# 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, 2004 | Commission File No. | 0-24866
|----------------- | ------------- | ------------------- | -------

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

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

512 LEHMBERG ROAD COLUMBUS, MISSISSIPPI 39702 
(Address of principal executive offices)

(662) 327-1863 
(Registrants telephone number, including area code)

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

Yes   [X]     No  [_]

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

|Class                         | Outstanding at August 4, 2004
|----------------------------- | -----------------------------
|                              |                              
|Common Stock, $.001 par value | 43,094,927                   

---

# INDEX

# PART I:   FINANCIAL
INFORMATION

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

| |  |  | Unaudited
Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003
| |  |  | -----------------------------------------------------------------------------------------

| |  |  | Unaudited
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three
Months ended June 30, 2004 and June 30, 2003 and for the Six Months ended June 30, 2004
and June 30, 2003
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Unaudited
Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2004
and June 30, 2003
| |  |  | ------------------------------------------------------------------------------------------------------------------

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

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

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

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

# PART II:   OTHER
INFORMATION

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

| | Item 2. |  | Changes
in Securities and Use of Proceeds
| | ------- |  | -----------------------------------------

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

| | Item 4. |  | Submission
of Matters to a Vote of Securityholders
| | ------- |  | --------------------------------------------------

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

| | Item 6. |  | Exhibits
and Reports on Form 8-K
| | ------- |  | --------------------------------

2

---

# PART I 
FINANCIAL INFORMATION

# Item 1.   Financial
Statements

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

|Assets                                      | June 30, 2004 | December 31, 2003
|------------------------------------------- | ------------- | -----------------
|Current assets:                             |               |                  
|Cash and cash equivalents                   |               |                  
|Accounts receivable, net                    |               |                  
|Other receivables                           |               |                  
|Inventories                                 |               |                  
|Prepaid expenses and other assets           |               |                  
|                                            |               |                  
|Total current assets                        |               |                  
|                                            |               |                  
|Property and equipment                      |               |                  
|Less accumulated depreciation               |               |                  
|                                            |               |                  
|Property and equipment, net                 |               |                  
|                                            |               |                  
|Intangible assets, net                      |               |                  
|Deferred income taxes                       |               |                  
|Other assets                                |               |                  
|                                            |               |                  
|Total assets                                |               |                  
|                                            |               |                  
|Liabilities and Shareholders' Equity        |               |                  
|Current liabilities:                        |               |                  
|Accounts payable                            |               |                  
|Accrued expenses                            |               |                  
|Current portion of long-term debt           |               |                  
|                                            |               |                  
|Total current liabilities                   |               |                  
|                                            |               |                  
|Long-term debt, excluding current portion   |               |                  
|Other long-term liabilities                 |               |                  
|                                            |               |                  
|Total liabilities                           |               |                  
|                                            |               |                  
|Shareholders' equity:                       |               |                  
|Common stock                                |               |                  
|Additional paid-in capital                  |               |                  
|Accumulated deficit                         |               |                  
|Accumulated other comprehensive income, net |               |                  
|                                            |               |                  
|                                            |               |                  
|Treasury shares, at cost                    |               |                  
|                                            |               |                  
|Total shareholders' equity                  |               |                  
|                                            |               |                  
|Total liabilities and shareholders' equity  |               |                  
|                                            |               |                  

See notes to unaudited condensed
consolidated financial statements.

3

---

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

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

See notes to unaudited condensed
consolidated financial statements.

4

---

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

|                                                            | Six months ended
June 30, 2004 | Six months ended
June 30, 2003
|----------------------------------------------------------- | ------------------------------ | ------------------------------
|Cash flows from operating activities:                       |                                |                               
|Net income                                                  |                                |                               
|Adjustments to reconcile net income to net cash provided by |                                |                               
|operating activities:                                       |                                |                               
|Depreciation                                                |                                |                               
|Amortization of intangibles                                 |                                |                               
|Provision for doubtful accounts                             |                                |                               
|Deferred income taxes                                       |                                |                               
|Other                                                       |                                |                               
|Changes in operating assets and liabilities, net of         |                                |                               
|acquisitions                                                |                                |                               
|                                                            |                                |                               
|Net cash provided by operating activities                   |                                |                               
|                                                            |                                |                               
|Cash flows from investing activities:                       |                                |                               
|Purchase of and deposits for property and equipment         |                                |                               
|Investment in International Medical Products                |                                |                               
|Investment in OrthoPlast                                    |                                |                               
|                                                            |                                |                               
|Net cash used in investing activities                       |                                |                               
|                                                            |                                |                               
|Cash flows from financing activities:                       |                                |                               
|Net borrowings (repayments) under credit agreement          |                                |                               
|Changes in bank overdraft                                   |                                |                               
|Repayments under notes payable                              |                                |                               
|Proceeds from exercise of stock options                     |                                |                               
|Repurchase of treasury stock                                |                                |                               
|Proceeds from issuance of common stock                      |                                |                               
|                                                            |                                |                               
|Net cash provided by (used in) financing activities         |                                |                               
|                                                            |                                |                               
|Effect of exchange rate changes on cash                     |                                |                               
|                                                            |                                |                               
|Net (decrease) increase in cash and cash equivalents        |                                |                               
|Cash and cash equivalents at beginning of period            |                                |                               
|                                                            |                                |                               
|Cash and cash equivalents at end of period                  |                                |                               
|                                                            |                                |                               

See notes to unaudited condensed
consolidated financial statements.

5

---

# 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) develop, manufacture,
and market proprietary and other products and services for patient care, occupational
safety and management of potentially infectious and hazardous waste primarily for the
domestic 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. OTI has recently
commercialized its patented technology in the nuclear 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 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, 2003 (the Annual Report).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Companys discussion of results of operations and financial condition relies on its
consolidated financial statements that are prepared based on certain critical accounting
policies that require management to make judgments and estimates that are subject to
varying degrees of uncertainty. The Company believes that investors need to be aware of
these policies and how they impact its financial statements as a whole, as well as its
related discussion and analysis presented herein. While the Company believes that these
accounting policies are based on sound measurement criteria, actual future events can and
often do result in outcomes that can be materially different from these estimates or
forecasts. The accounting policies and related risks described in the Companys
Annual Report are those that depend most heavily on these judgments and estimates. During
the six months ended June 30, 2004, there have been no material changes to any of the
Companys critical accounting policies.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities, an interpretation of ARBNo. 51. In December 2003, the FASB
published a revision to Interpretation No. 46 (46R) to clarify some of the provisions of
the original Interpretation. This Interpretation addresses the consolidation by business
enterprises of variable interest entities as defined in the Interpretation. Under the new
guidance, special effective date provisions apply to enterprises that have fully or
partially applied Interpretation 46 prior to issuance of this revised Interpretation.
Otherwise, application of Interpretation 46R is required in financial statements of
public entities that have interests in structures that are commonly referred to as
special-purpose entities for periods ending after December 15, 2003. Application by
public entities, other than small business issuers, for all other types of variable
interest entities is required in financial statements for periods ending after March 15,
2004. The adoption of the provisions of this Interpretation for 2003 and 2004 had no
effect on the Companys consolidated financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6

---

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

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

| | Effective
November 1, 2003, Microtek acquired substantially all of the assets of Plasco, Inc. (Plasco),
a manufacturer and marketer of multi-line disposable medical device products. The
preliminary allocation of the total estimated purchase price of approximately $3.4
million is subject to adjustment in 2004 when finalized and is summarized as follows (in
thousands):
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               |  | 
|------------------------------ |  | 
|Purchase price paid as:        |  | 
|Cash                           |  | 
|Note payable (note 6)          |  | 
|                               |  | 
|Total purchase consideration   |  | 
|Allocated to:                  |  | 
|Accounts receivable            |  | 
|Inventories                    |  | 
|Other current assets           |  | 
|Property and equipment         |  | 
|Identifiable intangible assets |  | 
|Accounts payable               |  | 
|Other liabilities              |  | 
|                               |  | 
|Total allocation               |  | 
|                               |  | 
|Goodwill                       |  | 
|                               |  | 

| | Effective
March 1, 2004, Microtek acquired substantially all of the assets of Ortho/Plast, Inc. (OrthoPlast),
a marketer of a small line of orthopedic products. The purchase price of approximately
$413 thousand in cash, including certain acquisition costs, was allocated to accounts
receivable, inventories, property and equipment and identifiable intangibles (principally
trademarks and customer list) based on those assetsrespective estimated fair
values, with the excess allocated to goodwill. The amount allocated to goodwill was not
significant. The terms of the related purchase agreement also provide for additional cash
consideration up to $600 thousand if future revenues from the Companys orthopedic
product line exceed certain targeted levels, as defined in the agreement, through 2009.
The additional consideration will be recorded when it is determinable that such target
revenues have been met and is expected to result in additional goodwill. The acquisition
of OrthoPlast on March 1, 2004, did not have a material impact on the Companys
consolidated results of operations for the first six months of 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

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| | Effective
May 28, 2004, Microtek acquired selected fixed assets and inventories related to certain
businesses of International Medical Products B.V. and affiliates (collectively, IMP)
from Cardinal Health for approximately $9.5 million in cash, including acquisition costs.
The fixed assets and inventories acquired were recorded at estimated fair values totaling
approximately $2.0 million, as determined by the Companys management based on
information currently available. The Company is currently evaluating the fair value of
other assets acquired, principally any identifiable intangible assets. Accordingly, the
preliminary allocation of the purchase price, which tentatively resulted in goodwill of
$7.5 million, is subject to revision based on the final determination of other fair
values.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. |  | 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, 2004 and December 31, 2003 as follows (in thousands):
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  | June 30, 2004 | December 31, 2003
|----------------- | ------------- | -----------------
|Raw materials     |               |                  
|Work-in-progress  |               |                  
|Finished goods    |               |                  
|                  |               |                  
|Total inventories |               |                  
|                  |               |                  

| | At
June 30, 2004 and December 31, 2003, OREX inventories approximated $5.4 million. Included
in the OREX inventories at June 30, 2004 and December 31, 2003 were finished goods of
$4.3 million and $4.1 million, respectively, and raw materials of $1.1 million and $1.3
million, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. |  | LONG-TERM
DEBT
| | -- |  | --------------

| | The
Credit Agreement.The Company maintains a credit agreement with a Bank (the Credit
Agreement). As amended to date, the Credit Agreement provides for a $23.5 million
revolving credit facility, which matures on June 30, 2006. Borrowing availability under
the revolving credit facility is based on the lesser of (i) a percentage of eligible
accounts receivable and inventory or (ii) $23.5 million, less any outstanding letters of
credit issued under the Credit Agreement. Revolving credit borrowings bear interest, at
the Companys option, at either a floating rate approximating the Banks prime
rate plus an interest margin (4.5% at June 30, 2004) or LIBOR plus an interest margin
(3.1% at June 30, 2004). Borrowing availability under the revolving facility at June 30,
2004 and December 31, 2003 totaled $18.0 million and $15.1 million, respectively. There
were outstanding borrowings under the revolving credit facility of $8.1 million at June
30, 2004 and $7.2 million at December 31, 2003. 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, earnings before interest, taxes, depreciation and amortization (EBITDA)
and net worth, and places limitations on acquisitions, dispositions, capital expenditures
and additional indebtedness. In addition, the Company is not permitted to pay any
dividends. At June 30, 2004 and December 31, 2003, the Company was in compliance with all
of 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, 2004 or December 31, 2003. The
Credit Agreement also provides for a fee of 0.375% per annum on the unused commitment, an
annual collateral monitoring fee of $35,000 and an outstanding letter of credit fee of
2.0% per annum.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

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| | Other
Long-Term Debt.The Company is obligated under certain long-term lease arrangements
and notes payable which aggregated $387,000 and $474,000 at June 30, 2004 and December
31, 2003, respectively. In addition, in conjunction with the Plasco acquisition described
in Note 4, the Company originally signed a Promissory Note in the principal amount of
$1.1 million. This principal amount was reduced in December 2003 to $866,000 as a result
of adjustments made to the original purchase price. This note payable balance, including
accrued interest, amounted to $732,000 and $873,000 at June 30, 2004 and December 31,
2003, respectively, bears interest at 6% and is payable in quarterly payments of
principal and interest through October 2006. This note payable arrangement is
subordinated to the Credit Agreement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
carrying value of long-term debt at June 30, 2004 and December 31, 2003 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7. |  | EARNINGS
PER SHARE
| | -- |  | ------------------

| | Earnings
per share is calculated in accordance SFAS 128, Earnings Per Share, which requires
dual presentation of basic and diluted earnings per share on the face of the income
statement for all entities with complex capital structures. Basic per share income is
computed using the weighted average number of common shares outstanding for the period.
Diluted per share income is computed including the dilutive effect of all contingently
issuable shares. Dilutive potential common shares are calculated in accordance with the
treasury stock method, which assumes that proceeds from the exercise of all options are
used to repurchase common shares at market value. The number of shares remaining after
the exercise proceeds are exhausted represents the potentially dilutive effect of the
options. The following table reflects the weighted average number of shares used to
calculate basic and diluted earnings per share for the periods presented (in thousands):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       | Three months ended June 30, | Six months ended
June 30,
|-------------------------------------- | --------------------------- | -------------------------
|
|Basic Shares                           |                             |                          
|Dilutive Shares (due to stock options) |                             |                          
|                                       |                             |                          
|Diluted Shares                         |                             |                          
|                                       |                             |                          

| | For
the three months and six months ended June 30, 2004, options to purchase  approximately
 275,000 shares were not included in        the  computation  of diluted net income per
share because the exercise  price of the options was greater than the average market
       price of the common  shares,  and  therefore,  the effect would be  antidilutive.
 There were  829,000 and 879,000  antidilutive        shares for the three months and six
months ended June 30, 2003, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8. |  | STOCK-BASED
COMPENSATION PLANS
| | -- |  | ------------------------------

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

9

---

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

|                        | Three months ended
June 30, | Six months ended
June 30,
|----------------------- | --------------------------- | -------------------------
|
|Dividend yield          | 0.0%                        | 0.0%                     
|Expected volatility     | 34.5%                       | 33.3%                    
|Risk free interest rate | 4.2%                        | 3.3%                     
|Forfeiture rate         | 0.0%                        | 0.0%                     
|Expected life, in years | 6.7                         | 8.5                      

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

| | The
following table illustrates the effect on net income and net income per share as if the
Company had applied the fair value recognition provisions of SFAS 123, Accounting for
Stock-Based Compensation, to its stock-based employee compensation plans (in
thousands, except per share data).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 9. |  | STOCK
REPURCHASE PROGRAM
| | -- |  | ------------------------

| | In
December 2003, the Board of Directors amended the Companys existing stock
repurchase program to authorize the repurchase of an aggregate of 2.0 million shares
through December 31, 2004. A total of 205 thousand shares were repurchased under this
program during the six months ended June 30, 2003. There were no shares repurchased
during the six months ended June 30, 2004. As of June 30, 2004, the Company had
repurchased approximately 1.3 million shares for an aggregate repurchase price of
approximately $2.7 million.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

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| | 10. |  | COMMITMENTS
AND CONTINGENCIES
| | --- |  | -----------------------------

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

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

# General

The Company has two primary
operating units. Substantially all of the Companys operations are conducted through
Microtek which manufactures and sells infection control products, fluid control products,
safety products and other products to healthcare professionals for use in environments
such as operating rooms and ambulatory surgical centers. OTI focuses on the
commercialization of the Companys OREX degradable products and disposal
technologies to the nuclear power generating industry. Effective November 1, 2003,
Microtek acquired substantially all of the assets of Plasco, Inc. (Plasco), a
manufacturer and marketer of multi-line disposable medical device products. Effective
March 1, 2004, Microtek acquired substantially all of the assets of Ortho/Plast, Inc. (OrthoPlast),
a marketer of a small line of orthopedic products. The acquisition of OrthoPlast did not
have a material impact on the Companys consolidated results of operations for the
first six months of 2004 and is not expected to have a material impact on the Companys
consolidated results of operations in the near term. Effective May 28, 2004, Microtek
acquired selected fixed assets, inventories and intangibles of certain businesses of
International Medical Products, B.V. and affiliates (collectively, IMP) from
Cardinal Health.

# Quarter and Six Months
Ended June 30, 2004 Compared to Quarter and Six Months Ended June 30, 2003

Net revenues for the three months
ended June 30, 2004 (the 2004 Quarter) were $30.2 million, an increase of
$5.3 million or 21.2 percent from the $24.9 million of net revenues reported for the
three months ended June 30, 2003 (the 2003 Quarter). Net revenues for the six
months ended June 30, 2004 (the 2004 Period) were $59.5 million, an increase
of $11.6 million or 24.2 percent over the $47.9 million of net revenues reported for the
six months ended June 30, 2003 (the 2003 Period). Approximately $2.7 million
and $956 thousand of the increased revenues in the 2004 Quarter was attributable to
businesses acquired in the Plasco and IMP transactions, respectively. For the 2004
Period, revenues attributable to the Plasco and IMP acquisitions amounted to $4.9 million
and $956 thousand, respectively.

For the 2004 Quarter, Microteks
net revenues totaled $29.1 million, an increase of $5.8 million or 25.0 percent over
Microteks net revenues of $23.3 million in the 2003 Quarter. Excluding revenues
from the Plasco and IMP transactions, Microteks net revenues grew by $2.2 million,
or 9.4 percent, over the 2003 Quarter. During the 2004 Period, Microteks net
revenues increased by $11.6 million, or 25.8 percent, to $56.4 million from $44.8 million
in net revenues reported for the 2003 Period. Excluding revenues from the Plasco and IMP
transactions, Microteks revenue growth in the 2004 Period totaled $5.7 million or
12.7 percent over the 2003 Period. The following tables depict Microteks domestic
and international revenues and the relative percentage of each to Microteks total
revenues for the 2004 Quarter and 2003 Quarter and for the 2004 Period and 2003 Period:

11

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|              | Three months ended
June 30, 2004 | Three months ended
June 30, 2003
|------------- | -------------------------------- | --------------------------------
|
|Domestic      |                                  |                                 
|International |                                  |                                 
|              |                                  |                                 
|Total         |                                  |                                 
|              |                                  |                                 

|              | Six months ended
June 30, 2004 | Six months ended
June 30, 2003
|------------- | ------------------------------ | ------------------------------
|
|Domestic      |                                |                               
|International |                                |                               
|              |                                |                               
|Total         |                                |                               
|              |                                |                               

Microteks domestic revenues
are generated through two primary channels or customer categories: branded hospital and
contract manufacturing (commonly referred to as OEM). Included in the Companys OEM
revenues are sales of products to custom procedure tray companies and other non-branded or
private label customers. Hospital branded revenues were 57.2 percent and OEM revenues
were 42.8 percent of total domestic revenues in the 2004 Quarter as compared to 57.4
percent and 42.6 percent, respectively, in the 2003 Quarter. For the 2004 Period,
hospital branded revenues comprised 55.5 percent and OEM revenues comprised 44.5 percent
of total domestic revenues, respectively, versus 57.2 percent and 42.8 percent,
respectively, for the 2003 Period.

Microteks domestic revenues in
the 2004 Quarter increased by $4.9 million over corresponding revenues in the 2003 Quarter
due to an increase of $1.2 million, or 10.3 percent, in Microteks branded hospital
revenues (excluding revenues from the Plasco division), an increase of $1.0 million, or
12.1 percent, in Microteks OEM revenues (excluding revenues from the Plasco
division), and revenues of $2.7 million generated by Microteks Plasco division.
Branded hospital revenue growth in the 2004 Quarter over the 2003 Quarter was demonstrated
in Microteks CleanOp product line (an increase of $432 thousand or 18.4 percent),
its Venodyne product line (an increase of $396 thousand or 31.4 percent) and its domestic
equipment and patient drape business (an increase of $289 thousand or 4.4 percent).
Microteks safety product revenues declined by approximately $161 thousand in the
2004 Quarter primarily as a result of the sale of certain of the Companys
non-strategic safety product lines in September 2003. Microteks international net
revenues, including revenues related to the IMP businesses, totaled $4.6 million for the
2004 Quarter, an increase of $978 thousand from the 2003 Quarter.

Microteks domestic revenues in
the 2004 Period were $48.0 million, approximately $10.3 million more than domestic
revenues for the 2003 Period, an increase of 27.2 percent. Excluding Plasco revenues of
$4.9 million for the 2004 Period, Microteks domestic hospital branded and OEM growth
rates for the 2004 Period were 9.7 percent and 20.2 percent, respectively. Branded
hospital revenue growth was attributable to CleanOp (an increase of $1.3 million or 31.0
percent), Venodyne (an increase of $178 thousand or 7.0 percent) and domestic equipment
and patient drapes (an increase of $500 thousand or 3.9 percent). Safety product revenues
declined by approximately $301 thousand as a result of the safety product line sale in
September 2003. Microteks international net revenues for the 2004 Period, including
revenues related to the acquired IMP businesses, were $8.4 million, as compared to $7.1
million for the 2003 Period.

OTIs net revenues were $1.0
million in the 2004 Quarter, down from $1.6 million in the 2003 Quarter. For the 2004
Period, OTIs net revenues of $3.0 million were consistent with net revenues reported
for the 2003 Period. The Company attributes the decline in OTIs nuclear revenues in
the 2004 Quarter primarily to increased competition.

The Companys consolidated gross
profit margin for the 2004 Quarter of 39.1 percent was unchanged from the 2003 Quarter.
For the 2004 Period, gross margins increased slightly to 39.2 percent from 38.9 percent
for the 2003 Period.

Operating expenses as a percentage of
net revenues in the 2004 Quarter were 32.7 percent versus 31.9 percent of net revenues in
the 2003 Quarter. For the 2004 Period, operating expenses were 32.9 percent of net
revenues as compared to 32.3 percent for the 2003 Period. Selling, general and
administrative expenses were $9.5 million or 31.4 percent of net revenues in the 2004
Quarter, versus $7.6 million or 30.5 percent of net revenues in the 2003 Quarter. For the
2004 Period, selling, general and administrative expenses were $18.7 million or 31.5
percent of net revenues, as compared to $14.7 million or 30.8 percent of net revenues in
the 2003 Period. The increases in the absolute dollar amount of selling, general and
administrative expenses in the 2004 Quarter and 2004 Period are primarily attributable to
operating expenses of Plasco and IMP and higher distribution and other variable selling
costs associated with increased revenues in 2004.

12

---

Research and development expenses in
the 2004 Quarter and 2004 Period of $246 thousand and $508 thousand, respectively, were
comparable to research and development expenses of $259 thousand in the 2003 Quarter and
$478 thousand in the 2003 Period.

Amortization of intangibles in the
2004 Quarter and 2004 Period was $158 thousand and $306 thousand, respectively,
approximately $50 thousand and $81 thousand higher than amortization expense in the 2003
Quarter and 2003 Period, respectively. These increases result primarily from the
amortization of OTI patent costs recorded in September 2003 and certain intangibles
acquired in the Plasco acquisition in November 2003.

Income from operations for the 2004
Quarter and 2004 Period was $1.9 million and $3.8 million, respectively, versus $1.8
million in the 2003 Quarter and $3.2 million in the 2003 Period. For the 2004 Quarter,
Microteks income from operations of $2.1 million exceeded its income from operations
recorded in the 2003 Quarter by $380 thousand, or 21.8 percent. For the 2004 Period,
Microteks income from operations was $3.8 million, approximately $622 thousand more
than its income from operations of $3.2 million recorded in the 2003 Period, a 19.7
percent increase. The Companys OTI division reported an operating loss in the 2004
Quarter of $202 thousand versus operating income of $51 thousand in the 2003 Quarter.
OTIs income from operations in the 2004 Period was $14 thousand as compared to an
operating loss of $6 thousand for the 2003 Period.

Interest expense, net of interest
income, of $56 thousand in the 2004 Quarter was unchanged from the 2003 Quarter due to
offsetting decreases in interest expense related to lower average borrowings and decreases
in interest income due to lower interest income on cash and cash equivalents in the 2004
Quarter. For the 2004 Period, interest expense, net of interest income, increased from the
2003 Period by $16 thousand due primarily to lower interest income on cash and cash
equivalents.

The Companys provision for
income taxes in the 2004 Quarter and 2004 Period reflects income tax expense of $195
thousand and $291 thousand, respectively, consisting entirely of the Companys state
and foreign tax provisions for the quarter and year to date periods. This compares to a
net income tax benefit of approximately $1.5 million for the 2003 Quarter and $2.3 million
for the 2003 Period. During the 2003 Quarter and 2003 Period, the Company recorded a
non-cash deferred income tax benefit of approximately $1.6 million, or $0.04 per diluted
share, and approximately $2.5 million or $0.06 per diluted share, respectively, related to
the decrease in the Companys valuation allowance with respect to certain of its
deferred tax assets. Offsetting this income tax benefit in the 2003 Quarter and 2003
Period were the Companys state and foreign income tax provisions of approximately
$119 thousand and $190 thousand, respectively. The Company did not record any deferred
income tax benefit in the 2004 Quarter or 2004 Period.

The resulting net income for the 2004
Quarter was $1.7 million, or $0.04 per basic and diluted share, bringing the
Companys net income for the 2004 Period to $3.4 million, or $0.08 per diluted share,
as compared to $3.2 million, or $0.08 per basic and diluted share reported for the 2003
Quarter and $5.4 million, or $0.13 per basic and diluted share reported for the 2003
Period. Excluding the non-cash deferred income tax benefit recorded in the 2003 Quarter
and 2003 Period of $1.6 million and $2.5 million, respectively, the Companys net
income for the 2004 Quarter and 2004 Period increased over the 2003 Quarter and 2003
Period by approximately $71 thousand or 4.4 percent and $527 thousand or 18.2 percent,
respectively.

13

---

# Liquidity and Capital
Resources

As of June 30, 2004 and December 31,
2003, the Companys cash and cash equivalents totaled $6.9 million and $9.5 million,
respectively. The Companys cash flow activity in the 2004 Period and the 2003 Period
was as follows (in thousands):

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

During the 2004 Period, the
Companys operating activities generated cash of $6.7 million compared to $2.3
million in the 2003 Period. The improvement in operating cash flow in the 2004 Period is
principally attributable to improved net income, net of deferred income taxes in the 2003
Period, plus disciplined working capital management activities which resulted in a net
change in operating assets and liabilities of $1.6 million for the 2004 Period. During the
2004 Period, a $2.1 million decrease in accounts receivable and a net increase of $1.4
million in inventories, prepaid expenses and other assets were leveraged against a $2.3
million increase in accounts payable, accrued compensation and other liabilities. During
the 2003 Period, a significant portion of the Companys operating cash flow was used
to fund working capital expansion related to the commercialization of OTIs nuclear
business and Microteks expanding operations, particularly in accounts receivable and
inventory.

Investing activities in the 2004
Period used $10.9 million in cash and consisted of purchases of capital property and
equipment of $991 thousand and cash consideration of $413 thousand and $9.5 million for
the OrthoPlast and IMP acquisitions, respectively. Cash used in investing activities in
the 2003 Period included $1.2 million in capital property and equipment additions.

During the 2004 Period, financing
activities provided $1.6 million in cash. Net borrowings under the Companys Credit
Agreement in the 2004 Period provided $943 thousand while other financing cash inflows
included proceeds of $885 thousand from the exercise of stock options and $425 thousand
from other stock issuances. Offsetting these inflows were repayments of other long-term
debt agreements in the 2004 Period of $228 thousand and a decrease in the Companys
bank overdraft of $467 thousand. Cash used in financing activities for the 2003 Period was
$628 thousand comprised of net repayments under the Companys Credit Agreement of
$809 thousand, repayments under other long-term debt agreements of $6 thousand and the
purchase of 205 thousand shares of stock for $497 thousand. Offsetting these amounts were
an increase in the Companys bank overdraft of $237 thousand, proceeds from the
exercise of stock options of $149 thousand, and $298 thousand from 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, 2006. Borrowing availability under the revolving credit facility is based on the
lesser of (i) a percentage of eligible accounts receivable and inventories or (ii) $23.5
million, less any outstanding letters of credit issued under the Credit Agreement.
Outstanding borrowings under the revolving credit facility were $8.1 million and $7.2
million at June 30, 2004 and December 31, 2003, respectively. As of June 30, 2004, the
Company had additional borrowing availability under the revolving facility of $9.9
million. As of August 4, 2004, the Companys total borrowing availability under the
revolving facility was $17.2 million, of which the Company had borrowed $6.9 million.
Revolving credit borrowings bear interest, at the Companys option, at either a
floating rate approximating the Banks prime rate plus an interest margin (4.5% at
August 4, 2004) or LIBOR plus an interest margin (3.1% at August 4, 2004). At June 30,
2004, the Company was in compliance with its financial covenants under the Credit
Agreement.

Based on its current business plan,
the Company expects that cash equivalents and short term investments on hand, the
Companys credit facility, as amended, and funds budgeted to be generated from
operations will be adequate to meet its liquidity and capital requirements for the next
year. However, currently unforeseen future developments, potential acquisitions and
increased working capital requirements may require additional debt financing or issuance
of common stock in 2004 and subsequent years.

14

---

# Off-Balance Sheet
Arrangements

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

# Forward Looking
Statements

Statements made in this Quarterly
Report include forward-looking statements made under the provisions of the Private
Securities Litigation Reform Act of 1995 including, but not limited to, the ability of the
Company to meet its liquidity and capital requirements. The Companys actual results
could differ materially from such forward-looking statements and such results will be
affected by risks described in the Companys Annual Report including, without
limitation, those described under Risk Factors under the captions -Reliance upon
Microtek, -History of Net Losses, -Competition,
-Product Liability, -Stock Price Volatility, -Dependence on
Key Personnel, -Anti-takeover Provisions, -Low Barriers to Entry
for Competitive Products, -Potential Erosion of Profit Margins,
-Risks of Completing Acquisitions, -Risks of Successfully Integrating
Acquisitions, -Small Sales and Marketing Force, -Reliance upon
Distributors, -Reliance Upon Large Customers, -Microtek Regulatory
Risks, -Risks of Obsolescence, -Reduced OREX Market
Potential, -OREX Commercialization Risks, -OREX
Manufacturing and Supply Risks, -Risks Affecting Protection of
Technology, -Risks of Technological Obsolescence and -OTI
Regulatory Risks. The Company does not undertake to update our 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 interest rates and foreign
currency exchange rates. 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 impact the Companys operating results or cash flow. The
effect of foreign currency transactions has not historically been material to the
Companys results of operations. The Company may in the future export or import
increased amounts of products payable in foreign currencies, exposing the Company to
increased risks on fluctuations in currency exchange rates.

The Companys greatest
sensitivity with respect to market risk is to changes in the general level of U.S.
interest rates and its effect upon the Companys interest expense. At June 30, 2004,
the Company had $8.1 million of long-term debt bearing interest at a floating rate
approximating the Prime Rate or LIBOR. Because these rates are variable, an increase or
decrease in the Companys average interest rate of 10%, or approximately 23 basis
points, would have increased or decreased interest expense by less than $9 thousand for
the six months ended June 30, 2004.

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 provided                     reasonable assurance as of the end
of the quarter for which this report is being                     filed that (i)
information required to be disclosed in the Companys                     reports
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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

---

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

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

# PART II 
OTHER INFORMATION

# Item 1. Legal Proceedings

Not applicable.

# Item 2. Changes in
Securities and Use of Proceeds

During the quarter for which this
report is filed, there were no material modifications in the instruments defining the
rights of shareholders. During the quarter for which this report is filed, none of the
rights evidenced by the shares of the Companys common stock were materially limited
or qualified by the issuance or modification of any other class of securities. The Company
made no repurchases of equity securities during the quarter ended June 30, 2004.

# Item 3. Default Upon
Senior Securities

Not applicable.

16

---

# Item 4.   Submission of
Matters to a Vote of Securityholders

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 19, 2004.

(a)       The Companys annual meeting of shareholders was held on May 19, 2004. 
(b)       The nominees for the Board of Directors of the Company are identified below. 
(c)       With respect to the election of directors, the inspector of election tabulated
          the following votes:

|Nominee for Office        | Number of Votes For | Number of Votes Withheld | Abstention
|------------------------- | ------------------- | ------------------------ | ----------
|Kenneth F. Davis          | 35,863,828          | 3,188,251                | --        
|Michael E. Glasscock, III | 35,855,212          | 3,196,867                | --        
|Rosdon Hendrix            | 35,852,288          | 3,199,791                | --        
|Dan R. Lee                | 36,007,337          | 3,044,742                | --        
|Gene R. McGrevin          | 32,930,978          | 6,121,101                | --        
|Ronald L. Smorada         | 36,033,864          | 3,018,215                | --        

|(d) |  | With
respect to the approval of the amendment to the Companys 1999
               Long-Term Incentive Plan, increasing the number of shares for the award of
stock                options and other stock awards to 5,345,000, the inspector of
election tabulated                the following votes:
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                |            | 
|--------------- | ---------- | 
|For             | 11,249,291 | 
|Against         | 7,092,606  | 
|Abstention      | 954,579    | 
|Broker Non-Vote | 19,755,603 | 

# Item 5.   Other Information

None.

# Item 6.   Exhibits and
Reports on Form 8-K

|(a) |  | Exhibits:
|--- |  | ---------

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

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

| | 3.2(2) |  | Articles
of Amendment to Articles of Incorporation of Isolyser Company, Inc.
| | ------ |  | ----------------------------------------------------------------------------

| | 3.3(3) |  | Amended
and Restated Bylaws of Microtek Medical Holdings, Inc.
| | ------ |  | --------------------------------------------------------------

| | 4.1(1) |  | Specimen
Certificate of Common Stock
| | ------ |  | ------------------------------------

| | 4.2 |  | Eighth
 Amendment and Waiver  Agreement dated as of May 28, 2004, to the Amended and Restated
Credit Agreement dated as                      of May 14, 2001
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1(4) |  | 1999
Long-Term Incentive Plan, as amended May 19, 2004
| | ------- |  | ------------------------------------------------------

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

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

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

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

17

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_________________

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

| | (2) |  | Incorporated
by reference to Exhibit 3.2 of the Companys Annual Report on           Form 10-K
for the year ended December 31, 1996.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------

| | (3) |  | Incorporated
by reference to Exhibit 3.1 of the Companys Quarterly Report           on Form 10-Q
for the quarter ended March 31, 2004
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------

| | (4) |  | Incorporated
by reference to Exhibit 10(a) of the Companys Registration           Statement on
Form S-8 (File No. 333-117736).
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Reports
on Form 8-K
|--- |  | -------------------

| | On
April 5, 2004, the registrant furnished a Current Report on Form 8-K dated April 5, 2004
pursuant to Item 12 announcing the Companys anticipated net revenues for the
quarter ended March 31, 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 10, 2004, the registrant furnished a Current Report on Form 8-K dated May 10, 2004
pursuant to Item 12 announcing the Companys results of operations for the quarter
ended March 31, 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

---

# 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,
2004.

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

19