A typical insider signal that gets me analyzing a company's financials is one that shows several insiders buying large dollar amounts of their own company's shares, leading to large percentage increases in their stakes.

Most weeks I can find a handful of companies with this type of pattern by looking at Form 4 purchases filed at the

Securities and Exchange Commission

, but sometimes a significant insider signal takes time to form. Such was the case with

Isolyser

(OREX)

Although the insider buying filed a couple of weeks ago for Isolyser was minimal (president Dan Lee purchased only $18,400 worth), a look at the past two years of insider history on Isolyser proved much more interesting than I expected.

During 2000, four executives picked up a total of 76,000 shares as their stock trended higher from the penny-stock junk pile it had landed on earlier this year. I like to see insiders averaging up, since this indicates that the execs believe that the factors moving the stock upward are likely to continue. I also notice that all four insiders have increased their holdings significantly on a percentage basis. Two of the purchasers were also smart enough to sell some stock in early 2000 for around $4.50 a share when it was headed south.

So even though the total dollar values of insider purchases at Isolyser are low compared with what I see at many firms that made the recommended list of my

InsiderInsights

newsletter, I deemed the pattern significant enough to justify looking into Isolyser's financial prospects. After all, not all insiders are multimillionaires with stippled headshots ready and waiting at the

Wall Street Journal

for the next story about rock-star managers.

The sexy part of Isolyser's business is its Orex Technologies International division. OTI has developed a proprietary disposable material called Orex that can be made into woven fabrics for towels, gowns, gauze, drapes and the like. This material can also be turned into a nonwoven, plastic-like fabric to make fluid collection bags and protective gear.

Used Orex can be dissolved in hot water in a proprietary processor, and much of the resultant solution is safe enough to dump down a drain.

Orex was the original flagship product of Isolyser, and a few years ago the company believed it would gain a large foothold in the market for infectious waste disposal in hospitals. The system worked, but unfortunately for the company, the cost to hospitals to dispose of hazardous and infectious materials through established channels came down, and hospitals could not justify purchasing Isolyser's products.

As a result, the company lost buckets of money in the mid-1990s, and Isolyser became a penny stock earlier this year. Even after smartening up in 1999, when it licensed other firms to market Orex products to the health care market, the OTI division still lost money. In the first nine months of 2001, OTI cost Isolyser $1.5 million in operating earnings.

But there may be promise in Orex yet. The system recently tested well for use within a nuclear power facility, and the company believes that an alliance with an established laundry company servicing nuclear plants could take the OTI unit to break-even in 2002.

Though the Orex product is not the reason to purchase shares of Isolyser, it is a tantalizing product line looking for a market. And since it is no longer bleeding the company financially, Orex is a sweetener to Isolyser's basic investment thesis, which I believe is its Microtek subsidiary. Microtek is the core of Isolyser's infection control group, and it produces specialized plastic drapes used in operating rooms and elsewhere in the health care environment.

This may not be sexy, but the importance of this group has been growing steadily. In 1998, 1999 and 2000, sales of Microtek products accounted for about 33%, 59% and 92%, respectively, of Isolyser's total revenues.

MicroTek dominates its little niche, selling its more than 2,500 products through its own direct sales force, as well as partnering with large distributors such as

Cardinal Health

(CAH) - Get Report

and

Owens & Minor

(OMI) - Get Report

.

The recent growth in the number of noninvasive surgeries being performed is a major factor in Microtek's revenue growth. These procedures require more equipment in the operating room, and that equipment has to be covered.

Bolstering the importance of this segment, Isolyser purchased Deka Medical in the first quarter of 2001. Deka has products that are complementary to Microtek's, and it was also the subsidiary's major competitor.

Isolyser stock has fallen mightily from the $24 it hit in 1995. But a management change at the end of 2000 has put Isolyser in better hands. New CEO Dan Lee and new CFO Jerry Wilson both came from Microtek. They are CPAs by training, and so far their focus on the numbers is working.

After posting $16.3 million in revenue in the first quarter of this year, the company registered an impressive $21.9 million top line in the three months ended Sept. 30. Operating profit and net income both more than tripled over the same time, proving that costs are being kept under control. The company's cash position also seems to have stabilized at just over $9 million, or 22 cents per share.

Isolyser has enough trading volume for individuals, and even smaller money managers, to feel comfortable taking a position. Now averaging 85,000 shares a day, volume has been on the rise recently.

There are no estimates for the company, because Wall Street abandoned its stock long ago. But even after popping a bit last week, Isolyser is still trading for just 14 to 18 times the 14 cents to 18 cents a share I expect Isolyser to earn in 2001. This seems cheap considering the earnings growth the company has the potential to register over the next two years.

Finally, forward-looking statements by president Dan Lee in his third-quarter press release are hopeful. "Excluding any acquisitions, our forecast for 2002 includes a double-digit revenue growth rate, revenues in excess of $90 million and an increase in net earnings over 2001 of at least 50%."

So insiders appear to have shown us to a beaten-down microcap in the midst of a turnaround. With its core business showing increases in revenues and margins, and its namesake unit supplying the potential for more upside, Isolyser looks like a good microcap addition to a balanced portfolio.

Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights and founder of the Web site InsiderInsights.com. At the time of publication, Moreland had a position in Isolyser, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland invites you to send comments on his column to

jonathan@insiderinsights.com.

TheStreet.com and Moreland are parties to a joint marketing agreement relating to InsiderInsights, a weekly newsletter written and owned by Moreland. Under the agreement, TheStreet.com provides marketing services, including promotion of InsiderInsights on TheStreet.com's Web properties and in his columns that appear on those properties. In exchange for these services, Moreland shares with TheStreet.com a portion of the revenue generated by subscriptions to InsiderInsights resulting from those marketing efforts.