Edgar Filing: HYDRON TECHNOLOGIES INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934

For the Quarterly Period Ended: JUNE 30, 2006

[ ] Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934

For the Period from __________ to __________

Commission File Number: 0-6333

HYDRON TECHNOLOGIES, INC.
-------------------------
(Exact name of Registrant as specified in its charter)

New York 13-1574215
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)

4400 34th Street N, Suite F
Saint Petersburg, FL 33714 (727)342-5050
--------------------------- -------------
(Address of Principal Executive Offices) (Registrant's telephone number)

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 the past 90 days. [X] Yes [_] No.

Number of shares of common stock outstanding as of August 10, 2006: 12,239,736

Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].

TABLE OF CONTENTS PAGE

Part I. Financial Information
------------------------------

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheet - June 30, 2006
and December 31, 2005 .......................................... 3

Condensed Consolidated Statement of Operations - Three and six
months ended June 30, 2006 and 2005 ............................ 4

Condensed Consolidated Statements of Cash Flow - Three and six
ended June 30, 2006 and 2005 ................................... 5

Notes to Condensed Consolidated Financial Statements ........... 6

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 13

Item 3. Controls and Procedures ........................................ 20

Part II. Other Information
--------------------------

Item 6. Exhibits and reports on Form 8K ................................ 21

HYDRON TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(Unaudited)

June 30, December 31,
2006 2005
------------ ------------
ASSETS
Current Assets

Cash and cash equivalents ....................... $ 25,745 36,281
Trade accounts receivable, net .................. 62,276 147,130
Inventories, net ................................ 377,076 406,164
Prepaid expenses and other current assets ....... 4,721 31,193
------------ ------------
Total current assets ........................ 469,818 620,768

Property and equipment, net ....................... 120,552 136,352

Deferred product costs, net ....................... 143,828 160,955
Intangible assets, net ............................ 204,742 222,634
Restricted cash ................................... 98,250 112,334
Deposits .......................................... 13,153 7,579
------------ ------------
Total Assets ................................ $ 1,050,343 1,260,622
============ ============

LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable ................................ 307,589 333,398
Loans payable, net .............................. 156,858 146,700
Royalties payable ............................... 27,012 29,512
Deferred revenues ............................... 188,336 134,533
Accrued liabilities ............................. 265,704 254,727
Current portion of capital leases payable ....... 24,360 22,648
------------ ------------
Total current liabilities ................... 969,859 921,518

Long tern liabilities
Capital leases payable .......................... 37,952 50,576

Minority interest in consolidated partnership ... 235,674 249,863

Commitments and contingencies

Shareholders' deficit
Preferred stock - $.01 par value 5,000,000 shares
authorized; no shares issued or outstanding ... - -
Common stock - $.01 par value
30,000,000 shares authorized; 12,201,936 and
11,926,836 shares, respectively issued
and outstanding ............................... 122,019 119,268
Additional paid-in capital ...................... 21,215,906 21,126,925
Accumulated deficit ............................. (21,523,251) (21,199,712)
Treasury stock, at cost 10,000 .................. (7,816) (7,816)
------------ ------------
Total Shareholders' deficit ................. (193,142) 38,665
------------ ------------
Total liabilities and shareholders deficit .. $ 1,050,343 $ 1,260,622
============ ============

See accompanying notes to condensed consolidated financial statements

HYDRON TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(Unaudited)

Three months ended June 30, Six months ended June 30,
2006 2005 2006 2005
------------ ----------- ------------ ------------

Net sales ...................................... $ 346,863 $ 275,781 $ 722,330 $ 531,695
Cost of sales .................................. 91,094 132,390 236,818 229,650
------------ ------------ ------------ ------------
Gross profit ................................... 255,769 143,391 485,512 302,045

Expenses
Royalty expense .............................. 1,543 10,486 9,043 18,211
Research and development ..................... 5,957 15,758 6,967 54,728
Selling, general & administration ............ 344,284 216,395 707,808 491,669
Depreciation & amortization .................. 25,410 9,137 50,820 18,274
------------ ------------ ------------ ------------
Total expenses ............................. 377,194 251,776 774,638 582,882

------------ ------------ ------------ ------------
Operating loss ................................. (121,426) (108,386) (289,127) (280,837)

Interest (expense) income - net ................ (21,528) 264 (48,600) 686
------------ ------------ ------------ ------------
Loss before income taxes and minority interest (142,954) (108,122) (337,727) (280,151)

Income taxes expense ........................... - - - -
Minority interest in net loss of subsidiary .... 5,139 9,666 14,188 18,211
------------ ------------ ------------ ------------
Net loss ................................... $ (137,815) $ (98,455) $ (323,539) $ (261,940)
============ ============ ============ ============

Basic and diluted loss per share
Net loss per common share .................... $ (0.01) $ (0.01) $ (0.03) $ (0.03)
============ ============ ============ ============

Weighted average shares
outstanding (basic and diluted) .............. 12,201,936 9,320,336 12,118,629 9,320,336
============ ============ ============ ============

See accompanying notes to condensed consolidated financial statements.

HYDRON TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flow
(Unaudited)

Six Months ended June 30,
2006 2005
--------- ---------
Operating activities
Net loss ........................................... $(323,539) $(261,940)
Adjustments to reconcile net loss to
net cash used in operating activities
Minority Interest .............................. (14,188) (18,211)
Depreciation and amortization .................. 50,820 18,274
Compensation expense from stock option awards .. 12,420 0
Deferred financing costs ....................... 7,134 0
Interest expense ............................... 34,776 0

Change in operating assets and liabilities
Restricted cash ................................ 14,084 0
Trade accounts receivable ...................... 84,854 (31,849)
Inventories .................................... 29,088 (19,436)
Prepaid expenses and other current assets ...... 26,470 37,380
Deposits ....................................... (5,574) -
Accounts payable ............................... (25,808) 5,699
Royalties payable .............................. (2,500) 1,380
Deferred revenues .............................. 53,803 46,539
Accrued interest ............................... 3,024 0
Accrued liabilities ............................ 10,977 2,821
--------- ---------
Net cash used in operating activities ............ (44,159) (219,343)

Investing activities
Net cash from investing activities ................. - -

Financing activities
Loan payable, proceeds ............................. - 150,285
Payments on capital leases ......................... (10,912) -
Proceeds from exercise of stock options ............ 44,535 -
--------- ---------
Net cash provided by (used in) financing
activities ....................................... 33,623 150,285

Net decrease in cash and cash equivalents ........ (10,536) (69,058)

Cash and cash equivalents at beginning of period ..... 36,281 339,679

--------- ---------
Cash and cash equivalents at end of period ........... $ 25,745 $ 270,621
========= =========

SUPPLEMENTAL CASH FLOW INFORMATION
Stock issued to pay accrued interest ............... $ 34,776 -
Warrants issued in connection with loans payable ... - 24,000

See accompanying notes to condensed consolidated financial statements

NOTE A - BASIS OF PRESENTATION

The condensed consolidated financial statements included in this report have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission for interim reporting and include all
adjustments (consisting only of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation. These financial
statements have not been audited.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations for
interim reporting. The Company believes that the disclosures contained herein
are adequate to make the information presented not misleading. However, these
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report for the year ended
December 31, 2005, which is included in the Company's Form 10-KSB for the year
ended December 31, 2005. The financial data for the interim periods presented
may not necessarily reflect the results to be anticipated for the complete year.

NOTE B - ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of Hydron
Technologies, Inc. and its wholly-owned subsidiary CRI purchased as of July 1,
2005, and its majority owned limited liability limited partnership, Hydron
Royalty Partners, LLLP. All significant inter-company transactions have been
eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The credit risk
associated with cash equivalents is considered low due to the credit quality of
the issuers of the financial instruments.

The cash and cash equivalent balances at June 30, 2006 and December 31,
2005 are covered by the Federal Deposit Insurance Commission.

Restricted cash

At June 30, 2006, the Company had restricted cash of $98,250, all of
which were covered by the Federal Deposit Insurance Commission, which represents
funds from a consolidated entity, that are not available for use in the
Company's normal operations.

Concentration of Credit Risk

Trade accounts receivable are due primarily from contract manufacturing
customers and are usually paid to the Company within 45 days after receipt of
goods. The Company performs ongoing evaluations of its significant customers and
does not require collateral, although in some cases it requires deposits or
advances.

Inventories

Inventories are valued at the lower of cost (first-in, first-out) or
market, and include finished goods, components and raw materials.

Long-Lived Assets

The Company reviews long-lived assets and certain identifiable
intangibles held and used for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In evaluating the fair value and future benefits of its intangible
assets, management performs an analysis of the anticipated undiscounted future
net cash flows of the individual assets (or asset groups) over the remaining
depreciation/amortization period. The Company recognizes an impairment loss if
the carrying value of the asset exceeds the expected future cash flows. During
the periods ended June 30, 2006 and 2005, there was no deemed impairment of
long-lived assets.

Property and Equipment

Property and equipment, consisting primarily of furniture and
equipment, is carried at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, ranging from four to six
years.

Deferred Product Costs

Deferred product costs consist primarily of costs incurred for the
purchase and development of patents and product rights. The deferred product
costs are being amortized over their estimated useful lives of five to seventeen
years using the straight-line method.

Common Stock, Common Stock Options and Net Loss Per Share

Prior to January 1, 2006, the Company accounted for employee
stock-based compensation using the intrinsic value method supplemented by pro
forma disclosures in accordance with APB 25 and SFAS 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No.148 "Accounting
for Stock-Based Compensation--Transition and Disclosures." Under the intrinsic
value method, the recorded stock-based compensation expense was related to the
amortization of the intrinsic value of stock options issued and other
equity-based awards issued by the Company. Options granted with exercise prices
equal to the grant date fair value of the Company's stock have no intrinsic
value and therefore no expense was recorded for these options under APB 25.
Other equity-based awards for which stock-based compensation expense was
recorded were generally grants of restricted stock awards which were measured at
fair value on the date of grant based on the number of shares granted and the
quoted price of the Company's common stock. Such value was recognized as an
expense over the corresponding service period.

Effective January 1, 2006 the Company adopted SFAS 123R using the
modified prospective approach and accordingly prior periods have not been
restated to reflect the impact of SFAS 123R. Under SFAS 123R, stock-based awards
granted prior to its adoption will be expensed over the remaining portion of
their vesting period. These awards will be expensed under the accelerated
amortization method using the same fair value measurements which were used in
calculating pro forma stock-based compensation expense under SFAS 123. For
stock-based awards granted on or after January 1, 2006, the Company will
amortize stock-based compensation expense on a straight-line basis over the
requisite service period, which is generally a four year vesting period. SFAS
123R requires that the deferred stock-based compensation on the condensed
consolidated balance sheet on the date of adoption be netted against additional
paid-in capital.

For the six months ended June 30, 2006, the Company recorded
stock-based compensation expense of $12,420. For the six months ended June 30,
2005, the Company recognized $0 of stock-based compensation expense under the
intrinsic value method.

The table below reflects the pro forma impact of valuing compensation
expense of awards at fair value:

Six months ended
June 30, 2005
----------------
Net loss, as reported .......................... $ (261,940)
Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for all awards, net of related tax effects ..... -
-----------
Pro Forma net loss ............................. $ (261,940)
===========
Basic and diluted loss per share
As reported .............................. $ (0.03)
===========
Pro forma ................................ $ (0.03)
===========

Revenue Recognition

The Company recognizes revenue when:

o Persuasive evidence of an arrangement exists,

o Shipment has occurred,

o Price is fixed or determinable, and

o Collectibility is reasonably assured.

Subject to these criterion, the Company recognizes revenue at the time
of shipment of the relevant merchandise. The Company offers its individual
consumer customers a thirty-day warranty and estimates an allowance for sales
returns based on historical experience with product returns. For the Company's
formulation and contract manufacturing business revenue is recognized when the
work is complete and the client approves the formula by written correspondence.

Shipping and Handling Fees

The Company follows the provisions of Emerging Issues Task Force Issue
No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Any amounts
billed to third-party customers for shipping and handling is included as a
component of revenue. Shipping and handling costs incurred are included as a
component of cost of sales.

Recent accounting Pronouncements

New Accounting Standard - Accounting for Uncertainty in Income Taxes

In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes,"
which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. In accordance with FIN 48, the Company
must adjust its financial statements to reflect only those tax positions that
are more-likely-than-not to be sustained as of the adoption date. The effective
date of FIN 48 for the Company is January 1, 2007. The adoption of FIN 48 is not
expected to have a material impact on the Company's condensed consolidated
financial statements.

NOTE C - INVENTORIES

Inventories consist of the following at June 30, 2006:

Finished Goods ................................ $ 77,759
Raw materials and components .................. 590,071
---------
667,830
Less: inventory valuation allowance .......... (290,754)
---------
Inventories, net .............................. $ 377,076
=========

NOTE D - ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following at June 30, 2006:

Accounts Receivable ........................... $ 75,026
Less: Allowance for Doubtful accounts ........ (12,750)
---------
Accounts Receivable, Net ...................... $ 62,276
=========

NOTE E - SHARE BASED COMPENSATION

The Company recognized $12,420 in share based compensation expense for
the six month period ended June 30, 2006. Options to purchase 9,500 shares were
granted to employees during the six months ended June 30, 2006.

For the stock-based awards granted on or after January 1, 2006, the
Company is amortizing stock-based compensation expense on a straight-line basis
over the requisite service period, which is generally a four year vesting
period. The fair value for these options was estimated at the date of the grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for the period ended June 30, 2006:

Risk-free interest rate .... 4.3%
Expected life .............. 5 years
Expected volatility ........ 124%
Expected dividend yield .... 0%

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. As the Company's stock options have characteristics significantly
different than 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 stock options.

NOTE F - LOAN PAYABLE

On June 14, 2005, the Company borrowed an aggregate of One Hundred
Fifty Thousand Dollars ($150,000) (collectively, the "Loans") from three
individual lenders (collectively, the "Lenders"), including individuals who are
(i) the Chairman of the Board and Interim President, and (ii) a second director
of the Company.

In connection with the Loans, the Company issued to each of the Lenders
a promissory note in the principal amount of Fifty Thousand Dollars ($50,000)
(individually, a "Note" and collectively, the "Notes") providing for (a)
quarterly payments of interest at ten percent (10%) per annum and (b) repayment
of principal in a balloon payment on the second anniversary of the date of the
Notes. Under the terms of the Notes, the Company may elect to pay quarterly
interest to the holders of the Notes in shares of common stock, $.01 par value,
of the Company (the "Common Stock"), in an amount calculated by dividing the
amount of interest due and payable by ten cents ($.10). The Notes also provide
that, in the event of a default by the Company under the Notes, the holders may
elect to receive payment of principal and accrued and unpaid interest in shares
of Common Stock, in an amount calculated by dividing the amount of principal and
accrued and unpaid interest payable by the "Average Market Price" for a share of
Common Stock. Under the terms of the Notes, "Average Market Price" means the
average closing sale price for a share of Common Stock measured over the last
ten trading days of the month preceding the interest payment date or, if no
trading in the Common Stock has occurred during such period, the average closing
sale price on the last date on which a share of Common Stock was sold in
over-the-counter trading in the Common Stock. In the event that no shares of
Common Stock have traded in the over-the-counter market for a period of six
months or more, the Average Market Price shall be the fair market price for a
share of Common Stock as determined in good faith by the Board of Directors of
the Company. In October 2005, the Company elected to pay the accrued interest
due on the Notes of $11,040 in stock of the Company and issued 44,000 shares at
$.25 to the Note holders. In January 2006, the Company elected to pay the
accrued interest due on the Notes of $13,230 in stock of the Company and issued
37,800 shares at $.35 to the Note holders. In March 2006, the Company elected to
pay the accrued interest due on the notes of $21,546 in stock of the Company and
issued 37,800 shares at $.57 to the Note holders. At June 30, 2006, the Company
had accrued $16,254 of interest on the notes, subsequently in July 2006 the
Company elected to pay the accrued interest in stock of the Company and issued
37,800 shares at $.43 to the Note holders.

In addition, in connection with the Loans, each Lender received a Common Stock
Purchase Warrant (collectively, the "Warrants") entitling the holder to purchase
One Hundred Thousand (100,000) shares of Common Stock at an exercise price of
ten cents ($.10) per share for a five-year period. The warrants were valued
using the Black Scholes model at $24,000, which is being amortized as interest
expense over the life of the notes.

The Notes and the Warrants each provide that in the event that the Company shall
grant "piggy back" registration rights to any other party to cause the Company's
Common Stock or any security exercisable or exchangeable for, or convertible
into, shares of Common Stock to be included in a registration statement filed by
the Company for sale by any selling shareholder or by the Company, the Company
will grant the holders of the Notes and Warrants similar registration rights.

Loans Payable consisted of the following at June 30, 2006:

Loan Payable .................................. $ 150,000
Accrued interest .............................. 16,254
Less: Deferred financing costs ................ (9,396)
---------
$ 156,858
=========

NOTE G - ACCRUED LIABILITIES

Accrued liabilities represent expenses that apply to the reported
period and have not been billed by the provider or paid by the Company.

Accrued liabilities consisted of the following at June 30, 2006:

Dividends payable ............................. $ 83,163
Director fees payable ......................... 104,770
Professional fees ............................. 39,128
Other ......................................... 38,643
---------
$ 265,704
=========

NOTE H - GOING CONCERN

The accompanying condensed financial statements were prepared assuming
that the Company will continue as a going concern. This basis of accounting
contemplates the recovery of the Company's assets and the satisfaction of its
liabilities in the normal course of operations.

The Company anticipates that present working capital balances and
internally generated funds will be sufficient to meet our working capital needs
for the next three months or longer based on management decisions and sales. The
Company's independent accountants issued a "going concern" opinion on the
Company's December 31, 2005 financial statements, since the Company has incurred
significant losses over the past five years and generates a negative cash flow
on a monthly basis.

On July 1, 2005, the Company acquired Clinical Results, Inc. (CRI), a
St. Petersburg, Florida-based company. CRI is a privately held product
development laboratory and contract manufacturer of cosmeceutical and other
personal care products. CRI's clients range from mass market retailers to
marketers of high end brands, and certain health food store brands.

Management believes that Hydron Technologies will benefit from lower
manufacturing costs, and be better positioned to build its catalog and internet
business, as well as expand the sale of its skin care treatments beyond its
historical direct response TV and catalog operations, by utilizing CRI's broker
network.

Management anticipates that any impact of the acquisition on cash flow
will not be realized for six to nine months. The Company's ultimate ability to
attain profitable operations is dependent upon obtaining additional financing or
achieving a level of sales adequate to support its cost structure.

Accordingly, there are no assurances that the Company will be
successful in achieving the above objectives, or that such objectives, if
realized, will enable the Company to obtain profitable operations or continue as
a going concern.

NOTE I - SUBSEQUENT EVENTS

Subsequent to June 30, 2006, the Company elected to pay the $16,254 in
accrued interest due on the loan payable in stock of the Company and issued
37,800 shares at $.43 to the Note holders.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

BUSINESS

During early 2005, the Company returned its focus to the development
and sales of its skin care products. For several years prior, the Company's
research and development efforts were concentrated on products and medical
applications utilizing its patented tissue oxygenation technology, and on
accumulating data for a Food & Drug Administration (FDA) application related to
this technology. On January 10, 2005, the Company attended a Pre-Investigational
Device Exemption meeting with the FDA in the belief that a clear pathway for
safety and clinical research requirements could be determined at that time;
however, a defined methodology could not be agreed upon at that time. As a
result of that meeting, and in consideration of the Company's limited working
capital, management decided to refocus its efforts on non-medical technologies.
The Company continues to believe that its tissue oxygenation technology has
significant potential, and expects to re-institute research and development in
that area when working capital allows.

The Company's current focus is on furthering development and sales of
its other proprietary products, including a newly patented evaporating
emulsifier technology for use in cosmetic treatments and acne products, a number
of patented polymer skin care formulas using a moisture-attracting ingredient
(the "Hydron(R) polymer") that provide superior skin moisturization benefits and
sunscreen delivery, and a patented formula for a wrinkle reduction serum.

Currently, the Company markets a broad range of cosmetic and oral
health care products using a moisture-attracting ingredient (the "Hydron(R)
polymer") and a topical delivery system for active ingredients including
pharmaceuticals. The Company holds U.S. and international patents on, what
management believes is, the only known cosmetically acceptable method to suspend
the Hydron polymer in a stable emulsion for use in personal care/cosmetic
products. The Company is developing other personal care/cosmetic products for
consumers using its patented technology and would, when appropriate, either seek
licensing arrangements with third parties, or develop and market proprietary
products through its own efforts. Management believes that because of their
unique properties, products that utilize the Hydron polymer have the potential
for wide acceptance in consumer and professional health care markets.

On July 1, 2005, the Company purchased Clinical Results, Inc. ("CRI"),
for two million (2,000,000) shares of the Company's common stock. Through the
purchase of CRI the Company has entered the business of proprietary formulations
and contract manufacturing for other consumer product companies.

HYDRON(R) BRANDED SKIN CARE PRODUCTS

The Company has been developing various consumer products using Hydron
polymers since 1986. The Company's products are designed to address concerns
about the visible signs of aging, and include Hydron(R) skincare, hair care,
bath and body and sun care lines. The Company currently has forty three
individual branded products available in the following product categories: skin
care (24 products), hair care (6 products), bath and body (11 products) and sun
care (2 products). These products are also packaged into collections and sold at
a more favorable value than the individual products sold separately. All of the
products are available through the Hydron catalog and web site at www.hydron.com
("Catalog"). The Company also markets a number of customized formulations under
private label and contract manufacturing for various outside brands.

Management believes that the Company's moisturizers and skin treatments
are unique and offer the following competitive benefits: they self-adjust to
match the skin's optimal pH balance soon after they are applied to the skin;
they become water-insoluble on the skin's surface, and unlike all other
water-based cremes and lotions, are not removed by the skin's perspiration or
plain water; they are oxygen-permeable, allowing the skin to breathe; they do
not emulsify the skin's natural moisturizing agents, as do conventional cremes
and lotions; and they attract and hold water, creating a cushion of moisture on
the skin's surface that promotes penetration of other beneficial product
ingredients, all while leaving no greasy after-feel.

The Company's products are independently tested by dermatologists and,
in their opinion, are considered to be safe, non-irritating and applicable to
most skin types. Products for use around the eye area are also ophthalmologist
tested and safe for contact lens wearers. Most of the Company's branded
moisturizing products are based on the Company's patented emulsion system, which
permits the product ingredients to deliver their intended benefits over an
extended period of time and in a more efficient manner.

Management believes that the Hydron(R) emulsion system can enhance the
effectiveness of topical over-the-counter medications. The emulsion system is
designed to deposit a polymer film on the skin's surface which has a number of
advantages over traditional lotions: it promotes hydration of the outer layer of
skin, improves penetration into the skin's pores, and has good tactility and
flexibility. The Company expects to continue to focus research and development
resources on proprietary technology-based products as determined by management's
assessment of consumer demand.

The Company discovered that the Hydron emulsion system also adjusts pH
on the skin to match the pH of the stratum corneum, the skin's surface layer.
The pH range of the emulsion system is ideal for promoting the skin's natural
healing process and enzyme production responsible for rebuilding the skin's
lipid barrier. In January 2006, the Company was granted U.S. Patent Number
6,984,391 for its Compositions and Method for Delivery of Skin Cosmeceuticals to
cover this technology, which also applies to a new acne treatment system.

Catalog Sales - The Company offers personal care products for sale directly to
consumers. Augmenting direct mail, the Company sells its products on the World
Wide Web and regularly transmits E-mail broadcasts to its customer base. Catalog
sales represented approximately 40% of Hydron's total sales for the six months
ended June 30, 2006 and 68% of sales the six months ended June 30, 2005. The
Company is continuing to explore new ways to enhance Catalog sales and
operations.

Private Label Contracting - Since March 1, 2001, the Company has been a supplier
to Reliv International, Inc ("Reliv") to develop and manufacture a line of
private label skin care products under their brand name, ReversAge(R). Reliv is
a public company traded on NASDAQ (symbol RELV). Private label sales represented
approximately 15% of Hydron's total sales for the six months ended June 30, 2006
and 22% of sales for the six months ended June 30, 2005.

Contract Manufacturing - Through its acquisition of CRI, the Company now
manufactures consumer products for a number of companies. Products include
proprietary formulations for skin and hair care. During the six months of
combined operations ending December 31, 2005, non-Hydron Technologies, Inc.
related contract manufacturing revenue represented 30% of Hydron's total sales
and 29% of sales for the six months ended June 30, 2006.

Formulation and Commission - The Company received a $60,000 payment for
formulation services that its subsidiary Clinical Results, Inc had previously
performed. Formulation sales represented 17% of sales and Commissions
represented 5% of sales for the six months ended June 30, 2006. When certain
additional consulting services are completed, the Company expects to receive
another milestone payment and may receive continuing royalties thereafter.

RESULTS OF OPERATIONS

Results of Operations - 2006 versus 2005

Total net sales for the three months ended June 30, 2006 were $346,863,
an increase of $71,082 or 26% from net sales of $275,781 for the three months
ended June 30, 2005. Catalog Sales net sales for the three months ended June 30,
2006 were $135,421, a decrease of $36,113 or 21% from sales of the three months
ended June 30, 2005 of $171,534. Private Label and Contract Manufacturing net
sales for the three months ended June 30, 2006 were $118,654, an increase of
$40,194 or 51% from sales the three months ended June 30, 2005 of $78,460.
Formulation and commission net sales for the three months ended June 30, 2006
were $79,050, a 100% increase from the same period in 2005. Shipping and
handling revenues for the three months ended June 30, 2006 were $13,738, a
decrease of $12,049 or 47% from shipping and handling revenues for the three
months ended June 30, 2005 of $25,787.

Total net sales for the six months ended June 30, 2006 were $722,330,
an increase of $190,635 or 36% from net sales of $531,695 for the six months
ended June 30, 2005. Catalog Sales net sales for the six months ended June 30,
2006 were $291,020, a decrease of $68,136 or 19% from sales of the six months
ended June 30, 2005 of $359,156. Private Label and Contract Manufacturing net
sales for the six months ended June 30, 2006 were $325,690, an increase of

$206,580 or 173% from sales the six months ended June 30, 2005 of $119,110.
Formulation and commission net sales for the three months ended June 30, 2006
were $79,050, a 100% increase from the same period in 2005. Shipping and
handling revenues for the six months ended June 30, 2006 were $26,569, a
decrease of $26,859 or 50% from shipping and handling revenues for the six
months ended June 30, 2005 of $53,428.

The decrease in catalog sales was the result of the attrition of the
Company's customer base without marketing spending to replace those customers.
Private Label Manufacturing sales increased due to the acquisition of Clinical
Results, Inc. on July 1, 2005. Clinical Results is in the early stages of its
manufacturing facility and has helped contribute to the overall revenue.

Cost of sales was $91,094 for the three months ended June 30, 2006, a
decrease of $41,296, or 31%, from cost of sales of $132,390 for the three months
ended June 30, 2005. Cost of sales was 26% of total sales the three months ended
June 30, 2006, compared to 48% for the three months ended June 30, 2005. The
decrease in the cost of sales percentage reflects the impact of private label,
commission and formulation sales. Cost of sales for private label sales was in
direct proportion to the sales level. Cost increases are not material to catalog
sales and the private label contracts provide for a pass through of any cost
increases incurred in that segment Shipping and handling costs for the second
quarter of 2006 were $18,743, a decrease of $9,565, or 34%, from shipping and
handling cost of $28,308 for the same period in 2005. This decrease reflects the
decline in catalog sales plus savings realized by performing more of the
shipping and handling tasks in-house.

For the six months ended June 30, 2006 cost of sales was $236,818, an
increase of $7,168 or 3% from cost of sales of $229,650 for the six months ended
June 30, 2005. Cost of sales was 33% of total sales for the six months ended
June 30, 2006 compared to 43% for the six months ended June 30, 2005. The
decrease in cost of sales percentage reflects the impact of this period's
formulation and commission net sales as stated above. Shipping and handling
costs for the six months were $37,383, a decrease of $22,895 or 38% from
shipping and handling costs of $60,278 for the same period in 2005. This
decrease reflects the 19% decline in catalog sales offset by savings realized by
performing more of the shipping and handling tasks in house.

The Company's overall gross profit margin increased to 74% of net sales
for the three months ended June 30, 2006 versus 52.0% for the three months ended
June 30, 2005. This reflects the increase in formulation and commission sales as
discussed above, less the relative mix of higher margin catalog sales versus
lower margin private label sales. For the six months ended June 30, 2006 the
overall gross profit margin increased similarly to 67% of net sales versus 56.8%
for the same period in 2005.

Royalty expenses for the three months ended June 30, 2006 were $1,543
and $10,486 for the three months ended June 30, 2005. Royalty expenses for the
six months ended June 30, 2006 were $9,043 and $18,211 for the six months ended
June 30, 2005. An aggregate of $27,012 was accrued and unpaid as of June 30,
2006. This amount is adequate to cover any royalties that are payable through
June 2006.

Research and development ("R&D") expenses reflect the Company's efforts
to identify new product opportunities, obtain regulatory approval, develop and
package the products for commercial sale, perform appropriate efficacy and
safety tests, and conduct consumer panel studies and focus groups. R&D expenses
for the three months ended June 30, 2006 were $5,957 and $15,758 for the three
months ended June 30, 2005, For the six months ended June 30, 2006 R & D
expenses were $6,967, a decrease of $47,761 or 87% from R & D expenses of $
$54,728 for the same period last year. This decrease was due principally to the
Company eliminating the use of outside FDA consultants in association with its
oxygenation technology during 2005 versus 2006. The amount of annual R&D
expenses will vary year to year depending on the Company's research
requirements.

Selling, general and administrative ("SG&A") expenses for the three
months ended June 30, 2006 were $344,284, representing an increase of $127,889
or 59% from SG&A expenses of $216,395 for the three months ended June 30, 2005.
Employment expense was $147,208 for the three months ended June 30, 2006, an
increase of $67,028, or 84%, from $80,180 for the three months ended June 30,
2005. This increase was due primarily to the acquisition of Clinical Results,
Inc. on July 1, 2005 which includes new management and office support and the
bringing in house of more functions. Postage expense was $7,874 for the three
months ended June 30, 2006, a decrease of $4,130, or 34%, from $12,004 for the
three months ended June 30, 2005. This decrease was related principally to a new
catalog marketing strategy, which reduces mailing frequency to customers who
have not purchased in the last 24 months. Advertising and promotional expenses
was $21,452 for the three months ended June 30, 2006, an increase of $11,606, or
118% from $9,846 for the three months ended June 30, 2005. This increase is due
to new advertising initiatives taken by the Company to increase sales.
Warehousing expense was $921 for the three months ended June 30, 2006, a
decrease of $10,880, or 92% from $11,801 for the three months ended June 30,
2006. This decrease is due to bringing all products to one location relieving
the need for outside storage. Professional expenses (legal and audit) was
$41,824 for the three months ended June 30, 2006, an increase of $10,797 or 35%
from $31,027 for the three months ended June 30, 2005. The increase in
professional fees involved additional costs associated with the use of an
outside consultant instead of an in house CFO and additional fees for quarterly
reviews. Bad debt was $12,325 for the three months ended June30, 2006, an
increase of $12,325 or 100% from $0 for the three months ended June 30, 2005.
The increase is due to the settlement of an outstanding receivable with a
customer and write off of accounts deemed uncollectible. All other expenses were
$112,680 for the three months ended June 30, 2006, an increase of 41,143 or 58%
from $71,537 for the three months ended June 30, 2005. For the six months ended
June 30, 2006 selling, general and administrative expenses were $707,808, an
increase of $216,139 or 44% from $491,669 for the same period last year.

Depreciation and amortization expense was $25,410 for the three months
ended June 30, 2006, an increase of $16,273 or 178% from $9,137 for the three
months ended June 30, 2005. For the six months ended June 30, 2006 depreciation
and amortization were $50,820 an increase of $32,546 or 178% from $18,274 for
the same period last year. The increase was due primarily to the amortization of
the intangible of the purchase of CRI.

Net interest (expense) was ($21,528) for the three months ended June
30, 2006 compared to net interest income of $264 for the three months ended June
30, 2005. For the six months ended June 30, net interest (expense) was ($48,600)
compared to net interest income of $686 for the same period last year. The
increase in interest expense was due primarily to the interest on the loan
payable and amortization of related debt discount.

Minority interest in net loss for the three months ended June 30, 2006
was $5,139 compared to $9,666 for the three months ended June 30, 2005. Minority
interest in net loss for the six months ended June 30, 2006 was $14,188 compared
to $18,211 for the six months ended June 30, 2005. This minority interest is
created from a consolidated limited liability partnership, Hydron Royalty
Partners, LLLP, established by the Company in August 2004.

The Company had a net loss of $137,815 for the three months ended June
30, 2006, representing an increase of $39,360 or 40% from the net loss of
$98,455 for the three months ended June 30, 2005. The Company had a net loss of
$323,539 for the six months ended June 30, 2006, representing an increase of
$61,599 or 24% from the net loss of $261,940 for the six months ended June 30,
2005, primarily as a result of the factors discussed above.

LIQUIDITY AND FINANCIAL RESOURCES

The Company anticipates that present working capital balances and
internally generated funds will be sufficient to meet our working capital needs
for the next three months and maybe longer based on management decisions and
order flow. Beyond that point, it may be necessary to sell selected assets, or
obtain an infusion of capital. The Company's independent accountants issued a
"going concern" opinion on the Company's December 31, 2005 financial statements,
since the Company has incurred significant losses over the past five years and
generates a negative cash flow on a monthly basis.

On July 1, 2005, the Company acquired CRI, a St. Petersburg,
Florida-based company. CRI was a privately held product development laboratory
and contract manufacturer of cosmeceuticals and other personal care products.
CRI's clients range from mass-market retailers to marketers of high-end brands,
and of certain health food store brands.

The Company's working capital deficit was approximately ($500,000) at
June 30, 2006, including cash and cash equivalents of approximately $25,745.
Cash used by operating activities during the six months ended June 30, 2006 was
$44,159. This was offset by proceeds from financing activities of $33,623.

The Company does not have any material debt other than the loan payable
of $150,000 borrowed from three shareholders in May 2005 (see Note F), and two
capital leases for equipment purchases of $73,224. Effective August 5, 2005, the
Company relocated its offices to St Petersburg, Fl. There are no capital
expenditures under construction and no long-term commitments other than royalty
payments under an agreement with Valera Pharmaceuticals, Inc. The Company does
not have any lines of credit. There are no purchase order commitments that
exceed 90 days.

Management's plan includes implementing one or more of the following
elements:

o Emphasize and expand the marketing and manufacturing of private
label products.

o Emphasize Catalog sales, including sales made over the Internet,
since these sales have higher profit margins.

o Evaluate the possibilities of increasing direct marketing and direct
response television exposure to build brand awareness and revenues.

o Team with third parties to build the advertising and promotion of
the Hydron(R) brand, as the Company does not have the financial
resources to sustain a national advertising campaign to support
distribution of its production into retail stores.

o Develop and market new product lines based on the Company's
proprietary technologies.

o Continue to reduce overhead and operating costs.

o Obtain an infusion of capital that will sustain the Company's
operation until the newly established licensing arrangements can
produce positive cash flow.

There can be no assurances that management's plan will be successful
and the Company's actual results could differ materially. No estimate has been
made to the financial statements to account for the possibility that the plan
may be unsuccessful.

Recent accounting Pronouncements

New Accounting Standard - Accounting for Uncertainty in Income Taxes

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The following discussion and analysis of the Company's financial
condition and results of operations should be read with the condensed
consolidated financial statements and related notes contained in this quarterly
report on Form 10-QSB ("Form 10-QSB"). All statements other than statements of
historical fact included in this Form 10-QSB are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements involve known and unknown risks, uncertainties and other factors that
may cause the Company's actual results, levels of activity, performance or
achievements to be materially different than any expressed or implied by these
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue," or
the negative of these terms or other comparable terminology. Important factors
that could cause actual results to differ materially from those discussed in
such forward-looking statements include: 1. General economic factors including,
but not limited to, changes in interest rates and trends in disposable income;
2. Information and technological advances; 3. Cost of products sold; 4.
Competition; and 5. Success of marketing, advertising and promotional campaigns.
The Company is subject to specific risks and uncertainties related to its
business model, strategies, markets and legal and regulatory environment. You
should carefully review the risks described in this Form 10-QSB and in other
documents the Company files from time to time with the SEC. You are cautioned
not to place undue reliance on the forward-looking statements, which speak only
as of the date of this Form 10-QSB. The Company undertakes no obligation to
publicly release any revisions to the forward-looking statements to reflect
events or circumstances after the date of this document.

ITEM 3. CONTROLS AND PROCEDURES

As of the end of this period, the Company carried out an evaluation,
under the supervision and with the participation of management, including its
Chief Executive Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer concluded that
the Company had material weaknesses associated with insufficient personnel
resources with appropriate accounting experience and lack of controls relating
to inventory valuation and segregation of inventory. Management is currently
seeking personnel resources with appropriate accounting experience, as well as
implementing a perpetual inventory system which should mitigate these material
weaknesses in 2006.

Disclosure controls and procedures (as defined in the Exchange Act
Rules 13a-14(c) and 15d-14(c)) are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act are recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management to allow timely decisions regarding required
disclosure.

The Certifying Officer has also indicated that there were no
significant changes in our internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation,
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.

Our management, including the Certifying Officer, does not expect that
our disclosure controls or our internal controls will prevent all error and
fraud. 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. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a 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 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 systems of controls also is based in
part upon certain assumptions about the likelihood of future events, and their
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8K

(a) Exhibits:

31.1 Certification of Chief Executive Officer, Principal Financial and
Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 and Item 307 of Regulation S-K (filed herewith)

32.1 Certification of Chief Executive Officer, Principal Financial and
Accounting Officer Pursuant to 18 U.S.C., Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)

(b) Reports on Form 8-K:

None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

HYDRON TECHNOLOGIES, INC.

/s/ David Pollock
-----------------
David Pollock
Chief Executive Officer
Principal Financial and Accounting Officer

Dated: August 14, 2006