Edgar Filing: HYDRON TECHNOLOGIES INC

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

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Quarterly Period Ended: SEPTEMBER 30, 2005
------------------

[ ] 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 North, Suite F
St Petersburg, FL 33714
-------------------------------
(Address of Principal Executive Offices) (Zip Code)

(727) 342-5050
--------------
(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

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). [_] Yes [X] No

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [_] Yes [X] No

Number of shares of common stock outstanding as of November 21, 2005: 11,927,236

TABLE OF CONTENTS

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

Item 1. Financial Statements (Unaudited) ................................ 3

Condensed Consolidated Balance Sheets -
September 30, 2005 and December 31, 2004 ...................... 3

Condensed Consolidated Statement of Operations -
Three and nine months ended September 30, 2005 and 2004 ....... 4

Condensed Consolidated Statement of Shareholders' Equity
Nine months ended September 30, 2005 and 2004 ................. 5

Condensed Consolidated Statements of Cash Flow -
Nine months ended September 30, 2005 .......................... 6

Notes to Condensed Consolidated Financial Statements ............ 7

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 14

Item 4. Controls and Procedures ......................................... 20

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

Item 6. Exhibits ........................................................ 21

Signatures ............................................................... 22

Certification of Chief Officers Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and Item 307 of Regulation S-K ............. EX 31

Certification Pursuant to 18 U.S.C., Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ............. EX 32

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

HYDRON TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, DECEMBER 31,
2005 2004
(UNAUDITED) Note
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents ...................... $ 55,481 $ 339,679
Restricted cash ................................ 118,894 -
Trade accounts receivable ...................... 76,565 9,614
Inventories .................................... 492,082 481,996
Prepaid expenses and other current assets ...... 26,266 67,190
------------ ------------
Total current assets ....................... 769,288 898,479

Property and equipment, less accumulated
depreciation of $225,435 and $209,329 at
2005 and 2004, respectively .................. 26,235 12,673
Deposits ......................................... 9,348 19,587
Deferred product costs, less accumulated
amortization of $181,182 and $162,135 at
2005 and 2004, respectively .................. 166,008 189,683
Deferred financing costs ......................... 20,097 -
Intangible ....................................... 241,311 -
------------ ------------
Total Assets ............................... $ 1,232,287 $ 1,120,422
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ............................... $ 189,379 $ 90,440
Loans payable .................................. 154,440 751
Royalties payable .............................. 27,512 29,132
Deferred revenues .............................. 101,147 91,180
Accrued liabilities ............................ 238,414 229,953
------------ ------------
Total current liabilities .................... 710,892 441,456

Commitments and contingencies
Minority interest in consolidated partnership .... 258,076 285,191

Shareholders' equity
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; 11,320,336
shares issued and 9,320,336 shares outstanding
at 2005; and 2004, respectively .............. 113,203 93,203
Additional paid-in capital ..................... 21,004,310 20,736,049
Accumulated deficit ............................ (20,846,378) (20,427,661)
Treasury stock, at cost 10,000 shares at 2005
and 2004 ..................................... (7,816) (7,816)
------------ ------------
Total Shareholders' equity ................... 263,319 393,775

------------ ------------
Total liabilities and shareholders equity .... $ 1,232,287 $ 1,120,422
============ ============

Note: The balance sheet at December 31, 2004 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

HYDRON TECHNOLOGIES, INC.
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------

Net sales ............................... $ 403,704 $ 200,975 $ 935,399 $ 923,204
Cost of sales ........................... 163,507 75,324 393,157 378,776
------------ ------------ ------------ ------------
Gross profits ........................... 240,197 125,651 542,242 544,428

Expenses
Royalty expense ....................... 7,500 4,565 25,711 27,384
Research and development .............. 9 46,946 54,737 168,389
Selling, general & administration ..... 382,718 318,666 874,387 926,681
Depreciation & amortization ........... 9,137 8,550 27,411 25,650
------------ ------------ ------------ ------------
Total expenses ...................... 399,364 378,727 982,247 1,148,104

------------ ------------ ------------ ------------
Operating loss .......................... (159,167) (253,076) (440,005) (603,676)

Interest income - net of interest expense (6,515) 942 (5,829) 2,604
------------ ------------ ------------ ------------
Loss before income taxes ............ (165,682) (252,134) (445,834) (601,072)

Minority interest in net loss ........... 8,904 15,448 27,115 15,448
Income taxes expense .................... - - - -
------------ ------------ ------------ ------------
Net loss ............................ $ (156,778) $ (236,686) $ (418,718) $ (585,624)
============ ============ ============ ============

Basic and diluted loss per share
Net loss per common share ............. $ (0.01) $ (0.03) $ (0.04) $ (0.06)
============ ============ ============ ============

Weighted average shares
outstanding (basic and diluted) ....... 11,260,136 9,260,136 9,934,129 9,260,136
============ ============ ============ ============

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

HYDRON TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

COMMON STOCK PREFERRED STOCK ADDITIONAL TREASURY
-------------------- --------------- PAID-IN ACCUMULATED STOCK TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (AT COST) EQUITY
---------- -------- ------ ------ ----------- ------------ -------- ---------

Balance at
December 31, 2004 9,320,336 $ 93,203 - - $20,736,049 $(20,427,661) $ (7,816) 393,775

Warrents issued
in connection with
loan payable 24,000 24,000

Issuance of Common
shares for CRI
acquisition 2,000,000 20,000 - - 240,000 - 260,000

Compensation
expense from stock
option awards - - - - 4,261 - - 4,261

Net loss - - - - - (418,718) - (418,718)
---------- -------- ------ ------ ----------- ------------ -------- ---------
Balance at
September 30, 2005 11,320,336 $113,203 - $ - $21,004,310 $(20,846,378) $ (7,816) $ 263,319
========== ======== ====== ====== =========== ============ ======== =========

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

HYDRON TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)

NINE MONTHS ENDED
SEPTEMBER 30,
2005 2004
--------- ---------
Operating activities
Net loss ......................................... $(418,718) $(585,624)
Adjustments to reconcile net loss to
net cash used by operating activities
Minority Interest ............................ (27,115) -
Depreciation and amortization ................ 27,411 25,650
Stock options issued to employees ............ 4,261 -
Deferred financing costs ..................... 3,903 -
Change in operating assets and liabilities
Trade accounts receivables ................... (30,844) 9,254
Inventories .................................. 2,414 (5,822)
Prepaid expenses and other current assets .... 43,986 (10,025)
Deposits ..................................... 12,455 -
Accounts payable ............................. 53,310 30,464
Royalties payable ............................ (1,620) (100,600)
Deferred revenues ............................ 9,967 (71,351)
Interest payable ............................. 4,440 -
Accrued liabilities .......................... (5,380) 26,189
--------- ---------
Net cash used in operating activities .......... (321,530) (681,867)

Investing activities
Restricted cash .................................. (118,894) -
Deferred product costs ........................... - (4,739)
Cash acquired .................................... 6,977 -
--------- ---------
Net cash used in investing activities .......... (111,917) -

Financing activities
Loan payable, proceeds, net ................... 149,249 (2,966)
Change in amount due minority interest ......... - 284,552
--------- ---------
Net cash provided from financing activities .... 149,249 281,586

Net decrease in cash and cash equivalents ...... (284,198) (400,281)

Cash and cash equivalents at beginning of period ... 339,679 964,723

--------- ---------
Cash and cash equivalents at end of period ......... $ 55,481 $ 564,442
========= =========

Supplemental cash flow information
Warrents issued in connection with loans payable ... $ 24,000 -
Stock issued in acquisition ........................ 260,000 -

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

HYDRON TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management of Hydron Technologies, Inc. (the "Company"), all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three and
nine month periods ended September 30, 2005 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2005. For
further information, refer to the financial statements and footnotes included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2004.

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 accompanying consolidated financial statements for the period ended
September 30, 2005 and September 30, 2004 include the accounts of Hydron
Technologies, Inc. and its subsidiary, Hydron Royalty Partners Ltd LLP. All
significant intercompany accounts and transactions have been eliminated.

Restricted cash

At September 30, 2005, the Company had restricted cash of $118,894, which
represents funds from a consolidated entity, that are not available for use in
the Company's normal operations.

Stock Compensation

When the Company issues shares of common stock in exchange for services, an
expense is recognized over the period in which the services are rendered. The
expense is based upon the fair value of such shares, in accordance with FASB
statement No. 123 using a Black-Scholes pricing model, at the date such
arrangements are consummated or authorized by the Board of Directors, with a
corresponding credit to capital.

The Company has elected to follow Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its stock options and has adopted the disclosure-only provisions
of FASB Statement No. 123, "Accounting and Disclosure of Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
Company's stock option plans.

In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." The Company has elected to use the
intrinsic value method of accounting for stock compensation in accordance with
APB No. 25 and related interpretations. Had the compensation expense for the
stock option plan been determined based on the fair value of the options at the
grant date consistent with the methodology prescribed under Statement of
Financial Standards No. 123, "Accounting for Stock Based Compensation," at
September 30, the Company's net income and earnings per share would have been
reduced to the proforma amounts indicated below:

HYDRON TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2005
----------

Net loss, as reported .............. $ (418,718)
----------

Pro Forma net loss ................. $ (432,737)
==========

Basic and diluted loss per share
As reported ....... $ (0.04)
==========
Pro forma ......... $ (0.04)
==========

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123R "Share-Based Payment" ("SFAS
123R"), a revision to SFAS No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123"), and superseding APB Opinion No. 25 "Accounting for Stock Issued to
Employees" and its related implementation guidance. SFAS 123R establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services, including obtaining employee services
in share-based payment transactions. SFAS 123R applies to all awards granted
after the required effective date and to awards modified, repurchased, or
cancelled after that date. Adoption of the provisions of SFAS 123R is effective
as of the beginning of the first interim or annual reporting period that begins
after June 15, 2005. The Company is currently in the process of evaluating the
potential impact that the adoption of SFAS 123R will have on its consolidated
financial position and results of operations.

SFAS No. 154, Accounting Changes and Error Corrections, was issued in May 2005
and replaces APB Opinion No. 20 and SFAS No. 3. SFAS No. 154 requires
retrospective application for voluntary changes in accounting principle in most
instances and is required to be applied to all accounting changes made in fiscal
years beginning after December 15, 2005. The Company's expected April 1, 2006
adoption of SFAS No. 154 is not expected to have a material impact on the
Company's consolidated financial condition or results of operations.

NOTE B - INVENTORIES

Inventories consist of the following:

SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------

Finished Goods ............... $129,560 $ 93,312
Raw materials and components . 362,522 388,684
-------- --------

$492,082 $481,996
======== ========

NOTE C - DISTRIBUTION

The majority of the Company's products are currently sold in the United States
through the Company's direct marketing channels (proprietary Catalog and the Web
site), and to a lesser extent through salons and doctors' offices, and
internationally. The Company also sells its products to private label customers.

HYDRON TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE D - EARNINGS PER SHARE

On January 25, 2005, the Board of Directors, by unanimous consent, re-authorized
the issuance of 743,500 stock options from the 2003 Stock Plan to Directors and
Officers of the Company. Since the original approval date was more than 12
months before the shareholder adoption of the 2003 Stock Plan, the options had
to be re-authorized to include them under the plan.

Options to purchase 228,500 shares were granted to employees during the nine
months ended September 30, 2005, necessitating adjustments to the pro forma
information regarding net income and earnings per share as required by FASB
Statement No. 123. The Company recognized $4,261 in compensation expense at
September 30, 2005.

Pro forma information regarding net income and earnings per share is required by
FASB Statement No. 123, which also requires that the information be determined
as if the Company had accounted for its stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. 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
years ended September 30, 2005:

2005
-------

Risk-free interest rate ..... 4.0%
Expected life ............... 5 YEARS
Expected volatility ......... 106%
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 E - ACQUISITION

On July 1, 2005, the Company acquired all the outstanding common stock of
Critical Results, Inc. (CRI) as consideration, the Company issued 2,000,000
shares of common stock (fair value of $260,000). The acquisition was accounted
for using the purchase method of accounting. The results of operations are
included in the consolidated statements of operations since the date of
acquisition. Intangible assets of $241,311 was recorded in this transaction
which is being amortized over 10 years using the straight line method.

HYDRON TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following summarizes the fair value of the assets of CRI acquired and the
liabilities of CRI assumed:

Cash .......................... $ 6,977
Accounts receivable ........... 36,107
Inventory ..................... 12,500
Prepaid assets ................ 3,062
Deposits ...................... 2,216
Property and equipment, net ... 17,297
Accounts payable .............. 45,629
Other liabilities ............. 13,841
-------

NET ASSETS ................ $18,689
=======

NOTE F - 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:

SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------

Dividends payable ........ $ 83,163 $ 83,163
Director fees payable .... 96,019 81,016
Legal fees ............... 30,440 40,754
Other .................... 28,792 25,020
-------- --------
$238,414 $229,953
======== ========

NOTE G - 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 (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

HYDRON TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock. Under the terms of the Notes, "Average Market Price" means the average
closing sale price for a share of Common Stock measured (x) over the last ten
trading days of the month preceding the interest payment date or, (y) 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 $4,440 in stock of the Company and issued 44,000 shares at
$.10 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 will be amortized as additional
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:

SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------

Loan Payable .................. $ 150,000 $ 751
Accrued interest .............. 4,440 -
--------- -----

$ 154,440 $ 751
========= =====

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 and maybe longer based on management decisions and sales. The
Company's independent accountant issued a "going concern" opinion 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 certain
health food store brands, and marketers of high end brands.

HYDRON TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

Under the terms of the agreement, Hydron Technologies acquired all of the
outstanding shares of capital stock of CRI in consideration of an aggregate of
two million newly-issued shares of the Company, in a transaction exempt from
registration under the securities laws. Such shares will be subject to transfer
restrictions unless registered under federal and applicable state securities
laws or sold in a transaction exempt from registration.

Additionally, Hydron restructured both its management and its Board of
Directors. David Pollock, the President of CRI, was appointed Chief Executive
Officer of the Company and joined Hydron's Board, replacing Joshua Rochlin, who
resigned from the Board on March 31, 2005. Douglas Reitz, M.D., CRI's co-owner,
was appointed Executive Vice President of Hydron. As part of the arrangement,
the Company entered in to a three-year employment agreement with Mr. Pollock and
Dr. Reitz, each with an annual salary of $106,000.

Effective August 5, 2005, Terrence S. McGrath, the Company's Chief Operating
Officer, resigned in order to pursue other career opportunities. Mr. McGrath's
responsibilities were assumed by Mr. Pollock, Hydron's Chief Executive Officer.

In an effort to reduce operating expenses, the Company has consolidated
operations by relocating Hydron Technologies' headquarters and certain
warehousing facilities to the CRI manufacturing facility. While CRI will
continue to provide contract manufacturing services, the Company has renamed the
CRI operation as Hydron Technologies. The Company will continue its cost cutting
efforts by reducing research and development costs, and cost of goods by
manufacturing certain products in-house.

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.

On October 24, 2005 the Company received proceeds of $112,500 through the
partial exercise of certain warrants. (Note I)

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.

HYDRON TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE I - SUBSEQUENT EVENTS

On October 24, 2005 the Company received proceeds of $112,500 through the
partial exercise of certain warrants relating to a previous private placement of
its securities in December 2002. These funds were received from three
individuals including two individuals who are (i) the Chairman of the Board and
Interim President, and (ii) a second director of the Company.

On October 24, 2005, the Board of Directors of Hydron Technologies, Inc., a New
York corporation (the "Company"), adopted a resolution authorizing the extension
of the exercise period for certain options to purchase common stock (the
"Options") granted in connection with a private placement of securities by the
Company from December 9, 2005 to December 9, 2007 (the "New Expiration Date") in
consideration of the agreement of certain holders to immediately exercise 50% of
the Options and purchase the underlying common stock. The shares underlying the
original Options were registered by the Company under the Securities Act of
1933, as amended (the "Securities Act"). The shares of common stock underlying
the Options totaled 1,750,000 shares or approximately 13.4% of the total
outstanding shares of the Company.

Richard Banakus, the acting Chairman and a director, and Ronald J. Saul, a
director of the Company, together with his spouse, Antonette G. Saul, are among
the holders of the Options. Mr. Banakus assigned for nominal consideration
certain of his Options exercisable for 250,000 shares to Mr. Saul and effective
October 27, 2005 exercised Options representing an aggregate of 250,000 shares
of common stock in consideration of the extension of the exercise period to the
New Expiration Date for Options representing an aggregate of 750,000 shares of
common stock. Mr. Saul exercised Options effective October 28, 2005,
representing an aggregate of 250,000 shares and had Options representing an
aggregate of 125,000 extended to the New Expiration Date. In addition, certain
other holders of Options exercised Options representing an aggregate of 62,500
shares and had the exercise period for Options representing an aggregate of
62,500 shares extended to the New Expiration Date bringing the total number of
shares represented by the new Options (the "New Options") exercisable at any
time prior to the New Expiration Date to 937,500 or approximately 7.6% of the
total outstanding shares.

Each party receiving New Options is an "accredited investor" as defined in Rule
501(a) under the Securities Act of 1933, as amended (the "Securities Act"). The
Company issued the New Options without registration under the Securities Act in
reliance on the exemptions from registration provided by Rule 506 of Regulation
D and Section 4(2) of the Securities Act.

The Company received no proceeds for the issuance of the New Options other than
proceeds from the exercise of Options pursuant to the agreement of holders of
Options to exercise certain Options and proceeds the Company may receive upon
exercise of the New Options. The Company intends to use the proceeds of the
exercise of the Options and the New Options for general working capital
purposes.

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

BUSINESS

Hydron Technologies develops, manufactures and markets a broad range of
cosmetic, personal care and oral health care products using a patented
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. 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.

The Company's other proprietary technologies include: patented polymer skin care
formulas that provide superior skin moisturization benefits and sunscreen
delivery; a patented formula for a wrinkle reduction serum; and patent-pending
technology associated with an evaporating emulsifier used in cosmetic treatments
and acne products, that allows these topical formulations to self-adjust to the
individual.

Management believes the Company's proprietary and patented technologies and
finished goods product lines are unique and offer many advantages over other
personal care product lines. 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, offer
the formulations under private label or contract manufacturing, and/or develop
and market proprietary products through its own efforts.

While the Company will continue providing contract manufacturing and private
label service, its primary focus is to build awareness and distribution of the
Hydron(R) branded personal care products.

Catalog Sales - The Company's catalog business offers personal care products for
sale directly to consumers. Customers can call and order directly from the
Company or via Hydron's website. The Company is continuing to explore new ways
to enhance Catalog sales and operations through various advertising and sampling
campaigns, and is evaluating retail distribution of its brands and formula
technologies in salons, spas and other specialty locations.

Private Label Contracting - The Company contract manufactures for a number of
name brands that sell products through television shopping channels, direct
response television, mass market retailers, high-end department stores,
dermatologists, etc. In addition, the Company has an agreement with 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 19.2% of Hydron's total annual sales in 2004. Private label sales
accounted for 36.8% of total sales during the nine months ended September 30,
2005.

International - The Company sells products to an Australia-based health and
beauty products distributor for retail sale in salon stores and medical offices
in Australia and New Zealand. The Company also distributes dental products in
Spain and, to a lesser extent, other countries. Although this category is not
significant at this time, management believes that it can expand with the
introduction of the Company's brands and technologies to various international
distributors, retailers and/or representatives.

Retail - The Company has established minor levels of retail distribution.
Management is evaluating various retail channels of distribution, but
anticipates that any significant retail effort involving core Hydron products
would require investment in repackaging.

On July 7, 2005, the Company received a Notice of Allowance for Patent
Application #20030165552 for the Compositions and Methods for Delivery of
Cosmeceuticals. Management believes the final issuance of the patent will be
during the fourth quarter of 2005. This Patent covers a unique method of
emulsification whereby the emulsifier evaporates shortly after application;
thus, allowing the residual product to adjust to the skins natural Ph. The
Company believes, based on current scientific knowledge, that this unique
benefit provides a significant advance over current competitive delivery systems
in skin care. Once issued, the Company may seek to license this unique
technology.

The Company has made a significant investment in the research and development of
products and medical applications utilizing its patented tissue oxygenation
technology. Its research and development efforts during 2004 concentrated on
accumulating data for a Food and Drug Administration (FDA) application related
to the oxygenation technology. A formal Request For Designation (RFD) was filed
with the FDA in September 2004 to request that the FDA designate the Hydron
MicroO2 Oxygenation Apparatus as a medical device. The FDA agreed in October
2004. On January 10, 2005, the Company attended a Pre-Investigational Device
Exemption meeting with the FDA to present the device, however, a clear pathway
for safety and clinical research requirements could not be determined at that
time. It was suggested that filing a complete 510(k) application would provide
the FDA with an opportunity to review additional information from Hydron. The
Company is considering if and when to pursue the 510(k) filing.

RESULTS OF OPERATIONS

Total net sales for the three months ended September 30, 2005 were $403.704, an
increase of $200,729 from net sales of $200,975 for the three months ended
September 30, 2004. Catalog Sales net sales for the three months ended September
30, 2005 were $155,705, a decrease of $15,374 or 9.0% from sales of $171,079 for
the three months ended September 30, 2004. Private Label Manufacturing net sales
for the three months ended September 30, 2005 were $225,011, an increase of
$223,136 from sales of $1,875 for the three months ended September 30, 2004.
Shipping and handling revenues for the three months ended September 30, 2005
were $22,988, a decrease of $1,838 or 7.4% from shipping and handling revenues
of $24,826 in the three months ended September 30, 2004.

For the nine months ended September 30, 2005, total net sales were $935,399, an
increase of $12,195 or 1.3% from net sales of $923,204 for the nine months ended
September 30, 2004. Catalog Sales net sales for the nine months ended September
30, 2005 were $514,861, a decrease of $101,901 or 16.5% from sales of $616,762
for the nine months ended September 30 2004. Private Label Manufacturing net
sales for the nine months ended September 30, 2005 were $341,392, an increase of
$128,160 or 60.1% from sales of $213,232 for the nine months ended September 30,
2004. Shipping and handling revenues for the nine months ended September 30,
2005 were $76,417, a decrease of $11,425 or 13.0% from shipping and handling
revenues of $87,842 in the nine months ended September 30, 2004.

Catalog Sales decreased due to the Company transferred its customer care center
and upgraded the order taking systems and pick/pack operation in an effort to
reduce operational costs. Additionally, the Company began work on the new
website, which launched at the end of October of this year. During the three
months ended September 30, 2005 the Company went two months without being able
to take orders on the internet, which management feels may have reduced some of
the anticipated sales. 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 $163,507 for the three months ended September 30, 2005, an
increase of $88,183 or 117.1% from cost of sales of $75,324 for the three months
ended September 30, 2004. Cost of sales was 40.5% of total sales the three
months ended September 30, 2005 compared to 37.5% for the three months ended
September 30, 2004. The increase in cost of sales percentage reflects the impact
of this period's Private Label Manufacturing sales, that included private label
sales with unusually high product cost (41.3% of sales), versus the product cost
of catalog sales (21.0% of catalog sales.) Shipping and handling costs for the
third quarter of 2005 were $24,644, a decrease of $5,162 or 17.3% from shipping
and handling costs of $29,806 for the same period in 2004. This decrease
reflects the 9.0% decline in catalog sales plus savings realized by performing
more of the shipping and handling tasks in house.

For the nine months ended September 30, 2005 cost of sales was $393,157, an
increase of $14,381 or 3.8% from cost of sales of $378,776 for the nine months
ended September 30, 2004. Cost of sales was 42.0% of total sales for the nine
months ended September 30, 2005 compared to 41.0% for the nine months ended
September 30, 2004. The increase in cost of sales percentage reflects the impact
of this period's private label sales as stated above. Shipping and handling
costs for the nine months were $84,922, a decrease of $12,822 or 13.1% from
shipping and handling costs of $97,744 for the same period in 2004. This
decrease reflects the 16.5% decline in catalog sales plus savings realized by
performing more of the shipping and handling tasks in house.

The Company's overall gross profit margin decreased to 59.5% of net sales for
the three months ended September 30, 2005 versus 62.5% for the three months
ended September 30, 2004. This is due primarily to the lower margin private
label sales and, to a lesser degree the costs discussed above. For the nine
month ended September 30, 2005 the overall gross profit margin decreased
similarly to 58.0% of net sales versus 59.0% for the same period in 2004.

Royalty expenses for the three months ended September 30, 2005 were $7,500 an
increase of $2,935, or 64.3%, from royalty expenses of $4,565 for the three
months ended September 30, 2004. Royalty expenses for the nine months ended
September 30, 2005 were $25,711; a decrease of $1,673, or 6.1%, from royalty
expenses of $27,384 for the nine months ended September 30, 2004.

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 September 30, 2005 were $9, a decrease of $46,937 or
99.98% over R&D expenses of $46,946 for the three months ended September 30,
2004. For the nine months ended September 30, 2005 R&D expenses were $54,737, a
decrease of $113,652 or 67.5% from R&D expenses of $168,389 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 2004. The amount of annual R&D expenses will vary year to year
depending on the Company's research requirements. This decrease is due
principally to the Company's reduced use of outside consultant. 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 September 30, 2005 were $382,718, representing an increase of $64,052 or
20.1% from SG&A expenses of $318,666 for the three months ended September 30,
2004. Employment expense was $181,368 for the three months ended September 30,
2005, an increase of $45,558 or 33.5% from $135,810 for the three months ended
September 30, 2004. This increase was due primarily to the acquisition of
Clinical Results, Inc. on July 1, 2005 which includes new management, office
support, the moving of manufacturing and shipping in house, severance expense
and operating two offices for two months. Moving expense was $12,625 for the
three months ended September 30, 2005, an increase of $12,625 or 100%, from $0
for the three months ended September 30, 2004. Moving expenses increased $12,625
due to the relocation of the Company's operations to the Clinical Results, Inc.
manufacturing facility. Postage expense was $10,614 for the three months ended
September 30, 2005, a decrease of $7,302 or 40.8%, from $17,916 for the three
months ended September 30, 2004. 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. All other expenses were $178,111 for
the three months ended September 30, 2005, an increase of $13,171 or 8.0% from
$164,940 for the three months ended September 30, 2004. For the nine months
ended September 30, 2005 selling, general, and administrative expenses were
$874,387, a decrease of $52,294 or 5.6% from $926,681 for the same period last
year.

Depreciation and amortization expense was $9,137 for the three months ended
September 30, 2005, an increase of $587 or 6.9% from $8,550 for the three months
ended September 30, 2004. For the nine months ended September 30, 2005
depreciation and amortization were $27,411, an increase of $1,761 or 6.9% from
$25,650 for the same period last year.

Net interest income (expense) was $(6,515) for the three months ended September
30, 2005 compared to net interest income of $942 for the three months ended
September 30, 2004. The Company maintains a conservative investment strategy
with respect to its cash balances, deriving investment income primarily from
U.S. Treasury securities. The increase in interest expense was primarily due to
the interest on the loan payable and the warrants in 2005.

The Company had a net loss of $156,778, representing a decrease of $79,908 or
33.8% for the three months ended September 30, 2005 from the net loss of
$236,686 for the three months ended September 30, 2004, a result primarily of
the factors discussed above.

For the nine months ended September 30, 2005, the company had a net loss of
$418,718, an decrease of $166,906 or 28.5% from net loss of $585,624 for the
nine months ended September 30, 2004. The decrease in the net loss is a result
primarily 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 its working capital needs for the
next three months, perhaps longer based on management decisions and order flow.
Beyond that point, it will be necessary to consummate a merger, sell selected
assets, or obtain an infusion of capital. On July 1, 2005 the Company acquired
Clinical Results, Inc. The Company's independent accountants issued a "going
concern" opinion since the Company has incurred significant losses over the past
five years and generates a negative cash flow on a monthly basis.

The Company's working capital was approximately $58,396 as of September 30,
2005, including cash and cash equivalents of approximately $55,481. Cash used by
operating activities was $321,530.Net cash used by investing activities was
$111,917 and net proceeds from financing activities were $149,249.

The Company does not have any material debt other than the loan payable of
$150,000 borrowed from three investors on May 2005 (see Note F), long-term
capital leases, or long-term operating leases. 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.

The Company's independent accountants issued a "going concern" opinion since the
Company has incurred significant losses over the past five years and generates a
negative cash flow on a monthly basis. The ability of the Company to continue as
a going concern is dependent upon increasing sales, managing operating expenses
and obtaining additional equity financing.

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

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 building 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 in to 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 Obtaining 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.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The statements contained in this Report on Form 10-K that are not purely
historical are 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, including statements regarding the Company's expectations, hopes,
intentions, beliefs or strategies regarding the future, including, without
limitation, its plans regarding distribution and marketing of its products and
the development, acquisition and marketing of new products. Forward-looking
statements include the Company's liquidity, anticipated cash needs and
availability, and the anticipated expense levels under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations." All
forward-looking statements included in this document are based on information
available to the Company on the date of this report, and the Company assumes no
obligation to update any such forward-looking statement. It is important to note
that the Company's actual results could differ materially from those expressed
or implied in such forward-looking statements.

Each forward-looking statement reflects the Company's current view of future
events and is subject to risks, uncertainties, and other factors that could
cause actual results to differ materially from any results expressed or implied
by the forward-looking statements. Important factors that could cause actual
results to differ materially from the results expressed or implied by any
forward-looking statements include:

o The volatility of the price of the Company's Common Stock;

o The Company's ability to fund future growth;

o The Company's ability to be profitable;

o The Company's ability to attract and retain qualified personnel;

o The Company's ability to effectively relocate operations to its new
facility in St Petersburg , Fl

o The ability of the new management to effectively execute the Company's
operating plan and continue operations

o General economic conditions in the medical and cosmetic markets;

o Market demand for and market acceptance of the Company's products;

o Legal claims against the Company, including, but not limited to claims
of patent infringement;

o The Company's ability to protect its intellectual property;

o Defects in the Company's products;

o The Company's obligation to indemnify certain customers;

o The Company's dependence on contact manufacturers and suppliers;

o The Company's dependence on a small number of customers for revenue
with respect to its private label products;

o The Company's ability to develop and maintain relationships with key
vendors;

o New regulations and legislation;

o General economic and business conditions;

o Other risks and uncertainties disclosed in the Company's Annual Report
on Form 10-K for the year ended December 31, 2004 and in the Company's
other filings with the SEC.

All subsequent forward-looking statements relating to the matters described in
this document and attributable to us or to persons acting on the Company's
behalf are expressly qualified in their entirety by such factors. The Company
has no obligation to publicly update or revise these forward-looking statements
to reflect new information, future events, or otherwise, except as required by
applicable Federal securities laws, and the Company cautions you not to place
undue reliance on these forward-looking statements.

RECENT ACCOUNTING PRONOUNCEMENTS

ITEM 4. 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's disclosure controls and procedures are effective to timely alert
them to material information required to be included in the Company's Securities
Exchange Act of 1934 filings.

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

(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)

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: November 22, 2005