income taxes of ($29), ($45), ($36)
                and
                ($66), respectively
            
            
            184
            
            
            
            458
            
            
            
            341
            
            
            
            817Unrealized
                gain (loss) on available for sale securities, net of income taxes
                of $1,
                $18, ($2), and $14, respectively
            
            
            -
            
            
            
            (28
            )
            
            
            3
            
            
            
            (22
            )Comprehensive
                income
            
            $
            2,688
            
            
            $
            2,585
            
            
            $
            4,934
            
            
            $
            5,200Net
                income per common share – Basic
            
            $
            0.06
            
            
            $
            0.05
            
            
            $
            0.11
            
            
            $
            0.10Net
                income per common share – Diluted
            
            $
            0.06
            
            
            $
            0.05
            
            
            $
            0.10
            
            
            $
            0.10Basic
                  weighted average number of common
              shares
                outstanding
            
            
            43,455
            
            
            
            43,639
            
            
            
            43,427
            
            
            
            43,656Diluted
                  weighted average number of common
              shares
                outstanding
            
            
            44,820
            
            
            
            44,668
            
            
            
            44,754
            
            
            
            44,647




See
      notes
      to unaudited condensed consolidated financial statements.





4





**MICROTEK
                MEDICAL HOLDINGS, INC.**Unaudited
                Condensed Consolidated Statements of Cash Flows(in
                thousands)**Six
                months ended**
            
            
            **Six
                months ended****June
                30, 2007**
            
            
            **June
                30, 2006**Cash
                flows from operating activities:Net
                income
            
            $
            4,590
            
            
            $
            4,405Adjustments
                to reconcile net income to net cash provided byoperating
                activities:Depreciation
            
            
            1,010
            
            
            
            1,024Amortization
                of intangibles
            
            
            679
            
            
            
            468Provision
                for doubtful accounts
            
            
            268
            
            
            
            307Deferred
                income taxes
            
            
            1,625
            
            
            
            2,057Equity
                in earnings of investee
            
            
            (133
            )
            
            
            (123
            )Other
            
            
            5
            
            
            
            (3
            )Changes
                in operating assets and liabilities, net of
              acquisitions
            
            
            (2,687
            )
            
            
            (1,360
            )**Net
                cash provided by operating activities**
            
            ****
            **5,357**
            
            
            ****
            **6,775**Cash
                flows from investing activities:Purchase
                of and deposits for property and equipment
            
            
            (672
            )
            
            
            (831
            )Acquisition
                of Samco, net of cash acquired
            
            
            -
            
            
            
            (2,274
            )Acquisition
                of Europlak, net of cash acquired
            
            
            (96
            )
            
            
            -Acquisition
                of Eurobiopsy, net of cash acquired
            
            
            (125
            )
            
            
            -Proceeds
                from dispositions
            
            
            31
            
            
            
            6**Net
                cash used in investing activities**
            
            ****
            **(862**
            **)**
            
            ****
            **(3,099**
            **)**Cash
                flows from financing activities:Borrowings
                under line of credit agreement
            
            
            62,953
            
            
            
            60,731Repayments
                under line of credit agreement
            
            
            (62,953
            )
            
            
            (61,962
            )Changes
                in bank overdraft
            
            
            (4,721
            )
            
            
            (1,764
            )Repayments
                under notes payable
            
            
            (95
            )
            
            
            (247
            )Proceeds
                from exercise of stock options
            
            
            583
            
            
            
            68Repurchase
                of treasury stock
            
            
            (627
            )
            
            
            (883
            )Proceeds
                from issuance of common stock
            
            
            604
            
            
            
            463**Net
                cash used in financing activities**
            
            ****
            **(4,256**
            **)**
            
            ****
            **(3,594**
            **)**Effect
                of exchange rate changes on cash
            
            
            (117
            )
            
            
            269Net
                increase in cash and cash equivalents
            
            
            122
            
            
            
            351Cash
                and cash equivalents at beginning of period
            
            
            17,059
            
            
            
            14,765**Cash
                and cash equivalents at end of period**
            
            **$**
            **17,181**
            
            
            **$**
            **15,116**




See
        notes
        to unaudited condensed consolidated financial statements.





5


**MICROTEK
      MEDICAL HOLDINGS, INC.**


**Notes
      to Unaudited Condensed Consolidated Financial Statements**








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





Microtek
      Medical Holdings, Inc. and subsidiaries (the “Company”) manufactures and
      supplies innovative product solutions for patient care, occupational safety
      and
      management of infectious and hazardous waste for the healthcare market, which
      represents one business segment.  The Company markets its products to
      hospitals and other end users through a broad distribution system consisting
      of
      multiple channels including distributors, directly through its own sales force,
      original equipment manufacturers, and private label customers.  The
      Company also markets certain of its products through custom procedure tray
      companies.





The
      Company’s revenues are generated through two operating units, Microtek Medical,
      Inc. (“Microtek”), a subsidiary of the Company, and OREX Technologies
      International (“OTI”), an operating division.  Microtek is the core
      business of the Company.  As described in Note 7 to these unaudited
      condensed consolidated financial statements, in September 2004, the Company
      entered into an agreement which grants to Eastern Technologies, Inc. a worldwide
      exclusive license to manufacture, use and sell the Company’s OREX materials and
      processing technology in the nuclear industry and homeland security industry,
      and for certain other industrial applications.  Subject to the terms
      and conditions of this licensing agreement, OTI no longer sells OREX products
      to
      the nuclear power industry.





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





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared  in accordance with Rule 10-01 of Regulation S-X for interim
      financial statements required to be filed with the Securities and Exchange
      Commission and do not include all information and footnotes required by
      generally accepted accounting principles for complete financial
      statements.  In the opinion of management, the information furnished
      reflects all adjustments (consisting only of normal recurring adjustments)
      necessary for a fair presentation of the financial position, results of
      operations and cash flows for the interim periods presented.  Results
      for the interim periods are not necessarily indicative of results to be expected
      for the full year.  The unaudited condensed consolidated financial
      statements herein should be read in conjunction with the consolidated financial
      statements and notes thereto contained in the Company's Annual Report on Form
      10-K for the year ended December 31, 2006 (the “Annual Report”).





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




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





**3.**
            **NEWLY
                ISSUED ACCOUNTING
                STANDARDS**





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, *Accounting for Uncertainty in Income Taxes – An interpretation of
      FASB Statement No. 109***(“FIN 48”) which clarifies the
      accounting and disclosure requirements for uncertainty in tax positions, as
      defined.  The Company’s adoption of the provisions of FIN 48 on
      January 1, 2007 had no impact on the Company’s consolidated financial
      statements.  The Company examined its tax positions for all open tax
      years through December 31, 2006 and the full benefit of each tax position has
      been recognized in the financial statements in accordance with FIN
      48.  On any future tax positions, the Company intends to record
      interest and penalties, if any, as a component of interest expense and general
      and administrative expenses, respectively.  The Company’s tax years
      are open for U.S. Federal purposes from 2003 through 2006.  Certain
      U.S. state tax years remain open for 2002 and 2006
      filings.  International statutes vary widely and the open years range
      from 2004 through 2006.  Taxing authorities have the ability to review
      prior tax years to the extent of net operating loss and tax credit carryforwards
      to open tax years.






6





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





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





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





**4.**
            **STOCK-BASED
                COMPENSATION**




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





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






7





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





Pursuant
      to the Company’s Credit Agreement (see Note 11), the Company is not permitted to
      pay any dividends and does not anticipate paying any cash dividends in the
      foreseeable future.  Therefore, an expected dividend yield of zero is
      assumed for purposes of the Company’s Black Scholes
      calculations.  Pre-vesting forfeiture rates are estimated based on the
      Company’s historical experience and expectations about future
      forfeitures.  Expected price volatility is determined using a weighted
      average of daily historical volatility of the Company’s stock price over the
      corresponding expected option life.  The average risk-free interest
      rate is determined using the Federal Reserve nominal rates in effect as of
      the
      date of grant for U.S. Treasury zero-coupon bonds with maturities similar to
      those of the expected term of the share-based award being valued.  The
      expected term of stock options is determined using historical data.





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





The
      1992
      Plan was adopted on April 28, 1992 and, as amended, authorized the issuance
      of
      up to 4,800,000 shares of common stock to certain employees, consultants and
      directors of the Company under incentive and/or nonqualified options and/or
      alternate rights.  An alternate right is defined as the right to
      receive an amount of cash or shares of stock having an aggregate market value
      equal to the appreciation in the market value of a stated number of shares
      of
      the Company’s common stock from the alternate right grant date to the exercise
      date.  Options and/or rights under the 1992 Plan were granted through
      April 27, 2002 at prices not less than 100 percent of the market value at
      the date of grant.  Options and/or rights become exercisable based
      upon a vesting schedule determined by the 1992 Plan Committee and become fully
      exercisable upon a change in control, as defined.  Options expire not
      more than ten years from the date of grant and alternate rights expire at the
      discretion of the 1992 Plan Committee.  At June 30, 2007, currently
      exercisable options for 745,337 shares were outstanding under the 1992
      Plan.  There were no alternate rights issued under the 1992
      Plan.  The expiration of the 1992 Plan on April 27, 2002 does not
      affect options currently outstanding.





The
      1999
      Plan was approved by the shareholders on May 27, 1999, and as amended on May
      19,
      2004, authorizes the issuance of up to 5,345,000 shares of common stock to
      certain employees, consultants and directors of the Company under incentive
      and/or nonqualified options, stock appreciation rights (“SARs”) and other stock
      awards (collectively, “Stock Awards”).  Stock Awards under the 1999
      Plan may be granted at prices not less than 100 percent of the market value
      at
      the date of grant.  Options and/or SARs become exercisable based upon
      a vesting schedule determined by the 1999 Plan Committee and become fully
      exercisable upon a change in control, as defined.  Options expire not
      more than ten years from the date of grant and SARs and other stock awards
      expire at the discretion of the 1999 Plan Committee.  The 1999 Plan is
      unlimited in duration.  At June 30, 2007, currently exercisable
      options for 2,984,000 shares were outstanding under the 1999 Plan.






8





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




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





**Shares**
            
            
            **Weighted
                Average**
              **Exercise
                Price**Outstanding
                and Exercisable – December 31, 2006
            
            
            3,990,806
            
            
            $
            2.97Granted
            
            
            -
            
            
            
            -Exercised
            
            
            (225,469
            )
            
            
            2.58Canceled
            
            
            (36,000
            )
            
            
            4.69Outstanding
                and Exercisable – June 30, 2007
            
            
            3,729,337
            
            
            $
            2.98





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





**Range
                of**
              **Exercise**
              **Prices**
            **Number**
              **Outstanding
                and Exercisable**
            **Average**
              **Remaining**
              **Contractual**
              **Life
                (Years)**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**$0.72
                - $1.50
            400,011
            3.7
            
            $     1.35$1.66
                - $2.28
            1,272,581
            4.1
            
            1.96$2.35
                - $3.59
            506,745
            5.1
            
            2.96$3.60
                - $3.99
            775,500
            6.8
            
            3.72$4.00
                - $5.02
            774,500
            6.3
            
            4.773,729,337
            5.2
            
            $     2.98





The
      aggregate intrinsic value of options outstanding and exercisable was
      approximately $10.2 million at June 30, 2007.  There were 53,500
      options and 225,469 options exercised during the three months and six months
      ended June 30, 2007, respectively, and 25,750 options and 60,750 options
      exercised during the three months and six months ended June 30, 2006,
      respectively.  The total intrinsic value of options exercised during
      the three months and six months ended June 30, 2007 was approximately $83,000
      and $434,000, respectively, and $60,000 and $152,000 for the three months and
      six months ended June 30, 2006, respectively, as determined as of the date
      of
      exercise.  Cash received from option exercises totaled $173,000 and
      $583,000 during the three months and six months ended June 30, 2007,
      respectively, and $37,000 and $68,000 during the three months and six months
      ended June 30, 2006, respectively.





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




**5.**
              **STOCK
                  REPURCHASE PROGRAM**


In
      August
      2006, the Board of Directors amended the Company’s existing stock repurchase
      program to authorize the repurchase of an aggregate of 4.0 million shares over
      an indefinite period, including approximately 1.7 million shares previously
      repurchased under the program.  During the three months and six months
      ended June 30, 2007, the Company repurchased 22,000 and 141,100 shares,
      respectively, under this program for approximately $104,000 and $627,000,
      respectively, at an average repurchase price of approximately $4.71 per share
      and $4.44 per share, respectively.  During the three months and six
      months ended June 30, 2006, the Company repurchased 235,241 shares under this
      program for approximately $883,000, an average repurchase price of approximately
      $3.75 per share.  As of June 30, 2007, the Company had repurchased
      approximately 2.1 million shares for an aggregate repurchase price of
      approximately $5.6 million.






9




**6.**
            **ACQUISITIONS**




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





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





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





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





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





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






10





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





Microtek
      acquired all of the stock of Europlak, a surgeon-owned marketer of minimally
      invasive surgical products and devices primarily in urology, gastroenterology
      and related surgical specialties, and all of the stock of Eurobiopsy, a company
      focused on the design, development, manufacture and commercialization of a
      line
      of endoscope biopsy forceps, on October 2, 2006 and December 15, 2006,
      respectively.  Both of these companies are located in France and
      currently generate substantially all of their revenues from French
      customers.  The combined purchase price of approximately $7.0 million
      in cash, including certain acquisition costs, is expected to be allocated to
      the
      assets acquired and liabilities assumed, primarily accounts receivable,
      inventories, identifiable intangibles, accounts payable, other accrued
      liabilities and notes payable, based on the respective estimated fair values
      of
      those assets and liabilities, with the excess allocated to
      goodwill.  The terms of the Europlak agreement also provide for
      additional cash consideration up to approximately $12.4 million through 2021
      if
      certain revenue hurdles, as defined in the agreement, are
      achieved.  The additional consideration will be recorded when it is
      determinable that the payment of such amounts is probable and is expected to
      result in additional goodwill.





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





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





**Three
                months ended**
              **June
                30,**
            
            
            **Six
                months ended**
              **June
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                revenues
            
            $
            38,505
            
            
            $
            37,831
            
            
            $
            75,681
            
            
            $
            73,929Net
                income
            
            $
            2,504
            
            
            $
            2,212
            
            
            $
            4,590
            
            
            $
            4,599Net
                income per share – basic
            
            $
            0.06
            
            
            $
            0.05
            
            
            $
            0.11
            
            
            $
            0.11Net
                income per share – diluted
            
            $
            0.06
            
            
            $
            0.05
            
            
            $
            0.10
            
            
            $
            0.10





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





**7.**
            **LICENSE
                AGREEMENT**





In
      September 2004, the Company entered into an agreement (the “License Agreement”)
      which grants to Eastern Technologies, Inc. (“ETI”) a worldwide exclusive license
      to manufacture, use and sell the Company’s OREX materials and processing
      technology in the nuclear industry and homeland security industry, and for
      certain other industrial applications.  Under the terms of the License
      Agreement, the Company will receive license royalties equal to $75,000 per
      quarter for the first three years of the agreement.  Thereafter and
      generally until the expiration of the underlying patents related to the products
      or services generating the subject royalties, the Company will receive license
      royalties equal to the greater of: (i) generally 5% of net sales, as defined
      in
      the agreement, or (ii) $300,000 per year.  The royalty rate is subject
      to downward adjustment in certain events with respect to net sales of certain
      products.  The Company also entered into an exclusive three-year
      supply agreement (the “Supply Agreement”) under which the Company agreed to
      provide certain sourcing and supply chain management services to ETI, and ETI
      agreed to purchase a total of approximately $4.8 million of inventory over
      the
      term of the Supply Agreement.  For these services, the Company will
      receive management fees totaling $2.7 million, $600,000 of which was received
      at
      the signing of the Supply Agreement and the remainder of which are payable
      in
      quarterly installments of $175,000 beginning December 31, 2004 and continuing
      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, was recognized into income ratably over the term of the
      Supply Agreement as nuclear finished goods inventories on hand were sold to
      ETI.  During the first quarter of 2007, the nuclear finished goods
      inventories were fully depleted, and the Company had fulfilled all of its
      responsibilities to ETI under the Supply Agreement.  At June 30, 2007
      and December 31, 2006, amounts recognized into income exceeded cash receipts
      from ETI by approximately $175,000 and $294,000, respectively, which amounts
      were recorded in the accompanying unaudited condensed consolidated balance
      sheet
      in prepaid expenses and other current assets.







11


**8.**
            **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 9 below, for
      the sale of certain of its raw material inventories used in the manufacture
      of
      finished goods for sale to the nuclear industry.  At closing, the
      Company received cash proceeds of $200,000 and a promissory note in the amount
      of $1.051 million.  The promissory note, including interest at 5%, was
      repaid ratably as the raw material inventories purchased by GRI in the
      transaction were consumed by GRI.  The final note payment was received
      in August 2006.  The total gain on the sale of these raw material
      inventories approximated $467,000.  Of this total gain, approximately
      $91,000, an amount commensurate with the Company’s relative ownership interest
      in GRI, was deferred and recognized into income as the raw material inventories
      purchased by GRI in the transaction were sold by GRI.  During the
      three months and six months ended June 30, 2006, approximately $2,000 of this
      deferred gain was recognized into income.  All remaining deferred gain
      on this transaction was fully recognized into income during the third quarter
      of
      2006.





**9.**
            **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 $884,000 and $751,000 at June 30, 2007 and December 31, 2006,
      respectively.  The Company recorded $101,000 and $133,000 of income
      during the three months and six months ended June 30, 2007, respectively, and
      $90,000 and $123,000 of income during the three months and six months ended
      June
      30, 2006, respectively, related to this investment.





**10.**
            **INVENTORIES**





Inventories
      are stated at the lower of cost or market.  The first-in first-out
      (“FIFO”) valuation method is used to determine the cost of
      inventories.  Cost includes material, labor and manufacturing overhead
      for manufactured and assembled goods and materials only for goods purchased
      for
      resale.  Inventories are summarized by major classification at June
      30, 2007 and December 31, 2006 as follows (in thousands):





**June
                30, 2007**
            
            
            **December
                31, 2006**Raw
                materials
            
            $
            14,925
            
            
            $
            13,317Work-in-progress
            
            
            2,191
            
            
            
            1,397Finished
                goods
            
            
            22,252
            
            
            
            20,940Total
                inventories
            
            $
            39,368
            
            
            $
            35,654






12





**11.**
            **LONG-TERM
                DEBT**





*The
      Credit Agreement.*The Company maintains a credit agreement with
      a Bank (the “Credit Agreement”).  As amended to date, the Credit
      Agreement provides for a $23.5 million revolving credit facility, which matures
      on June 30, 2008.  Borrowing availability under the revolving credit
      facility is based on the lesser of (i) a percentage of eligible accounts
      receivable and inventory or (ii) $23.5 million, less any outstanding letters
      of
      credit issued under the Credit Agreement.  Revolving credit borrowings
      bear interest at a floating rate approximating the Bank’s prime rate plus an
      interest margin (8.5% at June 30, 2007).  Borrowing availability under
      the revolving facility at June 30, 2007 and December 31, 2006 totaled $18.1
      million and $17.4 million, respectively.  There were no outstanding
      borrowings under the revolving credit facility as of June 30, 2007 or December
      31, 2006.  Borrowings under the Credit Agreement are collateralized by
      the Company’s accounts receivable, inventory, equipment, the Company’s stock of
      its subsidiaries and certain of the Company’s plants and offices.





The
      Credit Agreement contains certain restrictive covenants, including the
      maintenance of certain financial ratios, and places limitations on acquisitions,
      dispositions, capital expenditures and additional indebtedness.  In
      addition, the Company is not permitted to pay any dividends.  At June
      30, 2007 and December 31, 2006, the Company was in compliance with its financial
      covenants under the Credit Agreement.





The
      Credit Agreement provides for the issuance of up to $1.0 million in letters
      of
      credit.  There were no outstanding letters of credit at June 30, 2007
      or December 31, 2006.  The Credit Agreement also provides for a fee of
      0.3% per annum on the unused commitment, an annual collateral monitoring fee
      of
      $35,000 and an outstanding letter of credit fee of 2.0% per annum.





*Other
      Long-Term Debt.*The Company is obligated under a long-term lease
      arrangement which totaled $11,000 and $19,000 at June 30, 2007 and December
      31,
      2006, respectively.  In addition, as a result of the Company’s
      Europlak and Eurobiopsy acquisitions in October and December 2006, respectively,
      the Company assumed two notes payable to banks with amounts outstanding at
      June
      30, 2007 of approximately $794,000 and $12,000, respectively, and $836,000
      and
      $39,000, respectively, at December 31, 2006.  The first of these notes
      payable bears interest at 4.25 percent and is payable in monthly installments
      of
      principal and interest through March 2013.  The second note payable
      arrangement bears interest at a floating rate (approximately 5.1 percent at
      June
      30, 2007) and matures in November 2007.





The
      carrying value of long-term debt at June 30, 2007 and December 31, 2006
      approximates fair value based on interest rates that are believed to be
      available to the Company for debt with similar prepayment provisions provided
      for in the existing debt agreements.





**12.**
            **EARNINGS
                PER SHARE**




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





**Three
                months ended June 30,**
            
            
            **Six
                months ended****June
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Basic
                Shares
            
            
            43,455
            
            
            
            43,639
            
            
            
            43,427
            
            
            
            43,656Dilutive
                Shares (due to stock options)
            
            
            1,365
            
            
            
            1,029
            
            
            
            1,327
            
            
            
            991Diluted
                Shares
            
            
            44,820
            
            
            
            44,668
            
            
            
            44,754
            
            
            
            44,647






13





For
      the
      three months and six months ended June 30, 2007, options to purchase 685,500
      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.  For the three months and six months ended June 30,
      2006, there were 1.1 million and 1.6 million antidilutive shares,
      respectively.





**13.**
            **GEOGRAPHIC
                CONCENTRATIONS**




A
      significant portion of the Company’s products are manufactured at its facilities
      in the Dominican Republic, Mexico, the Netherlands, Malta, France or at GRI’s
      facilities in China.  Included in the Company’s consolidated balance
      sheet at June 30, 2007 and December 31, 2006 are the net assets of the Company’s
      sales, manufacturing and distribution facilities located in the United Kingdom
      and the Dominican Republic which totaled $20.5 million and $17.5 million,
      respectively.  Additionally, at June 30, 2007 and December 31, 2006,
      the net assets of the Company’s sales, manufacturing and distribution operations
      in the Netherlands, Malta, Germany and France totaled $31.2 million and $28.4
      million, respectively.  The Company’s Dominican Republic and Mexico
      facilities are engaged in manufacturing operations only and do not sell products
      to external customers.




Total
      international sales by the Company were $10.3 million and $20.8 million for
      the
      three and six months ended June 30, 2007, respectively, as compared to $9.7
      million and $18.5 million for the three months and six months ended June 30,
      2006.




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.





**15.**
            **SUBSEQUENT
                EVENT**





On
      August
      7, 2007, the Company and Ecolab Inc. (Ecolab) entered into a definitive
      agreement and plan of merger whereby Ecolab will acquire the Company in a cash
      transaction.  Under the terms of the agreement, the Company’s
      shareholders will receive $6.30 for each share of common stock outstanding
      as of
      the closing date of the transaction, which is expected to be during the fourth
      quarter of 2007.  Completion of the transaction is contingent upon
      various conditions, which are more fully set forth in the merger agreement,
      including, among other things, approval of the transaction by the Company’s
      shareholders, regulatory approval, and other customary closing
      conditions.





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





**General**





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





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






14





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





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





In
      September 2004, the Company entered into an agreement (the “License Agreement”)
      with Eastern Technologies, Inc. (“ETI”) which grants to ETI a worldwide
      exclusive license to manufacture, use and sell the Company’s OREX materials and
      processing technology in the nuclear industry and the homeland security industry
      and for certain other industrial applications.  Concurrent with the
      signing of the License Agreement, the Company also entered into an exclusive
      three-year supply agreement (the “Supply Agreement”) under which the Company has
      agreed to provide certain sourcing and supply chain management services and
      to
      sell a total of approximately $4.8 million of inventory to ETI over the term
      of
      the Supply Agreement.  The Company’s responsibilities to ETI under the
      Supply Agreement were fulfilled during the first quarter of
      2007.  Except for activities under the License Agreement, the Company
      is not actively engaged in any business development efforts associated with
      the
      Company’s OREX products and processing technologies.





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





**Recent
      Developments**





On
      August
      7, 2007, the Company and Ecolab entered into a definitive agreement and plan
      of
      merger whereby Ecolab will acquire the Company in a cash
      transaction.  Under the terms of the agreement, the Company’s
      shareholders will receive $6.30 for each share of common stock outstanding
      as of
      the closing date of the transaction, which is expected to be during the fourth
      quarter of 2007.  Completion of the transaction is contingent upon
      various conditions, which are more fully set forth in the merger agreement,
      including, among other things, approval of the transaction by the Company’s
      shareholders, regulatory approval, and other customary closing
      conditions.





**Results
      of Operations**





The
      following tables set forth certain unaudited income statement data, including
      amounts expressed as a percentage of net revenues, for the three months and
      six
      months ended June 30, 2007 and 2006 (in thousands):






15





**Three
                months ended**
              **June
                30, 2007**
            
            
            **Three
                months ended**
              **June
                30, 2006****Amount
                ($)**
            
            
            **%
                of Net Revenues**
            
            
            **Amount
                ($)**
            
            
            **%
                of Net Revenues**Net
                revenues
            
            $
            38,505
            
            
            
            100.0
            %
            
            $
            36,058
            
            
            
            100.0
            %Gross
                profit
            
            
            16,369
            
            
            
            42.5
            %
            
            
            14,072
            
            
            
            39.0
            %Operating
                expenses
            
            
            12,960
            
            
            
            33.7
            %
            
            
            10,984
            
            
            
            30.5
            %Income
                from operations
            
            
            3,409
            
            
            
            8.9
            %
            
            
            3,088
            
            
            
            8.6
            %Net
                income
            
            
            2,504
            
            
            
            6.5
            %
            
            
            2,155
            
            
            
            6.0
            %





**Six
                months ended**
              **June
                30, 2007**
            
            
            **Six
                months ended**
              **June
                30, 2006****Amount
                ($)**
            
            
            **%
                of Net Revenues**
            
            
            **Amount
                ($)**
            
            
            **%
                of Net Revenues**Net
                revenues
            
            $
            75,681
            
            
            
            100.0
            %
            
            $
            69,741
            
            
            
            100.0
            %Gross
                profit
            
            
            31,861
            
            
            
            42.1
            %
            
            
            27,710
            
            
            
            39.7
            %Operating
                expenses
            
            
            25,776
            
            
            
            34.1
            %
            
            
            21,299
            
            
            
            30.5
            %Income
                from operations
            
            
            6,085
            
            
            
            8.0
            %
            
            
            6,411
            
            
            
            9.2
            %Net
                income
            
            
            4,590
            
            
            
            6.1
            %
            
            
            4,405
            
            
            
            6.3
            %





**Three
      Months and Six Months Ended June 30, 2007 Compared to Three Months and Six
      Months Ended June 30, 2006**





**Net
      Revenues.**  Consolidated net revenues for the three months and
      six months ended June 30, 2007 (the “2007 Quarter” and the “2007 Period”,
      respectively) of $38.5 million and $75.7 million, respectively, increased by
      approximately $2.4 million, or 6.8 percent, and $5.9 million, or 8.5 percent,
      over consolidated net revenues of $36.1 million reported for the three months
      ended June 30, 2006 (the “2006 Quarter”) and $69.7 million reported for the six
      months ended June 30, 2006 (the “2006 Period”).





For
      the
      2007 Quarter and 2007 Period, Microtek’s net revenues totaled $38.4 million and
      $75.0 million, respectively, increases of $2.7 million and $5.9 million,
      respectively, over $35.7 million and $69.1 million reported for the respective
      2006 quarter and year-to-date periods.





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





**Three
                months ended**
              **June
                30, 2007**
            
            
            **Three
                months ended**
              **June
                30, 2006****Amount**
            
            
            **%
                of Total**
            
            
            **Amount**
            
            
            **%
                of Total**Domestic
            
            $
            28.1
            
            
            
            73.3
            %
            
            $
            26.0
            
            
            
            72.7
            %International
            
            
            10.3
            
            
            
            26.7
            %
            
            
            9.7
            
            
            
            27.3
            %Total
            
            $
            38.4
            
            
            
            100.0
            %
            
            $
            35.7
            
            
            
            100.0
            %





**Six
                months ended**
              **June
                30, 2007**
            
            
            **Six
                months ended**
              **June
                30, 2006****Amount**
            
            
            **%
                of Total**
            
            
            **Amount**
            
            
            **%
                of Total**Domestic
            
            $
            54.1
            
            
            
            72.2
            %
            
            $
            50.6
            
            
            
            73.2
            %International
            
            
            20.9
            
            
            
            27.8
            %
            
            
            18.5
            
            
            
            26.8
            %Total
            
            $
            75.0
            
            
            
            100.0
            %
            
            $
            69.1
            
            
            
            100.0
            %






16





Microtek’s
      domestic revenues are generated through two primary channels or customer
      categories: domestic branded and contract manufacturing (commonly referred
      to as
      OEM).  Domestic branded revenues were 68.2 percent and OEM revenues
      were 31.8 percent of total domestic revenues in the 2007 Quarter, as compared
      to
      63.1 percent and 36.9 percent, respectively, in the 2006 Quarter.  For
      the 2007 Period, domestic branded revenues were 68.4 percent and OEM revenues
      were 31.6 percent of total domestic revenues, as compared to 63.8 percent and
      36.2 percent, respectively, in the 2006 Period.  Included in the
      Company’s OEM revenues are sales of products to “non-branded” or private label
      customers.





Domestic
      branded revenues in the 2007 Quarter and 2007 Period increased over the 2006
      Quarter and 2006 Period by $2.8 million, or 17.0 percent, and $4.7 million,
      or
      14.6 percent, respectively.  The primary contributors to the increased
      revenues for the 2007 Quarter were a $2.0 million, or 22.3 percent, increase
      in
      specialty product revenues (which includes Microtek’s CleanOp product sales and
      its specialty procedure patient drapes) and an increase of approximately $700
      thousand, or 9.6 percent, in the Company’s core equipment draping
      revenues.  Additionally, the Company’s surgical product offerings in
      orthopedics and cardiology (primarily as a result of the Ceres Medical
      acquisition) increased by approximately $237 thousand during the 2007
      Quarter.  For the 2007 Period, specialty product revenues increased by
      $3.0 million, or 17.1 percent, core equipment draping revenues grew by $1.4
      million, or 9.8 percent, and orthopedic and cardiology revenues increased by
      approximately $439 thousand (primarily as a result of the Ceres Medical
      acquisition in July 2006), as compared to the 2006 Period.  Through
      on-going recruiting and training efforts, the Company believes that it has
      assembled an optimally-sized domestic sales force to generate sustainable
      above-market domestic branded sales growth.  Additionally, where
      possible, the Company has begun to implement pricing programs to improve net
      revenue results and offset rising product costs.





For
      the
      2007 Quarter and 2007 Period, OEM revenues decreased by $640 thousand, or 6.7
      percent, and by $1.2 million, or 6.5 percent, respectively.  These
      declines result from lower contract manufacturing and woundcare revenues in
      2007
      and reflect the comparison of the 2007 results to strong quarter-to-date and
      year-to-date OEM revenues in 2006.  OEM revenues can be volatile as
      they are heavily dependent on customer demand and the buying patterns of the
      Company’s OEM partners.  Since 2006, the Company has also been
      strategically evaluating its OEM business to diversify its customer base and
      improve the overall profitability of its OEM accounts.  Business has
      been curtailed where targeted profitability levels are not
      met.  Through this process, the Company believes it has lessened its
      dependence on a few large customers and has secured more profitable, higher
      technological OEM opportunities.





Overall,
      Microtek’s total domestic revenues in the 2007 Quarter and 2007 Period increased
      by approximately $2.1 million, or 8.3 percent, and $3.5 million, or 7.0 percent,
      over the 2006 Quarter and 2006 Period, respectively.





Microtek’s
      international net revenues for the 2007 Quarter increased by 5.5 percent over
      the 2006 Quarter to $10.3 million, primarily as a result of the acquisitions
      of
      Europlak and Eurobiopsy in October 2006 and December 2006,
      respectively.  Microtek’s international net revenues for the 2007
      Period totaled $20.9 million, an increase of approximately $2.4 million or
      12.4
      percent over the 2006 Period, as a result of approximately $1.6 million in
      revenues attributable to the Europlak and Eurobiopsy acquisitions and an
      increase in revenues of approximately $740 thousand in the Company’s businesses
      based in the Netherlands, the United Kingdom and the rest of the
      world.  The Company believes that its international markets continue
      to represent key areas for future growth.  The Company believes that
      its international sales, marketing and administrative infrastructure is now
      in
      place and is focused on the marketing and commercialization of its core Microtek
      products and its newly acquired products across Europe, South America, the
      Pacific Rim and Asia.





OTI’s
      net
      revenues, consisting primarily of sales of finished goods inventories to ETI
      and
      royalties under the license agreement of $75 thousand per quarter, totaled
      $75
      thousand and $701 thousand in the 2007 Quarter and 2007 Period, respectively,
      as
      compared to $314 thousand in the 2006 Quarter and $601 thousand in the 2006
      Period.  As of March 31, 2007, the Company’s OTI finished goods
      inventories were fully depleted.  Pursuant to the Company’s September
      2004 licensing agreement with ETI, the Company expects that OTI division
      revenues in the third quarter of 2007 will consist of license royalties totaling
      $75 thousand.  Thereafter, OTI division revenues will include license
      royalties equal to the greater of: (i) generally 5% of ETI’s net sales, as
      defined in the agreement, or (ii) $300,000 per year.





**Gross
      Margin.**  The Company’s gross profit was $16.4 million, or
      42.5 percent of net revenues, in the 2007 Quarter, as compared to $14.1 million,
      or 39.0 percent of net revenues, for the 2006 Quarter.  For the 2007
      Period, the Company’s gross profit was $31.9 million, or 42.1 percent of net
      revenues, versus $27.7 million, or 39.7 percent of net revenues for the 2006
      Period.  The Company attributes the improvement in its gross margins
      in the 2007 Quarter and 2007 Period to favorable changes in the Company’s sales
      mix, particularly the increase in the Company’s higher margin domestic branded
      revenues relative to its OEM revenues, leverage from additional sales volume,
      contribution from certain higher margin international product lines acquired
      in
      2006, recent domestic branded pricing programs and successful manufacturing
      cost
      initiatives.  Additionally, gross margin improvement in the 2007
      Quarter and 2007 Period was realized through favorable product and customer
      sales mix changes within the domestic branded and OEM channels, primarily strong
      core equipment draping revenue growth in the domestic branded business and
      successful OEM business rationalization and profitability improvement
      initiatives.







17


**Operating
      Expenses.**  Operating expenses for the 2007 Quarter of $13.0
      million represented 33.7 percent of net revenues, as compared to operating
      expenses of $11.0 million, or 30.5 percent of net revenues, in the 2006
      Quarter.  For the 2007 Period, operating expenses totaled $25.8
      million, or 34.1 percent of net revenues, as compared to $21.3 million, or
      30.5
      percent of net revenues in the 2006 Period.





Selling,
      general and administrative (“SG&A”) expenses in the 2007 Quarter and 2007
      Period were $12.2 million and $24.4 million, respectively, as compared to $10.6
      million in the 2006 Quarter and $20.5 million in the 2006 Period.  As
      a percentage of net revenues, the Company’s SG&A expenses in the 2007
      Quarter and 2007 Period were 31.8 percent and 32.2 percent, respectively, versus
      29.4 percent of net revenues in the 2006 Quarter and 29.5 percent of net
      revenues in the 2006 Period.





For
      the
      2007 Quarter and 2007 Period, domestic SG&A expenses increased approximately
      $1.0 million and $2.1 million, respectively, over the 2006 Quarter and 2006
      Period.  Domestic sales and marketing expenses (primarily salaries and
      benefits, a significant portion of which are variable in relation to sales
      volumes, direct hiring and training expenses for new sales personnel, sales
      fees
      and travel and related expenses) increased by $327 thousand and $797 thousand
      in
      the 2007 Quarter and 2007 Period, respectively.  Domestic distribution
      expenses which consist primarily of variable distribution freight increased
      by
      $145 thousand and $297 thousand in the 2007 Quarter and 2007 Period,
      respectively.   Domestic general and administrative expenses
      increased by $566 thousand and $1.0 million in the 2007 Quarter and 2007 Period,
      respectively, as a result of normal inflationary increases in general and
      administrative salaries and benefits and higher professional fees.





For
      the
      2007 Quarter and 2007 Period, SG&A expenses of the Company’s international
      operations based in the Netherlands, Malta, Germany and France increased
      approximately $618 thousand and $1.7 million, respectively.  Included
      in these increases for the 2007 Quarter and 2007 Period are incremental SG&A
      expenses related to the October 2006 Europlak acquisition and the December
      2006
      Eurobiopsy acquisition of approximately $783 thousand and $1.6 million,
      respectively.  Excluding Europlak and Eurobiopsy, international
      SG&A expenses decreased $165 thousand in the 2007 Quarter as a result of
      severance expenses and consulting fees related to the 2006 transition of certain
      manufacturing operations from Zutphen to Malta and China which were recorded
      in
      the 2006 Quarter.  For the 2007 Period, international SG&A
      expenses, other than those incurred at Europlak and Eurobiopsy, increased
      approximately $122 thousand primarily as a result of additional investments
      in
      the Company’s sales, marketing and administrative infrastructure in the
      Netherlands.





Research
      and development expenses of $347 thousand and $739 thousand for the 2007 Quarter
      and 2007 Period, respectively, increased from $145 thousand in the 2006 Quarter
      and $289 thousand in the 2006 Period primarily as a result of the Company’s
      research and development activities related to the Europlak and Eurobiopsy
      businesses acquired in the fourth quarter of 2006 and to Microtek’s ongoing
      research and development efforts which center on new product development, as
      well as product enhancements and product line extensions.





Amortization
      of intangibles in the 2007 Quarter and 2007 Period was $372 thousand and $679
      thousand, respectively, up from $254 thousand in the 2006 Quarter and $468
      thousand in the 2006 Period.  The increases in amortization expense in
      the 2007 Quarter and 2007 Period are associated primarily with intangibles
      acquired in the Samco, Ceres Medical, Europlak and Eurobiopsy transactions
      completed in 2006.





**Income
      from Operations.**  Income from operations for the 2007 Quarter
      and 2007 Period was $3.4 million, or 8.9 percent of net revenues, and $6.1
      million, or 8.0 percent of net revenues, respectively.  For the 2006
      Quarter and 2006 Period, income from operations was $3.1 million, or 8.6 percent
      of net revenues, and $6.4 million, or 9.2 percent of net revenues,
      respectively.







18


**Interest
      Expense and Interest Income.**Interest expense for the 2007
      Quarter and 2007 Period of $53 thousand and $69 thousand, respectively,
      increased from $10 thousand in the 2006 Quarter and $21 thousand in the 2006
      Period as a result of higher average borrowings under the Company’s Credit
      Agreement and interest expense related to long-term debt acquired in the
      Europlak and Eurobiopsy acquisitions in the fourth quarter of
      2006.  Interest income in the 2007 Quarter and 2007 Period totaled
      $120 thousand and $231 thousand, respectively, compared to $105 thousand in
      the
      2006 Quarter and $199 in the 2006 Period, respectively.  The increases
      in interest income in the 2007 Quarter and 2007 Period result primarily from
      higher interest rates applicable to the Company’s cash and cash equivalents and
      higher average cash and cash equivalent balances.





**Other
      Income/Expense, Net.**  Other income and expense include the
      Company’s equity in earnings of its investee, GRI, and foreign currency exchange
      gains resulting from the translation of certain intercompany transactions of
      the
      Company’s Netherlands subsidiaries which are denominated in a currency other
      than the functional currency of those subsidiaries.  The Company
      recorded foreign currency exchange gains of approximately $108 thousand in
      the
      2007 Quarter and $203 thousand in the 2007 Period.  There were no such
      foreign currency exchange gains recorded in the 2006 Quarter or 2006
      Period.  In the 2007 Quarter and 2007 Period, the Company’s equity in
      earnings of its investee, GRI, were $101 thousand and $133 thousand,
      respectively, as compared to $90 thousand in the 2006 Quarter and $123 thousand
      in the 2006 Period.





**Income
      Taxes.**  The Company’s provisions for income taxes in the 2007
      Quarter and 2007 Period reflect income tax expense of $1.2 million and $2.0
      million, respectively, consisting of current and deferred Federal, state and
      foreign income tax expense.  For the 2006 Quarter and 2006 Period, the
      Company recorded income tax expense of $1.1 million and $2.3 million,
      respectively.  The Company’s effective tax rate (income tax expense
      divided by income before income taxes) declined to approximately 32 percent
      in
      the 2007 Quarter and to approximately 30 percent in the 2007 Period as a result
      of changes in mix of the Company’s earnings and losses in foreign tax
      jurisdictions.





**Net
      Income.**  The resulting net income for the 2007 Quarter and
      2007 Period was $2.5 million, or $0.06 per diluted share, and $4.6 million,
      or
      $0.10 per diluted share, respectively, as compared to $2.2 million, or $0.05
      per
      diluted share in the 2006 Quarter and $4.4 million, or $0.10 per diluted share
      in the 2006 Period.





**Liquidity
      and Capital Resources**





As
      of
      June 30, 2007 and December 31, 2006, the Company’s cash and cash equivalents
      totaled $17.2 million and $17.1 million, respectively.  The Company’s
      cash flow activity in the 2007 Period and 2006 Period was as follows (in
      thousands):





**Six
                months ended June 30****2007**
            
            
            **2006**Cash
                provided by operating activities
            
            $
            5,357
            
            
            $
            6,775Cash
                used in investing activities
            
            
            (862
            )
            
            
            (3,099
            )Cash
                used in financing activities
            
            
            (4,256
            )
            
            
            (3,594
            )





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





During
      the 2007 Period, the Company’s operating activities generated cash of
      approximately $5.4 million as a result of net income from operations, net of
      deferred income taxes, depreciation and amortization, of $7.9 million and a
      $5.3
      million increase in accounts payable, offset by other working capital management
      requirements, including an increase in receivables and inventory of $3.2 million
      and $3.6 million, respectively, an increase in other current and long term
      assets of $75 thousand, and a decrease in accrued expenses and other liabilities
      of $803 thousand.  The Company’s receivables and inventory have
      increased as a result of the Company’s expanding operations and, with respect to
      inventories, the impact of certain purchasing strategies to ensure a continuous
      supply of certain inventory items as the Company seeks to transfer additional
      manufacturing processes offshore to the Dominican Republic and to
      China.







19


During
      the 2006 Period, the Company’s operating activities generated cash of
      approximately $6.8 million and consisted primarily of net income from
      operations, net of deferred income taxes, depreciation and amortization, of
      $8.0
      million, an increase in accounts payable of $2.4 million, an increase in accrued
      compensation of $985 thousand, an increase in other liabilities of $678 thousand
      and a decrease in prepaid expenses and other assets of $285
      thousand.  Offsetting these sources of cash were a $535 thousand
      increase in accounts receivable, net of allowances, and an increase of $4.9
      million in inventories.





Cash
      used
      in investing activities in the 2007 Period totaled $862 thousand as a result
      of
      additional cash consideration of $96 thousand and $125 thousand paid with
      respect to the Europlak and Eurobiopsy acquisitions, respectively, and purchases
      of capital property and equipment of $672 thousand and an offsetting $31
      thousand in proceeds from the disposal of property and
      equipment.  Investing activities in the 2006 Period of $3.1 million
      included cash consideration of approximately $2.3 million for the Samco
      acquisition, purchases of capital property and equipment of $831 thousand,
      and
      proceeds from the disposition of property and equipment of $6
      thousand.





During
      the 2007 Period, financing activities used approximately $4.3 million in
      cash.  Financing cash outflows in the 2007 Quarter included a decrease
      in the Company’s bank overdraft of approximately $4.7 million, repayments of
      long-term debt obligations of $95 thousand, and repurchases of treasury stock
      of
      $627 thousand.  Financing cash inflows included proceeds from the
      exercise of stock options and other stock issuances of approximately $1.2
      million.  Cash used in financing activities for the 2006 Period of
      $3.6 million included net repayments of borrowings under the Company’s Credit
      Agreement of $1.2 million, repayments of other long-term debt agreements of
      $247
      thousand, a decrease in the Company’s bank overdraft of approximately $1.8
      million and repurchase of treasury stock of $883 thousand, offset by $531
      thousand from the exercise of stock options and other stock
      issuances.





The
      Company maintains a $23.5 million credit agreement (as amended to date, the
      “Credit Agreement”) with the JP Morgan Chase Bank (the “Bank”), consisting of a
      revolving credit facility maturing on June 30, 2008.  Borrowing
      availability under the revolving credit facility is based on the lesser of
      (i) a
      percentage of eligible accounts receivable and inventories or (ii) $23.5
      million, less any outstanding letters of credit issued under the Credit
      Agreement.  There were no outstanding borrowings under the revolving
      credit facility at June 30, 2007 or December 31, 2006.  As of June 30,
      2007, the Company had total borrowing availability under the revolving facility
      of $18.1 million.  As of August 6, 2007, the Company had a total
      borrowing availability of approximately $18.9 million and no outstanding
      borrowings under the facility.  Revolving credit borrowings bear
      interest at a floating rate approximating the Bank’s prime rate plus an interest
      margin (8.5% at August 6, 2007).  At June 30, 2007, the Company was in
      compliance with its financial covenants under the Credit Agreement.





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





**Off-Balance
      Sheet Arrangements**





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





**Inflation**





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







20




**Recent
      Accounting Pronouncements**





**Accounting
      for Uncertainty in Income Taxes.**  In June 2006, the FASB
      issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes –
An interpretation of FASB Statement No. 109* (“FIN 48”) which clarifies the
      accounting and disclosure requirements for uncertainty in tax positions, as
      defined.  The Company’s adoption of the provisions of FIN 48 on
      January 1, 2007 had no impact on the Company’s consolidated financial
      statements.  The Company examined its tax positions for all open tax
      years through December 31, 2006 and the full benefit of each tax position has
      been recognized in the financial statements in accordance with FIN
      48.  On any future tax positions, the Company intends to record
      interest and penalties, if any, as a component of interest expense and general
      and administrative expenses, respectively.  The Company’s tax years
      are open for U.S. Federal purposes from 2003 through 2006.  Certain
      U.S. state tax years remain open for 2002 and 2006
      filings.  International statutes vary widely and the open years range
      from 2003 through 2006.  Taxing authorities have the ability to review
      prior tax years to the extent of net operating loss and tax credit carryforwards
      to open tax years.





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




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





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





**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; statements regarding
      the
      completion and timing of the proposed transaction with Ecolab; the Company’s
      ability to grow its business by continually improving its existing capabilities
      and simultaneously developing and acquiring new business opportunities while
      maintaining its customer focus and providing the highest levels of customer
      support; the Company’s ability to increase sales and earnings from its infection
      control business by completing strategic acquisitions, enhancing marketing
      and
      distribution efforts both domestically and internationally, introducing new
      products, increasing direct sales representation, employing tele-sales agents
      for added sales coverage, and capitalizing on low-cost manufacturing
      opportunities in the Dominican Republic, Malta and China; the ability of the
      Company’s sales force to generate sustainable above-market domestic branded
      sales growth; the Company’s ability to increase prices to improve net revenues
      and to offset rising product costs; the Company’s expectation about the
      composition and amount of revenues to be received by the Company’s OTI division;
      and the Company’s current expectation that cash and cash equivalents on hand,
      the Company’s existing credit facility and funds budgeted to be generated from
      operations will be adequate to meet its liquidity and capital requirements
      for
      the next year*.*






21





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





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





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





The
      financial position and results of operations of the Company’s foreign
      subsidiaries in the United Kingdom, the Netherlands, Malta, Germany and France
      are measured using the foreign subsidiary’s local currency as the functional
      currency.  Revenues and expenses of such subsidiaries are translated
      into U.S. dollars at average exchange rates prevailing during the
      period.  Assets and liabilities are translated at the rates of
      exchange on the balance sheet date.  The resulting translation gain
      and loss adjustments are recorded directly as a separate component of
      shareholders’ equity.  Foreign currency translation adjustments, net
      of applicable taxes, resulted in gains of $184 thousand and $341 thousand for
      the three months and six months ended June 30, 2007, respectively, and $458
      thousand and $817 thousand for the three months and six months ended June 30,
      2006, respectively.





Transaction
      gains and losses that arise from exchange rate fluctuations on transactions
      denominated in a currency other than the subsidiary’s functional currency are
      included in the results of operations as incurred.  Included in the
      Company’s results of operations for three months and six months ended June 30,
      2007 were foreign currency exchange gains of approximately $108 thousand and
      $203 thousand, respectively, resulting from the translation of certain
      intercompany transactions of the Netherlands subsidiaries which are denominated
      in a currency other than the functional currency of those
      subsidiaries.  There were no such foreign currency exchange gains or
      losses recorded for the three months and six months ended June 30,
      2006.





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





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






22





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





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





**Item
      4.   Controls and Procedures**





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





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






23





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





**PART
      II**


**OTHER
      INFORMATION**





**Item
      1.   Legal Proceedings**





Not
      applicable.





**Item
      1A.   Risk Factors**





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





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





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





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





In
      February 2000, the Board of Directors authorized the repurchase of up to five
      percent (5%) of the Company’s outstanding common stock from time to time in open
      market or private transactions.  As amended to date, the Company’s
      share repurchase program authorizes the repurchase of up to an aggregate of
      4,000,000 shares over an indefinite period.  As of June 30, 2007, the
      Company had repurchased 2,125,355 shares for an aggregate repurchase price
      of
      $5.6 million, at an average repurchase price of approximately $2.65 per
      share.  The following table summarizes the Company’s share repurchases
      during the Company’s second quarter of 2007:





Period
            
            Total
                Number of Shares Purchased
            
            Average
                Price Paid per Share
            
            Total
                Number of Shares Purchased as Part of Publicly Announced Repurchase
                Plans
            
            Maximum
                Number of Shares that May Yet Be Purchased Under the Repurchase
                PlansApril
                1 to 30, 2007
            
            -
            
            $          -
            
            -
            
            1,896,645May
                1 to 31, 2007
            
            22,000
            
            $    4.71
            
            22,000
            
            1,874,645June
                1 to 30, 2007
            
            -
            
            $          -
            
            -
            
            1,874,645Total
            
            22,000
            
            $    4.71
            
            22,000
            
            1,874,645





**Item
      3.   Default Upon Senior Securities**





Not
      applicable.





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





During
      the period covered by this report, the Company filed with the Securities and
      Exchange Commission and delivered to its shareholders the Company’s Proxy
      Statement for its Annual Meeting of Shareholders held May 22, 2007.





(a)  The
      Company’s annual meeting of shareholders was held on May 22, 2007.


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






24




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


Nominee
                for Office
            
            Number
                of Votes For
            
            Number
                of Votes Withheld
            
            AbstentionKenneth
                F. Davis
            
            33,189,765
            
            7,027,551
            
            -Michael
                E. Glasscock, III
            
            33,145,935
            
            7,071,381
            
            -Rosdon
                Hendrix
            
            33,201,013
            
            7,016,303
            
            -Dan
                R. Lee
            
            33,188,467
            
            7,028,849
            
            -Gene
                R. McGrevin
            
            33,196,203
            
            7,021,113
            
            -Marc
                R. Sarni
            
            33,160,290
            
            7,057,026
            
            -Ronald
                L. Smorada
            
            33,216,440
            
            7,000,876
            
            -




(d) 
      With respect to the approval of the Company’s 2007 Employee Stock Purchase Plan,
      which authorizes the issuance of up to 500,000 shares of common stock, plus
      the
      104,633 shares available for purchase under the Company’s 1999 Employee Stock
      Purchase Plan, the inspector of election tabulated the following
      votes:




For
              21,691,966Against
              1,799,618Abstention
              189,538Broker
                  Non-Vote
              16,536,194
 **Item
        5.   Other Information**





Not
      applicable.





**Item
      6.   Exhibits**





Exhibit
                No.
            Description3.1(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 Stock4.2(4)
            First
                Amended and Restated Shareholder Protection Rights Agreement dated
                as of
                December 20, 2006 between Microtek Medical Holdings, Inc. and
                Computershare Investor Services, LLC31.1
            Certification
                of Chief Executive Officer31.2
            Certification
                of Chief Financial Officer32.1
            Certification
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                200232.2
            Certification
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002








25








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





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





(3)
            Incorporated
                by reference to Exhibit 4.1 of the Company’s Quarterly Report on Form 10-Q
                for the quarter ended June 30,
                2006.





(4)
            Incorporated
                by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K
                dated December 20, 2006.








26


**SIGNATURES**








Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      caused this quarterly report on Form 10-Q to be signed on its behalf by the
      undersigned thereunto duly authorized on August 9, 2007.








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











27