# SECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

# FORM 10-Q

# QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (d) 
OF THE SECURITIES
EXCHANGE ACT OF 1934

|For Quarter Ended | September 30, 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 by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes [X]     No  [_]

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

|Class                         | Outstanding at November 4, 2004
|----------------------------- | -------------------------------
|                              |                                
|Common Stock, $.001 par value | 43,166,598                     

---

# INDEX

# PART I:   FINANCIAL
INFORMATION

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

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

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

| |  |  | Unaudited
Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2004
and September 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. |  | Unregistered Sales of Equity Securities
and Use of Proceeds
| | ------- |  | -----------------------------------------------------------

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

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

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

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

-2-

---

# PART I 
FINANCIAL INFORMATION

# Item 1. Financial
Statements

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

|Assets                                                 | September 30, 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, excluding current portion |                    |                  
|                                                       |                    |                  
|Total liabilities                                      |                    |                  
|                                                       |                    |                  
|Shareholders' equity:                                  |                    |                  
|Common stock                                           |                    |                  
|Additional paid-in capital                             |                    |                  
|Accumulated deficit                                    |                    |                  
|Accumulated other comprehensive income, net of         |                    |                  
|income taxes                                           |                    |                  
|                                                       |                    |                  
|                                                       |                    |                  
|Treasury shares, at cost                               |                    |                  
|                                                       |                    |                  
|Total shareholders' equity                             |                    |                  
|                                                       |                    |                  
|Total liabilities and shareholders' equity             |                    |                  
|                                                       |                    |                  

See notes to unaudited condensed
consolidated financial statements.

-3-

---

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

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

See notes to unaudited condensed
consolidated financial statements.

-4-

---

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

|                                                            | Nine months ended
September 30, 2004 | Nine months ended
September 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                                       |                                      |                                     
|Gain on dispositions                                        |                                      |                                     
|Other                                                       |                                      |                                     
|Changes in operating assets and liabilities, net of         |                                      |                                     
|Acquisitions                                                |                                      |                                     
|                                                            |                                      |                                     
|Net cash provided by operating activities                   |                                      |                                     
|                                                            |                                      |                                     
|Cash flows from investing activities:                       |                                      |                                     
|Purchase of and deposits for property and equipment         |                                      |                                     
|Acquisition of International Medical Products               |                                      |                                     
|Acquisition of OrthoPlast                                   |                                      |                                     
|Proceeds from dispositions                                  |                                      |                                     
|                                                            |                                      |                                     
|Net cash used in investing activities                       |                                      |                                     
|                                                            |                                      |                                     
|Cash flows from financing activities:                       |                                      |                                     
|Net 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 in cash and cash equivalents                   |                                      |                                     
|Cash and cash equivalents at beginning of period            |                                      |                                     
|                                                            |                                      |                                     
|Cash and cash equivalents at end of period                  |                                      |                                     
|                                                            |                                      |                                     
|Supplemental disclosures of noncash investing and           |                                      |                                     
|financing activities:                                       |                                      |                                     
|Note receivable from sale of product line                   |                                      |                                     
|                                                            |                                      |                                     
|Notes receivable from sale of inventories                   |                                      |                                     
|                                                            |                                      |                                     
|Capital lease liability for purchase of equipment           |                                      |                                     
|                                                            |                                      |                                     
|Common stock issuance pursuant to patent issuance           |                                      |                                     
|                                                            |                                      |                                     

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. Since 2002, OTI has
focused on commercializing its OREX patented technology in the nuclear industry. 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, homeland security
industry and certain other industrial applications (see note 5).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 nine months ended September 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-

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# 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 8)          | 
|                               | 
|Total purchase consideration   | 
|                               | 
|Allocated to:                  | 
|Accounts receivable            | 
|Inventories                    | 
|Other current assets           | 
|Property and equipment         | 
|Identifiable intangible assets | 
|Accounts payable               | 
|Other liabilities              | 
|                               | 
|Total allocation               | 
|                               | 

| | Effective
March 1, 2004, Microtek acquired substantially all of the assets of Ortho/Plast, Inc. (OrthoPlast),
a marketer of a small line of orthopedic products. The purchase price of approximately
$419,000 in cash, including certain acquisition costs, was allocated to accounts
receivable, inventories, property and equipment and identifiable intangibles (principally
trademarks and customer list) based on those assetsrespective estimated fair
values, with the excess allocated to goodwill. The amount allocated to goodwill was not
significant. The terms of the related purchase agreement also provide for additional cash
consideration up to $600,000 if future revenues from the Companys orthopedic
product line exceed certain targeted levels, as defined in the agreement, through 2009.
The additional consideration will be recorded when it is determinable that such target
revenues are probable of being met and is expected to result in additional goodwill. The
acquisition of OrthoPlast on March 1, 2004, did not have a material impact on the Companys
consolidated results of operations for the first nine 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 $9.6 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
$7.6 million, is subject to revision based on the final determination of other fair
values.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 5.   LICENSE AGREEMENT AND
DISPOSITIONS

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

| | Concurrent
with the signing of the License Agreement and the Supply Agreement, the Company also sold
its interest in certain equipment having a net book value of approximately $190,000 to
ETI for $400,000. This sale resulted in a gain on disposition of approximately $210,000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
September 26, 2003, Microtek sold substantially all of its assets related to the
manufacture and sale of three of its safety products for a total consideration of
approximately $1.3 million, consisting of $400,000 in cash and a note receivable for
approximately $903,000. The note receivable bears interest at seven percent and is
payable in 36 monthly installments of principal and interest of approximately $9,000
beginning in December 2003, one payment of $103,184 on March 15, 2004 and a final balloon
payment representing all remaining principal and accrued interest on December 15, 2006.
In conjunction with the sale, the Company recorded a gain of approximately $982,000. The
cash proceeds from the sale were used to repay outstanding borrowings under the Companys
Credit Agreement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 6.   SALE OF INVENTORIES
TO RELATED PARTY

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

-8-

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# 7.   INVENTORIES

| | Inventories
are stated at the lower of cost or market. The first-in first-out (FIFO)
valuation method is used to determine the cost of inventories. Cost includes material,
labor and manufacturing overhead for manufactured and assembled goods and materials only
for goods purchased for resale. Inventories are summarized by major classification at
September 30, 2004 and December 31, 2003 as follows (in thousands):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | At
September 30, 2004 and December 31, 2003, OREX inventories approximated $4.9 million and
$5.4 million, respectively. Included in the OREX inventories at September 30, 2004 and
December 31, 2003 were finished goods of $4.8 million and $4.1 million, respectively, and
raw materials of $100,000 and $1.3 million, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 8.   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 (5.3% at September 30, 2004) or LIBOR plus an interest
margin (3.1% at September 30, 2004). Borrowing availability under the revolving facility
at September 30, 2004 and December 31, 2003 totaled $17.2 million and $15.1 million,
respectively. There were outstanding borrowings under the revolving credit facility of
$6.9 million at September 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 September 30, 2004 and December 31, 2003, the Company was in compliance
with its financial covenants under the Credit Agreement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Credit Agreement provides for the issuance of up to $1.0 million in letters of credit.
There were no outstanding letters of credit at September 30, 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-9-

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| | Other
Long-Term Debt.The Company is obligated under certain long-term lease arrangements
and notes payable which aggregated $343,000 and $474,000 at September 30, 2004 and
December 31, 2003, respectively. In addition, in conjunction with the Plasco acquisition
described in Note 4, the Company signed a promissory note originally 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 $659,000 and $873,000 at September 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 September 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 9.   EARNINGS PER SHARE

| | Earnings
per share is calculated in accordance with 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
September 30, | Nine months ended
September 30,
|-------------------------------------- | -------------------------------- | -------------------------------
|
|Basic Shares                           |                                  |                                
|Dilutive Shares (due to stock options) |                                  |                                
|                                       |                                  |                                
|Diluted Shares                         |                                  |                                
|                                       |                                  |                                

| | For
the three months and nine months ended September 30, 2004, options to purchase
approximately 1,055,000 shares and 796,000 shares, respectively, were not included in the
computation of diluted net income per share because the exercise price of the options was
greater than the average market price of the common shares, and therefore, the effect
would be antidilutive. There were 446,000 and 867,000 antidilutive shares for the three
months and nine months ended September 30, 2003, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 10.   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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-10-

---

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

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

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

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

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

-11-

---

# 11.   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 255,000 shares were repurchased under this program
during the nine months ended September 30, 2003. No shares were repurchased during the
nine months ended September 30, 2004. As of September 30, 2004, the Company had
repurchased approximately 1.3 million shares for an aggregate repurchase price of
approximately $2.7 million.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 12.   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: its wholly-owned subsidiary, Microtek Medical, Inc. (Microtek) and an
operating division, OREX Technologies International (OTI). 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. Since 2002, OTI has focused on commercializing its OREX
patented technology in the nuclear industry. In September 2004, the Company entered into
an agreement (the License Agreement) which grants to Eastern Technologies,
Inc. (ETI) a worldwide exclusive license to manufacture, use and sell the
Companys OREX materials and processing technology in the nuclear industry, homeland
security industry and 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 to ETI, and ETI has agreed to
purchase a total of approximately $4.8 million of inventory over the term of the Supply
Agreement. The terms of the License Agreement and the Supply Agreement are more fully
discussed in footnote 5 to the Companys unaudited condensed consolidated financial
statements as of and for the three- and nine-month periods ended September 30, 2004.

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 has not had a material impact on the Companys consolidated
results of operations 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 Nine Months
Ended September 30, 2004 Compared to Quarter and Nine Months Ended September 30, 2003

Net revenues for the three months
ended September 30, 2004 (the 2004 Quarter) were $34.0 million, an increase of
$9.7 million or 39.6 percent from the $24.3 million of net revenues reported for the three
months ended September 30, 2003 (the 2003 Quarter). Net revenues for the nine
months ended September 30, 2004 (the 2004 Period) were $93.4 million, an
increase of $21.2 million or 29.4 percent over the $72.2 million of net revenues reported
for the nine months ended September 30, 2003 (the 2003 Period). Approximately
$2.2 million and $3.4 million of the increased revenues in the 2004 Quarter were
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 $7.1
million and $4.3 million, respectively.

-12-

---

For the 2004 Quarter, Microteks
net revenues totaled $31.3 million, an increase of $8.3 million or 36.1 percent over
Microteks net revenues of $23.0 million in the 2003 Quarter. Excluding revenues from
the Plasco and IMP transactions, Microteks net revenues grew by $2.7 million, or
11.8 percent, over the 2003 Quarter. During the 2004 Period, Microteks net revenues
increased by $19.8 million, or 29.3 percent, to $87.7 million from $67.9 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 $8.4 million or
12.4 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:

|              | Three months endedSeptember 30, 2004 | Three months endedSeptember 30, 2003
|------------- | ------------------------------------ | ------------------------------------
|
|Domestic      |                                      |                                     
|International |                                      |                                     
|              |                                      |                                     
|Total         |                                      |                                     
|              |                                      |                                     

|              | Nine months endedSeptember 30, 2004 | Nine months endedSeptember 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 59.9
percent and OEM revenues were 40.1 percent of total domestic revenues in the 2004 Quarter
as compared to 55.8 percent and 44.2 percent, respectively, in the 2003 Quarter. For the
2004 Period, hospital branded revenues comprised 56.9 percent and OEM revenues comprised
43.1 percent of total domestic revenues, respectively, versus 56.7 percent and 43.3
percent, respectively, for the 2003 Period.

Microteks domestic revenues in
the 2004 Quarter increased by $4.0 million over corresponding revenues in the 2003 Quarter
due to an increase of $1.8 million, or 16.3 percent, in Microteks branded hospital
revenues (excluding revenues from the Plasco division) and revenues of $2.2 million
generated by Microteks Plasco division. OEM revenues in the 2004 Quarter of $9.5
million increased by $800 thousand over the 2003 Quarter primarily as a result of OEM
revenues from the 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 $851 thousand or 39.9 percent), its Venodyne product line (an increase of $404
thousand or 31.6 percent) and its domestic equipment and patient drape business (an
increase of $354 thousand or 5.5 percent). Microteks international net revenues for
the 2004 Quarter, including $3.4 million in revenues related to the IMP businesses,
increased by $4.3 million over the 2003 Quarter to $7.6 million. International revenues,
excluding the impact of IMP revenues, increased by approximately $1 million, or 30
percent, in the 2004 Quarter versus the 2003 Quarter.

Microteks domestic revenues in
the 2004 Period were $71.7 million, approximately $14.2 million more than domestic
revenues for the 2003 Period, an increase of 24.7 percent. Excluding Plasco revenues of
$7.1 million for the 2004 Period, Microteks domestic hospital branded and OEM growth
rates for the 2004 Period were 12.0 percent and 12.8 percent, respectively. Branded
hospital revenue growth was attributable to CleanOp (an increase of $2.1 million or 34.0
percent), Venodyne (an increase of $582 thousand or 15.2 percent) and domestic equipment
and patient drapes (an increase of $854 thousand or 4.4 percent). Safety product revenues
declined by approximately $386 thousand primarily as a result of the sale of certain
non-strategic components of the Companys safety product line in September 2003.
Microteks international net revenues for the 2004 Period, including revenues related
to the acquired IMP businesses, were $16.0 million, as compared to $10.4 million for the
2003 Period. The increase in international revenues in the 2004 Period of $5.6 million
consisted of IMP revenues of $4.3 million and an increase in Microteks other
international revenues of $1.3 million.

-13-

---

OTIs net revenues were $2.7
million in the 2004 Quarter, up from $1.3 million in the 2003 Quarter. For the 2004
Period, OTIs net revenues of $5.7 million increased by $1.3 million over net
revenues reported for the 2003 Period of $4.4 million. Sales to the nuclear industry
increased by $555 thousand and $821 thousand in the 2004 Quarter and 2004 Period,
respectively. The remainder of the increases in OTIs revenues in the 2004 Quarter
and 2004 Period is attributable to sales of OREX raw materials. Subsequent to the ETI
transaction which was completed at the end of the 2004 Quarter, the Company expects that
OTI division revenues will consist of license royalties totaling $75 thousand per quarter
through September 2007 and sales of finished goods inventories to ETI, including a prorata
share of management fee income, aggregating approximately $7.5 million over the three-year
term of the Supply Agreement.

The Companys consolidated gross
profit margin for the 2004 Quarter and 2004 Period was 38.2 percent and 38.9 percent,
respectively, as compared to 40.2 percent in the 2003 Quarter and 39.3 percent in the 2003
Period, respectively. These decreases are attributable to the Companys product mix
in the 2004 Quarter and 2004 Period as compared to the same prior year periods and the
slightly dilutive nature of Microteks international business (excluding IMP),
Microteks CleanOp product line and OTIs revenues in relation to other of
Microteks branded hospital revenues. Following the ETI transaction and for the
three-year term of the Supply Agreement, OTIs revenues, consisting of sales of
finished goods inventories, including a prorata share of management fee income, and
license royalties, are expected to generate gross margins in excess of 36 percent and are
not expected to have a material dilutive impact on the Companys consolidated gross
margins.

Operating expenses for the 2004
Quarter were $10.7 million, or 31.5 percent of net revenues, as compared to $8.2 million,
or 33.6 percent of net revenues, in the 2003 Quarter. For the 2004 Period, operating
expenses were $30.3 million, or 32.4 percent of net revenues, versus $23.6 million, or
32.7 percent of net revenues, for the 2003 Period. The net increase in the absolute dollar
amount of operating expenses in the 2004 Quarter and 2004 Period resulted primarily from
selling, general and administrative expenses related to the recently acquired Plasco and
IMP businesses, higher distribution and other variable selling costs associated with
increasing revenues, and other planned investments in selling and marketing during 2004.

Selling, general and administrative
expenses were $10.3 million or 30.2 percent of net revenues in the 2004 Quarter, versus
$7.8 million or 32.2 percent of net revenues in the 2003 Quarter. For the 2004 Period,
selling, general and administrative expenses were $29.0 million or 31.0 percent of net
revenues, as compared to $22.6 million or 31.3 percent of net revenues in the 2003 Period.
The improvements in the ratio of selling, general and administrative expenses to net
revenues in the 2004 Quarter and 2004 Period are attributable to improved leverage of the
Companys selling, general and administrative infrastructure due to increased
revenues. During the 2004 Period, selling, general and administrative expenses of the
Companys OTI division totaled approximately $1.1 million, primarily consisting of
sales commissions, certain warehousing and distribution expenses and other administrative
costs. As a result of the ETI transaction, the Company expects to eliminate substantially
all of its OTI division selling, general and administrative expenses in future periods.

Research and development expenses in
the 2004 Quarter and 2004 Period were $304 thousand and $812 thousand, respectively, as
compared to research and development expenses of $235 thousand in the 2003 Quarter and
$713 thousand in the 2003 Period. The Company attributes the increases in research and
development expenses in 2004 to its expanded product development program which includes
numerous product enhancements and new product launches. In the 2004 Period, the
Companys OTI division recorded research and development expenses of approximately
$115 thousand. There are no future research and development projects planned for the
Companys OTI division, except for expenses related to maintenance and protection of
OTIs intellectual property.

-14-

---

Amortization of intangibles in the
2004 Quarter and 2004 Period was $159 thousand and $465 thousand, respectively,
approximately $57 thousand and $138 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. Following the ETI transaction, the
Company retains ownership of all of its intangible assets, including patent acquisition
costs, related to its OREX products and processing technology. Consequently, the ETI
transaction is not expected to have an impact on amortization of intangibles in future
periods.

Income from operations for the 2004
Quarter and 2004 Period was $2.5 million and $6.3 million, respectively, versus $2.6
million in the 2003 Quarter and $5.7 million in the 2003 Period. Excluding gains resulting
from dispositions of property and equipment of $215 thousand in the 2004 Quarter and $982
thousand in the 2003 Quarter, the Companys income from operations for the 2004
Quarter and 2004 Period increased by $649 thousand, or 40.4 percent, and $1.3 million, or
27.2 percent, respectively, over the same prior year period. For the 2004 Quarter,
Microteks income from operations of $2.1 million declined from the income from
operations recorded in the 2003 Quarter by $500 thousand, or 22.3 percent. For the 2004
Period, Microteks income from operations was $5.8 million and was consistent with
income from operations recorded in the 2003 Period. Included in Microteks income
from operations in the 2003 Quarter and 2003 Period was a gain of $982 thousand on the
sale of certain non-strategic assets. The Companys OTI division reported income from
operations in the 2004 Quarter of $418 thousand versus an operating loss of $54 thousand
in the 2003 Quarter. OTIs income from operations in the 2004 Period was $432
thousand as compared to an operating loss of $60 thousand for the 2003 Period. Included in
OTIs income from operations in the 2004 Quarter and 2004 Period were gains on the
disposition of certain property and equipment of approximately $210,000.

Interest expense, net of interest
income, was $84 thousand in the 2004 Quarter and $194 thousand for the 2004 Period, as
compared to $40 thousand and $134 thousand in the 2003 Quarter and 2003 Period,
respectively. The increases in interest expense, net of interest income, in the 2004
Quarter and 2004 Period are attributable to increased interest expense due to higher
average borrowings and reduced 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 $287
thousand and $578 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 $2.3 million for the 2003 Quarter and $4.7 million
for the 2003 Period. During the 2003 Quarter and 2003 Period, the Company recorded a
non-cash deferred income tax benefit of $2.4 million and $4.9 million, 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 $30 thousand and $220 thousand, respectively. The Company did not record any
deferred income tax benefits in the 2004 Quarter or 2004 Period.

The resulting net income for the 2004
Quarter was $2.2 million, or $0.05 per diluted share, bringing the Companys net
income for the 2004 Period to $5.6 million, or $0.13 per diluted share, as compared to
$4.9 million, or $0.11 per diluted share, reported for the 2003 Quarter and $10.3 million,
or $0.24 per diluted share reported for the 2003 Period. Excluding the non-cash deferred
income tax benefit recorded in the 2003 Quarter and 2003 Period of $2.4 million and $4.9
million, respectively, and the gains on the dispositions of property and equipment of $215
thousand in the 2004 Quarter and $982 thousand in the 2003 Quarter, the Companys net
income for the 2004 Quarter and 2004 Period increased over the 2003 Quarter and 2003
Period by approximately $376 thousand, or 24 percent, and $903 thousand, or 20 percent,
respectively.

-15-

---

# Liquidity and Capital
Resources

As of September 30, 2004 and December
31, 2003, the Companys cash and cash equivalents totaled $8.9 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):

|                                                | Nine months ended
September 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 $9.6 million compared to $4.2
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, net of acquisitions, of $1.8 million for the
2004 Period. During the 2004 Period, changes in operating assets and liabilities included
a $2.9 million increase in accounts receivable, an increase of $3.0 million in accounts
payable, accrued compensation and other liabilities and a decrease of $1.7 million in
inventories, prepaid expenses and other assets. 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 $1.4 million and cash consideration of $419 thousand and $9.6 million for the
OrthoPlast and IMP acquisitions, respectively, less proceeds of $600 thousand from the
disposition of certain property and equipment. Cash used in investing activities in the
2003 Period included $1.7 million in capital property and equipment additions less
proceeds of $400 thousand from the disposition of certain property and equipment.

During the 2004 Period, financing
activities provided $661 thousand in cash. Financing cash inflows in the 2004 Period
included proceeds of $968 thousand from the exercise of stock options and $555 thousand
from other stock issuances. Offsetting these inflows in the 2004 Period were net
repayments under the Companys Credit Agreement of $291 thousand, repayments of other
long-term debt agreements of $345 thousand and a decrease in the Companys bank
overdraft of $226 thousand. Cash used in financing activities for the 2003 Period of $3.0
million consisted of net repayments under the Companys Credit Agreement of $3.3
million, repayments under other long-term debt agreements of $31 thousand and the purchase
of 255 thousand shares of stock for $667 thousand. Offsetting these amounts were an
increase in the Companys bank overdraft of $166 thousand, proceeds from the exercise
of stock options of $424 thousand, and $395 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 $6.9 million and $7.2
million at September 30, 2004 and December 31, 2003, respectively. As of September 30,
2004, the Company had additional borrowing availability under the revolving facility of
$10.3 million. As of November 4, 2004, the Companys total borrowing availability
under the revolving facility was $16.1 million, of which the Company had borrowed $5.6
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
(5.3% at November 4, 2004) or LIBOR plus an interest margin (3.1% at November 4, 2004). At
September 30, 2004, the Company was in compliance with its financial covenants under the
Credit Agreement.

-16-

---

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.

# Off-Balance Sheet
Arrangements

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

# Forward Looking
Statements

Statements made in this Quarterly
Report include forward-looking statements made under the provisions of the Private
Securities Litigation Reform Act of 1995 including, but not limited to, the effect of the
ETI transaction on the Companys revenues, gross margins, selling, general and
administrative expenses, research and development expenses, and amortization of
intangibles, and 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 materially impact the Companys operating results or cash
flow.

The assets and liabilities of the
Companys United Kingdom and Netherlands subsidiaries are translated into U.S.
dollars at current exchange rates, and revenues and expenses are translated at average
exchange rates. The Company has purchased its international imports in U.S. Dollars and
accordingly is not directly exposed to currency fluctuation risks as a result of these
imports. International sales by the Company during the 2004 Period were approximately
$16.0 million. Approximately $5.4 million of the Companys international sales in the
2004 Period were billed and paid in foreign currencies. Currency translations on
international sales that are billed and paid in foreign currencies could be adversely
affected in the future by the relationship of the U.S. Dollar with foreign currencies. The
effect of foreign currency transactions was not material to the Companys results of
operations in the 2004 Period. 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.

-17-

---

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 September 30,
2004, the Company had $6.9 million of long-term debt bearing interest at a floating rate
approximating the Prime Rate or LIBOR plus a margin. Because these rates are variable, an
increase or decrease in the Companys average interest rate of 10%, or approximately
29 basis points, would have increased or decreased interest expense by approximately $15
thousand for the nine months ended September 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.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

-18-

---

# PART II 
OTHER INFORMATION

# Item 1.   Legal Proceedings

Not applicable.

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

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

# Item 3.   Default Upon
Senior Securities

Not applicable.

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

None.

# Item 5.   Other Information

None.

# Item 6.   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
| | ------ |  | ------------------------------------

| | 10.1 |  | Form
of Incentive Stock Option pursuant to 1999 Long-Term Incentive Plan
| | ---- |  | ------------------------------------------------------------------------

| | 10.2 |  | Form
of Nonqualified Stock Option Agreement pursuant to 1999 Long-Term Incentive Plan
| | ---- |  | -------------------------------------------------------------------------------------

| | 10.3 |  | Form
of Nonqualified Stock Option Agreement (For Directors) pursuant to 1999 Long-Term
Incentive Plan
| | ---- |  | -----------------------------------------------------------------------------------------------------

| | 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
| | ---- |  | -----------------------------------------------------------------------

-19-

---

_________________

(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).

-20-

---

# SIGNATURES

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