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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

PART II:   OTHER INFORMATION

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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.

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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.

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

See notes to unaudited condensed consolidated financial statements.

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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

General

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Liquidity and Capital Resources

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

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

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

During the 2004 Period, financing activities provided $1.6 million in cash. Net borrowings under the Company’s Credit Agreement in the 2004 Period provided $943 thousand while other financing cash inflows included proceeds of $885 thousand from the exercise of stock options and $425 thousand from other stock issuances. Offsetting these inflows were repayments of other long-term debt agreements in the 2004 Period of $228 thousand and a decrease in the Company’s bank overdraft of $467 thousand. Cash used in financing activities for the 2003 Period was $628 thousand comprised of net repayments under the Company’s Credit Agreement of $809 thousand, repayments under other long-term debt agreements of $6 thousand and the purchase of 205 thousand shares of stock for $497 thousand. Offsetting these amounts were an increase in the Company’s bank overdraft of $237 thousand, proceeds from the exercise of stock options of $149 thousand, and $298 thousand from other stock issuances.

The Company maintains a $23.5 million credit agreement (as amended to date, the “Credit Agreement”) with the JP Morgan Chase Bank (the “Bank”), consisting of a revolving credit facility maturing on June 30, 2006. Borrowing availability under the revolving credit facility is based on the lesser of (i) a percentage of eligible accounts receivable and inventories or (ii) $23.5 million, less any outstanding letters of credit issued under the Credit Agreement. Outstanding borrowings under the revolving credit facility were $8.1 million and $7.2 million at June 30, 2004 and December 31, 2003, respectively. As of June 30, 2004, the Company had additional borrowing availability under the revolving facility of $9.9 million. As of August 4, 2004, the Company’s total borrowing availability under the revolving facility was $17.2 million, of which the Company had borrowed $6.9 million. Revolving credit borrowings bear interest, at the Company’s option, at either a floating rate approximating the Bank’s prime rate plus an interest margin (4.5% at August 4, 2004) or LIBOR plus an interest margin (3.1% at August 4, 2004). At June 30, 2004, the Company was in compliance with its financial covenants under the Credit Agreement.

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

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Off-Balance Sheet Arrangements

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

Forward Looking Statements

Statements made in this Quarterly Report include forward-looking statements made under the provisions of the Private Securities Litigation Reform Act of 1995 including, but not limited to, the ability of the Company to meet its liquidity and capital requirements. The Company’s actual results could differ materially from such forward-looking statements and such results will be affected by risks described in the Company’s Annual Report including, without limitation, those described under Risk Factors under the captions “-Reliance upon Microtek”, “-History of Net Losses”, “-Competition”, “-Product Liability”, “-Stock Price Volatility”, “-Dependence on Key Personnel”, “-Anti-takeover Provisions”, “-Low Barriers to Entry for Competitive Products”, “-Potential Erosion of Profit Margins”, “-Risks of Completing Acquisitions”, “-Risks of Successfully Integrating Acquisitions”, “-Small Sales and Marketing Force”, “-Reliance upon Distributors”, “-Reliance Upon Large Customers”, “-Microtek Regulatory Risks”, “-Risks of Obsolescence”, “-Reduced OREX Market Potential”, “-OREX Commercialization Risks”, “-OREX Manufacturing and Supply Risks”, “-Risks Affecting Protection of Technology”, “-Risks of Technological Obsolescence” and “-OTI Regulatory Risks”. The Company does not undertake to update our forward-looking statements to reflect future events or circumstances.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

The Company’s operating results and cash flows are subject to fluctuations from changes in interest rates and foreign currency exchange rates. The Company’s cash and cash equivalents are short-term, highly liquid investments with original maturities of three months or less. As a result of the short-term nature of the Company’s cash and cash equivalents, a change of market interest rates does not impact the Company’s operating results or cash flow. The effect of foreign currency transactions has not historically been material to the Company’s results of operations. The Company may in the future export or import increased amounts of products payable in foreign currencies, exposing the Company to increased risks on fluctuations in currency exchange rates.

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

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

Item 4.   Controls and Procedures

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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. The Company made no repurchases of equity securities during the quarter ended June 30, 2004.

Item 3. Default Upon Senior Securities

Not applicable.

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Item 4.   Submission of Matters to a Vote of Securityholders

During the period covered by this report, the Company filed with the Securities and Exchange Commission and delivered to its shareholders the Company’s Proxy Statement for its Annual Meeting of Shareholders held May 19, 2004.

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

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 9, 2004.

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