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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

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

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

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

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

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

Yes  X  No

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

INDEX

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

Item 4. Submission of Matters to a Vote of Securityholders

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

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

See notes to unaudited condensed consolidated financial statements.

2

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

See notes to unaudited condensed consolidated financial statements.

3

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

See notes to unaudited condensed consolidated financial statements.

4

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

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

Net revenues for the three months ended June 30, 2003 (the “2003 Quarter”) were $24.9 million, an increase of $3.7 million or 17.5 percent from the $21.2 million of net revenues reported for the three months ended June 30, 2002 (the “2002 Quarter”). Net revenues for the six months ended June 30, 2003 (the “2003 Period”) were $47.9 million, an increase of $5.5 million or 13.0 percent over the $42.4 million of net revenues reported for the six months ended June 30, 2002 (the “2002 Period”). Excluding licensing revenues associated with the amortization of the $10.5 million payment by Allegiance allocated to the Company’s Supply and License Agreement with Allegiance, net revenues in the 2002 Quarter and 2002 Period were $20.8 million and $41.6 million, respectively. There were no license revenues recorded in the 2003 Quarter or 2003 Period. The increases in net revenues in the 2003 Quarter and 2003 Period as compared to the 2002 Quarter and 2002 Period are attributable to an increase in the Company’s domestic hospital branded sales, continued substantial growth in the CleanOp product line and international business and significant growth in OTI’s nuclear business. These increases were partially offset by revenue declines in Microtek’s safety product line and the termination of the OTI licensing revenues in December 2002.

For the 2003 Quarter, Microtek’s net revenues totaled $23.3 million, an increase of approximately $2.6 million or 12.3 percent over Microtek’s net revenues of $20.7 million in the 2002 Quarter. Microtek’s net revenues for the 2003 Period were $44.8 million, approximately $3.6 million more than the $41.2 million reported in the 2002 Period. The following tables depict Microtek’s domestic and international revenues and the relative percentage of each to Microtek’s total revenues for the 2003 Quarter and 2002 Quarter and for the 2003 Period and the 2002 Period:

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Microtek’s domestic revenues are generated through two primary channels or customer categories: hospital branded and contract manufacturing (commonly referred to as OEM). Also included in the Company’s OEM revenues are sales of products to custom procedure tray companies and other “non-branded” or private label customers. Microtek’s domestic revenues in the 2003 Quarter increased by $1.9 million due to an increase of approximately $1.5 million, or 14.8 percent, in Microtek’s hospital branded revenues and an increase of approximately $490,000, or approximately 6.2 percent, in Microtek’s OEM revenues. Hospital branded revenue growth in the 2003 Quarter over the 2002 Quarter was demonstrated in Microtek’s domestic core businesses (an increase of $777,000 or 13.6 percent) and in its CleanOp product line (an increase of $920,000 or 64.7 percent). Growth in the CleanOp product line and in Microtek’s core hospital branded revenues was offset by a $172,000 decline in safety product revenues resulting from increased competitive pressures. Microtek’s international net revenues were $3.7 million for the 2003 Quarter, an increase of $700,000 or 20.2 percent over the 2002 Quarter.

On a year-to-date basis, Microtek’s domestic revenues in the 2003 Period increased by $2.3 million due to an increase of approximately $2.4 million, or 12.4 percent, in Microtek’s hospital branded revenues and a decrease of approximately $100,000 in Microtek’s OEM revenues. Hospital branded net revenues increased in the 2003 Period due primarily to a $1.6 million increase in revenues from the CleanOp product line and to growth of approximately 11.5 percent in Microtek’s core hospital branded product lines. These increases were offset by a decrease of $553,000 in safety products revenues in the 2003 Period. Microtek’s international revenues for the 2003 Period were $7.1 million, or $1.3 million more than the $5.8 million reported for the 2002 Period.

OTI’s net revenues were $1.6 million in the 2003 Quarter versus $417,000 in the 2002 Quarter. OTI’s net revenues were approximately $3.0 million in the 2003 Period as compared to $1.0 million in the 2002 Period. Licensing revenues in the 2002 Quarter and 2002 Period were $356,000 and $713,000, respectively. There were no licensing revenues recorded in the 2003 Quarter and 2003 Period. Included in OTI’s net revenues for the 2003 Quarter and 2003 Period were revenues related to its nuclear operations of approximately $1.0 million and $2.2 million, respectively, as compared to revenues from nuclear operations of $25,000 and $115,000 in the 2002 Quarter and 2002 Period, respectively. The growth of OTI’s nuclear revenues is attributable to growing nuclear industry usage and acceptance of the OREX products. The balance of OTI’s net revenues is attributable to sales of certain of the OREX raw materials inventory and amounted to $564,000 in the 2003 Quarter and $814,000 in the 2003 Period as compared to $35,000 and $187,000 in the 2002 Quarter and 2002 Period, respectively.

Gross margins in the 2003 Quarter and 2003 Period were 39.1 percent and 38.9 percent, respectively, down from the margins of 40.0 percent recorded in the 2002 Quarter and 40.3 percent recorded in the 2002 Period. The absence of the amortization of deferred licensing revenues contributed approximately one percentage point to the gross margin decline in the 2003 Quarter and the 2003 Period. Because there was no cost of sales associated with the deferred license revenues recorded in the 2002 Quarter and 2002 Period, these revenues contributed directly to the Company’s gross margin. Excluding the impact of the deferred license revenues in 2002, the Company’s gross margins in the 2003 Quarter and 2003 Period were consistent with gross margins in the 2002 Quarter and 2002 Period.

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Operating expenses as a percentage of net revenues in the 2003 Quarter were 31.9 percent versus 35.6 percent in the 2002 Quarter. For the 2003 Period, operating expenses as a percentage of net revenues were 32.3 percent as compared to 34.4 percent for the 2002 Period. Selling, general and administrative expenses were $7.6 million or 30.5 percent of net revenues in the 2003 Quarter, versus $7.2 million or 33.9 percent of net revenues in the 2002 Quarter. For the 2003 Period, selling, general and administrative expenses were $14.7 million or 30.8 percent of net revenues, as compared to $13.9 million or 32.9 percent of net revenues in the 2002 Period. Severance expenses related to OTI’s restructuring activities and the closure of Microtek’s Waynesville, North Carolina facility in the 2002 Quarter increased selling, general and administrative expense margins in the 2002 Quarter and 2002 Period by approximately 1.5 and 1.0 percentage points, respectively. The increases in the absolute dollar amount of selling, general and administrative expenses in the 2003 Quarter and 2003 Period are attributable to increases in the Company’s variable selling costs.

Research and development expenses in the 2003 Quarter and 2003 Period were $259,000 and $478,000, respectively, as compared to $254,000 and $417,000 in the 2002 Quarter and 2002 Period, respectively. OTI’s research and development expenses, substantially all of which are related to the nuclear industry, decreased by $147,000 and $223,000 in the 2003 Quarter and 2003 Period, respectively, as compared to the 2002 Quarter and 2002 Period. Offsetting these decreases was an increase in Microtek’s research and development expenses of $152,000 and $284,000 in the 2003 Quarter and 2003 Period, respectively, related to an expanded product development program which includes numerous product enhancements and new product introductions planned for 2003.

Amortization of intangibles in the 2003 Quarter and 2003 Period was $108,000 and $225,000, respectively, which was consistent with amortization expense recorded in the 2002 Quarter and 2002 Period.

Income from operations for the 2003 Quarter and 2003 Period was $1.8 million and $3.2 million, respectively, versus $924,000 in the 2002 Quarter and $2.5 million in the 2002 Period. For the 2003 Quarter, Microtek’s operating profit of $1.7 million increased by $400,000 from the $1.3 million recorded in the 2002 Quarter. For the 2003 Period, Microtek’s operating profit was $3.2 million, approximately $100,000 more than the operating profit of $3.1 million recorded in the 2002 Period. The Company’s OTI division reported an operating income of $51,000 in the 2003 Quarter versus an operating loss of $369,000 for the 2002 Quarter. OTI’s operating loss in the 2003 Period was $6,000, as compared to the operating loss of $516,000 recorded in the 2002 Period.

Interest expense, net of interest income, was $56,000 and $94,000 in the 2003 Quarter and 2003 Period, respectively, as compared to $137,000 and $295,000 in the 2002 Quarter and 2002 Period, respectively. The decreases in net interest expense in the 2003 Quarter and 2003 Period as compared to the 2002 Quarter and 2002 Period are attributable to lower average borrowings under the Company’s lines of credit facility and declining interest rates during the 2003 Quarter and 2003 Period and was slightly offset by lower interest income on cash and cash equivalents due to lower average interest rates.

The Company’s provision for income taxes in the 2003 Quarter and 2003 Period reflects a net income tax benefit of approximately $1.5 million and $2.3 million, respectively. During the 2003 Quarter, the Company recorded an income tax benefit of approximately $1.6 million related to the decrease in the Company’s valuation allowance with respect to certain of its deferred tax assets, principally its net operating loss carryforwards, bringing the total income tax benefit related to the decrease in the Company’s deferred tax asset valuation allowance for the 2003 Period to approximately $2.5 million. The income tax benefit portion of the provision for income taxes in the 2003 Quarter and 2003 Period amounted to approximately $0.04 and $0.06 per basic and diluted share, respectively. Offsetting these income tax benefits was the Company’s state and foreign income tax provision for the 2003 Quarter and 2003 Period of approximately $119,000 and $190,000, respectively. The Company’s provision for income taxes in the 2002 Quarter and 2002 Period consisted entirely of state and foreign income taxes of approximately $61,000 and $150,000, respectively.

The resulting net income for the 2003 Quarter was $3.2 million, or $0.08 per basic and diluted share, bringing the Company’s net income for the 2003 Period to $5.4 million, or $0.13 per basic and diluted share. The Company’s earnings for the 2003 Quarter and the 2003 Period represent increases of approximately $2.4 million and $3.3 million over the net income reported for the 2002 Quarter and the 2002 Period, respectively.

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Liquidity and Capital Resources

As of June 30, 2003, the Company’s cash and cash equivalents totaled $10.3 million as compared to $9.8 million at December 31, 2002.

During the 2003 Period, the Company’s operating activities provided cash of $2.3 million as compared to $4.5 million in the 2002 Period. The decrease in cash provided by operating activities in the 2003 Period is attributable to increases in the Company’s accounts receivable and inventory balances which are attributable to its increase in net revenues and to working capital expansion related to the successful commercialization of OTI’s nuclear business and Microtek’s expanding operations. However, inventory months on hand and accounts receivable days outstanding did not increase. Cash used in investing activities consisted of the purchase of property and equipment and amounted to $1.2 million in the 2003 Period as compared to $981,000 in the 2002 Period. During the 2003 Period, cash used in financing activities was $628,000. Net repayments under the Company’s Credit Agreement in the 2003 Period were $809,000, and repayments of other long-term debt agreements in the 2003 Period totaled $6,000. During the 2003 Period, the Company received $149,000 in proceeds from the exercise of stock options, generated $298,000 from the issuance of stock and purchased 205,000 shares of stock for $497,000. During the 2002 Period, net cash used in financing activities was $4.3 million including $4.6 million of repayments under the Company’s Credit Agreement, and repayments of $420,000 under other long-term debt agreements. During the 2002 Period, the Company received $483,000 in proceeds from the exercise of stock options, generated $360,000 from the issuance of stock and purchased 45,000 shares of stock for $112,000.

The Company maintains a $17.5 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) $17.5 million, less any outstanding letters of credit issued under the Credit Agreement. Outstanding borrowings under the revolving credit facility were $6.3 million and $7.1 million at June 30, 2003 and December 31, 2002, respectively. As of June 30, 2003, the Company had additional borrowing availability under the revolving facility of $7.1 million. As of August 8, 2003, the Company’s total borrowing availability under the revolving facility was $13.6 million, of which the Company had borrowed $6.2 million. Revolving credit borrowings bear interest, at the Company’s option, at either a floating rate approximating the Bank’s prime rate plus an interest margin (4.5% at August 8, 2003) or LIBOR plus an interest margin (2.78% at August 8, 2003). At June 30, 2003, the Company was in compliance with its financial covenants under the Credit Agreement.

Based on its current business plan, the Company expects that cash equivalents and short term investments on hand, the Company’s credit facility, as amended, and funds budgeted to be generated from operations will be adequate to meet its liquidity and capital requirements for the next year. The Company’s liquidity is not dependent upon the use of off-balance sheet financing arrangements. Currently unforeseen future developments and increased working capital requirements may require additional debt financing or issuance of common stock in 2003 and subsequent years.

Forward Looking Statements

Statements made in this Quarterly Report include forward-looking statements made under the provisions of the Private Securities Litigation Reform Act of 1995 including, but not limited to, the ability of the Company to meet its liquidity and capital requirements. The Company’s actual results could differ materially from such forward-looking statements and such results will be affected by risks described in the Company’s Annual Report including, without limitation, those described under “Risk Factors -History of Net Losses”, “-Reliance upon Microtek”, “-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”, “-Small Sales and Marketing Force”, “-Reliance upon Distributors”, “-Microtek Regulatory Risks”, “-Risks of Obsolescence”, “-Reduced OREX Market Potential”, “-OREX Commercialization Risks”, “-OREX Manufacturing and Supply Risks”, “-Risks Affecting Protection of Technologies”, “-Risks of Technological Obsolescence” and “-OTI Regulatory Risks”. We do not undertake to update our forward-looking statements to reflect future events or circumstances.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s greatest sensitivity with respect to market risk is to changes in the general level of U.S. interest rates and its effect upon the Company’s interest expense. At June 30, 2003, the Company had $6.6 million of long-term or short-term debt bearing interest at floating rates. Because these rates are variable, a 1% increase in interest rates would have resulted in additional interest expense of approximately $18,000 and $36,000 for the three months and six months ended June 30, 2003, respectively, and a 1% reduction in interest rates would have resulted in reduced interest expense of approximately $18,000 and $36,000 for the three months and six months ended June 30, 2003.

Item 4. Controls and Procedures

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PART II
OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 2. Changes in Securities and Use of Proceeds

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

Item 3. Default Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Securityholders

During the period covered by this report, the Company filed with the Securities and Exchange Commission and delivered to its shareholders the Company’s Proxy Statement for its Annual Meeting of Shareholders held on May 22, 2003.

(a)     The Company’s annual meeting of shareholders was held on May 22, 2003.
(b)     The nominees for the Board of Directors of the Company are identified below.
(c)     With respect to the election of directors, the inspector of election tabulated the following votes:

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

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_________________

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this quarterly report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized on August 12, 2003.

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