**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





**Washington,
      D.C. 20549**







**FORM
      10-KSB**




(Mark
      One)





x ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
      THE
      FISCAL YEAR ENDED DECEMBER 31, 2007.





o TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
      OF
      1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .





Commission
      File Number: 0-26694


**SPECIALIZED
        HEALTH
        PRODUCTS
        INTERNATIONAL,
        INC****.**


(Name
      of
      small business issuer in its charter)





**Delaware**
            
            **93-0945003**(State
                or other jurisdiction of incorporation)
            
            (I.R.S
                Employer Identification No.)**585
                West 500 South, Bountiful, Utah 84010**
            
            **84010**(Address
                of principal executive offices)
            
            (Zip
                Code)





Issuer’s
      telephone number: (801) 298-3360





Securities
      registered under Section 12(b) of the Exchange Act:





None.





Securities
      registered under Section 12(g) of the Exchange Act:





Common
      Stock, par value $.02 per share


(Title
      of
      class)





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act: Yes o No
x .





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 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. Yes x No
o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of the registrant's knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
o No
x .





State
      issuer’s revenues for its most recent fiscal year: $18,923,627





The
      aggregate market value of the common stock held by non-affiliates ( *i.e.,* does
      not
      include directors, executive officers or ten percent stockholders identified
      in
      Item 11 hereof) of the issuer as of March 10, 2008 was approximately
      $42,879,597.





As
      of
      March 10, 2008, the issuer had 68,373,633 shares of common stock
      outstanding.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Certain
      information contained in the issuer’s definitive Proxy Statement for the 2007
      annual meeting of stockholders (the “Definitive Proxy Statement”), to be filed
      not later than 120 days after the end of the fiscal year covered by this report,
      is incorporated by reference into Part III hereof.





Transitional
      Small Business Disclosure Format: Yes o ;   
      No x .





[REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK]










**SPECIALIZED
          HEALTH
          PRODUCTS
          INTERNATIONAL,
          INC****.**


**TABLE
      OF CONTENTS TO ANNUAL REPORT**


**ON
      FORM 10-KSB**


**YEAR
      ENDED DECEMBER 31, 2007**




PART
                IItem
                1.
            
            Description
                of Business
            
            3Item
                2.
            
            Description
                of Property
            
            18Item
                3.
            
            Legal
                Proceedings
            
            18Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            20PART
                IIItem
                5.
            
            Market
                for Common Equity and Related Stockholder Matters and Small Business
                IssuerPurchases
                of Equity Securities
            
            20Item
                6.
            
            Management’s
                Discussion and Analysis or Plan of Operation
            
            21Item
                7.
            
            Financial
                Statements
            
            42Item
                8.
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosures
            
            42Item
                8A(T).
            
            Controls
                and Procedures
            
            42Item
                8B.
            
            Other
                Information
            
            43PART
                IIIItem
                9.
            
            Directors,
                Executive Officers, Promoters and Control Persons and Corporate
                Governance; Compliance with Section 16(a) of the Exchange
                Act
            
            45Item
                10.
            
            Executive
                Compensation
            
            45Item
                11.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stock-
                holder Matters
            
            45Item
                12.
            
            Certain
                Relationships and Related Transactions, and Director
                Independence
            
            45Item
                13.
            
            Exhibits
            
            46Item
                14.
            
            Principal
                Accountant Fees and Services
            
            46





2


**Forward-Looking
      Statements**




When
      used
      in this Annual Report on Form 10-KSB, the words or phrases “would be,” “will
      allow,” “intends to,” “will likely result,” “are expected to,” “will continue,”
“is anticipated,” “estimate,” “project,” or similar expressions are intended to
      identify “forward-looking statements” within the meaning of the Private
      Securities Litigation Reform Act of 1995. Forward-looking statements
      specifically include, but are not limited to, our anticipated merger with C.
      R.
      Bard, Inc., our expectations regarding international expansion of our products
      and markets ;
      the
      conversion of the market to safety products; trends regarding growth and capital
      expenditures; plans to launch two new manufactured product lines; foreign demand
      for medical safety needle products; the generation of royalty revenues from
      our
      licensees; the impact of our new products in their fields; the availability
      of
      necessary raw materials; the validity and enforceability of our patents and
      patent applications; the existence of a continuing market opportunity for our
      medical safety needle products; the regulatory treatment of our products;
      the ability
      of our products to compete with the products of our competitors; acceptance
      of
      our products by the marketplace as cost-effective; acceptance of safety products
      by health care professionals; dates upon which we will receive royalty payments;
      plans to rely on our licensees to pursue commercialization of licensed products;
      factors affecting the ability of our licensees to sell licensed products; the adequacy
      of our current office and warehouse space to meet the needs of current and
      expected growth; our expectation that our prices will be competitive with those
      of competing safety products; the retention of all earnings in the
      foreseeable future for use
      in our operations instead
      of paying dividends; the insignificant impact of inflation on our operations;
      the size of the market for safety products; plans regarding sales and marketing;
      and strategic business initiatives, and our
      intentions to defend our
      intellectual property rights,
      continue our research and development, and seek regulatory approvals .




We
      caution readers not to place undue reliance on any forward-looking statements,
      which speak only as of the date made, are based on certain assumptions and
      expectations which may or may not be valid or actually occur, and which involve
      various risks and uncertainties, including but not limited to risks that our
      merger with C. R. Bard, Inc. will not close for any of a variety of reasons,
      including failure to obtain regulatory approval or stockholder approval, risk
      of
      a lack of demand or low demand for our products or for safety products
      generally; the maturation of the U.S. safety Huber needle market; slower growth
      in market share, revenue and earnings in our core markets and product lines;
      the
      need to invest in infrastructure and build up our pipeline of new products
      and
      invest in new products and technologies in order to maintain growth rates in
      revenue and earnings; a determination of one or more licensees to focus their
      marketing efforts on products other than those licensed from us; constraints
      on
      our growth from limitations on our manufacturing capacity and our ability to
      build manufacturing capacity and other facilities; increasing manufacturing
      and
      material costs; increasing competition from well-funded competitors; competitive
      products and pricing; difficulties in product development, commercialization
      and
      technology; changes in the regulation of safety healthcare products; unexpected
      delays or difficulties in executing on our expansion into international markets;
      a failure to timely obtain Food and Drug Administration (“FDA”) or other
      necessary approvals to sell future products and other risks set forth in Item
      6
“Risk Factors” and elsewhere herein. If and when product sales commence, sales
      may not reach the levels anticipated. As a result, our actual results for future
      periods could differ materially from those anticipated or
      projected.




Unless
      otherwise required by applicable law, we do not undertake, and specifically
      disclaim any obligation, to update any forward-looking statements to reflect
      occurrences, developments, unanticipated events or circumstances after the
      date
      of such statement.





**PART
      I**


**Item
      1. Description of Business**




**Recent
      Developments**




On
      March
      10, 2008, we entered into an Agreement and Plan of Merger dated as of March
      10,
      2008 (the “Merger Agreement”), with C. R. Bard, Inc. (“C. R. Bard”) and Pelican
      Merger Acquisition Sub Co., a wholly owned subsidiary of C. R. Bard (“Merger
      Sub”).




Pursuant
      to the terms of the Merger Agreement, Merger Sub will merge with and into SHPI,
      with SHPI as the surviving corporation of the merger (the “Merger”). At the
      effective time of the Merger, each share of common stock of SHPI then
      outstanding, other than those held as treasury stock and those owned by C.
      R.
      Bard or Merger Sub, and other than those with respect to which appraisal rights
      are properly exercised, will be converted into the right to receive $1.00 per
      share in cash, without interest.




3




Our
      Board
      of Directors unanimously approved the Merger Agreement, the Merger and the
      transactions contemplated thereby, and recommends that our stockholders adopt
      the Merger Agreement, the Merger and the transactions contemplated
      thereby.




Completion
      of the transaction is subject to the affirmative vote of our stockholders,
      expiration or termination of the applicable anti-trust waiting periods and
      other
      customary closing conditions.




**General**




We
      are a
      developer, manufacturer and marketer of proprietary disposable medical devices
      for clinician and patient safety. Our innovative safety devices are designed
      to
      maximize the efficiency and quality of healthcare, while minimizing the risk
      of
      accidental needlesticks, which are a leading occupational cause of the spread
      of
      blood-borne diseases such as human immunodeficiency virus and
      autoimmunodeficiency syndrome (“HIV/AIDS”), hepatitis B virus (“HBV”) and
      hepatitis C virus (“HCV”). We have developed multiple safety needle products
      based upon a broad intellectual property portfolio that applies to most medical
      needles used today. We are a market leader in safety Huber needles (safety
      infusion sets) with four complementary product offerings. We have licensed
      or
      supply several other products to leading companies in the global disposable
      medical products industry.




In
      June
      2006, we merged with The Med-Design Corporation (“Med-Design”), a
      NASDAQ-listed company principally engaged in the design and development of
      safety medical needle products and technologies. Following the merger,
      Med-Design became a wholly owned subsidiary of ours .
      Med-Design stockholders received 21,525,788 shares of our common stock in
      exchange for their shares of Med-Design common stock. Upon completion of this
      exchange, the former Med-Design stockholders owned approximately 32.48% of
      our
      outstanding shares.





Upon
      completion of the merger , our
      board of directors was restructured, with the resignation of one Specialized Health Products International, Inc .
      (“SHPI”) director
      and the addition of two directors from the Med-Design board. The SHPI management
      team remained in place following the merger and a new Chief Financial Officer
      was recruited for the combined entity in September 2006. Our leadership team
      is experienced
      in both the healthcare and medical safety product sectors. See Item 9
“Directors, Executive Officers, Promoters and Control Persons and Corporate
      Governance; Compliance with Section 16(a) of the Exchange Act.”




Specialized
      Health Products, Inc. (“SHP”), a Utah corporation, was incorporated in November
      1993. On July 28, 1995, SHP became a wholly owned subsidiary of SHPI, a Delaware
      corporation, through a merger with a subsidiary of SHPI (the “Acquisition”). On
      that date SHP changed its name to SHPI. The persons serving as officers and
      directors of SHP immediately prior to the consummation of the Acquisition were
      elected to the same offices with SHPI and retained their positions as directors
      and officers of SHP. In addition, the outstanding securities of SHP became
      outstanding securities of SHPI.





We
      restructured our management team and board of directors in November 2001
      following a private placement of preferred stock to Galen Partners III, L.P.,
      Galen Partners International III, L.P., Galen Employee Fund III, L.P.
      (collectively, “Galen Partners”), and other accredited investors. In conjunction
      with the investment, we recruited a new President and Chief
      Executive Officer and
      appointed five new members to our board of directors.





**Overview**





Our
      business model is primarily to enter into licensing, original equipment
      manufacturing (“OEM”) supply or distribution agreements for our products, rather
      than engage in direct sales of products to end-users. We have entered
      into multiple product agreements relating to specific technologies and product
      lines with The Kendall Company (“Kendall”), a division of Tyco Healthcare Group
      LP (“Tyco Healthcare”), which is now known as Covidien, Bard Access Systems,
      Inc. (“Bard”), Becton, Dickinson and Company (“BD”), TAP Pharmaceutical Products
      Inc. (“TAP”), Merit Medical Systems, Inc. (“Merit”), B. Braun Medical S.A.S.
      (“B. Braun”), Fresenius-Kabi Deutschland GmbH (“Fresenius-Kabi”), and other
      corporations. We have distribution agreements in place with New Alliance of
      Independent Medical Distributors, Inc. (“Alliance Medical”), Cardinal Health
      (“Cardinal”), Medline Industries, Inc. (“Medline”), Physician Sales and Service,
      Inc. (“PSS”), Henry Schein, Inc. (“Henry Schein”), and other distributors for
      products marketed under our own SHPI label.




4




We
      introduced our first safety needle products into the U.S. market in 2002.
      Multiple product lines based upon our proprietary technologies are currently
      marketed in the U.S. and Canada. We have recently expanded distribution of
      our
      leading safety Huber needle products to Europe. We anticipate launching two
      additional manufactured product lines in 2008. A listing of our currently
      marketed product lines and additional products subject to agreements with major
      corporate partners is provided below.




**Manufactured
                Products**
            
            **Year
                Launched/Acquired**LiftLoc®
                Safety Infusion Set - OEM supply and SHPI branded
            
            2002MiniLoc®
                Safety Infusion Set - OEM supply and SHPI branded
            
            2005PowerLoc®
                Safety Infusion Set - exclusive OEM supply to Bard
            
            2006SafeStep®
                Huber Needle Set - OEM supply and SHPI branded
            
            2006SafeStep®
                MAXTM Power-Injectable Infusion Set - OEM supply and SHPI
                branded
            
            2008
                (anticipated)SecureLoc®
                Safety Introducer Needle - OEM supply to multiple
                customers
            
            2005MonojectTM
                Bone Marrow Biopsy Needles - exclusive OEM supply to Tyco
                Healthcare
            
            2006Safety
                PEG Introducer Needle - exclusive OEM Supply to Bard Access
                Systems
            
            2008
                (anticipated)**Licensed
                Products**
            
            **Year
                Launched/Acquired**Monoject
                MagellanTM Safety Syringe Needle - Tyco Healthcare
            
            2002Monoject
                MagellanTM Safety Blood Collector - Tyco Healthcare
            
            2004IntegraTM
                Syringe - BD Medical
            
            2006Vacutainer®
                Push Button Blood Collection Set - BD Medical
            
            2006LuproLocTM
                Pre-Filled Syringe Safety Needle Device - TAP
                Pharmaceuticals
            
            2003MajestikTM
                Shielded Needle - Merit Medical Systems
            
            2002Safety-Engineered
                Spinal Needles - BD Medical
            
            TBDSafety-Engineered
                Epidural Needles - BD Medical
            
            TBDSafety
                IV Catheter - Tyco Healthcare
            
            TBD




We
      believe that there is a continuing market opportunity for our medical safety
      needle products. We estimate the U.S. market for disposable medical needles
      to
      be in excess of $1.5 billion, including both conventional and safety products.
      Dollar growth in this market has been primarily driven by broad scale conversion
      to safety products in response to U.S. Occupational Safety and Health
      Administration (“OSHA”) regulation and legislative efforts, as well as
      healthcare workers’ demand for safety products. Regulatory and legislative
      efforts to protect healthcare workers from accidental needlesticks culminated
      in
      the passage of the U.S. Needlestick Safety and Prevention Act, which was signed
      into federal law in November 2000, and became effective in April 2001. This
      far-reaching federal legislation requires healthcare employers to review new
      safety needle products and mandates their usage by employees. As various
      government agencies increase their efforts to monitor compliance and better
      designed safety products become available at reasonable pricing, we anticipate
      that conversion to safety products will continue. However, we are starting
      to
      see a maturation of the U.S. safety needle market including our core safety
      Huber needle market, driven by industry conversion to safety needles. Our core
      markets may see more commoditization of products in future periods resulting
      in
      pricing pressures. In addition, we believe that we have reached a point where
      significant additional investment is required to build infrastructure and to
      develop or acquire new product lines to continue strong growth rates beyond
      fiscal 2008. As the U.S. medical needle markets are becoming largely converted
      to safety products, and as we built the leading position in the U.S. Huber
      needle market in terms of market share, we have begun focusing more on foreign
      markets.




5





Although
      we anticipate our primary growth opportunities in 2008 to come from product
      sales in foreign markets, foreign safety needle legislation lags behind that
      of
      the U.S. Many foreign markets do not benefit from the strong federal and state
      legislation that exists in the U.S., which legislation requires the usage of
      safety needles where available, regardless of cost. However, certain countries,
      such as Germany, France, Italy, Australia, and Canada are increasing efforts
      to
      protect their healthcare workers in a similar manner. As these efforts continue,
      we expect foreign demand for medical safety needle products to expand. We
      currently market our safety Huber needle products in Canada and have recently
      introduced our leading safety Huber needle product lines in Europe through
      private label OEM supply relationships with leading multinational medical
      products companies, including B. Braun (SafeStep®/SafeStep® MAXTM),
      Fresenius-Kabi (MiniLoc®), and Bard (PowerLocTM). We completed the necessary
      regulatory filings and began shipping our SafeStep®, MiniLoc®, and PowerLocTM
product lines to our corporate partners for sale in Europe in the fourth quarter
      of 2007. We are in the process of exploring distribution opportunities for
      our
      products in South America and researching the potential for commercial sales
      of
      our products in other countries.





**Our
      Products**





We
      have
      developed multiple safety needle product applications based upon a broad
      intellectual property portfolio, numbering over four hundred patents issued
      or
      pending worldwide. Our primary research and development, business development
      and marketing efforts are focused on exploiting this important asset in the
      following product areas:





*Safety
      Syringe Needles*





There
      is
      significant risk of accidental needlesticks during syringe needle use.
      Generally, the use of a needle for a medical procedure involves removing a
      needle cap just prior to performing the procedure. In the past, medical
      personnel attempted to achieve protection from accidental needlesticks by
      replacing the needle cap after performing a procedure, but a high number of
      accidental needlesticks related to needle cap replacement resulted in such
      practices being prohibited by the Centers for Disease Control (“CDC”). Some
      medical personnel began using needles and syringes with sheaths that could
      be
      extended over the exposed needle after a procedure.




FlexLoc®
      Safety Syringe





Our
      safety syringe needle utilizing the FlexLoc® technology eliminates the need to
      perform dangerous recapping techniques with an integral safety device that
      covers the needle after use. This innovative product features engineering
      controls designed to provide a high level of safety while conforming to current
      user technique. The FlexLoc® technology is low-cost, intuitive, and easy-to-use.
      The integral safety mechanism is activated by a simple press with the thumb
      or
      finger, or by pressing the device against a solid surface such as a counter
      or
      tabletop.





A
      product
      line based upon this proprietary safety syringe needle technology is
      manufactured and marketed by Kendall, a division of Tyco Healthcare Group LP.
      In
      November 1999, we entered into a Development and License Agreement (the “Kendall
      Agreement”) with Kendall relating to the production of a line of safety medical
      needle products, including six syringe products and five other safety needle
      products. The Kendall Agreement became effective in March 2000. In April 2000,
      we received $1,464,956 under the Kendall Agreement. We received an additional
      $1,000,000 in November 2002 in exchange for our assigning to Kendall the
      FlexLoc® and ReLocTM trademarks and two related U.S. patents and their progeny
      for a technology. The assignment of the patent rights to Kendall provides for
      our retention of an exclusive, royalty-free worldwide license in a number of
      strategic product areas. The Kendall Agreement also provides for us to receive
      development fees and ongoing royalties, including a $500,000 advance royalty
      payment also received in November 2002.





Kendall
      initiated its U.S. market launch of a proprietary line of safety syringe needles
      based upon this technology in the second calendar quarter of 2002, subsequent
      to
      receiving 510(k) clearance from the Food
      and
      Drug Administration (the “FDA”) in 2001.
      Kendall is marketing the product line under the brand name Monoject
      Magellan Ô .
      The
      Monoject Magellan Ô product
      line includes a wide variety of needle lengths and gauges, and primarily
      competes in the estimated $260 million U.S. safety needle and syringe market.
      Kendall launched the Monoject MagellanTM product into key international markets
      in the fourth quarter of 2004.




6





Retractable
      Safety Needles





In
      our
      merger with Med-Design, we acquired intellectual property rights related to
      retractable safety needle technology. A retractable safety syringe needle was
      the first product line to be developed based upon this technology platform.
      After the medication in the syringe has been delivered, the user simply applies
      a light amount of additional pressure in order to move the plunger slightly
      beyond the normal stop point. This action causes the needle to automatically
      and
      fully retract into the body of the syringe.





In
      1998
      and 2000, Becton, Dickinson and Company (“BD”), a market leader in disposable
      medical needles, licensed exclusive worldwide rights to manufacture and market
      our patented retractable needle technology in three fields of use: injection
      syringe, IV catheters and blood collection. The agreements with BD provide
      for
      continuing royalty payments based upon BD’s net sales for the licensed product
      technology, subject to annual minimums. BD currently markets the safety syringe
      under the brand name IntegraTM Syringe. The IntegraTM Syringe is manufactured with
      needles of various gauges and sizes and was introduced into the U.S. market
      in
      2002.





*Safety
      Huber Needle Devices (Safety Infusion Sets)*





LiftLoc®
      Safety Infusion Set





Our
      LiftLoc® Safety Infusion Set incorporates a Huber type needle into an integral
      safety needle device. This product is designed for use with a vascular access
      infusion system (used to infuse fluids, drugs, nutrients or for blood sampling)
      and is specifically designed to access surgically implanted, subcutaneous
      vascular ports. Patients with implanted ports require access by Huber needles
      frequently over periods extending from six months to one year. A major cause
      of
      accidental needlestick injuries to healthcare workers from Huber needles is
      due
      to the “rebound effect” which occurs during needle withdrawal from the implanted
      port. Huber needles present a high risk for transmission of blood-borne
      pathogens, since they are hollow-bore and potentially blood-contaminated at
      the
      time of removal.




Our
      LiftLoc® Safety Infusion Set conforms to current common user technique and
      reduces the risk of accidental needlesticks, including rebound injuries, by
      locking the needle into a protective sheath as the needle is withdrawn from
      the
      port. Each LiftLoc® set is packaged with a unique Patient Comfort
      Pad Ô accessory product. The Patient Comfort Pad Ô is made
      of breathable felted foam that creates a soft uniform barrier between the Huber
      needle’s wings and the patient’s skin.





The
      LiftLoc® Safety Infusion Set product line is distributed in the hospital market
      by Bard Access Systems, Inc., a division of C. R. Bard, Inc., a multinational
      developer, manufacturer and marketer of healthcare products in the field of
      implanted ports that are accessed using Huber needles. In September 2001, we
      entered into a Distribution Agreement (the “Bard Agreement”) with Bard whereby
      Bard acquired the non-exclusive right to promote, market, distribute and sell
      the LiftLoc® Safety Infusion Set, which we manufacture, to hospitals and group
      purchasing organizations. The Bard Agreement excludes alternate site locations,
      such as homecare services, nursing homes, oncology centers, infusion centers,
      same day surgery centers, physician offices and clinics, non-hospital pharmacies
      and pain clinics. Under the terms of the agreement, we sell finished product
      to
      Bard for marketing under Bard’s private label.





In
      the
      second calendar quarter of 2003, we entered into a Distribution Agreement (the
      “Exel Agreement”) with ExelInt International, Company (“Exel”) whereby Exel
      acquired the non-exclusive right to promote, market, distribute and sell
      LiftLoc® Safety Infusion Set. Under the terms of the agreement, we sell finished
      products to Exel for marketing under Exel’s SecureTouch® private label. Exel is
      subject to minimum purchase requirements under the terms of the
      agreement.





We
      distribute LiftLoc® Safety Infusion Set under the SHPI label through
      non-exclusive distribution agreements with Cardinal Health, Medline, PSS,
      Medical Specialties Distributors, Inc. (“Medical Specialties”), Henry Schein,
      Inc. (“Henry Schein”), and several regional specialty distributors with a strong
      presence in the oncology, chronic hematology, and long-term intravenous
      nutritionals markets. Under the terms of our distribution agreements, LiftLoc®
distributors purchase finished goods from us for resale to their end-user
      customers.





We
      received 510(k) clearance from the FDA for LiftLoc® Safety Infusion Set in 2001,
      and initiated the U.S. market launch of the product line under our SHPI label
      in
      September 2002. Bard initiated its U.S market launch of LiftLoc® Safety Infusion
      Set under the Bard label in December 2002. The LiftLoc® Safety Infusion Set
      product line includes a wide variety of needle lengths and gauge sizes. It
      competes in the estimated $50 million U.S. Huber needle market.




7





MiniLoc®
      Safety Infusion Set





MiniLoc®
      Safety Infusion Set is our second entry into the growing safety Huber needle
      market. Similar to our LiftLoc® Safety Infusion Set product, MiniLoc®
incorporates a Huber type needle with an integral safety needle device. However,
      MiniLoc® Safety Infusion Set is based upon a new proprietary technology that
      enables state-of-the-art protection in an ultra-low profile device. MiniLoc®’s
      small footprint, needle forward design and angled tubing makes the product
      easy
      to dress, facilitates placement in dual lumen ports, and is designed to provide
      excellent site visibility. The product’s proprietary design also enables
      controlled, easy engagement of the safety mechanism. MiniLoc® has a smooth
      comfortable base that is designed for patient comfort, as well as specially
      lubricated needles that significantly reduce needle penetration
      force.





We
      supply
      MiniLoc® Safety Infusion Set on an OEM private label basis to Bard and Exel. We
      distribute MiniLoc® under the SHPI label through non-exclusive distribution
      agreements with Cardinal Health, Medline, PSS, Medical Specialties, Henry
      Schein, and several regional U.S. specialty distributors. We have also entered
      into an agreement with Angus Medical for the distribution of our MiniLoc®
product in Canada. In 2007, we executed a private label OEM supply and
      distribution agreement with Fresenius Kabi for the sale of MiniLoc® Safety
      Infusion Set throughout Europe. Under the terms of our distribution agreements,
      MiniLoc® distributors purchase finished goods from us for resale to their
      end-user customers.





We
      received 510(k) clearance from the FDA for MiniLoc® Safety Infusion Set in May
      2005, and initiated the U.S. market launch of the product line under our SHPI
      label in September 2005. Bard initiated its U.S. market launch of MiniLoc®
Safety Infusion Set under the Bard label in the fourth quarter of 2005. In
      the
      fourth quarter of 2007, we began shipping MiniLoc® Safety Infusion Set to
      Fresenius-Kabi for distribution in Europe.





SafeStep®
      Huber Needle Set





The
      SafeStep® Huber Needle Set product line was acquired in our merger with
      Med-Design and is our third product entry in the Huber needle market. Med-Design
      acquired SafeStep® Huber Needle Set from Luther Needlesafe Products, Inc.
      (“Luther”) in April 2004. This proprietary product line is manufactured under a
      license granting Med-Design the exclusive use of the SafeStep® technology for
      use in the Huber needle field. SafeStep® Huber Needle Set was launched in the
      U.S. in October 2003.




SafeStep®
      Huber Needle Set was designed with both the clinician and the patient in mind.
      The product is indicated for the administration of fluids, drugs and blood
      sampling via a surgically implanted vascular port. SafeStep® features a tubing
      extension set, a non-coring Huber-type needle and a robust, built-in safety
      mechanism designed to help prevent accidental needlestick injuries. The safety
      feature is activated as the clinician removes the needle from the
      port.




The
      product contains a textured handle that is easy to grasp and insert. A soft,
      non-absorbent patient comfort pad lines the bottom of the base. An ultra-small
      footprint helps minimize dressing materials at the site. The clear plastic
      base
      is designed to rest gently on the patient's skin and allows clinicians to easily
      view and inspect the insertion site throughout the course of therapy. SafeStep®
is designed to be simple to use and intuitive in design, requiring minimal
      training.




We
      distribute SafeStep® Huber Needle Set in the U.S. market through an exclusive
      distribution agreement with Alliance Medical. In November 2007, we executed
      an
      exclusive OEM supply and distribution agreement with B. Braun for international
      markets excluding the U.S. and Canada. In December 2007, we made our first
      shipments of SafeStep® product to B. Braun for distribution in Europe.




8




PowerLocTM
      Safety Infusion Set





PowerLocTM
      Safety Infusion Set product is the first power-injectable safety infusion set
      available on the market. PowerLocTM incorporates all of the product features and
      benefits of MiniLoc® Safety Infusion Set, but is designed to withstand pressure
      injections up to 300 PSI (pounds per square inch). PowerLocTM Safety Infusion Set
      is designed to be used in conjunction with Bard’s new PowerPortTM, the first
      power-injectable vascular access port. Power-injection is an important feature
      that allows a clinician to inject contrast media for CT scans.




Bard
      received 510(k) clearance from the FDA for PowerPortTM, which incorporates our
      PowerLoc® Safety Infusion Set, in July 2006 and a comprehensive product line was
      launched into the U.S. market at that time. We supply PowerLocTM Safety Infusion
      Set to Bard on an exclusive OEM private label basis. In 2007, we began shipping
      PowerLocTM Safety Infusion Set to Bard for distribution in Europe.





SafeStep®
      MAXTM Power-Injectable Infusion Set





SafeStep®
      MAXTM Power-Injectable Infusion Set was developed to address the growing trend of
      power injection in the implantable port and Huber needle market. SafeStep® MAXTM
is a power-injectable version of the market-leading SafeStep® Huber Needle Set
      and is designed to withstand pressure injection up to 325 PSI (pounds per square
      inch). SafeStep® MAXTM incorporates all of the same product features and benefits
      of the SafeStep® Huber Needle Set, including a specially lubricated needle,
      angled tubing to facilitate dressing, and the smallest footprint on the market
      in a safety device.





SafeStep®
      MAXTM can be used for power injection with any power-injectable port. SafeStep®
MAXTM can also be used for standard infusion with any port. This universal
      application claim and the value price point provides the opportunity for
      facilities to standardize by using SafeStep® MAXTM throughout the clinical
      setting.





We
      received 510(k) clearance from the FDA for SafeStep® MAXTM Power-Injectable
      Infusion Set in January 2008. We anticipate a 2008 launch for this product
      in
      the U.S. and Europe. SafeStep® MAXTM will be sold exclusively through Alliance
      Medical in the U.S. B. Braun has exclusive rights to distribute SafeStep® MAXTM
in the rest of the world, with the exception of the U.S. and Canada .




*Pre-filled
      Syringe Safety Needle Devices*




Pre-filled
      syringes are a significant drug delivery modality, with a strong need for an
      effective, cost-efficient safety needle solution. A wide range of drugs, from
      high volume vaccines to many of today’s newer drugs, are delivered via
      pre-filled syringes. Typically, the pre-filled syringe is made of glass to
      ensure appropriate shelf life and inertness to the drug. Pre-filled syringes
      are
      used to deliver drugs in a variety of forms, including liquids, gels,
      lyophilized (freeze-dried) drugs, or a combination of liquid and dry medications
      in a multiple chamber syringe.





We
      have
      developed a proprietary safety needle device that is adaptable to a wide variety
      of pre-filled syringes. This device provides intuitive, one-handed activation.
      Additionally, the device is designed for easy integration into pharmaceutical
      manufacturing. Our device can be applied to the pre-filled syringe after filling
      and before final packaging. This minimizes capital investment and speeds
      integration.





In
      July
      2002, we entered into a Development and License Agreement (the “TAP Agreement”)
      with TAP
      Pharmaceutical Products Inc **.** (which
      is a joint venture between Abbott Laboratories and Takeda Chemical Industries,
      Ltd. (“TAP”), whereby TAP acquired the right to attach our proprietary safety
      needle device to their pre-filled syringes. The TAP Agreement has an effective
      date of January 1, 2002. Under the TAP Agreement, we have received reimbursement
      for research and development expenses, payments related to the achievement
      of
      certain development and regulatory milestones, and on-going royalty payments
      based upon the number of pre-filled syringes manufactured with our proprietary
      safety needle device. The TAP Agreement is for a minimum period of three years.
      The TAP Agreement automatically renews for additional one year terms through
      the
      life of the underlying patent, unless TAP provides written notice of termination
      at least ninety days prior to the expiration of the then current term.





TAP
      attaches our proprietary safety needle device to pre-filled syringes of Lupron
      Depot® (leuprolide acetate for depot suspension), the first pharmaceutical
      product available with our pre-filled syringe safety needle device and the
      first
      product in its class to offer an integral safety needle device on pre-filled
      syringes. TAP has branded this integral safety needle device
      LuproLoc Ô .
      TAP
      initiated the U.S. market launch of Lupron Depot Ò with
      LuproLoc Ô in
      January 2003, after receiving FDA approval as the result of filings with both
      the FDA’s Center for Drug Evaluation and Research (“CDER”) and its Center for
      Devices and Radiological Health (“CDRH”). Pharmaceutical products sold in
      pre-filled syringes represent a multi-billion dollar worldwide market. The
      total
      U.S. market for pre-filled syringes is estimated to be in excess of $100 million
      annually.




9





*Safety
      Blood Collection (Phlebotomy) Devices*





The
      present method for drawing large amounts of blood from patients for blood tests
      involves insertion of a needle, which is attached to a barrel, into a blood
      vessel. Blood is then obtained by way of vacuum pressure, most often into a
      small evacuated tube-like container inserted into the barrel. After blood is
      drawn, the needle is manually removed from the patient. While the healthcare
      worker continues attending to the patient, the collection tube, barrel and
      needle are often placed on a tray, table or otherwise set aside. Afterward,
      the
      needle is usually unscrewed from the barrel and discarded into a sharps
      container, while the barrel is often used again with another patient (increasing
      the risk of cross contamination).





We
      have
      developed a family of safety blood collection products that combine a unique,
      one-piece injection molded barrel with an integral safety needle device. Since
      the blood collection barrel is integral to the needle assembly, our safety
      phlebotomy device ensures that a new barrel is used for each patient. Our
      product offers what we believe is easy, one-handed activation and has been
      highly rated in market acceptance studies.




Our
      safety blood collection product line is manufactured and marketed by Kendall,
      a
      business unit of Tyco Healthcare. In April 2002, we entered into a Second
      Development and License Agreement with Kendall (the “2 nd Kendall
      Agreement”) relating to blood collection needles and blood collection
      needle/holder combinations.  Under
      the
      terms of the agreement, we received reimbursement for research and development
      expenses, payments related to the achievement of certain regulatory and sales
      milestones, and on-going royalty payments on all product sales.




Kendall
      initiated its U.S. market launch of the Monoject MagellanTM safety blood
      collection product line in January 2004. This product line competes in the
      estimated $130 million U.S. blood collection needle market.




In
      our
      merger with Med-Design, we acquired intellectual property rights relating to
      retractable safety needle technology. In 1998, exclusive rights to our
      retractable safety needle technology in the blood collection field were licensed
      to BD, the worldwide leader in the blood collection market. In 2005, BD launched
      a safety blood collection product line based upon our retractable needle
      technology into the U.S. market. This product line is manufactured and marketed
      by BD under the brand name BD VacutainerTM Push Button Collection Set. This
      safety blood collection set is compatible with substantially all standard blood
      collection needle accessories. After sufficient fluids have been extracted
      from
      the body, the clinician activates the safety device by depressing a conveniently
      located button on the barrel of the device. Upon activation, the needle
      automatically and fully retracts into the body of the device and is sealed
      in
      place, rendering the device harmless and inoperative. Under the terms of the
      Med-Design agreement with BD, we receive on-going royalty payments on sales
      of
      the BD VacutainerTM Push Button Collection Set.




*Safety
      Angiographic Needles*





Angiographic
      needles are used to provide vascular access for the introduction of guidewires
      or other devices during diagnostic or therapeutic procedures, primarily in
      the
      fields of cardiology and radiology. Approximately 10 million angiography
      procedures are performed each year worldwide.




We
      have
      entered into a License Agreement (the “Merit Agreement”) with Merit
      relating to the manufacture and marketing of safety needle devices for
      angiographic guidewire introducers utilizing our FlexLoc® technology. Merit is a
      leading manufacturer and marketer of proprietary disposable products used in
      cardiology and radiology procedures. We received an upfront license fee payment
      of $100,000 in January 2001, which was recognized ratably by us over the
      five-year life of the Merit Agreement. Under the terms of the Merit Agreement,
      we will receive ongoing royalties on net product. Merit initiated its U.S.
      market launch of a safety angiographic needle branded Majestik Ô Shielded
      Needle under this license agreement in November 2002.





Med-Design
      licensed to Enpath Medical, Inc. (“Enpath”) a safety Seldinger device, initially
      for venous access and subsequently for arterial access, utilizing our retraction
      technology. Enpath manufactures and markets this product line under its own
      label on a non-exclusive basis and makes royalty payments to SHPI based upon
      net
      sales of the licensed product technology. Royalties from this product declined
      significantly in 2005, as Enpath’s major customer began using a non-safety
      Seldinger introducer needle. In September 2001, Med-Design entered into an
      Addendum (“the Addendum”) to the development and licensing agreement with
      Enpath. The Addendum granted Enpath an exclusive license to manufacture and
      market Med-Design’s Safety Seldinger Introducer Needle in the arterial access
      market. Under the terms of the Addendum, Med-Design received an initial payment
      of $2,000,000, $1,000,000 of which was paid in 68,027 shares of Enpath common
      stock valued at the closing price on the date Med-Design entered into the
      Addendum and $1,000,000 of which was paid in cash on October 15, 2001. In
      addition, Med-Design is entitled to receive royalties of 20% of net sales of
      the
      product, which royalty rate may be reduced to 17% if certain sales volumes
      are
      met. The agreement is in effect for the remaining life of the underlying
      patents. In December 2004, Med-Design entered into Addendum Number Two to
      the development and licensing agreement with Enpath to eliminate the minimum
      purchase amount required for Enpath to maintain exclusivity under the
      development and licensing agreement. Future
      royalties from this product are expected to continue to
      decrease.




10




*Safety
      Long Specialty Needles*





We
      have a
      program underway for developing safety long specialty needles based upon our
      SecureLoc® platform technology. These needles are used across a wide range of
      medical disciplines, including anesthesiology, oncology, radiology, urology,
      and
      cardiology. Markets of interest include epidural, spinal, introducer needles,
      soft tissue and bone biopsy needles, and others.





Due
      to
      their length, these specialty needles present unique challenges for developing
      an effective safety system that does not interfere with clinical technique.
      We
      believe that our SecureLoc® technology effectively addresses these challenges.
      SecureLoc® is an integral safety needle device that automatically senses the end
      of the needle as it advances down the needle shaft and instantly locks out
      to
      fully encapsulate the needle tip. The SecureLoc® safety device is unobtrusive
      and does not interfere with clinical technique. This innovative technology
      is
      designed to work on virtually any gauge or length of needle, and addresses
      several categories without a currently available safety solution. We have
      developed a robust intellectual property portfolio for this technology, with
      U.S. and foreign patents issued or pending.





We
      are
      developing multiple product applications of SecureLoc®, and launched our first
      commercial product based upon this technology, SecureLoc® Safety Introducer
      Needle, into the U.S. market in December 2005. We have product agreements in
      place pertaining to four additional product lines based upon our SecureLoc®
platform technology.





Safety-Engineered
      Spinal and Epidural Needles





In
      August
      2003, we entered into a License Agreement (the “BD Agreement”) with BD relating
      to the manufacture and marketing of safety-engineered spinal and epidural
      needles and certain other specialty needles sold by BD. Under the terms of
      the
      agreement, we will receive reimbursement for certain research and development
      expenses, payments related to the achievement of certain regulatory and
      commercialization milestones, and on-going royalty payments on all product
      sales. ****** Products
      subject to this agreement will compete in the estimated $200 million U.S. spinal
      and epidural needle market.





Bone
      Marrow Biopsy Needles





In
      June
      2004, we entered into a worldwide Development and OEM Supply/Distribution
      agreement with Tyco Healthcare for the marketing and sale of bone marrow biopsy
      needles. Under the terms of the agreement, Tyco Healthcare will purchase bone
      marrow biopsy needles from us, as well as reimburse us for certain research
      and
      development expenses related to product commercialization. Tyco Healthcare
      is
      one of the leading U.S. marketers of bone marrow biopsy needles.





Safety
      Peripheral IV Catheter





In
      December 2005, we entered into a non-exclusive License Agreement (the
“Agreement”) with Tyco Healthcare relating to the manufacture and marketing of
      safety peripheral IV catheter devices (the “Technology”). The Agreement provides
      for us to receive $500,000 upon execution of the Agreement, $250,000 upon the
      issuance of the first patent relating to the Technology, $250,000 upon the
      first
      date that commercial sale of product incorporating the Technology, and on-going
      royalty payments based on net sales of product incorporating the
      Technology.




11





Safety
      Percutaneous Endoscopic Gastrostomy Introducer Needle





In
      April
      2006, we entered into a Development, Distribution and Supply Agreement with
      Bard. The Agreement provides for (i) Bard to provide funding for the development
      of a safety percutaneous endoscopic gastrostomy (“PEG”) introducer needle that
      meets Bard’s requirements (the “Safety PEG Product”), (ii) Bard to receive the
      right to distribute the Safety PEG Product worldwide for use in applications,
      and (iii) SHPI to manufacture, package and supply Bard with the Safety PEG
      Product. The Agreement has a term of five years, subject to automatic renewal
      for successive one-year terms unless terminated by either party on 180 days
      notice prior to the expiration of the then effective term. We anticipate
      initiation of sales of PEG introducer needles to Bard in 2008.




*Safety
      Introducer Needles*




Introducer
      needles are an important component in sterile procedure kits and trays used
      in
      the fields of interventional cardiology, interventional radiology, and for
      general vascular access. Introducer needles are estimated to represent a $29
      million U.S. market. SecureLoc® Safety Introducer Needle is our safety entry
      into this growing market. We believe that the SecureLoc® Safety Introducer
      Needle offers several compelling features and benefits to the end user,
      including:





·
            an
                integral safety mechanism to reduce the risk of accidental
                needlesticks,


·
            the
                ability to activate the safety device over a
                guidewire,


·
            specially
                lubricated needles to minimize needle penetration
                forces,


·
            a
                funneled hub for smooth guidewire introduction,
                and


·
            an
                ergonomic handle to facilitate grip, stability and needle control
                during
                procedure.





We
      received 510(k) clearance from the FDA for SecureLoc® Safety Introducer Needle
      in February 2005, and initiated our U.S. market launch of the product line
      under
      our SHPI label in December 2005. We are providing SecureLoc® Safety Introducer
      Needle to OEM customers on a bulk, non-sterile basis for inclusion in procedural
      kits and trays primarily in the fields of cardiology, radiology, and general
      vascular access. We also supply the SecureLoc® product to OEM customers on an
      individually packaged single, sterile basis.





In
      October 2005, we entered into a non-exclusive Distribution Agreement (the
“2 nd Merit
      Agreement”) with Merit relating to the OEM supply of SecureLoc® Safety
      Introducer Needle. In May 2006, we entered into a non-exclusive Distribution
      Agreement with ICU Medical for OEM supply of SecureLoc® Safety Introducer
      Needle. In addition to Merit and ICU, we supply SecureLoc® to several other
      corporate customers on a purchase order basis. We continue to be engaged in
      discussions with other large potential OEM customers for the supply and
      distribution of the SecureLoc® Safety Introducer Needle.





**Industry**





*Market*





The
      healthcare industry is a large and growing industry .
      Healthcare worker safety is and will remain a high priority, high profile issue.
      Healthcare workers in the U.S. use approximately six billion needles each year
      and suffer an estimated 800,000 injuries from accidental needlesticks and other
      sharps annually. Diseases that can be acquired from such accidents include
      HIV/AIDS, HBV, HCV, diphtheria, gonorrhea, typhus, herpes simplex virus,
      malaria, syphilis and tuberculosis. We believe that recent federal and state
      legislation in conjunction with increased awareness of these statistics will
      continue to spur growth in the safety needle and syringe market, as sales are
      converted from the traditional disposable needle and syringe market. However,
      we
      are beginning to see a maturation of the U.S. safety needle market, including
      our core safety Huber needle market, driven by industry conversion to safety
      needles. The current U.S. market for disposable medical needles is estimated
      to
      be in excess of $1.5 billion.




12





*Accidental
      Needlestick Injuries*





Needles
      for hypodermic syringes, phlebotomy sets, intravenous catheters, safety steel
      needles and specialty medical needles are necessary to inject drugs and other
      fluids into the body and for drawing blood and other fluids from the body.
      Hypodermic needles are used for the injection of drugs. Phlebotomy sets are
      used
      for the drawing of blood. Catheters, butterfly needles and specialty needles
      are
      used for access to patient vessels. There is an increasing awareness of the
      potential danger of infections and illnesses to healthcare workers that result
      from accidental needlesticks and of the need for safer needle devices to reduce
      the number of such accidents.





It
      is
      estimated that at least 1,000 healthcare workers annually contract serious,
      potentially life-threatening infections from accidental needlestick and sharps
      injuries in the U.S. Estimates also suggest that safety needle devices may
      prevent more than 80% of all needlestick injuries. Testing and treatment of
      needlestick injuries costs the U.S. healthcare system between $750 million
      and
      $1 billion each year. The average cost of treating a needlestick injury not
      resulting in the transmission of a disease is between $450 and $800 per
      incident, which only considers the direct costs associated with HBV, HCV and
      HIV
      screens and employee lost time. According to the American Hospital Association,
      a single case of serious blood-borne pathogen infection can cost more than
      $1
      million in expenses for follow-up testing, lost work time and disability
      payments. Even if no infection occurs as a result of the injury, the average
      cost of treating a high-risk exposure is estimated to be about $3,000 per
      needlestick. According to the Centers
      for Disease Control and
      Prevention (the “CDC”) ,
      the
      1998 infection rate following a single needlestick injury with a contaminated
      needle or other sharp was between 6% and 30% for HBV, 0.5% and 2% for HCV,
      and
      about 0.3% for HIV. 85% of the healthcare workers infected with HCV become
      chronic carriers of the virus. Treatment of HCV is very expensive, averaging
      $1,700 per month. Treatment for HIV is also expensive, with costs averaging
      up
      to $6,000 per month. Accidental needlesticks are the cause of 86% of all
      occupationally acquired cases of HIV/AIDS.





While
      we
      expect government regulations to continue to increase conversions to safety
      products in the future, the greatest obstacle to conversion in certain product
      categories may be availability of well-designed and cost-efficient safety
      products. We believe that pressure is increasing from the government and private
      sectors for the healthcare industry to develop medical devices that will provide
      a safer working environment for healthcare and related workers and patients.
      Our
      products are intended to address the demand for medical devices that reduce
      the
      risk of accidental exposure to blood-borne diseases.





*Legislative
      Response*




National
      safety regulations have enhanced the demand for safety medical devices. 
The U.S. Needlestick Safety and Prevention Act was signed into federal law
      in
      November 2000, and became effective in April 2001.  Twenty-six U.S. states
      have passed safety legislation requiring the use of safety needle
      products.  OSHA also issued a national directive in November 1999 requiring
      use of safety medical devices, and then revised the order in November of 2000
      to
      comply with the Needlestick Safety and Prevention Act. This order requires
      healthcare employers to review new safety products and mandates their
      use. Various government agencies now monitor hospitals and clinics for
      compliance. We believe these developments will positively affect market
      potential for our products.





**Our
      Strategy**





On
      March
      10, 2008, we entered into an Agreement and Plan of Merger with C. R. Bard and
      Merger Sub pursuant to which Merger Sub will merge with and into SHPI, with
      SHPI
      as the surviving corporation of the merger (the “Merger”). If the Merger is not
      consummated, we will continue to operate as a stand-alone company. As a
      stand-alone company, our mission is to be a leading developer, manufacturer
      and
      marketer of disposable medical devices for clinician and patient safety. We
      will
      seek to accomplish this objective by continuing to expand into foreign markets,
      capturing market share of targeted product segments, making investments to
      broaden existing product lines, develop new products, increasing manufacturing
      capacity and seeking additional market opportunities through merger and
      acquisition activities if attractive opportunities are available. Because growth
      in revenue or market share for our current products may decline in the future
      due to a maturing life cycle of our products in the safety needle market,
      competition and other factors, the investment in new infrastructure, the
      building of additional manufacturing and other facilities, the continued
      development of our products and development of additional applications and
      new
      products is important to our long-term success and to maintaining strong growth
      rates in revenue and earnings.




13




Our
      business model is primarily to leverage our intellectual property portfolio
      to
      enter into licensing, OEM supply, or distribution agreements for our products,
      rather than engage in direct sales of products to end-users on our own. OEM
      supply to corporate customers and sale of our own branded products through
      distributors are our preferred business relationships for targeted specialty
      products that can be manufactured efficiently on semi-automated manufacturing
      lines without a large capital investment. Targeted specialty products typically
      represent lower volume, higher margin opportunities in niche markets. We pursue
      out-licensing arrangements for high volume, typically lower margin; product
      opportunities that would require a tremendous capital investment to develop
      high
      speed automated manufacturing equipment or would require competition with
      dominant multinational companies.





**Marketing
      and Sales**





Because
      we focus on the design, development, manufacture, OEM supply and licensing
      of
      cost-effective, innovative safety healthcare products, we are not engaged in
      the
      sale of our products directly to end-users. For our licensed products, our
      current marketing efforts primarily focus upon identifying market leaders in
      the
      pharmaceutical and medical device industries who are highly qualified to sell
      and distribute our products after manufacture, incorporate our safety
      applications in their existing products, or some combination of the foregoing.





For
      products that we market under our own SHPI label, such as LiftLoc® and MiniLoc®
Safety Infusion Sets, SafeStep® Huber Needle Set, and SecureLoc® Safety
      Introducer Needle, we have established a small, yet highly experienced, sales
      and marketing group to manage our distributors and support their efforts in
      the
      field . This support includes development and supply of marketing materials,
      active lead generation through participation in trade shows, outbound
      telemarketing and sales presentations, in-service participation and customer
      service support.





**Manufacturing**





Products
      being developed under OEM supply or distribution agreements are manufactured
      under our authority and supervision by a qualified contract manufacturer
      headquartered in Vista, California, with FDA and ISO compliant assembly
      facilities in Tijuana, Mexico. In 2002, we began producing our LiftLoc® Safety
      Infusion Set at our contract manufacturer. We began producing our MiniLoc®
Safety Infusion Set and SecureLoc® Safety Introducer Needle product lines at
      this same facility in the second half of 2005. In June of 2006 we began
      producing the SafeStep® Huber Needle Set. In the second quarter of 2006, we
      began producing conventional bone marrow biopsy needles for Tyco Healthcare
      and
      PowerLoc® Safety Infusion Set for Bard Access Systems on an exclusive private
      label basis. Products subject to licensing agreements are manufactured by our
      corporate partners. The materials used to produce our products are generally
      widely available. We do not anticipate difficulty in obtaining such materials
      although material costs are increasing. However, we may face constraint on
      our
      growth from the inability to increase manufacturing capacity, and we may require
      additional manufacturing facilities in order to continue expanding our
      business.





We
      are
      certified to ISO 9001:2000 and ISO 13485:2003 international quality systems
      standards by our registrar, DQS. Certification to these international quality
      systems standards allows us to apply for CE Marking required for product
      distribution in Europe and to seek product registrations for our manufactured
      products in other international markets. We have also been certified to CMDCAS
      (“Canadian Medical Device Conformity Assessment System”), which allows us to
      market our manufactured products in Canada.




**Patents
      and Proprietary Rights**




Our
      policy is to seek patent protection for all developments, inventions and
      improvements that are patentable and which have potential value to us and to
      protect as trade secrets other confidential and proprietary information. We
      intend to vigorously defend our intellectual property rights to the extent
      our
      resources permit.




We
      have
      numerous safety needle technologies covered by over 400 issued or pending U.S.
      patents, with corresponding foreign filings. The patents referred to above
      first
      begin to expire in 2013




See
      Item
      3. “Legal Proceedings.” for a description of related patent infringement
      litigation.




14




**Research
      and Development**





We
      have
      devoted a substantial portion of our efforts to designing and developing
      healthcare products and processes. To date, research and development
      expenditures have resulted in our ownership of, or right to, numerous patents
      and patent applications worldwide. We incurred $4,057,068 in 2007 (excluding
      $423,163 of amortization of deferred compensation) and $3,327,815 in 2006
      (excluding $458,507 of amortization of deferred compensation) on research and
      development activities. Customer sponsored research activities relating to
      the
      development of new products, services or techniques or the improvement of
      existing products, services or techniques for which we earned revenues were
      $110,920 in 2007 and $590,741 in 2006. If the Merger with C. R. Bard discussed
      above in “Recent Developments” is not consummated, we plan to continue research
      and development to identify new products for development and commercialization.
      There is no assurance that our ongoing research and development activities
      will
      prove effective.





**Government
      Regulation**





*Product
      Approvals*





We
      are
      regulated by the FDA, pursuant to various statutes, including the Federal Food,
      Drug and Cosmetic (“FD&C”) Act, as amended and supplemented by the Medical
      Device Amendments of 1976 (the “1976 Amendments”) and other related medical
      device legislatively enacted statutes. Although our focus in the past has been
      on the design and development of devices, we anticipate that as we engage in
      more OEM manufacturing, we will become increasingly active in pursuing
      regulatory approvals. We have received FDA clearance for our LiftLoc ® Safety
      Infusion Set, MiniLoc® Safety
      Infusion Set, SecureLoc® Safety
      Introducer Needle, SafeStep® Huber
      Needle Set, and SafeStep® MAXTM Power-Injectable Infusion Set. In addition, our
      strategic partners have received FDA clearances for Monoject Magellan TM Safety
      Syringe Needle, Monoject Magellan TM Safety
      Blood Collection Device, LuproLoc TM Pre-filled Syringe Safety Needle, Majestik TM Shielded
      Angiographic Needle, and Bone Biopsy Needles. We plan to submit additional
      510(k) applications for disposable medical devices based in the
      future.





Pursuant
      to the 1976 Amendments, the FDA classifies medical devices intended for use
      with
      humans into three classes, Class I, Class II and Class III. The controls applied
      to the different classifications are those the FDA believes are necessary to
      provide reasonable assurance that a device is safe and effective. Many Class
      I
      devices have been exempted from pre-market notification requirements by the
      FDA.
      These products can be adequately regulated by the same types of controls the
      FDA
      has used on devices since the passage of the FD&C Act in 1938. These
“general controls” include provisions related to labeling, producer
      registration, defect notification, records and reports and good manufacturing
      practices (“GMP”). The GMP regulation was replaced in1996 by Quality System
      Regulation (“QSR”). QSRs include implementation of quality assurance programs,
      formalized product development procedures, written manufacturing specifications
      and processing procedures, written distribution procedures and record keeping
      requirements. Class II devices are products for which the general controls
      of
      Class I devices are deemed not sufficient to assure the safety and effectiveness
      of the device and thus require special controls. Special controls for Class
      II
      devices include performance standards, post-market surveillance, patient
      registries and the use of FDA guidelines. Standards may include both design
      and
      performance requirements. Class III devices have the most restrictive controls
      and require pre-market approval by the FDA. Generally, Class III devices are
      limited to life-sustaining, life-supporting or implantable devices. None of
      our
      currently proposed products are believed to be to be Class III products. The
      FDA
      has further established three tiers or levels of scientific review - Tier 1,
      Tier 2, and Tier 3 within each class. Submissions for Tier 1 devices receive
      limited review while submissions for Tier 2 and 3 devices receive more
      comprehensive reviews.





Section
      510(k) of the FD&C Act requires individuals or companies manufacturing
      medical devices intended for use with humans to file a notice with the FDA
      at
      least 90 days before introducing a product not exempted from notification
      requirements into the marketplace. The notice [a “510(k) Notification”] must
      state the class in which the device is classified and the actions taken to
      comply with performance standards or pre-market approval which may be needed
      if
      the device is a Class III device. If a company states the device is
      unclassified, it must explain the basis for that determination.





In
      some
      cases obtaining pre-market approval for Class III devices can take several
      years. Product clearance pursuant to a 510(k) Notification can be obtained
      in
      much less time. The average time for 510(k) clearance for safety devices is
      currently 90 days. In general, clearance of a 510(k) Notification for a Class
      II
      device may be obtained if an applicant can establish that the new device is
      “substantially equivalent” to another device of that Class already on the
      market. This requires the new device to have the same intended use as a legally
      marketed predicate device and have similar technological characteristics as
      the
      predicate device. If the technological characteristics are different, the new
      device can still be found to be “substantially equivalent” if information
      submitted by the applicant (including clinical data if requested) supports
      a
      finding that the new device is as safe and effective and does not raise
      questions of safety or efficacy that are different from the predicate
      device.




15





Our
      current products are categorized as Class II devices. We expect our safety
      medical needle products to be categorized as Class II devices. We also expect
      that these products will not require pre-market approval applications, but
      will
      be eligible for marketing clearance through the 510(k) Notification procedure
      based upon their substantial equivalence to previously marketed
      devices.





Although
      the 510(k) Notification clearance process is ordinarily simpler and faster
      than
      the pre-market approval application process, there can be no assurance that
      we
      will obtain 510(k) Notification clearance to market our future products, that
      our products will be classified as set forth above, or that, in order to obtain
      510(k) Notification clearance, we will not be required to submit additional
      data
      or meet additional FDA requirements which could substantially delay new product
      sales and add to our expenses. Moreover, any 510(k) Notification clearance,
      if
      obtained, may be subject to conditions on the marketing or manufacturing of
      the
      related products, which could impede our ability to market or manufacture such
      products.





In
      addition to the requirements described above, the FD&C Act requires that all
      medical device manufacturers and distributors register with the FDA annually
      and
      provide the FDA with a list of those medical devices that they distribute
      commercially. The FD&C Act also requires that all manufacturers of medical
      devices comply with labeling requirements and manufacture devices in accordance
      with QSRs. QSRs require that companies manufacture their products and maintain
      their documents in a prescribed manner with respect to manufacturing, testing,
      and quality control. The FDA's Medical Device Reporting regulation requires
      that
      companies provide information to the FDA on death or serious injuries alleged
      to
      have been associated with the use of their products, as well as product
      malfunctions that would likely cause or contribute to death or serious injury
      if
      the malfunction were to recur. The FDA further requires that certain medical
      devices not cleared with the FDA for marketing in the U.S. meet specific
      requirements before they are exported. We are registered as a manufacturer
      with
      the FDA.





The
      FDA
      inspects medical device manufacturers and distributors, and has broad authority
      to order recalls of medical devices, to seize non-complying medical devices,
      to
      enjoin and/or impose civil penalties on manufacturers and distributors marketing
      non-complying medical devices, and to criminally prosecute violators.
      Noncompliance with FDA regulations could have a material adverse effect on
      our
      Company.





In
      addition to the laws and regulations described above, we are subject to
      government regulations applicable to all businesses, including, among others,
      regulations related to occupational health and safety, workers' benefits and
      environmental protection.




*Safety
      Product Mandates*





Safety
      regulations and legislation have also increased the demand for and exposure
      of
      safety medical devices. The Needlestick Safety and Prevention Act became
      effective in April 2001 and orders specific revisions to OSHA's blood-borne
      pathogens standard. This legislation requires healthcare employers to review
      new
      safety products and mandates their use by employees. The revised standard
      directs all healthcare facilities and employers to select safety needle devices
      as they become available.





Twenty-six
      U.S. states have passed safety legislation requiring use of safety needle
      products. OSHA also issued a national directive in November 1999 requiring
      use
      of safety medical devices. In November 2000, the CDC and OSHA issued safety
      alerts urging healthcare workers to use safety devices having engineered
      controls. President Clinton signed the U.S. Needlestick Safety and Prevention
      Act--HR 5178 and SR 3067--into law Nov 6, 2000.




*Foreign
      Regulation*





Distribution
      and sales of our products in countries other than the U.S. are subject to
      regulations in those countries. In December of 2003, we received certification
      to ISO 9001:2000 and ISO 13485:2003 international quality systems standards.
      Following ISO certification, we were granted a CE Mark for our LiftLoc® Safety
      Infusion Set, MiniLoc® Safety Infusion Set, and SecureLoc® Safety Introducer
      Needle product lines. The granting of the CE mark enables us to distribute
      products in Europe and to seek product registrations in other international
      markets. We have also been certified to CMDCAS (“Canadian Medical Device
      Conformity Assessment System”), which certification allows us to market products
      in Canada.




16





**Competition**





The
      healthcare products market is highly competitive. Many of our competitors are
      substantially larger than we are, have longer operating histories, have
      established channels of distribution and may be more effective at competing
      than
      we are. We depend upon our indirect channels of distribution and our licensees,
      some of whom are our competitors for other products, in marketing and
      distributing our products .  Our
      major competitors are identified below.





*Competitors*





The
      leading suppliers of syringe needles and syringes with needles are BD and
      Kendall. Terumo Medical Corporation (“Terumo”) holds a minor U.S. market share.
      B. Braun Medical (“B. Braun”) is a leader in Europe and Asia, while Terumo is a
      leader in Japan and the Pacific Rim. In addition to the major companies
      mentioned above, other developers of safety medical needles include ICU Medical,
      Inc., Retractable Technologies, Inc., Medisys Technologies, Inc. and Smiths
      Medical.





Competitive
      suppliers of safety Huber needle products with an integral safety feature or
      mechanism include Smiths Medical, Bard Access Systems, AngioDynamics and B.
      Braun.





Leading
      suppliers in the blood collection (phlebotomy) needle market are BD, Kendall
      and
      Terumo.





The
      specialty needle market includes a wide variety of needles including Huber,
      spinal, epidural, biopsy, dental, dialysis, plasma aphaeresis, blood donor
      collection sets, guidewire introducer, PICC introducer, Veress and ophthalmic
      needles. Numerous companies compete within the various markets associated with
      each of these needles. These companies include Cardinal Health, AngioDynamics,
      Arrow, Bard, B. Braun, Kendall, Cook, Inc., BD, Boston Scientific, ICU Medical,
      Inc., Merit, Medtronic, Manan Medical Products, Hart Enterprises, Baxter
      International, Inc., Johnson & Johnson, Enpath, Needle Tech, Terumo, Daum,
      U.S. Biopsy, Kimberly Clark Corporation, and Abbott Laboratories.





*Our
      Competitive Advantages*





Conventional
      needle products have competed primarily on the basis of price. However, we
      believe the safety needle market offers substantial opportunities for premium
      priced products. We compete on the basis of healthcare worker safety, ease
      of
      use, patient comfort, added product features and compliance with state, federal
      and OSHA regulations. We believe our products perform well based on product
      design features and provide attractive margins for our partners and us at a
      reasonable cost to the end user. However, we also believe that as the life
      cycle
      of our safety products continues to mature, there are rising threats such as
      commoditization and corresponding price pressure in our core safety
      markets.





**Seasonality
      of Business**





With
      the
      exception of the IntegraTM syringe, which typically experiences a spike in sales
      during the flu vaccination period (the second half of our fiscal year), sales
      of
      our products are not subject to significant seasonal variations.





**Backlog**




As
      our
      business grows we expect our backlog to grow modestly since most of our
      manufacturing is custom made to order.




17





**Employees**





As
      of
      March 10, 2008, we employed 35 people, including 7 engineers. Our employees
      are
      not represented by any labor union, and we believe our relations with employees
      are good.




**Item
      2. Description of Property**




Our
      principal offices are located at 585 West 500 South, Bountiful, Utah, under
      the
      terms of a lease with an unaffiliated lessor, which expires on December 31,
      2008, at which time the lease shall continue in full force and effect
      indefinitely subject to our right to terminate upon providing three months
      notice after September 1, 2008. The offices and laboratories comprise 15,574
      square feet of space. Our
      primary use of the space is for offices. However, our facility also includes
      designated laboratory space for the development and testing of product
      prototypes, and a dedicated machine shop to support our product development
      activities. W e
      also
      have 3,226 square feet of warehouse space in an adjacent building located at
      557
      West 600 South, Bountiful, Utah, under the terms of a lease with an unaffiliated
      lessor, which expires on March 31, 2008. During 2007 we entered into a lease
      for
      4,600 square feet of warehouse space at 25 North 400 West, North Salt Lake,
      Utah, which expires on August 31, 2008, at which time we have the right to
      extend the lease term for an additional two years from the end of the lease
      term
      in one year increments. We believe that our current office and warehouse space
      will be adequate to meet the needs of current and expected growth for the
      foreseeable future. We may, however, require additional warehousing or
      manufacturing facilities in the future depending upon the volume of products
      sold and the manufacturing arrangements we develop.





In
      October 2006, MDC Research Ltd. (“MDC”), a subsidiary of Specialized Health
      Products International, Inc., and Moen Development entered into a Lease
      Cancellation Agreement (the “Agreement”) whereby a lease related to commercial
      offices leased by MDC in Ventura, California was terminated. Under the
      Agreement, we were obligated to pay for certain utilities through January 31,
      2007, make certain improvements to the premises, maintain insurance relating
      to
      the premises through January 31, 2007, pay our proportional share of property
      taxes from July 1, 2006 though January 31, 2007 which are estimated to be
      $10,801 and pay a base rent differential of $158,321. We also made warranties
      relating to the condition of the premises. In June 2006, MDC’s California
      operations were consolidated into our Bountiful, Utah facilities. MDC was paying
      approximately $22,000 per month in connection with this lease and related
      expenses prior to the effective date of the Agreement. The terminated lease
      had
      an expiration date of October 2008. We anticipate that the lease termination
      arrangements will provide cost savings of approximately $300,000. The lease
      termination agreement resulted in a reduction of the purchase price determined
      for the transaction by $284,819, with the savings resulting from the lease
      termination reducing the liabilities assumed, with an equal offsetting reduction
      being made to the goodwill arising from the purchase price valuation. The
      purchase price adjustment was made in the second quarter of 2007 when the actual
      liabilities had been determined.




**Item
      3. Legal Proceedings**




In
      December 2002, Becton Dickinson (“BD”) filed a lawsuit against Tyco Healthcare
      in the United States Court of the District of Delaware, asserting that Tyco
      Healthcare's Monoject Magellan TM safety
      needle and blood collector products infringe upon BD's U.S. Patent No. 5,348,544
      (the “‘544 Patent”). Tyco Healthcare is now known as Covidien.





Following
      trial, on October 26, 2004, the jury returned a verdict finding that Tyco
      Healthcare willfully infringed BD’s patent and awarded BD $4 million in lost
      profits damages and reasonable royalty damages. In post-trial proceedings,
      Tyco
      Healthcare filed motions for judgment as a matter of law, or, alternatively,
      for
      a new trial. BD filed a post-trial motion for enhanced damages, attorneys’ fees,
      pre-judgment interest and post judgment interest, and a motion for a permanent
      injunction. On March 31, 2006, the trial court issued a Memorandum and Order
      on
      the parties’ post-trial motions: (1) denying
      Tyco Healthcare’s motion for judgment as a matter of law; (2) granting
      Tyco Healthcare’s motion for a new trial on the issue of infringement; and (3) denying
      BD’s motion for enhanced damages, attorneys’ fees, pre-judgment interest and
      post judgment interest, and permanent injunction. The new trial commenced on
      November 27, 2007. On November 30, 2007, a jury found in favor of BD that Tyco
      Healthcare’s Monoject MagellanTM safety products infringe upon the ‘544 Patent.
      The court did, however, grant Tyco Healthcare’s motion to dismiss BD’s claims of
      willful infringement. Tyco Healthcare has indicated that it intends to appeal
      the jury’s decision following post-trial motions. We are not a party to the
      patent infringement lawsuit.




18


Under
      our
      arrangements with Tyco Healthcare, Tyco Healthcare has the right to withhold
      up
      to fifty percent (50%) of royalties due as an offset against litigation expenses
      related to charges of infringement by a third party for the manufacture, use
      or
      sale of licensed product. This right continues while this litigation is pending.
      If, as a result of judgment in the litigation or settlement with BD, Tyco
      Healthcare is required to pay royalty and/or other monies to BD, Tyco Healthcare
      may thereafter deduct from the amount of royalties due us on unit sales of
      products alleged to infringe, an amount which is the lesser of all royalties
      and/or other monies paid by Tyco Healthcare to BD, or fifty percent (50%) of
      all
      royalty payments otherwise payable to us. Accordingly, we have previously
      recorded liabilities for amounts that were our estimate of the portion of costs
      associated with BD’s suit against Tyco Healthcare that Tyco Healthcare would
      withhold against the royalties due to us.





Based
      on
      information obtained during the fourth quarter of 2003 related to costs incurred
      by Tyco Healthcare, we recorded a liability of approximately $1,300,000 at
      December 31, 2003, which amount was our estimate of the portion of costs
      associated with BD’s lawsuit against Tyco Healthcare that Tyco Healthcare would
      withhold against the royalties due SHPI through 2005. During the twelve month
      contract periods ended September 30, 2004 and 2005, Tyco Healthcare withheld
      fifty percent of royalty payments due us, which amounts totaling $1,000,000
      were
      offset against the accrual. Based on information obtained during the fourth
      quarter of 2005, we anticipated the litigation would continue at least through
      2007. Accordingly, we recorded an additional liability of $1,095,200 at December
      31, 2005, which amount was our estimate of the portion of costs associated
      with
      BD’s suit against Tyco Healthcare that Tyco Healthcare would withhold against
      the royalties due us during 2006 and 2007.





As
      a
      result of the jury’s verdict on November 30, 2007, we booked a non-cash charge
      to income of $250,000 during the fourth quarter of 2007 to arrive at the accrued
      liability of $606,928 at December 31, 2007, which represents our estimate of
      the
      portion of costs associated with BD’s suit against Tyco Healthcare that Tyco
      Healthcare will withhold against future royalties due to us through the end
      of
      the third quarter 2008. In the event litigation continues beyond 2008, or if
      Tyco Healthcare ultimately loses the case on appeal, additional liabilities
      may
      accrue. Moreover, if Tyco Healthcare is unsuccessful in post-trial motions
      and
      on appeal, Tyco Healthcare may be prohibited from selling the Monoject
      Magellan TM safety
      products in their current form.





In
      June
      2007, Retractable Technologies, Inc. (“RTI”) filed a lawsuit against Becton,
      Dickinson and Company (“BD”) in the United States Court for the Eastern District
      of Texas, alleging that the BD IntegraTM syringes infringe patents licensed
      exclusively to RTI. The IntegraTM syringe is the subject of a license agreement
      dated March 12, 2000, and subsequently amended, between BD and the Med-Design
      Corporation (“BD Agreement”). This patent claim was not covered by the release
      contained in the July 2004 settlement agreement between BD and RTI to settle
      the
      lawsuit previously filed by RTI. RTI also alleges in its lawsuit that BD engaged
      in false advertising with respect to certain of BD’s safety-engineered products
      in violation of the Lanham Act; acted to exclude RTI from various product
      markets and to maintain BD’s market share through, among other things,
      exclusionary contracts in violation of state and Federal antitrust laws; and
      engaged in unfair competition. The non-patent claims purport to relate to
      actions allegedly taken by BD following the date of the July 2004 settlement
      agreement referenced above. RTI seeks treble damages, attorney’s fees and
      injunctive relief. The Company is not a party to the patent infringement lawsuit
      brought by RTI against BD.




The
      IntegraTM syringe is the subject of a license agreement dated March 12, 2000, and
      subsequently amended, between BD and the Med-Design Corporation (“BD
      Agreement”). Under the BD Agreement, in the event of (i) a final adjudication
      enjoining BD from making, using, or selling the IntegraTM syringe or holding BD
      liable for damages based on the IntegraTM syringe or (ii) settlement of the
      lawsuit requiring payment of damages by BD relative to the IntegraTM syringe, BD
      has the right to deduct from future royalties sufficient to reimburse itself
      for
      one-half of its damages and legal expenses incurred and paid by BD in the
      lawsuit, but in no event shall BD’s royalty payments be reduced below a one
      percent (1%) royalty. No liability has been recorded at December 31, 2007 since
      we currently can not reasonably estimate any potential losses, if
      any.




On
      September 6, 2007, Becton Dickinson and Company (“BD”) and MDC Investment
      Holdings, Inc. (“MDC”) filed a lawsuit against Retractable Technologies, Inc.
      (“RTI”) in the United States Court for the Eastern District of Texas, asserting
      that RTI’s VanishPoint® line of syringes infringe upon MDC’s United States
      Patent No. 6,179,812 (the “‘812 patent”), entitled “Retractable Needle Medical
      Devices,” and United States Patent No. 7,090,656 (the “‘656 patent”), entitled
“Medical Devices with Retractable Needle.” BD and MDC seek damages, attorney’s
      fees and injunctive relief.




19




MDC
      is a
      wholly owned subsidiary of Med-Design Corporation. Med-Design Corporation is
      a
      wholly-owned subsidiary of Specialized Health Products International, Inc.
      Under
      a license agreement between BD and MDC, BD is the exclusive licensee with the
      right to sue for infringement of the ‘812 patent and the ‘656 patent and to join
      MDC as a party to such suit, in which event BD holds MDC free, clear and
      harmless from any and all costs and expenses of such litigation, including
      attorney’s fees.





Additional
      litigation to enforce patents, to protect proprietary information, or to defend
      us against alleged infringement of the rights of others may occur. Such
      litigation would be costly, could divert our resources from other planned
      activities, and could have a material adverse effect on our results of
      operations and financial condition.




**Item
      4. Submission of Matters to a Vote of Security Holders**




None.





**PART
      II**




**Item
      5.**  **Market
      for Common Equity** **and Related Stockholder Matters** **and Small Business Issuer Purchases of Equity Securities**




**S** **hare
      Price****History**




Our
      common stock is traded in the over-the-counter market in what is commonly
      referred to as the “Electronic” or “OTC Bulletin Board” or the “OTCBB” under the
      trading symbol “SHPI.” The following table sets forth the high and low bid
      information of our common stock for the periods indicated. The price information
      contained in the table was obtained from Reuters. Note that the over-the-counter
      market quotations reflect inter-dealer prices, without retail mark-up, markdown
      or commission, and that the quotations may not necessarily represent actual
      transactions in the common stock.





Quarter
                Ended
            
            High
            
            Low2006March
                31
            
            $
            0.60
            
            $
            0.43June
                30
            
            $
            0.52
            
            $
            0.37September
                30
            
            $
            0.70
            
            $
            0.36December
                31
            
            $
            0.72
            
            $
            0.592007March
                31
            
            $
            0.95
            
            $
            0.71June
                30
            
            $
            0.87
            
            $
            0.76September
                30
            
            $
            0.80
            
            $
            0.69December
                31
            
            $
            0.91
            
            $
            0.70




**Holders
      of Record**




At
      March
      10, 2008, there were approximately 3,652 holders of record of our common stock.
      The number of holders of record was calculated by reference to our stock
      transfer agent’s books.




**Dividend
      Policy**




To
      date,
      we have not paid dividends on our common stock. The payment of dividends on
      our
      common stock, if any, is at the discretion of our board of directors and will
      depend upon our earnings, if any, our capital requirements and financial
      condition, and other relevant factors. We do not intend to declare any dividends
      in the foreseeable future, but instead intend to retain all earnings, if any,
      for use in our operations.




20




**Item
      6. Management’s Discussion and Analysis or Plan of
      Operation**





The
      following discussion and analysis provides information which management believes
      is relevant to an assessment and understanding of our consolidated results
      of
      operations and financial condition. The discussion should be read in conjunction
      with the consolidated financial statements and notes thereto.





**Recent
      Developments**





On
      March
      10, 2008, we entered into an Agreement and Plan of Merger dated as of March
      10,
      2008 (the “Merger Agreement”), with C. R. Bard, Inc. (“C. R. Bard”) and Pelican
      Merger Acquisition Sub Co., a wholly owned subsidiary of C. R. Bard (“Merger
      Sub”).




Pursuant
      to the terms of the Merger Agreement, Merger Sub will merge with and into SHPI,
      with SHPI as the surviving corporation of the merger (the “Merger”). At the
      effective time of the Merger, each share of common stock of SHPI then
      outstanding, other than those held as treasury stock and those owned by C.
      R.
      Bard or Merger Sub, and other than those with respect to which appraisal rights
      are properly exercised, will be converted into the right to receive $1.00 per
      share in cash, without interest.




Our
      Board
      of Directors unanimously approved the Merger Agreement, the Merger and the
      transactions contemplated thereby, and recommends that our stockholders adopt
      the Merger Agreement, the Merger and the transactions contemplated
      thereby.




Completion
      of the transaction is subject to the affirmative vote of our stockholders,
      expiration or termination of the applicable anti-trust waiting periods and
      other
      customary closing conditions.




**Overview**





We
      design, develop, manufacture, and market proprietary disposable medical devices
      for clinician and patient safety. Our innovative safety devices are designed
      to
      maximize the efficiency and quality of healthcare, while minimizing the risk
      of
      accidental needlesticks, which are a leading occupational cause of the spread
      of
      blood-borne diseases such as human immunodeficiency virus and
      autoimmunodeficiency syndrome (“HIV/AIDS”) and the hepatitis B and C
      viruses. We have developed multiple safety needle products based upon a broad
      intellectual property portfolio that applies to virtually all medical needles
      used today. We manufacture and market certain products, including four of the
      leading brands in the safety Huber needle market, under our own label. We
      license or supply other products on an OEM basis to leading manufacturers and
      marketers in the global disposable medical products industry, including Tyco
      Healthcare, Bard Access Systems, BD Medical, B. Braun Medical and
      Fresenius-Kabi.




We
      completed our merger with The Med-Design Corporation (“Med-Design”) on
      June 2, 2006. Med-Design was principally engaged in the design and
      development of safety medical needle products and technologies. Med-Design
      has a
      broad intellectual property portfolio that relates primarily to retractable
      safety needle technology.




The
      financial results included in the year ended December 31, 2007 include combined
      SHPI and Med-Design operations from January 1, 2007 through December 31, 2007.
      Financial results for the year ended December 31, 2006 include combined
      operations from June 2, 2006 to December 31, 2006.




During
      the year ended December 31, 2007, we had total revenue of $18,923,627 compared
      to total revenue of $13,269,021 during the year ended December 31, 2006,
      representing an increase of $5,654,606 or 43%. The increase in revenue was
      primarily driven by increased sales of our manufactured products as they
      continue to gain acceptance in the marketplace, and the addition of new revenue
      streams acquired in our merger with Med-Design. Total revenue derived from
      Med-Design revenue streams for the year ended December 31, 2007 was $6,825,476
      as compared to $3,233,090 for the period from the acquisition date to December
      31, 2006.




Gross
      profit for the year ended December 31, 2007 was $12,658,675 as compared to
      $8,469,402 for the year ended December 31, 2006, representing an increase of
      $4,189,273 or 49%. The gross profit margin increased 3 percentage points to
      67%
      in 2007 compared to 64% in 2006. This increase in gross profit margin is due
      to
      increased gross profit margins from our manufactured products and lower
      development fee revenue which has a very high cost of revenue.




21




Net
      income for the year ended December 31, 2007 was $2,723,976 compared to net
      income of $385,207 for the year ended December 31, 2006. This represents an
      improvement of $2,338,769 or 607% for the year ended December 31, 2007. Basic
      net income per share for the year ended December 31, 2007 was $0.04 compared
      to
      basic net income per share of $0.01 for the year ended December 31, 2006.




We
      had
      $8,735,143 in cash and cash equivalents as of December 31, 2007, representing
      an
      increase of $6,453,463 from December 31, 2006, of which $4,275,375 is
      attributed to the proceeds from the sale of available-for-sale securities.
      The
      remaining increase of $2,178,088 is driven primarily by net cash of $3,005,377
      provided by operating activities during the year ended December 31, 2007, offset
      by the use of $828,889 to purchase patents and property and equipment and
      increased investment in working capital to fund our growth. Net cash of
      $3,005,377 provided by operating activities during the year ended December
      31,
      2007 represents an improvement of $3,151,046 compared to the net cash of
      $145,669 used in operating activities during the year ended December 31, 2006.




In
      November 2007, we entered into a Supply and Distribution Agreement with B.
      Braun
      Medical whereby B. Braun acquired the exclusive right to market, sell and
      distribute SafeStep® Huber Needle Sets and SafeStep® MAXTM Power-Injectable
      Infusion Set throughout the world with the exception of the U.S. and Canada.




**Sources
      of Revenue**




Revenue
      consists of (1) product sales, (2) product royalties, (3) technology fees and
      licensing revenues, and (4) development fees and related services.




Product
      sales are derived primarily from sales of our manufactured safety Huber needles,
      safety introducer needles and bone marrow biopsy needles to customers.




Product
      royalty income is generated from proprietary products subject to license
      agreements with corporate partners, including but not limited to Tyco
      Healthcare, BD Medical, and TAP Pharmaceutical Products Inc. In each case,
      these
      products are manufactured and sold by our licensing partners, and we receive
      on-going royalty payments on product sales.




Technology
      fees and licensing revenues consist of amortizing up-front payments related
      to
      certain license agreements.




Development
      fees and related services consist of payments for services rendered and
      reimbursements from our partners related to product development activities.




**Cost
      of Revenue and Operating Expenses**




Cost
      of
      revenue consists primarily of the
      raw
      material and manufacturing cost incurred to build the products sold, plus the
      cost of inbound and outbound freight .




Research
      and development expenses consist primarily of personnel costs related to our
      proprietary research and development efforts and the design, development and
      improvement of our manufacturing lines and capabilities, as well as costs
      incurred in connection with our third-party collaboration efforts. Also included
      is amortization of stock-based compensation cost recorded for restricted stock
      awards, the value of which is being amortized over the vesting period of the
      awards in accordance with SFAS 123R.




Sales
      and
      marketing expenses consist primarily of payroll
      and related expenses for personnel engaged in marketing and selling activities,
      as well as travel, promotional and marketing expenditures incurred to support
      the sale of our manufactured products. Also
      included is amortization of stock-based compensation cost recorded for
      restricted stock awards, the value of which is being amortized over the vesting
      period of the awards in accordance with SFAS 123R.




General
      and administrative expenses consist primarily of wages
      and
      benefits for executive, legal, accounting and administrative personnel,
      insurance, rent and utilities, travel, depreciation of property and equipment
      and amortization of intangible assets and other general corporate expenses. Also
      included is amortization of stock-based compensation cost recorded for
      restricted stock awards, the value of which is being amortized over the vesting
      period of the awards in accordance with SFAS 123R.




Patent
      litigation expense consist of costs expected to be incurred associated with
      BD’s
      suit against Tyco Healthcare that Tyco Healthcare is expected to withhold
      against future royalties.




22




**Outlook**




Our
      board
      of directors and senior management have determined that we have reached a point
      where significant additional investment is needed in order to build
      infrastructure, build more manufacturing capacity and other facilities, and
      to
      develop or acquire new product lines to continue our strong growth rates as
      a
      stand-alone company beyond 2008. If the proposed Merger with C. R. Bard, which
      is discussed above in “Recent Developments,” is not consummated, we expect to
      incur significant costs to build infrastructure, expand manufacturing capacity,
      and to develop or acquire new product lines.




**Results
      of Operations**





The
      following table presents our results of operations for the years ended December
      31, 2007 and 2006:




2007
            
            2006
            
            Change
            
            %
                ChangeRevenue:Product
                sales
            
            $
            14,489,223
            
            $
            9,593,615
            
            $
            4,895,608
            
            
            51
            %Royalties
            
            
            4,126,816
            
            
            2,887,997
            
            
            1,238,819
            
            
            43
            %Licensing
                revenues
            
            
            196,668
            
            
            196,668
            
            
            -
            
            
            0
            %Development
                fees and related services
            
            
            110,920
            
            
            590,741
            
            
            (479,821
            )
            
            -81
            %Total
                Revenue
            
            
            18,923,627
            
            
            13,269,021
            
            
            5,654,606
            
            
            43
            %Cost
                of revenue
            
            
            6,264,952
            
            
            4,799,619
            
            
            1,465,333
            
            
            31
            %Gross
                profit
            
            
            12,658,675
            
            
            8,469,402
            
            
            4,189,273
            
            
            49
            %Operating
                expenses:Research
                and development (1)
            
            
            4,480,231
            
            
            3,786,322
            
            
            693,909
            
            
            18
            %Sales
                and marketing (1)
            
            
            1,522,608
            
            
            1,484,350
            
            
            38,258
            
            
            3
            %General
                and administrative (1)
            
            
            3,898,458
            
            
            2,846,235
            
            
            1,052,223
            
            
            37
            %Patent
                litigation expense
            
            
            250,000
            
            
            -
            
            
            250,000
            
            
            100
            %Total
                operating expenses
            
            
            10,151,297
            
            
            8,116,907
            
            
            2,034,390
            
            
            25
            %Income
                from operations
            
            
            2,507,378
            
            
            352,495
            
            
            2,154,883
            
            
            611
            %Other
                income (expense):Interest
                income
            
            
            264,943
            
            
            180,440
            
            
            84,503
            
            
            47
            %Other
                expense, net
            
            
            (3,314
            )
            
            (147,728
            )
            
            144,414
            
            
            -98
            %Total
                other income, net
            
            
            261,629
            
            
            32,712
            
            
            228,917
            
            
            700
            %Income
                tax provision
            
            
            (45,031
            )
            
            -
            
            
            (45,031
            )
            
            0
            %Net
                income
            
            $
            2,723,976
            
            $
            385,207
            
            $
            2,338,769
            
            
            607
            %


(1)
        Includes amortization of stock-based compensation as follows:





Research
                and development
            
            $
            423,163
            
            $
            458,507
            
            $
            (35,344
            )
            
            -8
            %Sales
                and marketing
            
            $
            21,363
            
            $
            28,472
            
            $
            (7,109
            )
            
            -25
            %General
                and administrative
            
            $
            887,756
            
            $
            892,642
            
            $
            (4,886
            )
            
            -1
            %




*Revenue*





During
      the year ended December 31, 2007, we had total revenue of $18,923,627 compared
      to total revenues of $13,269,021 for the year ended December 31, 2006,
      representing an increase of $5,654,606 or 43%. The increase in revenue is
      attributable to increases in product sales and royalties discussed below.





*Product
      Sales*





During
      2007, we recognized $14,489,223 in product sales compared to $9,593,615 in
      2006.
      The $4,895,608 increase in product sales was primarily driven by increased
      sales
      to existing customers, of our leading safety Huber needle products, MiniLoc®
Safety Infusion Set and SafeStep® Huber Needle Set, as well as new OEM sales of
      our PowerLoc® Safety Infusion Set to Bard Access Systems and MonojectTM Bone
      Marrow Biopsy Needles to Tyco Healthcare.




23





Furthermore,
      the year ended December 31, 2007 reflects a full period of SafeStep® product
      revenue related to the Med-Design merger as compared to seven months of revenue
      for the year ended December 31, 2006. Revenue from sales of SafeStep® increased
      $2,363,567 for the year ended December 31, 2007 as compared to the year ended
      December 31, 2006.





*Product
      Royalties*





In
      2007,
      we recognized $4,126,816 in product royalties, compared to $2,887,997 in 2006.
      Product royalties in 2007 increased by $1,238,819, which is primarily
      attributable to realizing a full year of royalty income from BD Medical related
      to the Vacutainer® Push Button Blood Collection Set and the IntegraTM Syringe
      product lines acquired in the Med-Design merger in addition to increased income
      from Tyco Healthcare related to the Monoject MagellanTM safety
      syringe.





*Licensing
      revenue* *s*





Licensing
      revenues did not change over the comparable annual periods. We are currently
      amortizing two upfront payments ratably over the multi-year life of the related
      license agreements. One such prepayment of $150,000 was received in 2003, and
      is
      being amortized over a five year period. A second prepayment of $500,000 was
      received in 2005, and is being amortized over a three year period. No new
      license agreements have been entered into during 2007.





*Development
      Fees and Related Services Revenue*





Development
      fees and related services decreased $479,821 or 81% for the year ended December
      31, 2007 as compared to the year ended December 31, 2006. This decrease is
      related to the maturation of our funded development projects, which have moved
      into the production phase in 2007.




*Cost
      of Revenue*





Cost
      of
      revenue increased $1,465,333 or 31% for the year ended December 31, 2007 as
      compared to the year ended December 31, 2006. The increase in cost of revenue
      is
      attributable to the increase in product sales, partially offset by a 77%
      decrease in cost of revenue associated with development fees and related
      services.





*Gross
      Profit*





Gross
      profit for the year ended December 31, 2007 increased $4,189,273 or 49%,
      compared to the year ended December 31, 2006. The increase in gross profit
      is
      primarily attributable to (1) the increase in our total revenue, particularly
      the increase in royalty revenue, which has minimal cost of revenue and, (2)
      the
      cost savings realized by transitioning to multi-cavity molds for the component
      parts of our MiniLoc® Safety Infusion Set product line in July 2006.
      Additionally, development fees and related services, which carry a high cost
      of
      revenue, decreased 81% from the comparable periods.




Gross
      profit margin for the year ended December 31, 2007 was 67%, representing an
      increase of three percentage points compared to the 64% gross profit margin
      realized for the year ended December 31, 2006. The increase in gross profit
      margin is primarily attributable to cost savings realized by transitioning
      to
      multi-cavity molds for the component parts of our MiniLoc® Safety Infusion Set
      product line in July 2006, the increase in royalty revenue for which there
      is
      minimal cost of revenue, and the decrease in development fees for which there
      is
      high cost of revenue.





24




*Operating
      Expenses*





*Total
      Operating Expenses*




Total
      operating expenses increased by $2,034,390 or 25% from fiscal year 2006 to
      2007.
      The increase is primarily driven by an increased operating infrastructure
      required to meet the growing demand for our products in addition to having
      a
      full year of costs related to supporting the additional revenue streams acquired
      in the Med-Design merger in 2007 as compared to only seven months in 2006.
      Additionally, there was an increase in patent litigation expense of
      $ 250,000
      relating to BD’s suit against Tyco Healthcare, as described more fully in Item
      3, “Legal Proceedings”.





*Research
      and Development Expenses*





Research
      and development expenses increased $693,909 or 18% for the year ended December
      31, 2007 as compared to the year ended December 31, 2006. The increase in
      R&D expenses is primarily due to an increase of $270,992 for personnel
      related expenses for additional personnel including $143,120 in severance
      expense related to staff reduction, $111,542 in consultant related expenses,
      $23,728 in testing related expenses incurred in the exploration of additional
      products, $120,489 in research and development supplies, an increase of $106,561
      for depreciation of new R&D manufacturing equipment acquired during the last
      half of 2006 and throughout 2007 and an increase of $41,519 in patent
      amortization costs due to increased capitalization of patent costs in the last
      half of 2006 and throughout 2007.





The
      remaining increase is due to a number of smaller increases in various expense
      categories related to the development and commercialization of new product
      applications based upon our SecureLoc® technology, the exploration of additional
      products based upon our proprietary medical safety needle technologies,
      continued support of our manufactured product lines, and the development of
      product improvements to the SafeStep® Huber Needle Set product line acquired in
      the Med-Design transaction.





Stock
      based compensation included in research and development expenses was $423,163
      and $458,507 for the years ended December 31, 2007 and 2006,
      respectively.




*Sales
      and Marketing Expenses*





Sales
      and
      marketing expenses increased $38,258 or 3% for the year ended December 31,
      2007
      as compared to the year ended December 31, 2006. This increase is primarily
      related to an increase of $93,701 in commissions and distribution fees for
      our
      SafeStep® Huber Needle Set product line during the 2007 period. An increase of
      $19,361 in trade show and travel related expenses related to our expanded line
      of product offerings and an increase in marketing supplies and other expenses
      of
      $65,466 related to the creation and distribution of new marketing materials
      for
      the expanded line of products. The increases noted above were offset by a
      decrease in personnel related expenses of $149,492 due to the reduction of
      personnel within the sales and marketing group during 2007.





Stock
      based compensation included in sales and marketing expenses was $21,363 and
      $28,472 for the years ended December 31, 2007 and 2006,
      respectively.





*General
      and Administrative Expenses*





General
      and administrative expenses increased $1,052,223 or 37% for the year ended
      December 31, 2007 as compared to year ended December 31, 2006. The increase
      resulted primarily from increased personnel costs of $532,877 related primarily
      to the addition of new finance and accounting employees, increased consultant
      fees of $132,328 related to costs incurred to comply with Sarbanes-Oxley and
      retaining the services of a financial advisory firm, increased amortization
      of
      $103,542 related to amortizing the license rights acquired in the Med-Design
      merger, increased investor relation expenses of $114,424 related to retaining
      the services of an investor relations firm, increased legal fees and a number
      of
      smaller increases in various expense categories.





Stock
      based compensation included in general and administrative expenses was $887,756
      and $892,642 for the years ended December 31, 2007 and 2006,
      respectively.





25




*Patent
      Litigation Expense*





During
      the fourth quarter of 2007, we recorded an additional liability of $250,000,
      which is our estimate of the additional costs associated with BD’s suit against
      Tyco Healthcare that Tyco Healthcare will withhold against the royalties due
      SHPI for future sales on the Monoject MagellanTM safety syringe. After recording
      the additional liability of $250,000, there remained $606,928 of the accrued
      liability as of December 31, 2007, related to the BD / Tyco Healthcare lawsuit.
      See Item 3, “Legal Proceedings.”





*Other
      Income*





Other
      income consists primarily of interest income and debt related expenses. The
      $228,917 increase for the year ended December 31, 2007 as compared to December
      31, 2006 resulted primarily from an increase in interest earned on invested
      funds of $4,175,000 as the funds were invested for the whole period in 2007
      as
      compared to a portion of the period in 2006, a decrease in interest expense
      of
      $52,603 related to the Galen Partners’ convertible note and a $91,745 decrease
      in the expensing of deferred finance costs related to the issuance of warrants
      to Galen Partners in consideration for the convertible note, since the Galen
      note, including all accrued interest, was paid in full on September 30, 2006.





*Income
      Tax Expense*





We
      recognized income tax expenses of $45,031 for the year ended December 31, 2007
      related to alternative minimum taxes and state taxes for 2007. While we were
      profitable in 2006, we incurred no tax expense for the year ended December
      31,
      2006 due to the utilization of net operating losses incurred in prior periods.
      At December 31, 2007, we had total net operating losses (“NOL’s”) of
      $89,963,438. As defined in Section 382 of the Internal Revenue Code, the Company
      has undergone a greater than 50 percent ownership change as a result of the
      financing initiatives taken in 1998 and 2002. Consequently, there are
      limitations on the amount of the Company's NOL’s that may be utilized to offset
      future taxable income in any one year. In addition, approximately $64,800,000
      of
      the above NOL’s were acquired in the Med-Design merger. This portion of the NOL
      is subject to an annual limitation of approximately $79,000 under Internal
      Revenue Code Section 382, and consequently, approximately $63,300,000 will
      expire prior to utilization. In addition, Statement of Financial Accounting
      Standards No. 109 “ *Accounting
      for Income Taxes* ”,
      requires that as the Company realizes a tax benefit from the Med-Design NOL’s,
      that any benefit shall first, be applied against and reduce to zero, goodwill
      related to the acquisition, and second, reduce to zero other noncurrent assets
      related to the acquisition and third, reduce income tax expense. See Note 12
      in
      the Consolidated Financial Statements. Our ability to realize the benefit of
      these NOL’s and tax credits will depend on the generation of future taxable
      income through profitable operations.





We
      adopted Financial Accounting Standards Board Interpretation No. 48 “ *Accounting
      for Uncertainty in Income Taxes”* (“FIN
      48”) on January 1, 2007 which requires financial statement recognition and
      measurement of a tax position taken or expected to be taken in a return. The
      adoption of FIN 48 did not have a material impact on our financial
      statements.




*Net
      Income*





Our
      net
      income for the year ended December 31, 2007 increased $2,338,769 or 607% as
      compared to the year ended December 31, 2006. Basic and diluted net income
      per
      common share for the year ended December 31, 2007 was $0.04, compared to $0.01
      net income per common share for the year ended December 31, 2006.





**Liquidity
      and Capital Resources**





Historically,
      our principal use of cash has been to fund ongoing operations. To date, we
      have
      financed our operations principally through private placements of equity
      securities, the sale of products, technology and patents, advanced royalties,
      development fees, technology and license fees and proceeds from the sale of
      common stock.





We
      had
      $8,735,143 in cash and cash equivalents as of December 31, 2007, representing
      an
      increase of $6,453,463 from December 31, 2006. The increase relates to net
      cash provided by operations of $3,005,377 offset by the purchases of $828,889
      in
      long-term assets. The remainder of the increase primarily relates to proceeds
      of
      $4,275,375 from the sale of available-for-sale securities.




26





Working
      capital as of December 31, 2007 was $11,303,218, compared to $7,472,966 as
      of
      December 31, 2006. The increase in working capital in 2007 was primarily
      due to cash provided by operating activities and the maturity of marketable
      securities offset by purchases of long-term assets. Our working capital
      requirements for the foreseeable future will vary based upon a number of
      factors, including the costs to finance our growing business, the cost of
      bringing new safety medical needle technologies and other products to commercial
      viability, and the timing of market launches of new products.





Net
      cash
      provided by operating activities was $3,005,377 in 2007 compared to net cash
      used of $145,669 for operating activities in 2006. The increase was primarily
      attributable to an increase in net income offset by increases in accounts
      receivable and inventories, related to the dramatic growth of our manufactured
      product sales and payments for accrued liabilities.





Net
      cash
      provided by investing activities totaled $3,446,486 in 2007 compared to
      $2,220,127 in 2006. In 2007, cash proceeds of $4,275,375 were received from
      the
      sale of available-for-sale securities offset by purchases of long-term assets
      totaling $828,889. In 2006, net cash of $2,973,799 was received in connection
      with the Med-Design merger offset by the purchase of $753,672 in long-term
      assets.





Net
      cash
      provided by financing activities in 2007 was $1,600 from the exercise of 80,000
      warrants by Galen Partners. During 2006, net cash of $500,000 was used to retire
      the Galen note (see further discussion of the Galen note in Item 12 Certain
      Relationships and Related Transactions, and Director Independence).





As
      of
      December 31, 2007, we had accounts payable and accrued liabilities totaling
      $2,821,554. We also had a current portion of accrued patent litigation expense
      of $606,928 and current deferred revenue of $172,067, neither of which will
      require the use of cash. At December 31, 2007, we had cash and cash equivalents
      of $8,735,143.





We
      anticipate higher expenses and capital investment during the second-half of
      2008
      and through 2009 as we begin to make needed investments in facilities and
      infrastructure and step up our efforts to develop new products and business
      lines to supplement our existing products, which primarily compete in markets
      that are approaching full conversion to safety in the U.S.





We
      believe that existing cash and cash equivalents, along with cash generated
      from
      the collection of accounts receivable, the sale of products, development fees
      and royalties will be sufficient to meet our cash requirements during the next
      twelve months. However, there can be no assurance that we will not make an
      acquisition or encounter unforeseen difficulties that may deplete our resources
      more rapidly than anticipated. Additionally, if we increase research and
      development costs to build up our product pipeline, invest in additional
      infrastructure, or build additional manufacturing or other facilities, or
      otherwise increase manufacturing capacity, our resources will deplete more
      rapidly. Any efforts to seek additional funding could be done through equity,
      debt or other external financing; however there is no assurance that additional
      funding will be available on favorable terms, if at all. If we fail to obtain
      additional funding when needed, our business and financial condition may be
      adversely affected.





**Off-Balance
      Sheet Arrangements**





We
      do not
      have any off-balance sheet arrangements that have or are reasonably likely
      to
      have a current or future effect on our financial condition, results of
      operations or cash flows.




**Merger
      Agreement**




We
      completed our merger with The Med-Design Corporation (“Med-Design”) on
      June 2, 2006, following approval by stockholders of both
      companies.





Of
      the
      preliminary estimated $2,145,000 of liabilities accrued in the merger with
      Med-Design, $1,281,184 related to expected costs associated with exiting the
      Med-Design business. During 2007, it was determined, based on early termination
      of the Med-Design lease, that the actual cost of exiting the Med-Design business
      was $996,365, resulting in a decrease of $284,819 in assumed liabilities and
      goodwill related to the transaction.




27





**Product
      Agreements**





*License
      Agreements*





Kendall





In
      November 1999, we entered into a Development and License Agreement with The
      Kendall Company, a division of Tyco Healthcare Group LP, relating to the
      production of a line of safety medical needle products, including six syringe
      products and five other safety needle products. The Kendall Agreement became
      effective in March 2000. In April 2000, we received $1,464,956 under the Kendall
      Agreement. We received an additional $1,000,000 in November 2002 in exchange
      for
      assigning to Kendall the FlexLoc® and ReLocTM trademarks and two related U.S.
      patents and their progeny for a technology. Both of these payments are being
      recognized ratably over the estimated five-year life of the Kendall Agreement.
      The assignment of the patent rights to Kendall provides for the Company’s
      retention of an exclusive, royalty-free license in a number of strategic product
      areas. The Kendall Agreement also provides for us to receive development fees
      and ongoing royalties, including a $500,000 advance royalty payment that was
      also received in November 2002.





In
      April
      2002, we entered into a Second Development and License Agreement with Kendall
      relating to blood collection needles and blood collection needle/holder
      combinations. Under the terms of the agreement, we receive reimbursement for
      research and development expenses, payments related to the achievement of
      certain regulatory and sales milestones, and on-going royalty payments on all
      product sales.





Merit
      Medical





In
      January 2001, we entered into a License Agreement with Merit
      Medical Systems, Inc. relating to the manufacture and marketing of safety needle
      devices for angiographic guidewire introducers. We received an upfront license
      fee payment of $100,000 in January 2001, which is being recognized ratably
      over
      the estimated five-year life of the Merit Agreement. Under the terms of the
      Merit Agreement, we receive ongoing royalties on net product sales, and began
      receiving minimum royalty payments in 2002.





TAP
      Pharmaceutical Products





In
      July
      2002, we entered into a Development and License Agreement with TAP
      Pharmaceutical Products Inc. whereby TAP acquired the right to attach our
      proprietary safety needle device to TAP’s pre-filled syringes. The TAP Agreement
      has an effective date of January 1, 2002. Under the TAP Agreement, we receive
      reimbursement for research and development expenses, payments related to the
      achievement of certain development and regulatory milestones, and on-going
      royalty payments based upon the number of pre-filled syringes manufactured
      with
      our proprietary safety needle device. The TAP Agreement is for a minimum period
      of three years. The TAP Agreement automatically renews for additional one year
      terms unless TAP provides written notice of termination at least ninety days
      prior to the expiration of the then current term.





Becton,
      Dickinson and Company





In
      August
      2003, we entered into a License Agreement with Becton, Dickinson and Company
      relating to the manufacture and marketing of safety needle devices for spinal
      and epidural needles and certain other specialty needles sold by BD. Under
      the
      terms of the agreement, we receive reimbursement for certain research and
      development expenses, payments related to the achievement of certain regulatory
      and commercialization milestones, and on-going royalty payments on all product
      sales. The BD agreement is for the life of the patent.




28





Tyco
      Healthcare





In
      December 2005, we entered into a non-exclusive License Agreement with Tyco
      Healthcare relating to the manufacture and marketing of safety peripheral IV
      catheter devices. Under the terms of the agreement, SHPI receives payments
      related to the achievement of certain patent and commercialization milestones,
      and on-going royalty payments on all product sales. The agreement is for the
      life of the patents.





Becton,
      Dickinson and Company





In
      December 1998, Med-Design entered into a License Agreement with BD relating
      to the manufacture and marketing of safety medical needle products in the fields
      of blood collection and infusion therapy and obtained an option to license
      additional product technology. Under the terms of the agreement, Med-Design
      receives on-going royalty payments on all product sales. The agreement is for
      the life of the patents.




In
      March 2000, Med-Design signed a binding term letter with BD relating to
      safety hypodermic syringes, which outlined the terms for a definitive agreement
      pursuant to which BD would license the products subject to the option to
      license. Under the terms of the agreement, Med-Design has the right to receive
      royalty payments based on BD’s net sales of the products licensed under such
      agreement for the remaining life of the underlying patents.




Enpath
      Medical, Inc.





In
      September 2000, Med-Design entered into a development and license agreement
      granting Enpath a license to market and manufacture Med-Design’s Safety
      Seldinger Introducer Needle for certain venous applications. Under the terms
      of
      the agreement, Med-Design receives royalty payments based on the net sales
      of
      the Safety Seldinger Introducer Needle by Enpath. Royalties from this product
      declined significantly in 2005, as Enpath’s major customer decided to use a
      non-safety Seldinger introducer needle.




In
      September 2001, Med-Design entered into an Addendum (“the Addendum”) to the
      development and licensing agreement with Enpath Medical, Inc. The Addendum
      grants Enpath Medical, Inc. an exclusive license to manufacture and market
      the
      Med-Design’s Safety Seldinger Introducer Needle in the arterial access market.
      Under the terms of the Addendum, Med-Design received an initial payment of
      $2,000,000. $1,000,000 was paid in 68,027 shares of Enpath Medical, Inc. common
      stock valued at the closing price on the date Med-Design entered into the
      Addendum and $1,000,000 of which was paid in cash on October 15, 2001. In
      addition, Med-Design is entitled to receive royalties of 20% of net sales of
      the
      product, which royalty rate may be reduced to 17% if certain sales volumes
      are
      met. The agreement is in effect for the remaining life of the underlying
      patents.




In
      December 2004, Med-Design entered into Addendum Number Two to the
      development and licensing agreement with Enpath to eliminate the minimum
      purchase amount required for Enpath to maintain exclusivity under the
      development and licensing agreement.




*Distribution
      Agreements*





Bard
      Access Systems





In
      September 2001, we entered into a Distribution Agreement with Bard Access
      Systems, Inc. whereby Bard acquired the non-exclusive right to promote, market,
      distribute and sell LiftLoc® Safety Infusion Set, which we manufacture, to
      hospitals and group purchasing organizations. The Bard Agreement excludes
      alternate site locations. Under the terms of the agreement, we sell finished
      product to Bard for marketing under Bard’s private label. The Bard Agreement is
      for a two-year period from the initial date of product launch, and automatically
      renews for successive one-year terms unless terminated by either party in
      writing not less than 180 days prior to the expiration of the initial term
      or
      any renewal term. In September 2005, the Bard Agreement was amended to add
      the
      MiniLoc® Safety Infusion Set to the products supplied to Bard.





In
      September 2005, we entered into a Development, Distribution and Supply Agreement
      (the “2 nd Bard
      Agreement”) with Bard. The 2 nd Bard
      Agreement provides for (i) Bard to provide funding for the development of a
      new
      safety infusion set that meets Bard’s requirements (the “Bard Product”), (ii)
      Bard to receive the right to distribute the Bard Product, (iii) SHPI to
      manufacture, package and supply Bard with the Bard Product for marketing under
      Bard’s private label, and (iv) a term of five years, subject to automatic
      renewal for successive one-year terms unless terminated by either party on
      90
      days notice prior to the expiration of the then effective term.




29





In
      April
      2006, we entered into a Development, Distribution and Supply Agreement (the
      “3 rd Bard
      Agreement”) with Bard. The 3 rd Bard
      Agreement provides for (i) Bard to provide funding for the development of a
      safety percutaneous endoscopic gastrostomy (“PEG”) introducer needle that meets
      Bard’s requirements (the “Safety PEG Product”), (ii) Bard to receive the right
      to distribute the Safety PEG Product worldwide for use in applications, and
      (iii) SHPI to manufacture, package and supply Bard with the Safety PEG Product.
      The 3 rd Bard
      Agreement has a term of five years, subject to automatic renewal for successive
      one-year terms unless terminated by either party on 180 days notice prior to
      the
      expiration of the then effective term.




Physician
      Sales & Service





In
      July
      2002, we entered into a Distribution Agreement with Physician Sales and Service,
      Inc. whereby PSS acquired the non-exclusive right to distribute and sell
      LiftLoc® Safety Infusion Set. Under the terms of the agreement, PSS purchases
      SHPI branded product from us for resale to PSS’s end-user customers. The PSS
      Agreement is for a one-year period, which automatically renews for successive
      one-year terms unless terminated by either party in writing not less than 45
      days prior to the expiration of the initial term or any renewal term. In
      September 2005, the PSS Agreement was amended to add the MiniLoc® Safety
      Infusion Set to the products supplied to PSS.





Medline
      Industries





In
      August
      2002, we entered into a Distribution Agreement with Medline Industries, Inc.
      whereby Medline acquired the non-exclusive right to distribute and sell LiftLoc®
Safety Infusion Set. Under the terms of the agreement, Medline purchases SHPI
      branded product from us for resale to Medline’s end-user customers. The Medline
      Agreement is for a one-year period, which automatically renews for successive
      one-year terms unless terminated by either party in writing not less than 45
      days prior to the expiration of the initial term or any renewal term. In
      September 2005, the Medline Agreement was amended to add the MiniLoc® Safety
      Infusion Set to the products supplied to Medline.





Cardinal
      Health





In
      August
      2002, we entered into a Distribution Agreement with Cardinal Health, formerly
      named Allegiance Healthcare Corporation, whereby Cardinal acquired the
      non-exclusive right to distribute and sell LiftLoc® Safety Infusion Set. Under
      the terms of the agreement, Cardinal purchases SHPI branded product from us
      for
      resale to Cardinal’s end-user customers. The Cardinal Agreement shall continue
      until 90 days after written notice of termination is received by either party.
      In September 2005, the Cardinal Agreement was amended to add the MiniLoc® Safety
      Infusion Set to the products supplied to Cardinal.





ExelInt
      International





In
      May
      2003, we entered into a Distribution Agreement with ExelInt International,
      Company whereby Exel acquired the non-exclusive right to promote, market,
      distribute and sell LiftLoc® Safety Infusion Set. Under the terms of the
      agreement, we sell finished product to Exel for marketing under Exel’s
      SecureTouch® private label. Exel is subject to minimum purchase requirements. In
      October 2005, the Exel Agreement was amended to add the MiniLoc® Safety Infusion
      Set to the products supplied to Exel. The Exel Agreement is for a six-year
      period and automatically renews for successive five-year terms unless terminated
      by either party in writing not less than 180 days prior to the expiration of
      the
      initial term or any renewal term.





Henry
      Schein





In
      September 2003, we entered into a Distribution Agreement with Henry Schein,
      Inc., whereby Henry Schein acquired the non-exclusive right to distribute and
      sell LiftLoc® Safety Infusion Set. Under the terms of the agreement, Henry
      Schein purchases SHPI branded product from us for resale to Henry Schein’s
      end-user customers. The Henry Schein Agreement continues until 45 days after
      written notice of termination is received by either party.




30




Other
      LiftLoc® and MiniLoc® Distribution Agreements





During
      2003, we entered into Distribution Agreements with Medical Specialties
      Distributors, Inc., Briggs Corporation, Omni Medical Supply, Inc., and Wolf
      Medical Supply, Inc., whereby each company acquired the non-exclusive right
      to
      distribute and sell LiftLoc® Safety Infusion Set. Under the terms of these
      agreements, each company purchases SHPI branded product from us for resale
      to
      their end-user customers. Each of the agreements is for a one-year term and
      shall be renewed automatically for additional, consecutive one-year terms unless
      terminated by either party in writing not less than 45 days prior to the
      expiration of the initial term or any renewal term.





In
      December 2003, we entered into a Distribution Agreement with Biometrix Ltd.
      (“Biometrix”), whereby Biometrix acquired the non-exclusive right to distribute
      and sell LiftLoc® Safety Infusion Set in Israel. Under the terms of the
      agreement, Biometrix purchases SHPI branded product from us for resale to their
      end-user customers. The agreement is for a three-year term and shall be renewed
      automatically for additional, consecutive one-year terms unless terminated
      by
      either party in writing not less than 45 days prior to the expiration of the
      initial term or any renewal term.





In
      July
      2005, we entered into a Distribution Agreement with Angus Medical for the
      non-exclusive right to distribute and sell MiniLoc® Safety Infusion Set in
      Canada. Under the terms of the agreement, Angus Medical purchases SHPI branded
      product from us for resale to their end-user customers. The agreement is for
      a
      one-year term and shall be renewed automatically for additional, consecutive
      one-year terms unless terminated by either party in writing not less than 90
      days prior to the expiration of the initial term or any renewal
      term.





In
      March
      through December 2006, we
      entered into Distribution Agreements with Capitol Medical, Inc., Medtec Medical,
      Inc., Kentec Medical, Inc., and Tri-State Hospital Supply Corporation for the
      non-exclusive right to distribute and sell MiniLoc® Safety Infusion Set in
      defined geographic territories. Under the terms of the agreements, each company
      purchases SHPI branded product from us for resale to their end-user customers.
      Each of the agreements is for a one-year term and shall be renewed automatically
      for additional, consecutive one-year terms unless terminated by either party
      in
      writing not less than 45 days prior to the expiration of the initial term or
      any
      renewal term.





Tyco
      Healthcare





In
      June
      2004, we entered into a worldwide Development and OEM Supply/Distribution
      agreement with Tyco Healthcare for the marketing and sale of bone marrow biopsy
      needles. Under the terms of the agreement, Tyco Healthcare will purchase bone
      marrow biopsy needles from us, as well as reimburse us for certain research
      and
      development expenses related to product commercialization. The Tyco Healthcare
      agreement is for an initial term of three years during which it is
      non-cancellable. After the initial three-year term it automatically renews
      for
      additional one-year terms unless terminated in writing by Tyco Healthcare upon
      180 days notice.





Merit
      Medical





In
      October 2005, we entered into a Purchase Agreement with Merit Medical for the
      marketing and sale of our SecureLoc® Safety Introducer Needle. Under the terms
      of the agreement, Merit Medical will purchase safety introducer needles from
      us.
      The agreement is for an initial term of five years. After the initial five-year
      term it automatically renews for additional five-year terms unless terminated
      in
      writing by either party upon 90 days notice.





ICU
      Medical





In
      May
      2006, we entered into a Purchase Agreement with ICU Medical, Inc. for the
      marketing and sale of our SecureLoc® Safety Introducer Needle. Under the terms
      of the agreement, ICU Medical will purchase safety introducer needles from
      us.
      The agreement is for an initial term of five years. After the initial five-year
      term it automatically renews for additional five-year terms unless terminated
      in
      writing by either party upon 90 days notice.




31





Alliance
      Medical





Med-Design
      acquired the SafeStep® Huber Needle Set product line in April 2004. As a part of
      the purchase Med-Design assumed all existing contracts, one of which was an
      exclusive distribution agreement with Alliance Medical to market the SafeStep®
product line in the United States of America. The agreement establishes minimum
      purchase amounts to retain exclusive sales rights to distribute the product.
      The
      Alliance Medical agreement continues until December 31, 2008 and automatically
      renews for successive one-year terms unless terminated in writing not less
      than
      90 days prior to expiration of the initial term or any renewal term.





B.
      Braun Medical





In
      November 2007, we entered into a Supply and Distribution Agreement with B.
      Braun
      Medical whereby B. Braun acquired the exclusive right to market, sell and
      distribute SafeStep® Huber Needle Sets and SafeStep® MAXTM Power-Injectable
      Infusion Set throughout the world with the exception of the U.S. and Canada.
      B.
      Braun is subject to minimum purchase requirements. The B. Braun Agreement
      commenced in November 2007 and continues until the expiration of the third
      contract year, December 31, 2010, and automatically renews for successive
      one-year terms unless terminated by either party in writing not less than 180
      days prior to the expiration of the initial term or any renewal
      term.





Fresenius-Kabi





In
      July
      2007, we entered into a Distribution Agreement with Fresenius-Kabi whereby
      Fresenius-Kabi acquired the non-exclusive right to market, sell and distribute
      MiniLoc® Safety Infusion Set products in Europe. Fresenius-Kabi is subject to
      minimum purchase requirements. The Fresenius-Kabi Agreement continues until
      December 31, 2009, and automatically renews for successive one-year terms unless
      terminated by either party in writing not less than 90 days prior to the
      expiration of the initial term or any renewal term.





In
      connection with these product agreements, all product introductions are
      scheduled and controlled by our distribution and license partners. There
      is
      no assurance that products will be launched as anticipated, that effective
      sales
      and marketing efforts will be maintained, or that we will realize future
      revenues in excess of any minimum purchase/royalty commitment from these
      agreements.





We
      plan
      to focus our research and development activities on the further development
      of
      additional products based upon our intellectual property portfolio and unique
      safety needle technologies. We plan to focus our business development efforts
      on
      continuing discussions and negotiations with third parties to generate revenues
      through additional OEM manufacturing, distribution and product licensing
      relationships.





**Critical
      Accounting Policies**




Our
      significant accounting policies are discussed in Note 2 to the Consolidated
      Financial Statements. The application of certain policies requires significant
      judgments or an estimation process that can affect our results of operations,
      financial position and cash flows, as well as the related footnote disclosures.
      We base our estimates on historical experience and other assumptions, as
      discussed below, that we believe is reasonable. If actual amounts are ultimately
      different from previous estimates, the revisions are included in our results
      of
      operations for the period in which the actual amounts become known. The
      accounting policies and estimates with the greatest potential to have a
      significant impact on our operating results, financial position, cash flows
      and
      footnote disclosures are as follows.




*Revenue
      Recognition*




Pursuant
      to Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” we
      recognize license revenue when the following criteria have been met: (1)
      persuasive evidence of an arrangement exists, (2) delivery has occurred or
      services have been rendered, (3) the price is fixed or determinable and (4)
      collectibility is reasonably assured. Upfront payments relating to license
      agreements are recognized ratably over the term of the related agreement.





Product
      revenues are recognized when the following criteria have been met: (a)
      persuasive evidence of an arrangement exists, (b) delivery has occurred or
      services have been rendered, (c) the price is fixed or determinable, and (d)
      collectibility is reasonably assured. Rights of return for manufactured product
      are dependent upon the agreement. Certain distributors have the right, on a
      quarterly basis, to request the return of excess or slow-moving inventory.
      An
      allowance for product returns, calculated using historical data, is made at
      the
      end of each quarter. Actual product returns could differ from management’s
      estimates due to changes in future economic or industry conditions or specific
      customers’ inventory sales.




32





*Long-Lived
      Assets*




We
      regularly evaluate whether events or circumstances have occurred that indicate
      the carrying value of our long-lived assets may not be recoverable. When factors
      indicate the asset may not be recoverable, we compare the related undiscounted
      future net cash flows to the carrying value of the asset to determine if
      impairment exists. If the expected future net cash flows are less than the
      carrying value, an impairment charge is recognized based on the fair value
      of
      the asset. The estimates of future cash flows involve considerable management
      judgment and are based upon assumptions about expected future operating
      performance. The actual cash flows could differ from management’s estimates due
      to changes in business conditions, operating performance and economic
      conditions. No such impairments were recorded during the years ended December
      31, 2007 and 2006.





*Goodwill*





We
      review
      goodwill for impairment annually. We have one reporting unit.  If the
      reporting unit's fair value exceeds the carrying value of its net assets,
      goodwill is not considered impaired. If the reporting unit's carrying value
      exceeds its fair value, we must analyze the fair value of goodwill relative
      to
      its carrying value. If its carrying value exceeds its fair value, an impairment
      loss is recorded to write goodwill down to fair value. Determining the fair
      value of goodwill involves the use of significant estimates and assumptions.
      These estimates and assumptions include projected revenue growth rates and
      operating margins to calculate estimated cash flows.  No such impairment
      was recorded during the year ended December 31, 2007 and 2006. ****




*Stock-Based
      Compensation*





We
      adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R),
“ *Share-Based
      Payment* ”,
      on
      January 1, 2006, which requires us to measure compensation expense for all
      outstanding unvested share-based awards at fair value and recognize compensation
      expense over the service period for awards expected to vest. The estimation
      of
      stock awards that will ultimately vest requires judgment, and to the extent
      actual results differ from estimates, such amounts will be recorded as an
      adjustment in the period estimates are revised. We consider many factors when
      estimating expected forfeitures, including types of awards, employee class,
      and
      historical experience. Actual results may differ from these
      estimates.





**Recent
      Accounting Pronouncements**





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, *“Fair
      Value Measurements”* (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles, and expands disclosures
      about
      fair value measurements. The provisions of this standard apply to other
      accounting pronouncements that require or permit fair value measurements. We
      will adopt SFAS 157 for financial assets and liabilities on January 1,
      2009. We anticipate that the adoption of SFAS 157 will not have a material
      impact on our consolidated financial statements. FASB Staff Position FAS 157-2,
      “ *Effective
      Date of FASB Statement No. 157”,* was
      issued in February 2008. This staff position delays the effective date for
      implementation of SFAS 157 for non-financial assets and liabilities ** to
      fiscal
      years beginning after November 15, 2008.




In
      February 2007, the FASB issued SFAS No. 159, “ *The
      Fair Value Option for Financial Assets and Financial
      Liabilities”* (“SFAS
      159”). This Statement provides companies with an option to report selected
      financial assets and liabilities at fair value. Generally accepted accounting
      principles have required different measurement attributes for different assets
      and liabilities that can create artificial volatility in earnings. The
      Statement’s objective is to reduce both complexity in accounting for financial
      instruments and the volatility in earnings caused by measuring related assets
      and liabilities differently. SFAS 159 is effective for us beginning January
      1,
      2008. We anticipate that the adoption of SFAS 159 will not have a material
      impact on our consolidated financial statements.




In
      December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS 141R”),
“ *Business
      Combinations* ”
and
      SFAS No. 160 (“SFAS 160”), “ *Noncontrolling
      Interests in Consolidated Financial Statements, an amendment of Accounting
      Research Bulletin No. 51* ”.
      SFAS
      141R will change how business acquisitions are accounted for and will impact
      financial statements both on the acquisition date and in subsequent periods.
      SFAS 160 will change the accounting and reporting for minority interests, which
      will be recharacterized as noncontrolling interests and classified as a
      component of equity. SFAS 141R and SFAS 160 are effective for us beginning
      January 1, 2009. Early adoption is not permitted. We are evaluating the impact
      these statements will have on our consolidated financial statements.




33





We
      have
      reviewed all other recently issued, but not yet adopted, accounting standards
      in
      order to determine their effects, if any, on its consolidated results of
      operation, financial position or cash flow. Based on that review, we believe
      that none of these pronouncements will have a significant effect on our current
      or future earnings or operations.




**Contractual
      Obligations**





Our
      contractual obligations as of December 31, 2007 were as follows:





**Payments
                Due by Year****Obligation**
            
            **Total**
            
            **2008**
            
            **2009**
            
            **Thereafter**Operating
                leases (1)
            
            $
            259,689
            
            $
            259,689
            
            $
            -
            
            $
            -Purchase
                order commitments (2)
            
            
            1,421,131
            
            
            1,421,131
            
            
            -
            
            
            -Total
            
            $
            1,680,820
            
            $
            1,680,820
            
            $
            -
            
            $
            -





(1)
      We
      lease office space under an operating lease that is non-cancellable prior to
      December 31, 2008. The leases on our warehouse facilities expire on March 31,
      2008 and August 31, 2008.





(2)
      Due
      to the long lead time of specialty needles and proprietary molded parts, which
      are critical components for the LiftLoc® and MiniLoc® Safety Infusion Set,
      SafeStep® Huber Needle Set, SecureLoc® Safety Introducer Needle, and MonojectTM
Bone Marrow Biopsy Needle product lines, as of December 31, 2007, we had issued
      approximately $1,421,000 in long-term purchase orders relating to these
      products.





*Galen
      Partners Promissory Note*





On
      March
      22, 2004, we entered into an agreement with Galen Partners III, L.P., Galen
      Partners International III, L.P., and Galen Employee Fund III, L.P.
      (collectively, “Galen Partners”) whereby Galen Partners agreed to purchase a
      convertible promissory note (“Note”) in the aggregate principal amount of
      $1,000,000 upon the Company’s request made at any time between March 31, 2004
      and March 31, 2005. As consideration for entering into this purchase agreement,
      Galen Partners received a warrant that provides them the right, but not the
      obligation, to purchase 80,000 shares of common stock at an exercise price
      of
      $0.02 per share. On March 20, 2007 Galen Partners exercised its warrant to
      purchase 80,000 shares of common stock.





On
      March
      7, 2005, Galen Partners agreed to a six-month extension of its $1,000,000
      promissory note agreement through September 30, 2005 in exchange for the
      issuance of a warrant to purchase 40,000 shares of our common stock at an
      exercise price of $0.02 per share which they exercised on March 4, 2008. We
      elected to draw against the note, and on June 30, 2006 repaid the outstanding
      principal and interest on the note. No further obligations exist under the
      note
      agreement. See further discussion of the Galen Partners Promissory Note in
      Item
      12 Certain Relationships and Related Transactions, and Director Independence.





**Inflation**





We
      do not
      expect the impact of inflation on our operations to be significant.




34





**Risk
      Factors**





In
      addition to the risks set forth elsewhere or herein, we are subject to certain
      other risk factors due to the industry in which we compete and the nature of
      our
      operations. These risk factors include the following:




***The
      announcement of or failure to complete the proposed Merger could negatively
      impact our stock price, future business and financial
      results.***




Our
      pending Merger with C. R. Bard, which is described in Item
      1,
      Description of Business, “Recent Developments,” subjects
      us to business uncertainties and contractual restrictions. The announcement
      of
      the pending merger may adversely impact our customer relationships and could
      harm our business. In addition, we are also prohibited from taking various
      actions outside the ordinary course of business without the prior approval
      of C.
      R. Bard. Our inability to take these actions could adversely affect us,
      particularly if the Merger is not completed. Completion of the Merger is also
      subject to regulatory and stockholder approval, and certain other closing
      conditions. There is no assurance that the Merger Agreement and the Merger
      will
      be approved by our stockholders, and there is no assurance that the other
      conditions to the completion of the Merger will be satisfied. If the Merger
      is
      not completed, our common stock could be negatively impacted because the current
      market price of our common stock may reflect a market assumption that the Merger
      will occur, and a failure to complete the Merger could result in a negative
      perception by the stock market of us generally and a decline in the market
      price
      of our common stock. We will also remain liable for significant transaction
      costs, including legal, accounting and financial advisory fees regardless of
      whether the Merger is completed.




***We
      have a history of losses.***





We
      have
      accumulated deficits totaling $36,722,250 since inception in November 1993.
      With
      the exception of the second quarter of 1999, the third quarter of 2004, and
      the
      second, third and fourth quarters of 2006 and all four quarters in 2007, all
      quarters have had operating losses. Among other things, our ability to achieve
      sustainable profitability or maintain growth in revenue or earnings is dependent
      on:





·
            Successful
                marketing of our existing products by our distribution partners and
                licensees;





·
            For
                products that are not subject to distribution or license arrangements,
                our
                ability to enter into OEM manufacturing or license arrangements on
                commercially advantageous terms;





·
            Our
                ability to identify, develop and successfully commercialize new products
                and technologies; and





·
            Our
                ability to develop and market additional safety medical products.





·
            We
                may not be able to achieve sustainable profitability or maintain
                growth in
                revenue and earnings.





***We
      may not have adequate resources to maintain growth*** **.**





As
      the
      life cycle of our safety products and the market for our core products matures,
      the development and commercialization of new products will be required to
      maintain our growth. In order to develop or market new products, we may be
      required to do the following:





·
            Invest
                in additional infrastructure:




·
            Build
                additional manufacturing and other facilities, or otherwise develop
                additional manufacturing capacity;
                and




·
            Invest
                to develop or acquire new products and product
                lines.




We
      may
      not be able to accomplish any of these objectives, and, even if we are able
      to
      accomplish some of these objectives, we may be required to expend significant
      resources, which could affect our earnings growth.




35




***Our
      success is dependent on sales generated by our distribution and licensing
      partners.***





We
      have
      entered into licensing arrangements with Kendall, TAP, Merit, Enpath and BD.
      In
      addition, we have entered into private label distribution agreements with Bard,
      B. Braun, Fresenius-Kabi and Exel, and distribution agreements for our branded
      products with Cardinal Health, Medline, PSS, Alliance Medical, and other
      specialty distributors. **** You
      should consider the following in assessing the value of these agreements and
      our
      financial prospects:





·
            We
                are reliant on our business partners for substantially all of our
                product
                revenues;





·
            Our
                product revenues will depend, in part, on the marketing ability,
                marketing
                plans and credit-worthiness of our business
                partners;





·
            The
                ability of our business partners to sell our products will depend
                on
                competitive factors and the resources such parties commit to the
                sale of
                our products. The extent to which our partners commit their resources
                to
                the sale of our products is entirely within their control. In addition,
                our partners are not obligated to pursue the development and
                commercialization of our products;





·
            We
                are dependent on our business partners with respect to release dates
                for
                the products under contract;





·
            Our
                licensed products and products subject to private label distribution
                agreements will be marketed under our business partners’ labels and
                goodwill associated with use of the products may inure to the benefit
                of
                our business partners rather than to
                us;





·
            We
                have limited sales and marketing capabilities, and those resources
                are
                deployed in support of our distributors’ efforts. At this time, we do not
                intend to build a direct sales and marketing infrastructure for commercial
                sales of products;





·
            Our
                distribution and licensing arrangements provide us with only limited
                protection from changes in manufacturing costs and raw materials
                costs;





·
            We
                may be limited in our ability to negotiate with new business partners
                based on exclusivities in our
                agreements;





·
            The
                Kendall Agreement can be terminated upon 15 days written
                notice;





·
            Because
                our licensing arrangements are generally expected to provide our
                business
                partners with exclusivity with respect to the products to be marketed
                by
                those partners, our success will be highly dependent on the results
                obtained by our partners and the diligence with which our partners
                seek to
                develop, market and sell our products;
                and





·
            Our
                distribution and licensing arrangements do not provide for substantial
                minimum product royalties in the event our partners do not seek to
                develop
                market or sell our products.





If
      our
      distribution and licensing partners are not successful in their efforts to
      develop, market and sell our products, it may result in the discontinuance
      of
      our business due to lack of revenue. These and other factors create uncertainty
      concerning our ability to generate future revenues and future
      profits.





***In
      2007, over sixty percent of our revenues were generated under agreements with
      four of our corporate partners.***





In
      2007,
      we received a significant amount of revenue pursuant to agreements with four
      of
      our corporate partners. If arrangements with any of these partners were
      terminated or if there is a decline in revenues under any of these arrangements,
      it could have a material adverse effect on us and our revenues and could require
      us to significantly curtail or even cease operations. In assessing the value
      of
      these arrangements, you should consider the fact that one of these arrangements
      may be terminated on fifteen days notice and another arrangement is subject
      to
      annual renewal. In addition, these arrangements are subject to the marketing
      ability, marketing plans and credit-worthiness of these business partners and
      the other factors identified in the prior risk factor. There can be no assurance
      that any of these arrangements will not be terminated or that our business
      partners will be successful in their marketing and sale of the products that
      are
      subject to these arrangements.




36





***We
      are dependent upon our licensing partners or contract manufacturers to
      manufacture our products.***





Under
      our
      licensing arrangements, we are primarily relying on licensees to arrange for
      the
      commercial manufacture of products. LiftLoc Ò Safety
      Infusion Set, MiniLoc® Safety Infusion Set, SafeStep® Huber Needle Set,
      SecureLoc® Safety Introducer Needle, and MonojectTM Bone Marrow Biopsy Needle are
      manufactured at a contract manufacturer under our authority and supervision.
      Contracting with third parties or relying on licensees to manufacture products
      presents the following risks:





·
            Delays
                in the manufacture of products could have a material adverse effect
                on the
                marketing of the products;





·
            The
                manufacturers may not comply with requirements imposed by the FDA
                or other
                governmental agencies;





·
            We
                may have to share intellectual property rights to improvements in
                the
                manufacturing processes or new manufacturing processes for products;





·
            In
                those instances where we may seek third-party manufacturers for new
                products, we may not be able to locate acceptable manufacturers or
                enter
                into favorable long-term agreements with them;





·
            We
                may not be able to find substitute manufacturers, if necessary;
                and





·
            Our
                ability to increase manufacturing capacity is limited and this may
                negatively impact our ability to grow or maintain growth rates.





Any
      of
      these factors could delay commercialization of products and adversely affect
      the
      sale of the products and license or joint venture revenues.





***Our
      medical devices must be cleared or approved by the FDA before they can be sold
      in the U.S.***





Our
      ability to receive revenue from our products is subject to obtaining proper
      regulatory approvals. Moreover, obtaining FDA approval or clearance to market
      a
      product can be a lengthy and costly process, which, in some cases, involves
      extensive clinical studies. While we or our partners have received FDA clearance
      for our safety syringe needle, safety Huber needle products, safety angiographic
      needle, pre-filled syringe safety needle, blood collection devices, and safety
      introducer needles, we or our distribution partners or licensees may not be
      able
      to obtain the necessary FDA authorizations to allow marketing of our other
      products in a timely fashion, or at all.





Once
      the
      necessary FDA approvals or clearances are obtained, later problems with the
      product could cause the FDA to suspend or revoke the approvals or clearances.
      Also, once the FDA provides clearance to market our products, our distribution
      partners or licensees are subject to continuing requirements governing, among
      other things, the claims that can be made with respect to the products and
      manufacturing processes. Failing to comply with the FDA's requirements can
      result in issuance of FDA Warning Letters, FDA refusal to approve or clear
      products, revocation or withdrawal of approvals previously granted, product
      seizures, injunctions, recalls, operating restrictions, limitations on continued
      marketing and civil and criminal penalties.





Our
      manufacturing activities require us to comply with ongoing FDA requirements
      for
      submission of post market information. In addition, we are required to adhere
      to
      requirements pertaining to the FDA's current QSR. The current QSR requirements
      govern the methods, facilities and controls used for the manufacture, testing,
      design, packaging, labeling and storage of medical devices.





Our
      failure or the failure of our distribution partners or licensees to comply
      with
      the FDA and other applicable regulations could cause our business to be harmed
      significantly.





***There
      are negative pricing pressures on safety products.***





Prices
      for our safety products may be higher than for competing conventional products
      that are not designed to provide the safety protection afforded by our products.
      Our prices, however, are expected to be competitive with those of competing
      safety products. Continuing pressure from third-party payers to reduce costs
      in
      the healthcare industry, as well as increasing competition from safety products
      made by other companies, could adversely affect our selling prices. In addition,
      we also believe that as the life cycle of and market for our safety products
      continues to mature, our core safety products will face price pressure.
      Reductions in selling prices could adversely affect our operating margins if
      we
      cannot achieve corresponding reductions in manufacturing costs.




37





***Our
      business could be adversely affected by changes in safety medical product
      technology.***





Our
      products are in various stages of production, pre-production, development and
      research. There is no assurance that development of superior products by
      competitors or changes in technology will not eliminate the need for our
      products. The introduction of competing products using different technology
      could adversely affect our attempts to develop and market our
      products.





***Our
      products may not continue to be accepted by the market.***





The
      market may not continue to accept our existing products or accept any new
      products we develop. Their acceptance will depend in large part on our ability
      to demonstrate the operational advantages, safety, efficacy, and
      cost-effectiveness of our products in comparison with competing products and
      our
      ability to distribute our products through major medical products companies
      or
      distributors. Our products may not achieve market acceptance and major medical
      products companies or distributors may not sell our products.





***Our
      long-term success is dependent on the success of our research and development
      efforts.***





Growth
      in
      revenue or market share for our current products may decline in the future
      due
      to a maturing life cycle of our products and market. Future growth may be
      dependent on our ability to identify, develop and successfully commercialize
      new
      products and technologies. A number of our safety medical needle technologies
      and products are still in various stages of pre-production, development and
      research. We are also exploring additional product applications for our
      technologies. The continued development of our products and development of
      additional applications and new products is important to our long-term success.
      However, the development and commercialization of our existing products or
      new
      products may require substantial capital investment. New products may not
      receive required regulatory approvals or be accepted into the market place.
      There can be no assurance that our technologies or products will be developed
      or, if developed, that they will be successful.





***Our
      success is dependent on our patents and proprietary rights.***





Our
      future success depends in part on our ability to protect our intellectual
      property and maintain the proprietary nature of our technologies through a
      combination of patents and other intellectual property arrangements. The
      protection provided by our patents and patent applications, if issued, may
      not
      be broad enough to prevent competitors from introducing similar products. In
      addition, our patents, if challenged, may not be upheld by the courts of any
      jurisdiction. Patent infringement litigation, either to enforce our patents
      or
      to defend us from infringement suits, would be expensive and, if it occurs,
      could divert our resources from other planned uses. Any adverse outcome in
      such
      litigation could have a material adverse effect on our ability to market, sell
      or license the related products. Patent applications filed in foreign countries
      and patents in such countries are subject to laws and procedures that differ
      from those in the U.S. Patent protection in such countries may be different
      from
      patent protection under U.S. laws and may not be as favorable to us. Some of
      our
      international patent prosecution efforts are funded by third parties. The
      failure of the funding parties to pay for the international patent prosecution
      costs would materially affect our ability to prosecute these patents. We also
      attempt to protect our proprietary information through the use of
      confidentiality agreements and by limiting access to our facilities. There
      can
      be no assurance that our program of patents, confidentiality agreements and
      restricted access to our facilities will be sufficient to protect our
      proprietary technology.





In
      December 2002, Becton Dickinson (“BD”) filed a lawsuit against Tyco Healthcare
      in the United States Court of the District of Delaware, asserting that Tyco
      Healthcare’s Monoject MagellanTM safety products infringe upon BD’s U.S. Patent
      No. 5,348,544 (“544 Patent”), titled “Single-Handedly Actuable Safety Shield for
      Needles.” Tyco Healthcare is now known as Covidien.





Following
      trial, on October 26, 2004, the jury returned a verdict finding that Tyco
      Healthcare willfully infringed BD’s patent and awarded BD $4 million in lost
      profits damages and reasonable royalty damages. In post-trial proceedings,
      Tyco
      Healthcare filed motions for judgment as a matter of law, or, alternatively,
      for
      a new trial. BD filed a post-trial motion for enhanced damages, attorneys’ fees,
      pre-judgment interest and post judgment interest, and a motion for a permanent
      injunction. On March 31, 2006, the trial court issued a Memorandum and Order
      on
      the parties’ post-trial motions: (1) denying
      Tyco Healthcare’s motion for judgment as a matter of law; (2) granting
      Tyco Healthcare’s motion for a new trial on the issue of infringement; and (3) denying
      BD’s motion for enhanced damages, attorneys’ fees, pre-judgment interest and
      post judgment interest, and permanent injunction. The new trial commenced on
      November 27, 2007. On November 30, 2007, a jury found in favor of BD that Tyco
      Healthcare’s Monoject MagellanTM safety products infringe upon the 544 Patent.
      The court did, however, grant Tyco Healthcare’s motion to dismiss BD’s claims of
      willful infringement. Tyco Healthcare has indicated that it intends to appeal
      the jury’s decision following post-trial motions. We are not a party to the
      patent infringement lawsuit.




38





Under
      our
      arrangements with Tyco Healthcare, Tyco Healthcare has the right to withhold
      up
      to fifty percent (50%) of royalties due as an offset against litigation expenses
      related to charges of infringement by a third party for the manufacture, use
      or
      sale of licensed product. This right continues while this litigation is pending.
      If, as a result of judgment in the litigation or settlement with BD, Tyco
      Healthcare is required to pay royalty and/or other monies to BD, Tyco Healthcare
      may thereafter deduct from the amount of royalties due us on unit sales of
      products alleged to infringe, an amount which is the lesser of all royalties
      and/or other monies paid by Tyco Healthcare to BD, or fifty percent (50%) of
      all
      royalty payments otherwise payable to us. Accordingly, we have previously
      recorded liabilities for amounts that were our estimate of the portion of costs
      associated with BD’s suit against Tyco Healthcare that Tyco Healthcare would
      withhold against the royalties due to us.




As
      a
      result of the jury’s verdict on November 30, 2007, we booked a non-cash charge
      to income of $250,000 during the fourth quarter of 2007 to arrive at the accrued
      liability of $606,928 at December 31, 2007 which represents our estimate of
      the
      portion of costs associated with BD’s suit against Tyco Healthcare that Tyco
      Healthcare will withhold against future royalties due to us through the end
      of
      the third quarter 2008. In the event litigation continues beyond 2008, or if
      Tyco Healthcare ultimately loses the case on appeal, additional liabilities
      may
      accrue. Moreover, if Tyco Healthcare is unsuccessful in post-trial motions
      and
      on appeal, Tyco Healthcare may be prohibited from selling the Monoject
      Magellan(TM) safety products in their current form.





In
      June
      2007, Retractable Technologies, Inc. (“RTI”) filed a lawsuit against Becton,
      Dickinson and Company (“BD”) in the United States Court for the Eastern District
      of Texas, alleging that the BD IntegraTM syringes infringe patents licensed
      exclusively to RTI. This patent claim was not covered by the release contained
      in the July 2004 settlement agreement between BD and RTI to settle the lawsuit
      previously filed by RTI. RTI also alleges in its lawsuit that BD engaged in
      false advertising with respect to certain of BD’s safety-engineered products in
      violation of the Lanham Act; acted to exclude RTI from various product markets
      and to maintain BD’s market share through, among other things, exclusionary
      contracts in violation of state and Federal antitrust laws; and engaged in
      unfair competition. The non-patent claims purport to relate to actions allegedly
      taken by BD following the date of the July 2004 settlement agreement referenced
      above. RTI seeks treble damages, attorney’s fees and injunctive relief. The
      Company is not a party to the patent infringement lawsuit brought by RTI against
      BD.




The
      IntegraTM syringe is the subject of a license agreement dated March 12, 2000, and
      subsequently amended, between BD and the Med-Design Corporation (“BD
      Agreement”). Under the BD Agreement, in the event of (i) a final adjudication
      enjoining BD from making, using, or selling the IntegraTM syringe or holding BD
      liable for damages based on the IntegraTM syringe or (ii) settlement of the
      lawsuit requiring payment of damages by BD relative to the IntegraTM syringe, BD
      has the right to deduct from future royalties sufficient to reimburse itself
      for
      one-half of its damages and legal expenses incurred and paid by BD in the
      lawsuit, but in no event shall BD’s royalty payments be reduced below a one
      percent (1%) royalty. No liability has been recorded at December 31, 2007 since
      we currently can not reasonably estimate any potential losses, if
      any.




On
      September 6, 2007, Becton Dickinson and Company (“BD”) and MDC Investment
      Holdings, Inc. (“MDC”) filed a lawsuit against Retractable Technologies, Inc.
      (“RTI”) in the United States Court for the Eastern District of Texas, asserting
      that RTI’s VanishPoint® line of syringes infringe upon MDC’s United States
      Patent No. 6,179,812 (the “‘812 patent”), entitled “Retractable Needle Medical
      Devices,” and United States Patent No. 7,090,656 (the “‘656 patent”), entitled
“Medical Devices with Retractable Needle.” BD and MDC seek damages, attorney’s
      fees and injunctive relief.




MDC
      is a
      wholly owned subsidiary of Med-Design Corporation. Med-Design Corporation is
      a
      wholly-owned subsidiary of Specialized Health Products International, Inc.
      Under
      a license agreement between BD and MDC, BD is the exclusive licensee with the
      right to sue for infringement of the ‘812 patent and the ‘656 patent and to join
      MDC as a party to such suit, in which event BD holds MDC free, clear and
      harmless from any and all costs and expenses of such litigation, including
      attorney’s fees.




39





Additional
      litigation to enforce patents, to protect proprietary information, or to defend
      us against alleged infringement of the rights of others may occur. Such
      litigation would be costly, could divert our resources from other planned
      activities, and could have a material adverse effect on our results of
      operations and financial condition.





***We
      may not have adequate resources to manage growth.***





We
      may
      not be equipped to successfully manage any future periods of rapid growth or
      expansion, which could be expected to place a significant strain on our
      managerial, operating, financial and other resources. Our future performance
      will depend, in part, on our ability to manage growth effectively, which will
      require us to:





·
            Improve
                existing and implement operating and financial management information
                systems and related controls;




·
            Maintain
                close coordination among engineering, accounting, finance, marketing,
                sales and operations; and




·
            Retain
                and train additional management, technical and marketing personnel.




There
      is
      intense competition for management, technical and marketing personnel in our
      business. Our failure to attract and retain additional key employees could
      have
      a material adverse effect on our ability to continue as a going
      concern.





***We
      are dependent on Management and Technical Personnel.***





Our
      success depends upon the skills, experience and efforts of our management,
      and
      technical personnel (the “working team”). Should the services of one or more
      members of our present working team become unavailable for any reason, our
      business could be adversely affected. The employment agreements that we have
      in
      place with the working team allow members of the working team to terminate
      their
      employment at any time. There is no assurance that we will be able to retain
      the
      existing working team or attract new employees of the caliber needed to achieve
      our objectives. We carry Key Man life insurance policies of $1,000,000 each
      on
      the President/Chief Executive Officer and Chief Technical Officer/Chief
      Operating Officer, for which the Company is the named beneficiary.





***Because
      we are significantly smaller than the majority of our competitors, we may lack
      the resources needed to capture market share.***





We
      are
      engaged in a highly competitive business and compete directly with companies
      that have longer operating histories, more experience, substantially greater
      financial resources, greater size, more substantial research and development
      and
      marketing organizations, established distribution channels and are better
      situated in the market than us. Our competitors and potential competitors
      include Arrow, Baxter International, B. Braun, Becton, Dickinson and Company,
      Boston Scientific, Cook, Inc., AngioDynamics Incorporated, ICU Medical, Inc.,
      Covidien, Manan Medical Products, Smiths Medical, Retractable Technologies,
      Inc., Terumo, and several others identified in Item 1 “Description of
      Business-Competition”. Our competitors may use their economic strength to
      influence the market to continue to buy their existing products. Our competitors
      may also be potential strategic partners with respect to various products as
      are, for example, Kendall, Bard and Merit. We do not have an established
      customer base and are likely to encounter a high degree of competition in
      developing a customer base. One or more of these competitors could use their
      resources to improve their current products or develop new products that may
      compete more effectively with our products. New competitors may emerge and
      may
      develop products that compete with our products. No assurance can be given
      that
      we will be successful in competing in this industry. In addition, we also
      believe that as the life cycle of and market for our safety products continues
      to mature, we will face rising threats such as commoditization and corresponding
      price pressure from our competitors in our core safety markets.





***We
      face potential product liability relating to failure of our safety
      products.***





The
      sale
      of safety medical devices entails an inherent risk of liability in the event
      of
      product failure or claim of harm caused by product operation. There can be
      no
      assurance that we will not be subject to such claims, that any claim will be
      successfully defended or, if we are found liable, that the claim will not exceed
      the limits of our insurance. Our current insurance coverage is in the amount
      of
      $1 million per occurrence and $2 million in aggregate. We also have an umbrella
      policy in the amount of $9 million. In some cases, we have indemnification
      arrangements in place with strategic partners who are selling our products
      under
      their label or distributing our branded products. There is no assurance that
      we
      will maintain product liability insurance in the future, that such insurance
      will be available, or that we will not be subject to product liability claims
      in
      excess of our insurance coverage.




40





***Uncertainties
      in the healthcare industry create uncertainties regarding medical safety
      products.***





The
      healthcare industry is subject to changing political, economic and regulatory
      influences that may affect the procurement practices and operations of
      healthcare facilities. During the past several years, the healthcare industry
      has been subject to increased government regulation of reimbursement rates
      and
      capital expenditures. Among other things, third-party payers are increasingly
      attempting to contain healthcare costs by limiting both coverage and
      reimbursement levels for healthcare products and procedures. Because prices
      of
      our products may exceed the price of conventional products, the cost control
      policies of third-party payers, including government agencies, may adversely
      affect use of our products.





***Anti-takeover
      provisions of our certificate of incorporation and bylaws may discourage
      non-negotiated takeover of our company.***





Our
      Certificate of Incorporation provides for the division of the board of directors
      into three classes substantially equal in number. At each annual meeting of
      stockholders one class of directors is to be elected for a three-year term.
      Amendments to this provision must be approved by a two-thirds vote of all the
      outstanding stock entitled to vote; the number of directors may be changed
      by a
      majority of the entire board of directors or by a two-thirds vote of the
      outstanding stock entitled to vote. Meetings of stockholders may be called
      only
      by the board of directors, our CEO, or our president. Stockholder action may
      not
      be taken by written consent. These provisions could have the effect of (i)
      discouraging attempts at non-negotiated takeovers that may provide for
      stockholders to receive a premium price for their stock, or (ii) delaying or
      preventing a change of control, which some stockholders may believe is in their
      interest.





***Our
      common stock price may continue to be volatile.***





Market
      prices of securities of medical technology companies are highly volatile from
      time to time. The trading price of our common stock may be significantly
      affected by factors such as the announcement of new product or technical
      innovations by us or our competitors, proposed changes in the regulatory
      environment, or by other factors that may or may not relate directly to us.
      Sales of substantial amounts of common stock (including stock which may be
      issued upon exercise of warrants or stock options), or the perception that
      such
      sales may occur, could adversely affect the trading price of our common
      stock.





***We
      have outstanding securities whose holders have been granted registration
      rights.***





In
      October 2001, we entered into an Investor Rights Agreement with the purchasers
      of our Series A Preferred Stock. These shares were automatically converted
      into
      21,861,369 shares of our common stock in 2004. Holders of these shares have
      been
      granted demand and piggyback registration rights with respect to these shares.
      The existence of a substantial number of shares of common stock that can be
      resold could depress the market price for our common stock and impair our
      ability to raise needed capital.




***We
      do not anticipate paying dividends in the foreseeable future.***





We
      have
      never paid dividends on our common stock. The payment of dividends, if any,
      on
      the common stock in the future is at the discretion of the board of directors
      and will depend upon our earnings, if any, capital requirements, financial
      condition and other relevant factors. Based on the financial condition of the
      Company at December 31, 2007, the board of directors does not intend to declare
      any dividends on our common stock.





***Our
      common stock is subject to dilution.*** **





As
      of
      December 31, 2007, there were 68,333,633 shares of our common stock issued
      and
      outstanding. In addition there are an additional 28,000 shares of our common
      stock that are issuable pursuant to stock options granted under our stock option
      plans and 1,855,265 shares issuable under warrant agreements. The possible
      future sale of shares issuable on the exercise of outstanding options and
      warrants could adversely affect the prevailing market price for our common
      stock. Further, the holders of the outstanding stock options and warrants may
      exercise them at a time when we would otherwise be able to obtain additional
      equity capital on terms more favorable to us.




41




***Applicability
      of low priced stock risk disclosure requirements may adversely affect the prices
      at which our common stock trades*** *.*





Our
      common stock may be considered a low priced security under rules promulgated
      under the Securities Exchange Act of 1934 (the “Exchange Act”). Under these
      rules, broker-dealers participating in transactions in low priced securities
      must first deliver a risk disclosure document which describes the risks
      associated with such stocks, the broker-dealer's duties, the customer's rights
      and remedies, and certain market and other information, and make a suitability
      determination approving the customer for low priced stock transactions based
      on
      the customer's financial situation, investment experience and objectives.
      Broker-dealers must also disclose these restrictions in writing to the customer,
      obtain specific written consent of the customer, and provide monthly account
      statements to the customer. With these restrictions, the likely effect of
      designation as a low priced stock will be to decrease the willingness of
      broker-dealers to make a market for the stock, to decrease the liquidity of
      the
      stock and to increase the transaction cost of sales and purchases of such stock
      compared to other securities.





***No
      assurance of a liquid public market for our common stock.***





There
      can
      be no assurance as to the depth or liquidity of any market for our common stock
      or the prices at which holders may be able to sell their shares. As a result,
      an
      investment in our common stock may not be totally liquid, and investors may
      not
      be able to liquidate their investment readily or at all when they need or desire
      to sell.




**Item
      7. Financial Statements**




See
      index
      to consolidated financial statements beginning on page F-1 hereof.




**Item
      8. Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosures**




None.





**Item
      8AT. Controls and Procedures**





*Evaluation
      of Disclosure Controls and Procedures.*  Under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer, we evaluated the effectiveness
      of
      the design and operation of our disclosure controls and procedures (as defined
      in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
      “Exchange Act”)) as of
      the end of the period covered by this report. Based upon that evaluation, our
      Chief Executive Officer and Chief Financial Officer concluded that our
      disclosure controls and procedures as of the end of the period covered by this
      report were effective such that the information required to be disclosed by
      us
      in reports filed under the Securities Exchange Act of 1934 is (i) recorded,
      processed, summarized and reported within the time periods specified in the
      SEC’s rules and forms and (ii) accumulated and communicated to our
      management, including our Chief Executive Officer and Chief Financial Officer,
      as appropriate to allow timely decisions regarding disclosure. A controls system
      cannot provide absolute assurance, however, that the objectives of the controls
      system are met, and no evaluation of controls can provide absolute assurance
      that all control issues and instances of fraud, if any, within a company have
      been detected.





*Management’s
      Annual Report on Internal Control over Financial Reporting.* Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting (as defined in Rule 13a-15(f) under the
      Exchange Act). Our internal control over financial reporting is a process
      designed to provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external purposes
      of
      accounting principles generally accepted in the United States.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Therefore, even those systems determined to
      be
      effective can provide only reasonable assurance of achieving their control
      objectives. ****





Our
      management, with the participation of the Chief Executive Officer and Chief
      Financial Officer, evaluated the effectiveness of the Company’s internal control
      over financial reporting as of December 31, 2007. In making this
      assessment, our management used the criteria set forth by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO) in Internal
      Control — Integrated Framework. Based on this evaluation, our management,
      with the participation of the Chief Executive Officer and Chief Financial
      Officer, concluded that, as of December 31, 2007, our internal control over
      financial reporting was effective.




42





This
      annual report does not include an attestation report of the company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by the company’s registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permit the company to provide only management’s report
      in this annual report.





*Changes
      in Internal Control Over Financial Reporting.* During
      the most recent quarter ended December 31, 2007, there has been no change in
      our
      internal control over financial reporting (as defined in Rule 13a-15(f) and
      15d-15(f) under the Exchange Act) )
      that
      has materially affected, or is reasonably likely to materially affect, our
      internal control over financial reporting .





**Item
      8B. Other Information**





**Amendment
      to Restricted Stock Agreements**




On
      March
      10, 2008, the Compensation Committee of the Company approved an Amendment to
      Restricted Stock Agreement for grants of restricted stock made to certain
      employees of the Company under the Company’s 2004 Stock Incentive Plan (the
“2004 Plan”). The affected employees include, among others, Jeffrey Soinski,
      Donald Solomon, David Green, Paul Evans and Rebecca Whitney.




The
      revisions to the Restricted Stock Agreements clarify that the shares of common
      stock subject to the Restricted Stock Agreements will immediately vest in full
      upon a Change in Control (as defined in the 2004 Plan) of the Company.




The
      foregoing summary of the Amendment to the Restricted Stock Agreement is
      qualified in its entirety by reference to the Amendment to Restricted Stock
      Agreement, a copy of which is filed as Exhibit 10.45 hereto and is incorporated
      by reference herein.




**2008
      Executive Bonus Plan**




On
      March
      10, 2008, the Board of Directors of the Company amended the Specialized Health
      Products International, Inc. 2008 Executive Bonus Plan Proposal (the “2008
      Plan”), which was adopted by the Board of Directors on November 29, 2007. The
      2008 Plan now clarifies that bonuses will be payable after review and formal
      approval by the Compensation Committee but in any event will be paid on or
      before March 15, 2009.




Pursuant
      to the terms of the 2008 Plan, certain employees are eligible to receive an
      annual bonus based upon the achievement of 2008 revenue, net income and cash
      flow goals. Employees eligible for bonus payments under the 2008 Plan include
      among others Jeffrey Soinski, Donald Solomon, David Green, Paul Evans and
      Rebecca Whitney. The Merger Agreement described above in Item 1, Description
      of
      Business, “Recent Developments” provides, however, that in the event the Merger
      is consummated, these executive officers, as well as other participating
      employees whose employment with the surviving company continues following the
      Merger, will not participate in the 2008 Plan. All other participating employees
      whose employment terminates in connection with the completion of the Merger
      will
      receive payments pursuant to the 2008 Plan at the closing of the Merger. The
      amount these participants receive will be proportionately reduced if the Merger
      is completed before the end of calendar year 2008 based upon the amount of
      time
      that has elapsed in calendar year 2008.




**Officers**
            
            **Target
                Bonus Payout**Jeffrey
                Soinski
            
            40%
                of annual salaryDonald
                Solomon
            
            30%
                of annual salaryPaul
                Evans
            
            30%
                of annual salaryDavid
                Green
            
            30%
                of annual salaryRebecca
                Whitney
            
            30%
                of annual salary




43




The
      following formula related to achievement of our 2008 revenue, net income and
      cash flow goals (which will not include capital raised through the issuance
      of
      stock or debt) as defined in the final 2008 budget approved by our Board of
      Directors, will be used to calculate base bonus payout amounts at year-end
      2008:




**Revenue:**
            
            **Achieve:**
            
            **Base
                Bonus Payout:**<80%
                of Goal
            
            No
                Payout80%
                of Goal
            
            40%
                of Target Bonus Payout**100%
                of Goal**
            
            **50%
                of Target Bonus Payout**120%
                of Goal
            
            60%
                of Target Bonus Payout**Net
                Income:**
            
            **Achieve:**
            
            **Base
                Bonus Payout:**<80%
                of Goal
            
            No
                Payout80%
                of Goal
            
            20%
                of Target Bonus Payout**100%
                of Goal**
            
            **25%
                of Target Bonus Payout**120%
                of Goal
            
            30%
                of Target Bonus Payout**Cash
                Balance at December 31:**
            
            **Achieve:**
            
            **Base
                Bonus Payout:**<80%
                of Goal
            
            No
                Payout80%
                of Goal
            
            20%
                of Target Bonus Payout**100%
                of Goal**
            
            **25%
                of Target Bonus Payout**120%
                of Goal
            
            30%
                of Target Bonus Payout





Actual
      bonus payouts for each employee participating in the 2008 Plan will be adjusted
      based upon achievement of pre-determined qualitative objectives for such
      individual for 2008.




In
      addition to calculated bonus payouts, plan participants will be eligible to
      receive incremental bonus payments for achievement of strategic initiatives
      beyond those contemplated in the 2008 Plan. The amount of such incremental
      payment, if any, will be based upon the recommendation of the Compensation
      Committee and submitted to the Board of Directors for approval prior to payment,
      provided the maximum amount any participating employee may receive under the
      2008 Plan is 120% of his or her target bonus payout.




The
      foregoing summary of the 2008 Plan is qualified in its entirety by reference
      to
      the 2008 Plan, a copy of which is filed as Exhibit 10.48 hereto and is
      incorporated by reference herein.




**Executive
      Incentive Bonus Program**




On
      March
      10, 2008, the Board of Directors of the Company adopted the Specialized Health
      Products International, Inc. Executive Incentive Bonus Program (the “Bonus
      Program”). The Bonus Program is designed to reward executives of the Company for
      their contributions to the successful achievement of certain corporate goals
      and
      objectives and to share the success and risks of the business with them. The
      participants in the Bonus Program are Jeffrey Soinski, David Green, Donald
      Solomon, Paul Evans and Rebecca Whitney. Pursuant to the terms of the Bonus
      Program, the Compensation Committee has established a bonus pool to be allocated
      to eligible employees of $1,000,000, the maximum permitted amount. We currently
      anticipate that the participants in the Bonus Program will receive an award
      in
      connection with the closing of the pending Merger, if it occurs.




The
      allocation of bonus awards from the bonus pool among eligible participants
      will
      be determined by the Compensation Committee in its sole discretion. Subject
      to
      certain exceptions relating to termination without cause, death, retirement
      or
      disability, which are described in the Bonus Program, a participant must remain
      employed with the Company at least until immediately prior to a Change in
      Control in order to receive a bonus payment.




The
      foregoing summary of the Bonus Program is qualified in its entirety by reference
      to the Bonus Program, a copy of which is filed as Exhibit 10.50 hereto and
      is
      incorporated by reference herein.




44




PART
      III




**Item
      9. Directors, Executive Officers, Promoters and Control
      Persons** **and Corporate Governance** **;
      Compliance** **with** **Section 16(a) of the Exchange Act**




The
      information to be provided under the captions “Executive Officers” and “Election
      of Directors”, each to be contained in the Definitive Proxy Statement and
      required to be disclosed in this Item 9, is hereby incorporated by
      reference in this Item 9; and the information to be provided under the
      caption “Section 16(a) Beneficial Ownership Reporting Compliance”, to be
      contained in the Definitive Proxy Statement and required to be disclosed
      pursuant to Section 16(a) of the Exchange Act, is also hereby incorporated
      by reference in this Item 9.




SHPI
      has
      adopted a Code of Ethics that applies to SHPI’s principal executive officer,
      principal financial officer and other senior financial officers. SHPI’s Code of
      Ethics is posted on SHPI’s Web site, which is located at www.shpi.com .





We
      intend
      to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding
      an
      amendment to, or waiver from, a provision of this code of ethics by posting
      such
      information on our website, at the address specified above.




**Item
      10. Executive Compensation**




The
      information to be provided under the caption “Compensation of Directors and
      Executive Officers”, to be contained in the Definitive Proxy Statement and
      required to be disclosed in this Item 10, is hereby incorporated by
      reference in this Item 10.




**Item
      11. Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters**




The
      information to be provided under the captions “Equity Compensation Plan
      Information” and “Security Ownership of Certain Beneficial Owners and
      Management”, each to be contained in the Definitive Proxy Statement and required
      to be disclosed in this Item 11, is hereby incorporated by reference in
      this Item 11.




**Item
      12. Certain Relationships and Related Transactions, and Director
      Independence**




On
      March
      22, 2004, we entered into an agreement with Galen Partners III, L.P., Galen
      Partners International III, L.P., and Galen Employee Fund III, L.P.
      (collectively, “Galen Partners”) whereby Galen Partners agreed to purchase a
      convertible promissory note (“Note”) in the aggregate principal amount of
      $1,000,000 upon our request made at any time between March 31, 2004 and March
      31, 2005. As consideration for entering into this purchase agreement, Galen
      Partners received a warrant that provides them the right, but not the
      obligation, to purchase 80,000 shares of our common stock at an exercise price
      of $0.02 per share. Galen Partners exercised its warrant to purchase 80,000
      shares of our common stock at $0.02 on March 20, 2007. Further, we paid $9,991
      in legal fees related to this transaction. The Note has a term of three years
      and bears interest at the rate of 12% per annum, with accrued interest to be
      paid July 1 and January 1 of each year the Note remains outstanding. The entire
      outstanding principal amount due on the Note may, at Galen Partner’s option, be
      converted into fully paid and nonassessable shares of our common stock. The
      conversion price will be 110% of the average closing share price for our common
      stock as reported on NASDAQ or the OTC Bulletin Board for the twenty (20)
      consecutive trading days prior to the date of the issuance of the
      Note.





On
      March
      7, 2005, Galen Partners agreed to a six-month extension of the promissory note
      agreement through September 30, 2005 in exchange for the issuance of a warrant
      to purchase 40,000 shares of the our common stock at an exercise price of $.02
      per share which they exercised on March 4, 2008.





On
      September 1, 2005, the parties amended the March 7, 2005 purchase agreement
      to
      extend the note period from September 30, 2005 to March 31, 2006 without the
      consideration of additional warrants for shares of common stock and to allow
      us
      to exercise the option in principal amounts of less than $1,000,000, provided
      that the total aggregate principal amount of the outstanding obligations cannot
      exceed $1,000,000. All other terms and conditions of the original agreement
      remain unchanged in the subsequent agreement.




45





On
      September 1, 2005, we also requested that Galen Partners purchase a Note in
      the
      principal sum of $500,000 on the terms described above. We received the $500,000
      in loan proceeds, which were used primarily to fund capital expenses associated
      with two new Company manufactured product lines that launched during the fourth
      quarter of 2005.





On
      March
      6, 2006, we elected to draw the remaining $500,000 against the note agreement
      with Galen Partners, which funds were received March 24, 2006.





Under
      the
      note agreement, we had the right to, at any time, pay the outstanding principal
      and accrued interest on the note, with no penalty for early payment. On June
      30,
      2006, we elected to prepay the convertible note in full, along with all accrued
      interest. No further liabilities exist under the note agreement.




**Item
      13. Exhibits**




**Exhibits**




Listed
      on
      page 48 hereof ,
      and
      incorporated by reference herein .





**Item
      14. Principal Accountant Fees and Services**





The
      information to be provided under the caption “Principal Accountant Fees and
      Services”, to be contained in the Definitive Proxy Statement and required to be
      disclosed in this Item 14, is hereby incorporated by reference in this
      Item 14.





46


SIGNATURES





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**SPECIALIZED
                  HEALTH
                  PRODUCTS
                  INTERNATIONAL,
                  INC****.**(Registrant)Date:
                March 10, 2008
            By
            /s/
              Jeffrey M. SoinskiJeffrey
              M. SoinskiPresident,
                Chief Executive Officer and
                Director




In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.





Signature
            
            Title
            
            Date/s/
                Jeffrey M. Soinski
              Jeffrey
                M. Soinski
            
            President,
                Chief Executive Officer and Director (Principal Executive
                Officer)
            
            March
                10, 2008/s/
                David A. Green
              David
                A. Green
            
            Chief
                Financial Officer (Principal Financial and Accounting
                Officer)
            
            March
                10, 2008/s/
                Guy J. Jordan, Ph.D.
                Guy
                J. Jordan, Ph.D.
            
            Chairman
                of the Board
            
            March
                10, 2008/s/
                David W. Jahns
              David
                W. Jahns
            
            Director
            
            March
                10, 2008/s/
                Stuart A. Randle
              Stuart
                A. Randle
            
            Director
            
            March
                10, 2008/s/
                Stephen I. Shapiro
              Stephen
                I. Shapiro
            
            Director
            
            March
                10, 2008/s/
                Robert R. Walker
              Robert
                R. Walker
            
            Director
            
            March
                10, 2008/s/
                Vincent J. Papa
              Vincent
                J. Papa
            
            Director
            
            March
                10, 2008/s/
                Ralph Balzano
              Ralph
                Balzano
            
            Director
            
            March
                10, 2008





47


**EXHIBIT
      INDEX**




EXHIBIT
                NO.
            
            DESCRIPTION
                OF EXHIBIT2.1
            
            Agreement
                and Plan of Merger, dated as of November 21, 2005, among Specialized
                Health Products International, Inc. (“SHPI”), Mammoth Acquisition
                Sub, Inc., Mammoth Acquisition Sub, LLC., and The Med-Design
                Corporation (Incorporated by reference to Exhibit 99.1 to SHPI’s
                Current Report on Form 8-K filed November 22,
                2005).2.2
            
            First
                Amendment to the Agreement and Plan of Merger, dated as of
                November 21, 2005, among Specialized Health Products
                International, Inc., Mammoth Acquisition Sub, Inc., Mammoth
                Acquisition Sub, LLC., and The Med-Design Corporation (Incorporated
                by
                reference to Exhibit 2.2 to SHPI’s Annual Report on Form 10-KSB
                filed March 10, 2006).3(i).1
            
            Restated
                Certificate of Incorporation of the Company (Incorporated by reference
                to
                Exhibit 3(i).1 of SHPI’s Form 10-QSB, dated September 30,
                2001).3(i).2
            
            Certificate
                of Designations, Preferences and Limitations of Series A Preferred
                Stock,
                dated November 6, 2001 (Incorporated by reference to Exhibit 3(i)
                of
                SHPI’s Current Report on Form 8-K filed November 7,
                2001).3(i).3
            
            Certificate
                of Amendment to the Restated Certificate of Incorporation (Incorporated
                by
                reference to Exhibit 3(i).3 of SHPI’s Form 10-QSB, dated June 30,
                2007).3(ii).1
            
            Third
                Amended and Restated Bylaws of SHPI (Incorporated by reference to
                Exhibit 99.3 to SHPI’s Current Report on Form 8-K filed
                November 22, 2005).10.1*
            
            Employment
                Agreement with Jeffrey M. Soinski, dated November 8, 2001 (Incorporated
                by
                reference to Exhibit 10.1 of SHPI’s Form 10-QSB, dated September 30,
                2001).10.2*
            
            Employment
                Agreement with Donald D. Solomon, Ph.D. (Incorporated by reference
                to
                Exhibit 10.2 of SHPI’s Form 10-KSB, dated December 31, 2001).10.3*
            
            Employment
                Agreement with Mr. Paul S. Evans. (Incorporated by reference to Exhibit
                10.2 of SHPI’s Form 10-KSB, dated December 31, 2001).10.4*
            
            Specialized
                Health Products International, Inc. 2001 Stock Option Plan (Incorporated
                by reference to Exhibit 10.9 of SHPI’s Quarterly Report on Form 10-QSB,
                dated September 30, 2001).10.5
            
            Series A
                Stock Purchase Agreement, dated October 5, 2001, by and between SHPI
                and the investors identified therein (Incorporated by reference to
                Exhibit 10.1 of SHPI’s Current Report on Form 8-K, filed
                November 8, 2001).10.6
            
            Investors’
                Rights Agreement, dated October 5, 2001, by and between SHPI and the
                investors identified therein (Incorporated by reference to
                Exhibit 10.2 of SHPI’s Current Report on Form 8-K,
                filedNovember8,2001).10.7
            
            Distribution
                Agreement, dated September 17, 2001, by and between SHPI and Bard
                Access
                Systems, Inc. (Incorporated by reference to Exhibit 10.12 of SHPI’s
                Current Report on Form 8-K,filedNovember8,2001).10.8
            
            Second
                Development and License Agreement, effective date of April 12, 2002,
                by
                and among Safety Syringe Corporation, a wholly owned subsidiary of
                SHPI
                and Tyco Healthcare Group LP (Incorporated by reference to Exhibit
                10.13
                of SHPI’s Quarterly Report on Form 10-QSB, dated June 30, 2002).10.9
            
            Development
                and License Agreement, effective as of January 1, 2002, by and among
                Safety Syringe Corporation and TAP Pharmaceutical Products, Inc.
                (Incorporated by reference to Exhibit 10.14 of SHPI’s Quarterly Report on
                Form 10-QSB, dated June 30, 2002).10.10
            
            OEM
                Supply and Distribution Agreement, effective as of May 21, 2003,
                by and
                between Specialized Health Products, Inc., a wholly owned subsidiary
                of
                SHPI and ExelInt International, Company. (Incorporated by reference
                to
                Exhibit 10.16 of SHPI’s Quarterly Report on Form 10-QSB, dated June 30,
                2002).




48




EXHIBIT
                NO.
            
            DESCRIPTION
                OF EXHIBIT10.11
            
            License
                Agreement, effective August 8, 2003, by and between Specialized Health
                Products, Inc. and Becton, Dickinson and Company. (Incorporated by
                reference to Exhibit 10.17 of SHPI’s Quarterly Report on Form 10-QSB,
                dated June 30, 2002).10.12
            
            Lease
                Agreement dated June 15, 1995 by and between Moen Development and
                MDC
                Research Ltd. And guaranteed by The Med-Design Corporation (Incorporated
                by reference to Med-Design’s Form 10-KSB filed on March 29,
                1996).10.13
            
            First
                Amendment dated October 6, 2003 to Lease Agreement by and between
                Moen
                Development and MDC Research Ltd. and guaranteed by Med-Design
                (“Med-Design”) (Incorporated by reference to Med-Design’s Form 10-K filed
                on March 31, 2005).10.14
            
            Exclusive
                Master Sales & Distribution Agreement dated November 1, 2003 by and
                between Med-Design and New Alliance of Independent Medical Distributors,
                Inc. (Incorporated by reference to Med-Design’s Form 10-K filed on March
                31, 2005).10.15*
            
            Specialized
                Health Products International, Inc. 2004 Employee Stock Purchase
                Plan.
                (Incorporated by reference to Exhibit 10.18 of SHPI’s Annual Report on
                Form 10-KSB, dated December 31, 2003).10.16
            
            Purchase
                Agreement, dated March 22, 2004, by and between Specialized Health
                Products International, Inc. and Galen Partners III, L.P., Galen
                Partners
                International III, L.P. and Galen Employee Fund III, L.P. (Incorporated
                by
                reference to Exhibit 10.19 of SHPI’s Annual Report on Form 10-KSB, dated
                December 31, 2003).10.17
            
            Amendment
                No. 1 to Investors’ Rights Agreement, effective date of March 22, 2004, by
                and between SHPI and the Initiating Holders as identified on the
                signature
                page. (Incorporated by reference to Exhibit 10.19 of SHPI’s Annual Report
                on Form 10-KSB, dated December 31, 2003).10.18
            
            License
                Agreement dated December 11, 1998 by and between Med-Design and Becton,
                Dickinson and Company (Incorporated by reference to Med-Design’s Form
                10-KSB filed on March 31, 1999).10.19
            
            Addendum
                to License Agreement dated December 11, 1999 by and between Med-Design
                and
                Becton, Dickinson and Company (Incorporated by reference to Med-Design’s
                Form 10-KSB filed on March 7, 2000).10.20
            
            Second
                Addendum to License Agreement dated January 25, 2000 by and between
                Med-Design and Becton, Dickinson and Company (Incorporated by reference
                to
                Med-Design’s Form 10-KSB filed on March 7, 2000).10.21
            
            License
                Agreement dated May 11, 2000 by and between Med-Design and Becton,
                Dickinson and Company (Incorporated by reference to Med-Design’s Form 10-K
                filed on March 23, 2001).10.22*
            
            Separation
                of Employment Agreement dated October 10, 2004 by and between Med-Design
                and James Donegan (Incorporated by reference to Med-Design’s Form 10-K
                filed on March 31, 2005).10.23
            
            Development
                and OEM Supply/Distribution Agreement, effective as of June 15, 2004,
                by
                and between Specialized Health Products International, Inc. and Tyco
                Healthcare Group LP. (Incorporated by reference to Exhibit 10.20
                of SHPI’s
                Quarterly Report on Form 10-QSB, dated June 30, 2004).10.24*
            
            Specialized
                Health products International, Inc. 2004 Stock Incentive Plan
                (Incorporated by reference to Exhibit 4.5 of SHPI’s Registration Statement
                on Form S-8 filed September 27, 2004 (File
                333-119306)).10.25
            
            Purchase
                Agreement, dated March 7, 2005, by and between Specialized Health
                Products
                International, Inc. and Galen Partners III, L.P., Galen Partners
                International III, L.P. and Galen Employee Fund III, L.P. (Incorporated
                by
                reference to Exhibit 10.20 of SHPI’s Annual Report on Form 10-KSB, dated
                December 31, 2004).




49




EXHIBIT
                NO.
            
            DESCRIPTION
                OF EXHIBIT10.26
            
            Amendment
                to Purchase Agreement, dated September 1, 2005, by and between SHPI
                and
                Galen Partners III, L.P., Galen Partners International III, L.P.
                and Galen
                Employee Fund III, L.P. (Incorporated by reference to Exhibit 10.1
                of
                SHPI’s Current Report on Form 8-K, filedSeptember 8,
                2005).10.27
            
            Promissory
                Note, dated September 1, 2005, by and between SHPI and Galen Partners
                III,
                L.P., Galen Partners International III, L.P. and Galen Employee Fund
                III,
                L.P. (Incorporated by reference to Exhibit 10.2 of SHPI’s Current Report
                onForm
                8-K,
                filedSeptember8,
                2005).10.28
            
            Development,
                Distribution and Supply Agreement, dated April 21, 2006, by and between
                SHPI and Bard Access Systems, Inc. (Incorporated by reference to
                Exhibit
                10.1 of SHPI’s Current Report on Form 8-K, filed April 26,
                2006).10.29
            
            Voting
                Agreement (Incorporated by reference to Exhibit 99.2 of SHPI’s Current
                Report on Form 8-K, filed November 22, 2005).10.30
            
            License
                Agreement, dated December 5, 2005, by and between SHPI and an undisclosed
                third party (Incorporated by reference to Exhibit 10.1 of SHPI’s Current
                Report on Form 8-K, filed December 7, 2005).10.31
            
            Loan
                and Security Agreement, dated February 22, 2006 and mutually executed
                on
                March 6, 2006, by and between SHPI and Silicon Valley Bank (Incorporated
                by reference to Exhibit 2.2 to SHPI’s Annual Report on Form 10-KSB filed
                March 10, 2006).10.32
            
            First
                Amendment to Loan and Security Agreement, dated March 6, 2006, by
                and
                between SHPI and Silicon Valley Bank (Incorporated by reference to
                Exhibit
                2.2 to SHPI’s Annual Report on Form 10-KSB filed March 10,
                2006).10.33*
            
            Separation
                of Employment Agreement and General Release dated May 17, 2006 by
                and
                between Med-Design and David Dowsett (Incorporated by reference to
                Exhibit
                10.33 of SHPI’s Quarterly Report on Form 10-QSB, dated June 30,
                2006).10.34*
            
            Addendum
                to Separation of Employment Agreement and General Release dated May
                31,
                2006 by and between Med-Design and David Dowsett (Incorporated by
                reference to Exhibit 10.34 of SHPI’s Quarterly Report on Form 10-QSB,
                dated June 30, 2006).10.35*
            
            Separation
                of Employment Agreement and General Release dated May 17, 2006 by
                and
                between Med-Design and Lawrence Ellis (Incorporated by reference
                to
                Exhibit 10.35 of SHPI’s Quarterly Report on Form 10-QSB, dated June 30,
                2006).10.36*
            
            Addendum
                to Separation of Employment Agreement and General Release dated May
                25,
                2006 by and between Med-Design and Lawrence Ellis (Incorporated by
                reference to Exhibit 10.36 of SHPI’s Quarterly Report on Form 10-QSB,
                dated June 30, 2006).10.37*
            
            Separation
                of Employment Agreement and General Release dated May 18, 2006 by
                and
                between Med-Design and Joseph Bongiovanni (Incorporated by reference
                to
                Exhibit 10.37 of SHPI’s Quarterly Report on Form 10-QSB, dated June 30,
                2006).10.38*
            
            Addendum
                to Separation of Employment Agreement and General Release dated May
                19,
                2006 by and between Med-Design and Joseph Bongiovanni (Incorporated
                by
                reference to Exhibit 10.38 of SHPI’s Quarterly Report on Form 10-QSB,
                dated June 30, 2006).10.39*
            
            Employment
                Agreement with Mr. David A. Green (Incorporated by reference to Exhibit
                10.39 of SHPI’s Quarterly Report on Form 10-QSB, dated September 30,
                2006).10.40
            
            Lease
                Cancellation Agreement dated October 5, 2006 (Incorporated by reference
                to
                Exhibit 10.1 of SHPI’s Current Report on Form 8-K, filed October 10,
                2006).




50




EXHIBIT
                NO.
            
            DESCRIPTION
                OF EXHIBIT10.41*
            
            Separation
                and Consulting Agreement dated January 24, 2007 by and between SHPI
                and
                Keith Merrell (Incorporated by reference to Exhibit 10.41 to SHPI’s Annual
                Report on Form 10-KSB filed March 19, 2007).10.42*
            
            Amendment
                to Employment Agreement with Mr. David A. Green (Incorporated by
                reference
                to Exhibit 10.1 of SHPI’s Current Report on Form 8-K, filed July 13,
                2007).10.43*†
            
            Form
                of Restricted Stock Agreement under the 2004 Stock Incentive
                Plan.10.44*†
            
            Form
                of Restricted Stock Agreement.10.45*†
            
            Amendment
                to Restricted Stock Agreement.10.46*†
            
            Stock
                Unit Agreement under the 2004 Stock Incentive Plan.10.47*†
            
            Amendment
                No. 1 to the Stock Unit Agreement under the 2004 Stock Incentive
                Plan.10.48*†
            
            2008
                Executive Bonus Plan.10.49*†
            
            Employment
                Agreement with Rebecca A. Whitney.10.50*†
            
            Executive
                Incentive Bonus Program.23.1†
            
            Consent
                of Grant Thornton LLP.31.1†
            
            Certification
                by Jeffrey M. Soinski under Section 302 of the Sarbanes-Oxley Act of
                2002.31.2†
            
            Certification
                by David A. Green under Section 302 of the Sarbanes-Oxley Act of
                200232.1†
            
            Certification
                of Jeffrey M. Soinski pursuant to 18 U.S.C. Section 1350, as adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2†
            
            Certification
                of David A. Green pursuant to 18 U.S.C. Section 1350, as adopted
                pursuant
                to Section 906 of the Sarbanes-Oxley Act of
                2002.







*
      Management contracts or compensatory plans or arrangements




†
Filed
      herewith





51


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND
        SUBSIDIARIES**


INDEX
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




PageReport
                of Independent Registered Public Accounting Firm
            
            
            F
                - 2Consolidated
                Balance Sheet as of December 31, 2007
            
            
            F
                - 3Consolidated
                Statements of Operations for the Years EndedDecember
                31, 2007 and 2006
            
            
            F
                - 4Consolidated
                Statements of Stockholders’ Equityfor
                the Years Ended December 31, 2007 and 2006
            
            
            F
                -5Consolidated
                Statements of Cash Flows for the Years EndedDecember
                31, 2007 and 2006
            
            
            F
                - 6Notes
                to Consolidated Financial Statements
            
            
            F
                -7




F-1


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**





Board
      of
      Directors and Stockholders


Specialized
      Health Products International, Inc.




We
      have
      audited the accompanying consolidated balance sheet of Specialized Health
      Products International, Inc. and Subsidiaries (the “Company”) as of December 31,
      2007, and the related consolidated statements of operations, stockholders'
      equity, and cash flows for the years ended December 31, 2007 and 2006. 
These financial statements are the responsibility of the Company's
      management.  Our responsibility is to express an opinion on these financial
      statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States).  Those standards require that
      we plan and perform the audit to obtain reasonable assurance about whether
      the
      financial statements are free of material misstatement.  The Company is not
      required to have, nor were we engaged to perform an audit of its internal
      control over financial reporting. ** Our
      audits included consideration of internal control over financial reporting
      as a
      basis for designing audit procedures that are appropriate in the circumstances,
      but not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting. ** Accordingly,
      we express no such opinion. ** An
      audit
      also includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. ** We
      believe that our audits provide a reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Specialized
      Health Products International, Inc. and Subsidiaries as of December 31, 2007,
      and the consolidated results of their operations and their consolidated cash
      flows for the years ended December 31, 2007 and 2006 in conformity with
      accounting principles generally accepted in the United States of
      America.








/s/
      Grant
      Thornton LLP







Salt
      Lake
      City, Utah


March
      10,
      2008


F-2


**SPECIALIZED
      HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**


CONSOLIDATED
      BALANCE SHEET


December
                  31,2007**Assets**Current
                  Assets:Cash
                  and cash equivalents
              
              $
              8,735,143Accounts
                  receivable, net
              
              
              2,999,686Inventory
              
              
              2,915,814Prepaid
                  expenses and other
              
              
              253,124Total
                  current assets
              
              
              14,903,767Property
                  and equipment, net of accumulated depreciationof
                  $1,596,429
              
              
              1,309,888Intangible
                  assets, net
              
              
              2,917,390Goodwill
              
              
              586,161Other
                  assets
              
              
              232,961Total
                  assets
              
              $
              19,950,167**Liabilities
                  and Stockholders' Equity**Current
                  liabilities:Accounts
                  payable
              
              $
              1,657,127Accrued
                  liabilities
              
              
              1,164,427Accrual
                  for patent litigation expenses
              
              
              606,928Deferred
                  revenue
              
              
              172,067Total
                  current liabilities
              
              
              3,600,549Commitments
                  and contingencies (Note 9)
              
              
              -Stockholders'
                  equity:Series
                  A preferred stock, $.001 par value; 20,000,000 shares
                  authorized,no
                  shares issued and outstanding at December 31, 2007
              
              
              -Common
                  stock, $.02 par value; 80,000,000 shares authorized,68,333,633
                  shares issued and outstanding at December 31, 2007
              
              
              1,366,673Additional
                  paid-in capital
              
              
              51,705,195Accumulated
                  deficit
              
              
              (36,722,250
              )Total
                  stockholders' equity
              
              
              16,349,618Total
                  liabilities and stockholders' equity
              
              $
              19,950,167


The
      accompanying notes are an integral part of this consolidated financial
      statement.




F-3




SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
      AND
      SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF OPERATIONS


Years
                  Ended December 31,2007
              
              2006Revenue:Product
                  sales
              
              $
              14,489,223
              
              $
              9,593,615Royalties
              
              
              4,126,816
              
              
              2,887,997Licensing
                  revenues
              
              
              196,668
              
              
              196,668Development
                  fees and related services
              
              
              110,920
              
              
              590,74118,923,627
              
              
              13,269,021Cost
                  of revenue
              
              
              6,264,952
              
              
              4,799,619Gross
                  profit
              
              
              12,658,675
              
              
              8,469,402Operating
                  expenses:Research
                  and development (1)
              
              
              4,480,231
              
              
              3,786,322Sales
                  and marketing (1)
              
              
              1,522,608
              
              
              1,484,350General
                  and administrative (1)
              
              
              3,898,458
              
              
              2,846,235Patent
                  litigation expense
              
              
              250,000
              
              
              -Total
                  operating expenses
              
              
              10,151,297
              
              
              8,116,907Income
                  from operations
              
              
              2,507,378
              
              
              352,495Other
                  income (expense):Interest
                  income
              
              
              264,943
              
              
              180,440Interest
                  expense
              
              
              -
              
              
              (52,603
              )Amortization
                  of deferred finance cost
              
              
              -
              
              
              (91,745
              )Other
                  expense
              
              
              (3,314
              )
              
              (3,380
              )Total
                  other income, net
              
              
              261,629
              
              
              32,712Income
                  before income taxes
              
              
              2,769,007
              
              
              385,207Income
                  tax provision
              
              
              (45,031
              )
              
              -Net
                  income
              
              $
              2,723,976
              
              $
              385,207Basic
                  net income per common share
              
              $
              0.04
              
              $
              0.01Diluted
                  net income per common share
              
              $
              0.04
              
              $
              0.01Basic
                  weighted average number of shares outstanding
              
              
              63,523,665
              
              
              53,609,197Diluted
                  weighted average number of shares outstanding
              
              
              63,938,838
              
              
              54,697,664(1)
                  Includes amortization of stock-based compensation as
                  follows:Research
                  and development
              
              $
              423,163
              
              $
              458,507Sales
                  and marketing
              
              $
              21,363
              
              $
              28,472General
                  and administrative
              
              $
              887,756
              
              $
              892,642


The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-4




SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
      AND
      SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY


FOR
      THE
      YEARS ENDED DECEMBER 31, 2007 AND 2006


Series
                  A
              
              
              
              
              
              AdditionalPreferred
                  Stock
              
              Common
                  Stock
              
              Paid-in
              
              Deferred
              
              AccumulatedShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Compensation
              
              DeficitBALANCE
                  as ofDecember
                  31, 2005
              
              
              -
              
              $
              -
              
              
              44,629,445
              
              $
              892,589
              
              $
              42,153,783
              
              $
              (2,376,330
              )
              $
              (39,911,433
              )Cumulative
                  effect of adoptionof
                  SAB 108 (see Note 2)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              80,000Common
                  stock issued inMed-Design
                  merger
              
              
              -
              
              
              -
              
              
              21,525,788
              
              
              430,516
              
              
              9,256,064
              
              
              -
              
              
              -Common
                  stock granted under SHPI2004
                  Stock Incentive Plan
              
              
              -
              
              
              -
              
              
              1,149,974
              
              
              22,999
              
              
              (22,999
              )
              
              -
              
              
              -Elimination
                  of deferred compensationupon
                  adoption of SFAS No. 123R
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,376,330
              )
              
              2,376,330
              
              
              -Amortization
                  of stock-basedcompensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,379,621
              
              
              -
              
              
              -Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              385,207BALANCE
                  as ofDecember
                  31, 2006
              
              
              -
              
              
              -
              
              
              67,305,207
              
              
              1,346,104
              
              
              50,390,139
              
              
              -
              
              
              (39,446,226
              )Common
                  stock granted under SHPI2004
                  Stock Incentive Plan
              
              
              -
              
              
              -
              
              
              995,337
              
              
              19,907
              
              
              (19,907
              )
              
              -
              
              
              -Common
                  stock forfeited under SHPI2004
                  Stock Incentive Plan
              
              
              -
              
              
              -
              
              
              (46,911
              )
              
              (938
              )
              
              938
              
              
              -
              
              
              -Common
                  stock issued onexercise
                  of warrant
              
              
              -
              
              
              -
              
              
              80,000
              
              
              1,600
              
              
              -
              
              
              -
              
              
              -Amortization
                  of stock-basedcompensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,332,282
              
              
              -
              
              
              -Tax
                  benefit of vestedrestricted
                  stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,743
              
              
              -
              
              
              -Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,723,976BALANCE
                  as ofDecember
                  31, 2007
              
              
              -
              
              $
              -
              
              
              68,333,633
              
              $
              1,366,673
              
              $
              51,705,195
              
              $
              -
              
              $
              (36,722,250
              )
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-5


SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
        AND
        SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


Years
                  Ended December 31,2007
              
              2006Cash
                  flows from operating activities:Net
                  income
              
              $
              2,723,976
              
              $
              385,207Adjustments
                  to reconcile net income to net cashprovided
                  by (used in) operating activities:Depreciation
                  and amortization
              
              
              688,762
              
              
              432,477Cumulative
                  effect adjustment
              
              
              -
              
              
              80,000Amortization
                  of stock-based compensation
              
              
              1,332,282
              
              
              1,379,621Excess
                  tax benefits from stock-based compensation arrangements
              
              
              1,743
              
              
              -Amortization
                  of deferred finance cost
              
              
              -
              
              
              91,745Changes
                  in operating assets and liabilities:Accounts
                  receivable, net
              
              
              (318,821
              )
              
              (70,427
              )Inventory
              
              
              (887,794
              )
              
              (1,017,830
              )Prepaid
                  expenses and other
              
              
              (86,156
              )
              
              (230,652
              )Accounts
                  payable
              
              
              (42,742
              )
              
              324,991Accrued
                  liabilities
              
              
              95,243
              
              
              (841,783
              )Accrual
                  for patent litigation expenses
              
              
              (304,448
              )
              
              (475,187
              )Deferred
                  revenue
              
              
              (196,668
              )
              
              (196,668
              )Unamortized
                  rent
              
              
              -
              
              
              (3,176
              )Deferred
                  rent
              
              
              -
              
              
              (3,987
              )Net
                  cash provided by (used in) operating activities
              
              
              3,005,377
              
              
              (145,669
              )Cash
                  flows from investing activities:Purchase
                  of intangible assets
              
              
              (438,908
              )
              
              (260,407
              )Purchase
                  of property and equipment
              
              
              (389,981
              )
              
              (493,265
              )Proceeds
                  from sale of available-for-sale securities
              
              
              4,275,375
              
              
              -Cash
                  received in connection with acquisition, net of cash paid
              
              
              -
              
              
              2,973,799Net
                  cash provided by investing activities
              
              
              3,446,486
              
              
              2,220,127Cash
                  flows from financing activities:Proceeds
                  from draw against convertible note
              
              
              -
              
              
              500,000Payment
                  of convertible note
              
              
              -
              
              
              (1,000,000
              )Proceeds
                  from exercise of warrants
              
              
              1,600
              
              
              -Net
                  cash provided by (used in) financing activities
              
              
              1,600
              
              
              (500,000
              )Net
                  increase in cash and cash equivalents
              
              
              6,453,463
              
              
              1,574,458Cash
                  and cash equivalents at beginning of year
              
              
              2,281,680
              
              
              707,222Cash
                  and cash equivalents at end of year
              
              $
              8,735,143
              
              $
              2,281,680Supplemental
                  non-cash flow informationFair
                  value of assets acquired, net of cash received
              
              $
              -
              
              $
              9,289,560Fair
                  value of liabilities assumed in merger
              
              $
              -
              
              $
              2,145,800Capitalized
                  merger costs paid in 2005
              
              $
              -
              
              $
              442,720Purchase
                  price adjustment related to reductionin
                  assumed liabilities
              
              $
              284,819
              
              $
              -Supplemental
                  cash flow informationCash
                  payments for interest
              
              $
              -
              
              $
              55,436Cash
                  payments for taxes
              
              $
              (19,231
              )
              $
              -




The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-6


**SPECIALIZED
      HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(1)
            HISTORY
                AND NATURE OF OPERATIONS





Specialized
      Health Products, Inc. (“SHP”), a Utah corporation, was incorporated in November
      1993. On July 28, 1995, SHP became a wholly-owned subsidiary of Specialized
      Health Products International, Inc. (“SHPI”), a Delaware corporation, through a
      merger with a subsidiary of SHPI (the “Acquisition”). On that date, SHP changed
      its name to “Specialized Health Products International, Inc.” (“SHPI” or the
“Company”). The persons serving as officers and directors of SHP immediately
      prior to the consummation of the Acquisition were elected to the same offices
      with SHPI and retained their positions as directors and officers of SHP. In
      addition, the outstanding securities of SHP became outstanding securities of
      SHPI.





SHPI
      completed its merger with The Med-Design Corporation (“Med-Design”) on June 2,
      2006, following approval by stockholders of both companies. Following completion
      of the merger, Med-Design stockholders received 21,525,788 shares of SHPI’s
      common stock in exchange for their shares of Med-Design common stock,
      representing approximately 32.48% of the outstanding shares of SHPI. Med-Design
      was incorporated in 1994 and since that time has been principally engaged in
      the
      design and development of safety medical needle products and technologies.
      The
      financial results included in this report include combined operations from
      June
      2, 2006, the date of the merger, through December 31, 2007.





SHPI
      designs, develops, manufactures, markets and licenses safety healthcare products
      that minimize the risk of accidental needle sticks. The Company has developed
      multiple products based upon a broad intellectual property portfolio that
      applies to multiple medical needle categories. There are currently twelve
      marketed product lines based upon the Company’s proprietary technologies,
      including six manufactured product lines and six licensed products sold
      primarily in the United States, Canada and Europe. These products compete in
      the
      Huber, syringe, pre-filled syringe, blood collection, introducer and bone marrow
      biopsy needle markets. The Company has license or original equipment
      manufacturing (“OEM”) supply agreements for potential new product entries in the
      IV catheter, spinal, epidural and percutaneous endoscopic gastrostomy (“PEG”)
      introducer needle markets. The Company’s primary sales are in the safety Huber
      needle market, for which it manufactures four product lines.





(2)
            SIGNIFICANT
                ACCOUNTING POLICIES





Principles
      of Consolidation





The
      consolidated financial statements include the accounts of Specialized Health
      Products International, Inc. and its wholly-owned subsidiaries, Specialized
      Health Products, Inc. and Safety Syringe Corporation, for all of 2007 and 2006,
      and Med-Design Corporation, MDC Investment Holdings, Inc. and MDC Research
      Ltd.
      from June 2, 2006. All significant intercompany account balances and
      transactions have been eliminated in consolidation.





Use
      of
      Estimates





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and the disclosure of contingent assets and liabilities at the
      date
      of the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from these
      estimates.





Concentration
      Risks





The
      Company’s distribution and license agreements are primarily with partners
      operating in the United States. At December 31, 2007, four partners accounted
      for approximately 80% of the accounts receivable balance. For the years ended
      December 31, 2007 and 2006, four partners accounted for approximately 67% and
      58%, respectively, of total revenues. The significant amount of revenues the
      Company receives under these arrangements presents a risk to its commercial
      success, as termination of any of these agreements could have a material adverse
      effect on the Company.




F-7


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


The
      Company is currently utilizing a single contract manufacturer headquartered
      in
      Vista, California, with compliant assembly facilities in Tijuana, Mexico, to
      produce its LiftLoc® and MiniLoc® Safety Infusion Sets, SecureLocTM Safety
      Introducer Needle, SafeStep® Huber Needle Set and the Tyco Healthcare Monoject
      MagellanTM Bone Marrow Biopsy/Aspiration Needle. The Company believes that other
      contract manufacturers could provide similar services on comparable terms.
      A
      change in contract manufacturers, however, could cause a delay in manufacturing
      and a possible loss of sales, which would adversely affect operating
      results.





Cash
      and Cash Equivalents





The
      Company considers all investments with an original maturity date of three months
      or less, which primarily consist of money market funds, to be cash equivalents.
      Cash and cash equivalents are deposited with three **** financial
      institutions located in Utah and California and at times may exceed insured
      depository limits of $100,000 per institution. As of December 31, 2007, the
      Company had $8,330,805 deposited with such financial institutions that exceeded
      that limit.





Accounts
      Receivable





Accounts
      receivable consist of trade amounts due from customers and accrued royalties
      at
      period end. Accounts receivable are recorded at cost and do not bear interest.
      The Company evaluates its allowance for doubtful accounts monthly. Account
      balances are written-off against the allowance when it is probable that the
      receivable will not be recovered. An allowance for product returns, calculated
      using historical data, is made at the end of each quarter. Accounts receivable
      is comprised of the following at December 31, 2007:




Trade
                  accounts receivable from customers
              
              $
              2,180,412Accrued
                  royalties
              
              
              1,035,002Less:
                  allowance for sales returns
              
              
              (165,728
              )Less:
                  allowance for doubtful accounts
              
              
              (50,000
              )Total
              
              $
              2,999,686





Available-for-Sale
      Securities





The
      Company’s investments are classified as available-for-sale securities and,
      accordingly, any unrealized holding gains or losses, net of taxes, are excluded
      from income and recognized as a separate component of stockholders’ equity until
      realized. Investments in marketable securities are made consistent with the
      Company’s investment guidelines as developed by management and approved by the
      board of directors. Available-for-sale securities are reported at fair value,
      based on quoted market prices.





Inventory





Inventory
      is valued at the lower of cost or market. Cost is determined using the first-in
      first-out (“FIFO”) basis. At December 31, 2007, inventory is comprised of the
      following:




Raw
                  materials
              
              $
              1,810,086Work
                  in process
              
              
              110,727Finished
                  goods
              
              
              995,001Total
              
              $
              2,915,814





In
      the
      fourth quarter of fiscal 2007, the Company adjusted inventory by $236,000 for
      price and quantity adjustments.





F-8


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




Property
      and Equipment





Property
      and equipment are stated at cost. Manufacturing equipment is depreciated using
      the straight-line method over five years. Leasehold improvements are amortized
      using the straight-line method over the shorter of the lease term or the
      estimated useful life of the asset. All other property and equipment are
      depreciated using the straight-line method based on the estimated three to
      five
      year useful life of the related assets.





Maintenance
      and repairs are charged to expense as incurred and costs of improvements and
      betterments are capitalized. Upon disposal or sale, the related asset costs
      and
      accumulated depreciation or amortization


are
      removed from the accounts and resulting gains or losses are reflected in current
      operations.





Impairment
      of Long-Lived Assets





The
      Company regularly evaluates whether events or circumstances have occurred that
      indicate the carrying value of its long-lived assets may not be recoverable.
      When factors indicate the asset may not be recoverable, the Company compares
      the
      related undiscounted future net cash flows to the carrying value of the asset
      to
      determine if impairment exists. If the expected future net cash flows are less
      than the carrying value, an impairment charge is recognized based on the fair
      value of the asset. No such impairments were recorded during the years ended
      December 31, 2007 and 2006.





Goodwill





Goodwill
      represents the excess of the purchase price paid over the fair value of the
      tangible net assets acquired in business combinations.




In
      accordance with Statement of Financial Accounting Standards (“SFAS”)
      No. 142, “ *Goodwill
      and Other Intangible Assets”* ,
      goodwill is not amortized but tested for impairment at least annually. When
      evaluating whether goodwill is impaired, the Company compares the fair value
      of
      the reporting unit to which the goodwill is assigned to its carrying amount.
      If
      the carrying amount exceeds its fair value, then the amount of the impairment
      loss must be measured. The impairment loss is calculated by comparing the
      implied fair value of the goodwill to its carrying amount. In calculating the
      implied fair value of goodwill, the fair value of the reporting unit is
      allocated to all the other assets and liabilities within the reporting unit
      based on fair value. The excess of the fair value of a reporting unit over
      the
      amount allocated to its other assets and liabilities is the implied fair value
      of goodwill. An impairment loss is recognized when the carrying amount of
      goodwill exceeds its implied fair value. Determining the fair value of the
      asset
      involves the use of significant estimates and assumptions. These estimates
      and
      assumptions include projected revenue growth rates and operating margins to
      calculate estimated cash flows. The Company evaluated its goodwill during 2007
      and 2006, and determined that no impairment charge should be
      recorded.





Stock-Based
      Compensation





In
      December 2004, the Financial Accounting Standard Board (“FASB”) issued SFAS No.
      123R, “ *Share-Based
      Payments* ”
(“SFAS
      123R”), a revision of SFAS No. 123, “ *Accounting
      for Stock-Based Compensation* ”
(“SFAS
      123”), which requires companies to measure all employee stock-based compensation
      awards using a fair value method and record such expense in their financial
      statements. The Company adopted this standard effective January 1, 2006 and
      elected the modified-prospective transition method. Under the
      modified-prospective transition method, awards that are granted, modified,
      repurchased or cancelled after the date of adoption should be measured and
      accounted for in accordance with SFAS 123R and prior periods are not revised
      for
      comparative purposes. The stock-based compensation cost is measured at the
      grant
      date, based on the estimated fair value of the award, and is recognized as
      expense over the employee’s requisite service period using the straight-line
      method for awards expected to vest.




F-9


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


Revenue
      Recognition





Product
      revenues are recognized when the following criteria have been met: (a)
      persuasive evidence of an arrangement exists, (b) delivery has occurred or
      services have been rendered, (c) the price is fixed or determinable, and (d)
      collectibility is reasonably assured. Rights of return for manufactured product
      are dependent upon the agreement. Certain distributors have the right, on a
      quarterly basis, to request the return of excess or slow-moving inventory.
      An
      allowance for product returns, calculated using historical data, is made at
      the
      end of each quarter.





Royalty
      revenue is recognized when the related products are sold or upon the Company’s
      fulfillment of any future obligation under the related agreements.





License
      revenue is recognized when the following criteria have been met: (a) persuasive
      evidence of an arrangement exists, (b) services have been rendered, (c) the
      price is fixed or determinable, and (d) collectibility is reasonably assured.
      Upfront payments relating to license agreements are recognized ratably over
      the
      term of the related agreement.





Revenue
      from development agreements is recognized as the services are performed, in
      accordance with the terms of the agreements.





Research
      and Development Costs





Research
      and development costs are expensed as incurred.





Income
      Taxes





The
      Company recognizes a liability or asset for net operating losses and credit
      carryforwards and the deferred tax consequences of temporary differences between
      the tax bases of assets and liabilities and their reported amounts in the
      consolidated financial statements that will result in taxable or deductible
      amounts in future years when the reported amounts of the assets and liabilities
      are recovered or settled. A valuation allowance is established when necessary
      to
      reduce deferred tax assets to the amount expected to be realized.





Fair
      Value of Financial Instruments





The
      carrying amount of the Company’s financial instruments, including cash and cash
      equivalents, accounts receivable and accounts payable approximates fair value
      because of the short maturity of those instruments.





Adoption
      of SAB 108





The
      Company initially applied Staff Accounting Bulletin No. 108 (“SAB 108”) using
      the cumulative effect transition method in connection with the preparation
      of
      our annual financial statements for the year ending December 31, 2006. Upon
      adoption of SAB 108, the Company recorded a cumulative effect adjustment in
      the
      amount of $80,000 to reduce an accrued liability which the Company believes
      was overstated at December 31, 2005. The effect of this adjustment on the 2005
      financial statements was not material.





Recent
      Accounting Pronouncements





In
      September 2006, the FASB issued SFAS No. 157, *“Fair
      Value Measurements”* ,
      (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles, and expands disclosures
      about
      fair value measurements. The provisions of this standard apply to other
      accounting pronouncements that require or permit fair value measurements. The
      Company will adopt SFAS 157 for financial assets and liabilities on
      January 1, 2008. The Company anticipates that the adoption of SFAS 157 will
      not have a material impact on the Company’s consolidated financial statements.
      FASB Staff Position FAS 157-2, *Effective
      Date of FASB Statement No. 157,* was
      issued in February 2008. This staff position delays the effective date for
      implementation of SFAS 157 for non-financial assets and liabilities ** to
      fiscal
      years beginning after November 15, 2008.




F-10


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


In
      February 2007, the FASB issued SFAS No. 159, “ *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* ”,
      (“SFAS
      159”). This statement provides companies with an option to report selected
      financial assets and liabilities at fair value. Generally accepted accounting
      principles have required different measurement attributes for different assets
      and liabilities that can create artificial volatility in earnings. The
      statement’s objective is to reduce both complexity in accounting for financial
      instruments and the volatility in earnings caused by measuring related assets
      and liabilities differently. SFAS 159 is effective for the Company beginning
      January 1, 2008. The Company anticipates that the adoption of SFAS 159 will
      not
      have a material impact on the Company’s consolidated financial
      statements.




In
      December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS 141R”),
“ *Business
      Combinations* ”
and
      SFAS No. 160 (“SFAS 160”), “ *Noncontrolling
      Interests in Consolidated Financial Statements, an amendment of Accounting
      Research Bulletin No. 51* ".
      SFAS
      141R will change how business acquisitions are accounted for and will impact
      financial statements both on the acquisition date and in subsequent periods.
      SFAS 160 will change the accounting and reporting for minority interests, which
      will be recharacterized as noncontrolling interests and classified as a
      component of equity. SFAS 141R and SFAS 160 are effective for the Company
      beginning January 1, 2009. Early adoption is not permitted. The Company is
      evaluating the impact these statements will have on its consolidated financial
      statements.





The
      Company has reviewed all other recently issued, but not yet adopted, accounting
      standards in order to determine their effects, if any, on its consolidated
      results of operation, financial position and cash flows. Based on that review,
      the Company believes that none of these pronouncements will have a significant
      effect on its current or future consolidated financial statements.




Basic
      and Diluted Net Income Per Common Share





In
      accordance with SFAS No. 128, “ *Earnings
      per share”,* basic
      net income per share is computed by dividing net income attributable to common
      shares by the weighted average number of common shares outstanding, excluding
      unvested restricted stock, during the period. Diluted net income per common
      share is calculated using the treasury method, adding the number of shares
      of
      unvested restricted stock and number of warrants and options that are in the
      money, reduced by the number of shares that could be repurchased from the
      assumed proceeds of the warrant or option exercises or the average unrecognized
      compensation cost of the restricted stock.





At
      December 31, 2007, options and warrants to purchase 1,883,265 shares of common
      stock at exercise prices ranging from $0.02 to $4.79 per share were outstanding.
      At December 31, 2006, options and warrants to purchase 2,058,921 shares of
      common stock at exercise prices ranging from $0.02 to $11.23 per share were
      outstanding. At December 31, 2007 and 2006, there were 1,898,653 and 4,672,871
      unvested restricted common shares outstanding, respectively.





F-11


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


The
      following table sets forth the computation of basic and diluted net income
      per
      share for the periods indicated:


Years
                  Ended December 31,2007
              
              2006Net
                  Income
              
              $
              2,723,976
              
              $
              385,207Basic
                  weighted averageshares
                  outstanding
              
              
              63,523,665
              
              
              53,609,197Effect
                  of dilutive securities:Stock
                  warrants
              
              
              39,000
              
              
              115,409Unvested
                  restricted common shares
              
              
              376,173
              
              
              973,058Dilutive
                  weighted averageshares
                  outstanding
              
              
              63,938,838
              
              
              54,697,664Net
                  Income per shareBasic
              
              $
              0.04
              
              $
              0.01Diluted
              
              $
              0.04
              
              $
              0.01




The
      Company has excluded 1,843,265 and 1,938,921 options and warrants from its
      calculations of diluted net income per share in 2007 and 2006, respectively,
      as
      they represent antidilutive stock options and warrants.





(3)
            MERGER
                AGREEMENT




The
      Company completed its merger with Med-Design on June 2, 2006, following
      approval by stockholders of both companies.





Of
      the
      preliminary estimated $2,145,000 of liabilities accrued by the Company in the
      merger with Med-Design, $1,281,184 related to expected costs associated with
      exiting the Med-Design business. During 2007, it was determined, based on early
      termination of the Med-Design lease, that the actual cost of exiting the
      Med-Design business was $996,365, resulting in a decrease of $284,819 in assumed
      liabilities and goodwill related to the transaction.




The
      following unaudited pro forma financial information presents the consolidated
      results for the year ended December 31, 2006 reported as though the business
      combination had been completed at the beginning of the year. This pro forma
      financial information is not intended to be indicative of future
      results.




Year
                  EndedDecember
                  31, 2006Revenue
              
              $
              15,072,053Net
                  loss
              
              
              (7,693,032
              )Basic
                  and diluted net lossper
                  common share:
              
              $
              (0.14
              )




F-12


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




(4)
            PROPERTY
                AND EQUIPMENT





Property
      and equipment is stated at cost and consists of the following as of December
      31,
      2007:


Research
                  and development machinery and equipment
              
              $
              423,581Office
                  furniture and fixtures
              
              
              162,883Computer
                  equipment and software
              
              
              297,856Leasehold
                  improvements
              
              
              153,012Molds
              
              
              892,816Manufacturing
                  equipment
              
              
              781,056Construction-in-process
              
              
              195,113Total
                  property and equipment
              
              
              2,906,317Less
                  accumulated depreciation and amortization
              
              
              (1,596,429
              )Total
                  property and equipment, net
              
              $
              1,309,888





Depreciation
      of property and equipment was $362,212 and $250,987 for the years ended December
      31, 2007 and 2006, respectively.





(5)
            AVAILABLE-FOR-SALE
                SECURITIES





The
      Company sold its available-for-sale securities during the year ended December
      31, 2007 for $4,275,375. The available-for-sale securities were auction rate
      preferred securities for which the principal was guaranteed resulting in no
      realized gain or loss on the sale.





Investment
      income from available-for-sale securities for the years ended December 31,
      2007
      and 2006 was $209,052 and $133,921, respectively.





(6)
            INTANGIBLE
                ASSETS





Intangible
      assets at December 31, 2007 consist of the following:


AccumulatedCost
              
              amortization
              
              NetPatent
                  cost
              
              $
              998,218
              
              $
              172,370
              
              $
              825,848License
                  rights
              
              
              2,485,000
              
              
              393,458
              
              
              2,091,542Total
              
              $
              3,483,218
              
              $
              565,828
              
              $
              2,917,390





Amortization
      of intangible assets is calculated using the straight-line method over 9 to
      17
      years for patent costs and 10 years for the license rights. Amortization expense
      related to intangible assets for the years ended December 31, 2007 and 2006
      was
      $326,551 and $181,490, respectively.





F-13


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


Estimated
      future amortization expense for intangible assets as of December 31, 2007 is
      as
      follows:


Year
                  Ending December 31,
              
              Amortization
                  Expense2008
              
              $
              359,8332009
              
              
              359,8332010
              
              
              359,8332011
              
              
              359,8332012
              
              
              359,833Thereafter
              
              
              1,118,225$
              2,917,390




(7)
            ACCRUED
                LIABILITIES





Accrued
      liabilities at December 31, 2007 consist of the following:


Accrued
                  compensation expenses
              
              $
              698,751Uninvoiced
                  receipt of inventory and services
              
              
              300,464Other
                  liabilities
              
              
              165,212Total
              
              $
              1,164,427





(8)
            RESEARCH
                AND DEVELOPMENT AGREEMENTS





In
      June
      2004, the Company entered into a worldwide Development and OEM
      Supply/Distribution agreement with a customer for the marketing and sale of
      conventional and safety bone marrow biopsy needles. Under the terms of the
      agreement, the customer will purchase safety and conventional bone marrow biopsy
      needles from the Company, as well as reimburse the Company for certain research
      and development expenses related to product commercialization. The agreement
      is
      for an initial term of three years during which it is
      noncancellable.





The
      Company recognized no research and development revenue or expenses related
      to
      this agreement for the year ended December 31, 2007. The Company recognized
      research and development revenue of $152,107 and expenses of $572,188 related
      to
      this agreement for the year ended December 31, 2006. ****





(9)
            COMMITMENTS
                AND CONTINGENCIES





Lease
      Obligations





The
      Company leases office and warehouse space under non-cancelable operating leases,
      which are effective through various dates during the year ended December 31,
      2008. Certain of the leases have options to renew the lease beyond the initial
      term. The following summarizes future minimum lease payments under the operating
      leases at December 31, 2007:




MinimumYear
                  Ending December 31,
              
              Lease
                  Payments2008
              
              $
              259,689





Rental
      expense for the years ended December 31, 2007 and 2006 totaled $284,381 and
      $276,549, respectively.





F-14


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


Line
      of Credit





The
      Company maintains a $1,500,000 revolving line of credit under which borrowings
      are collateralized by substantially all of the assets of the Company. Available
      borrowings are based primarily on outstanding accounts receivable. As of
      December 31, 2007, there was no outstanding balance on the revolving line of
      credit. The line has a maturity date of February 10, 2008, and carries an
      interest rate equal to 1.00 percentage point above the Prime Rate. Subsequent
      to
      year end, the Company elected not to renew the revolving line of
      credit.





Employment
      and Indemnity Agreements





The
      Company has entered into employment agreements with four members of senior
      management. While each differs as to salary, bonus and stock options, each
      of
      the agreements provides for health and life insurance coverage, vacation and
      severance benefits if the officers are terminated for reasons other than
      disability, death or for cause.




The
      Company has entered into indemnity agreements (the “Indemnity Agreements”) with
      each of its executive officers and directors pursuant to which the Company
      has
      agreed to indemnify the officers and directors to the fullest extent permitted
      by law for any event or occurrence related to the service of the indemnitee
      for
      the Company as an officer or director that takes place prior to or after the
      execution of the Indemnity Agreement. The Indemnity Agreements obligate the
      Company to reimburse or advance expenses relating to any proceeding arising
      out
      of an indemnifiable event. Under the Indemnity Agreements, the Company’s
      officers and directors are presumed to have met the relevant standards of
      conduct required by Delaware law for indemnification. Should the Indemnity
      Agreements be held to be unenforceable, indemnification of these officers and
      directors may be provided by the Company in certain cases at the Company’s
      discretion.





Litigation





In
      December 2002, Becton Dickinson ("BD") filed a lawsuit against Tyco Healthcare
      in the United States Court of the District of Delaware, asserting that Tyco
      Healthcare's Monoject Magellan TM safety
      needle and blood collector products infringe upon BD's U.S. Patent No. 5,348,544
      (“544 Patent”). Tyco Healthcare is now known as Covidien.





Following
      trial, on October 26, 2004, the jury returned a verdict finding that Tyco
      Healthcare willfully infringed BD’s patent and awarded BD $4 million in lost
      profits damages and reasonable royalty damages. In post-trial proceedings,
      Tyco
      Healthcare filed motions for judgment as a matter of law, or, alternatively,
      for
      a new trial. BD filed a post-trial motion for enhanced damages, attorneys’ fees,
      pre-judgment interest and post judgment interest, and a motion for a permanent
      injunction. On March 31, 2006, the trial court issued a Memorandum and Order
      on
      the parties’ post-trial motions: (1) denying
      Tyco Healthcare’s motion for judgment as a matter of law; (2)  granting
      Tyco Healthcare’s motion for a new trial on the issue of infringement; and (3) denying
      BD’s motion for enhanced damages, attorneys’ fees, pre-judgment interest and
      post judgment interest, and permanent injunction. The new trial commenced on
      November 27, 2007. On November 30, 2007, a jury found in favor of BD that Tyco
      Healthcare’s Monoject MagellanTM safety products infringe upon the ‘544 Patent.
      The court did, however, grant Tyco Healthcare’s motion to dismiss BD’s claims of
      willful infringement. Tyco Healthcare has indicated that it intends to appeal
      the jury’s decision following post-trial motions. The Company is not a party to
      the patent infringement lawsuit.





Under
      the
      Company’s arrangements with Tyco Healthcare, Tyco Healthcare has the right to
      withhold up to fifty percent (50%) of royalties due the Company as an offset
      against litigation expenses related to charges of infringement by a third party
      for the manufacture, use or sale of licensed product. This right continues
      while
      this litigation is pending. If, as a result of a judgment in the litigation
      or
      settlement with BD, Tyco Healthcare is required to pay royalty and/or other
      monies to BD, Tyco Healthcare may thereafter deduct from the amount of royalties
      due the Company on unit sales of products alleged to infringe, an amount which
      is the lesser of all royalties and/or other monies paid by Tyco Healthcare
      to
      BD, or fifty percent (50%) of all royalty payments otherwise payable to the
      Company. Accordingly, the Company has previously recorded liabilities for
      amounts that were the Company’s estimate of the portion of costs associated with
      BD’s suit against Tyco Healthcare that Tyco Healthcare would withhold against
      the royalties due the Company.




F-15


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


Based
      on
      information obtained during the fourth quarter of 2003 related to costs incurred
      by Tyco Healthcare, the Company recorded a liability of approximately $1,300,000
      at December 31, 2003, which amount was the Company’s estimate of the portion of
      costs associated with BD’s lawsuit against Tyco Healthcare that Tyco Healthcare
      would withhold against the royalties due SHPI through 2005. During the twelve
      month contract periods ended September 30, 2004 and 2005, Tyco Healthcare
      withheld fifty percent of royalty payments due the Company, which amounts
      totaling $1,000,000 were offset against the accrual. Based on information
      obtained during the fourth quarter of 2005, the Company anticipated the
      litigation would continue at least through 2007. Accordingly, the Company
      recorded an additional liability of $1,095,200 at December 31, 2005, which
      amount was the Company’s estimate of the portion of costs associated with BD’s
      suit against Tyco Healthcare that Tyco Healthcare would withhold against the
      royalties due the Company during 2006 and 2007.





As
      a
      result of the jury’s verdict on November 30, 2007, the Company recorded a
      non-cash charge to patent litigation expense of $250,000 during the fourth
      quarter of 2007 to adjust the recorded liability to $606,928 at December 31,
      2007, which represents the Company’s estimate of the portion of costs associated
      with BD’s suit against Tyco Healthcare that Tyco Healthcare will withhold
      against future royalties due the Company through the end of the third quarter
      2008, at which time the Company expects to have more information about the
      lawsuit. In the event litigation continues beyond the third quarter of 2008,
      additional liabilities may accrue. Moreover, if Tyco Healthcare is unsuccessful
      in post-trial motions and on appeal, Tyco Healthcare may be prohibited from
      selling the Monoject MagellanTM safety products in their current form.





In
      June
      2007, Retractable Technologies, Inc. (“RTI”) filed a lawsuit against Becton,
      Dickinson and Company (“BD”) in the United States Court for the Eastern District
      of Texas, alleging that the BD IntegraTM syringes infringe patents licensed
      exclusively to RTI. The IntegraTM syringe is the subject of a license agreement
      dated March 12, 2000, and subsequently amended, between BD and the Med-Design
      Corporation (“BD Agreement”). This patent claim was not covered by the release
      contained in the July 2004 settlement agreement between BD and RTI to settle
      the
      lawsuit previously filed by RTI. RTI also alleges in its lawsuit that BD engaged
      in false advertising with respect to certain of BD’s safety-engineered products
      in violation of the Lanham Act; acted to exclude RTI from various product
      markets and to maintain BD’s market share through, among other things,
      exclusionary contracts in violation of state and Federal antitrust laws; and
      engaged in unfair competition. The non-patent claims purport to relate to
      actions allegedly taken by BD following the date of the July 2004 settlement
      agreement referenced above. RTI seeks treble damages, attorney’s fees and
      injunctive relief. The Company is not a party to the patent infringement lawsuit
      brought by RTI against BD.




Under
      the
      BD Agreement, in the event of (i) a final adjudication enjoining BD from making,
      using, or selling the IntegraTM syringe or holding BD liable for damages based on
      the IntegraTM syringe or (ii) settlement of the lawsuit requiring payment of
      damages by BD relative to the IntegraTM syringe, BD has the right to deduct from
      future royalty amounts sufficient to reimburse itself for one-half of its
      damages and legal expenses incurred and paid by BD in the lawsuit, but in no
      event shall BD’s royalty payments be reduced below a one percent (1%) royalty.
      No liability has been recorded at December 31, 2007 since the Company currently
      can’t reasonably estimate potential losses, if any.




On
      September 6, 2007, BD and MDC Investment Holdings, Inc. (“MDC”) filed a lawsuit
      against RTI in the United States Court for the Eastern District of Texas,
      asserting that RTI’s VanishPoint® line of syringes infringe upon MDC’s United
      States Patent No. 6,179,812 (the “‘812 patent”), entitled “Retractable Needle
      Medical Devices,” and United States Patent No. 7,090,656 (the “‘656 patent”),
      entitled “Medical Devices with Retractable Needle.” BD and MDC seek damages,
      attorney’s fees and injunctive relief.





MDC
      is a
      wholly owned subsidiary of Med-Design Corporation. Med-Design Corporation is
      a
      wholly-owned subsidiary of Specialized Health Products International, Inc.
      Under
      a license agreement between BD and MDC, BD is the exclusive licensee with the
      right to sue for infringement of the ‘812 patent and the ‘656 patent and to join
      MDC as a party to such suit, in which event BD holds MDC free, clear and
      harmless from any and all costs and expenses of such litigation, including
      attorney’s fees.




F-16


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


Purchase
      Order Commitments





Due
      to
      the long lead-time of critical components for the LiftLoc®, MiniLoc®, and
      SafeStep®, Safety Infusion Set product lines and the SecureLoc® Safety
      Introducer Needle, the Company had issued approximately $1,421,000 in long-term
      purchase orders relating to these products as of December 31, 2007.





(10)
            STOCK-BASED
                COMPENSATION





Effective
      June 2000, adoption of the Specialized Health Products International, Inc.
      2000
      Stock Option


Plan
      was
      approved by the Company’s Board of Directors. The plan is administered by the
      Board of Directors. The plan provides for the issuance of options for the
      purchase of up to 2,500,000 shares of common stock to directors, officers,
      employees and consultants. The exercise price of the options granted will be
      the
      greater of $1.00 per share or the fair market value (or 110% of such fair market
      value when the optionee is a 10% stockholder) of the underlying common stock
      on
      the date of grant. The options are exercisable for a period not to exceed 10
      years (or five years when the optionee is a 10% stockholder) from the date
      of
      grant. As of December 31, 2007, options to acquire an aggregate of 15,000 shares
      of common stock at exercise prices ranging from $1.00 to $1.13 were outstanding
      under the 2000 Stock Option Plan. The number of remaining stock options
      authorized under this plan at December 31, 2007 is 2,485,000.





Effective
      November 2001, the Company’s Board of Directors and stockholders approved the
      adoption of the Specialized Health Products International, Inc. 2001 Stock
      Option Plan. The plan permits the Company to grant non-qualified stock options
      and incentive stock options to acquire common stock. The total number of shares
      authorized for the plan may be allocated by the board between non-qualified
      stock options and incentive stock options from time to time, subject to certain
      requirements of the Internal Revenue Code of 1986, as amended. The option
      exercise price per share under the plan may not be less than the fair market
      value (or 110% of such fair market value when the optionee is a 10% stockholder)
      on the date on which the option is granted. A total of 5,000,000 shares are
      available for issuance under the plan. The options are exercisable for a period
      not to exceed 10 years (or five years when the optionee is a 10% stockholder)
      from the date of grant. At December 31, 2007, options to acquire an aggregate
      of
      13,000 shares of common stock at an exercise price of $1.19 were outstanding
      under the 2001 Stock Option Plan. The number of remaining stock options
      authorized under this plan at December 31, 2007 is 4,987,000.





Effective
      May 2006, the Company’s Board of Directors reduced the number of shares
      authorized and reserved for issuance under the 2000 Stock Option Plan, 2001
      Stock Option Plan and 2004 Stock Incentive Plan from 13,500,000 shares to
      6,028,000 shares to make sufficient shares of common stock available to issue
      to
      former stockholders of Med-Design pursuant to the merger. Effective August
      2007,
      the Company’s Board of Directors increased the number of shares authorized and
      reserved for issuance under the 2000 Stock Option Plan, 2001 Stock Option Plan
      and 2004 Stock Incentive Plan back to the original amount of 13,500,000 approved
      by the shareholders.





F-17


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


A
      summary
      of the status of the Company’s option plans as of December 31, 2007 and 2006,
      and changes during the years then ended is presented below:


2007
              
              2006Wtd.
                  Avg.
              
              
              
              Wtd.
                  Avg.Exercise
              
              
              
              ExerciseShares
              
              Prices
              
              Shares
              
              PricesOutstanding
                  at beginning of year
              
              
              28,000
              
              $
              1.13
              
              
              74,250
              
              $
              1.19Forfeited
              
              
              -
              
              
              
              
              
              (46,250
              )
              
              1.23Outstanding
                  at end of year
              
              
              28,000
              
              
              1.13
              
              
              28,000
              
              
              1.13Exercisable
                  at end of year
              
              
              28,000
              
              
              1.13
              
              
              28,000
              
              
              1.13Weighted
                  average fair valueof
                  options granted
              
              
              -
              
              
              
              
              
              -





The
      following table summarizes information about stock options outstanding at
      December 31, 2007:


Options
                  Outstanding and ExercisableWtd.
                  Avg.Number
              
              Remaining
              
              Wtd.
                  Avg.Range
                  of
              
              Outstanding
              
              Contractual
              
              ExerciseExercise
                  Prices
              
              and
                  Exercisable
              
              Life
                  (years)
              
              Price$
                  1.00
              
              
              5,000
              
              
              5.09
              
              $
              1.00$
                  1.13
              
              
              10,000
              
              
              2.47
              
              
              1.13$
                  1.19
              
              
              13,000
              
              
              3.87
              
              
              1.1928,000
              
              
              3.59
              
              $
              1.13





The
      fair
      value of each option granted is estimated on the date of grant using the
      Black-Scholes option pricing model. The options had no intrinsic value at
      December 31, 2007 since the exercise prices of all options were greater than
      the
      Company’s average stock price during the year.





On
      September 15, 2004, The 2004 Stock Incentive Plan (“Stock Plan”) was approved by
      the Board of Directors and became effective on that date, subject to the Stock
      Plan being approved by the stockholders within six months after that date.
      The
      Stock Plan provides that 6,000,000 shares of the Company’s authorized but
      unissued common stock be reserved pursuant to the terms and conditions of the
      plan. On October 19, 2004, a special meeting of stockholders was held, at which
      time the stockholders approved the Stock Plan. The Stock Plan allows the
      Company, under the direction of the Compensation Committee, to make broad-based
      grants of restricted stock and stock units, any of which may or may not require
      the satisfaction of performance objectives, to employees and non-employee
      directors. Under the Stock Plan, current directors and employees holding stock
      option grants were given the election of retaining those stock option grants
      or
      surrendering them for grants of common stock. This resulted in the surrender
      of
      5,738,190 stock options in exchange for the issuance of 3,375,397 shares of
      restricted common stock which cliff vested during 2007. The stock issuance
      resulted in a non-cash charge of $3,825,521, which was expensed ratably over
      the
      three year vesting period of the stock grants. In February 2005, the Board
      of
      Directors approved the grant of 147,500 shares of restricted stock to certain
      employees, resulting in a non-cash charge of $94,399, which is being expensed
      ratably over the three year cliff vesting period of the stock grants. In March
      2006, the Board of Directors approved the grant of 50,000 shares of restricted
      stock to certain employees, resulting in a non-cash charge of $26,000, which
      is
      being expensed ratably over the three year cliff vesting period of the stock
      grants. In August 2006, the Board of Directors approved the grant of 1,099,974
      shares of restricted stock to certain directors and employees which vest ratably
      on the anniversary date of the grant, resulting in a non-cash charge of
      $501,989, which is being expensed ratably over the three year vesting period
      of
      the stock grants. In August 2007, the Board of Directors approved the grant
      of
      995,337 shares of restricted stock to certain employees and non-employee
      directors which vest ratably on the anniversary date of the grant, resulting
      in
      a non-cash charge of $746,503, which is being expensed ratably over the three
      year vesting period of the stock grants. In the event of a merger or
      acquisition, vesting accelerates for all of the Stock Plan grants (see Note
      14).
      The number of remaining shares authorized under this plan at December 31, 2007
      is 378,703.




F-18


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


The
      Company’s consolidated statements of operations include stock-based compensation
      expense of $1,332,282 and $1,379,621 for the years ended December 31, 2007
      and
      2006, respectively. The Company accelerated the vesting of unvested restricted
      stock awards to one employee during 2007, resulting in incremental stock-based
      compensation expense of $24,112 which was fully recognized during the year
      ended
      December 31, 2007 according to the accelerated vesting terms.





The
      fair
      value of the restricted stock grants is measured by using the price of the
      Company’s shares on grant date. No adjustments were made for dividends and
      forfeitures as no dividends are expected to be paid on the underlying shares
      and
      no forfeitures are expected.





A
      summary
      of the status of the Company’s restricted stock grants as of December 31, 2007
      and 2006, and changes during the years then ended is presented
      below:




2007
              
              2006Wtd.
                  Avg.
              
              
              
              Wtd.
                  Avg.Fair
                  Value at
              
              
              
              Fair
                  Value atShares
              
              Grant
                  Date
              
              Shares
              
              Grant
                  DateNonvested
                  at beginning of year
              
              
              4,672,871
              
              $
              0.95
              
              
              3,522,897
              
              $
              1.11Forfeited
              
              
              (46,911
              )
              
              0.84
              
              
              -
              
              
              -Granted
              
              
              995,337
              
              
              0.75
              
              
              1,149,974
              
              
              0.46Vested
              
              
              (3,722,644
              )
              
              1.07
              
              
              -
              
              
              -Nonvested
                  at end of year
              
              
              1,898,653
              
              $
              0.64
              
              
              4,672,871
              
              $
              0.95





Total
      compensation costs related to nonvested restricted stock awards to be recognized
      was $914,153 as of December 31, 2007. The compensation cost is expected to
      be
      recognized over the weighted average period of 1.68 years. The total fair value
      of restricted stock grants vested during 2007 was approximately
      $4,000,000.





(11)
            CAPITAL
                TRANSACTIONS





Common
      Stock





Each
      share of common stock has the right to one vote. The holders of common stock
      are
      also entitled to receive dividends when and if declared by the Board of
      Directors. No dividends have been declared or paid on the Company’s common stock
      through December 31, 2007.





During
      the year ended December 31, 2007, the Company granted 995,337 shares of
      restricted stock to certain employees under the 2004 Stock Incentive Plan.
      During the year ended December 31, 2006, the Company issued 21,525,788 shares
      of
      common stock to acquire all the outstanding shares of Med-Design. Also, during
      the year ended December 31, 2006, 1,149,974 shares of restricted stock were
      granted to certain employees under the 2004 Stock Incentive Plan.




F-19


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


Stock
      Warrants





On
      March
      22, 2004, the Company entered into an agreement with Galen Partners III, L.P.,
      Galen Partners International III, L.P., and Galen Employee Fund III, L.P.
      (collectively, “Galen Partners”) whereby Galen Partners agreed to purchase a
      convertible promissory note (“Note”) in the aggregate principal amount of
      $1,000,000 upon the Company’s request made at any time between March 31, 2004
      and March 31, 2005. As of December 31, 2005 and 2006, Galen Partners owned
      approximately 34.2% and 23% of the Company’s common stock, respectively. As
      consideration for entering into this purchase agreement, Galen Partners received
      a warrant that provides them the right, but not the obligation, to purchase
      80,000 shares of common stock at an exercise price of $0.02 per share. Valuing
      the warrant utilizing the Black-Scholes valuation model, the issuance of the
      warrant resulted in deferred financing costs of $108,552. All of the costs
      were
      expensed during the years ended December 31, 2006 and 2005, due to the note
      being paid in full at June 30, 2006. On March 20, 2007, Galen Partners exercised
      its warrant for 80,000 common shares at the exercise price of $0.02 per share
      resulting in cash proceeds of $1,600 to the Company. The Note had a term of
      three years and bears interest at the rate of 12% per annum, with accrued
      interest to be paid July 1 and January 1 of each year the Note remains
      outstanding. The Note also provided that the Company may prepay all or any
      portion of the outstanding principal amount at any time without penalty. The
      entire outstanding principal amount due on the Note could have, at Galen
      Partner’s option, been converted into fully paid and nonassessable shares of the
      Company’s common stock. The conversion price will be 110% of the average closing
      share price for the Company’s common stock as reported on NASDAQ or the OTC
      Bulletin Board for the twenty (20) consecutive trading days prior to the date
      of
      the issuance of the Note.





On
      March
      7, 2005, Galen Partners agreed to a six-month extension of its $1,000,000
      promissory note agreement through September 30, 2005 in exchange for the
      issuance of a warrant to purchase 40,000 shares of the Company’s common stock at
      an exercise price of $0.02 per share which they exercised on March 4, 2008,
      resulting in cash proceeds of $800.00 to the Company.





All
      other
      terms and conditions of the original agreement remained unchanged in the
      subsequent agreement. Valuing the warrant utilizing the Black-Scholes valuation
      model resulted in amortization of $35,351 recognized during the year ended
      December 31, 2006, due to the note being paid in full at June 30, 2006.





On
      September 1, 2005, Galen Partners agreed to extend the note agreement for an
      additional six-month period without further consideration. On September 17,
      2005, the Company elected to draw $500,000 against the note agreement, with
      the
      option to draw down the remaining $500,000 prior to March 31, 2006. The note
      had
      a maturity date of September 17, 2008, at which time any outstanding principal
      and accrued interest must be paid in full.





On
      March
      6, 2006, the Company elected to draw the remaining $500,000 against the note
      agreement with Galen Partners. The note had a maturity date of March 6, 2009,
      at
      which time any outstanding principal and accrued interest would have been
      required to be paid in full.





On
      June
      30, 2006, the Company elected to prepay the $1,000,000 convertible note in
      full,
      along with all accrued interest. At December 31, 2007, no further liabilities
      exist under the note agreement.





The
      Company assumed 1,518,255 Med-Design warrants at strike prices ranging from
      $6.03 to $14.1375 in the merger. These warrants were exchanged for warrants
      to
      purchase the Company’s common stock at the same final exchange ratio received by
      the Med-Design stockholders resulting in the Company issuing 1,910,921 warrants
      at strike prices ranging from $4.79 to $11.23. The aggregate Black-Scholes
      value
      of the Company’s warrants issued in this exchange approximated $14,000 and was
      included as a component of the purchase price.





F-20


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


The
      following summarizes all warrant activity for the Company for the years ended
      December 31, 2007 and 2006.


2007
              
              2006Wtd.
                  Avg.
              
              
              
              Wtd.
                  Avg.Exercise
              
              
              
              ExerciseShares
              
              Prices
              
              Shares
              
              PricesOutstanding
                  at beginning of year
              
              
              2,030,921
              
              $
              4.79
              
              
              120,000
              
              $
              .02Exercised
              
              
              (80,000
              )
              
              0.02
              
              
              -
              
              
              -Forfeited
              
              
              (95,656
              )
              
              10.62
              
              
              -
              
              
              -Assumed
                  in Med-Design Merger
              
              
              -
              
              
              -
              
              
              1,910,921
              
              
              5.08Outstanding
                  at end of year
              
              
              1,855,265
              
              
              4.69
              
              
              2,030,921
              
              
              4.79Exercisable
                  at end of year
              
              
              1,855,265
              
              $
              4.69
              
              
              2,030,921
              
              $
              4.79





The
      fair
      value of each warrant assumed in 2006 was estimated on the date of purchase
      using the Black-Scholes option pricing model with the following weighted-average
      assumptions used for warrants assumed in 2006: average risk-free interest rate
      of 7.0%; expected lives of 3 years; expected dividend yield of zero percent;
      expected volatility of 82 percent.





During
      the year ended December 31, 2007, the number of authorized Series A preferred
      stock shares was reduced by 10,000,000 from 30,000,000 to 20,000,000 and the
      number of authorized common stock shares was increased by 10,000,000 from
      70,000,000 to 80,000,000 subsequent to approval from the stockholders at the
      annual meeting of stockholders on May 30, 2007.





(12)
            INCOME
                TAXES





The
      Company recorded income tax expenses of $45,031 for the year ended December
      31,
      2007 related to alternative minimum taxes and state taxes for 2007. While the
      Company was profitable in 2006, it incurred no tax expense due to the
      utilization of net operating losses incurred in prior periods. Significant
      components of the Company’s net deferred income tax assets as of December 31,
      2007 are as follows:


Deferred
                  income tax assets:Net
                  operating loss carryforwards
              
              $
              33,556,362Non
                  cash compensation expense
              
              
              103,365Allowance
                  for bad debt
              
              
              18,650Alllowance
                  for returns
              
              
              61,817Accrued
                  compensation
              
              
              14,435Intangible
                  assets
              
              
              1,427,032Financial
                  reporting accrual and reserves
              
              
              305,805AMT
                  credit
              
              
              20,593Depreciation
              
              
              172,354Deferred
                  revenue
              
              
              64,181Total
                  gross deferred income tax asset
              
              
              35,744,594Less
                  valuation allowance
              
              
              (35,744,594
              )Net
                  deferred income taxes
              
              $
              -





The
      net
      change in the valuation allowance for the years ended December 31, 2007 and
      2006
      was a decrease of $1,683,488 and a decrease of $19,795, respectively. The net
      change in valuation allowance for December 31, 2006 excludes $25,301,967
      acquired in the merger with Med-Design.




F-21


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


SFAS
      No.
      109 (“SFAS 109”) requires that a valuation allowance be provided if it is more
      likely than not that some portion or all of a deferred tax asset will not be
      realized. Because the Company has a history of operating losses, the Company’s
      ability to realize the benefit of its deferred tax asset will depend on the
      generation of future taxable income. The Company has recorded a full valuation
      allowance as of December 31, 2007.





The
      effective tax rate on income before income taxes differed from the federal
      income tax statutory rate in the accompanying statements of operations for
      the
      following reasons:


2007
              
              2006Tax
                  at federal statutory tax rates
              
              $
              941,462
              
              $
              130,970State
                  taxes
              
              
              129,968
              
              
              15,538Nondeductible
                  compensation expense items
              
              
              593,157
              
              
              -Research
                  and experimentation credits
              
              
              -
              
              
              (170,253
              )FIN
                  48 adjustment
              
              
              1,675,142
              
              
              -Net
                  operating loss adjustment from merger
              
              
              (1,641,662
              )
              
              -SAB
                  101 adjustment
              
              
              -
              
              
              27,200Other,
                  net
              
              
              30,452
              
              
              16,340Change
                  in valuation allowance
              
              
              (1,683,488
              )
              
              (19,795
              )Total
                  income tax provision
              
              $
              45,031
              
              $
              -





At
      December 31, 2007, the Company had total tax net operating losses (“NOL’s”) of
      $89,963,438 which will expire in the years 2008 through 2025, that can be
      carried forward to reduce federal and state income taxes, if any. Approximately
      $1,423,000 of NOL’s were used during 2007 and $6,500 expired in 2007. As defined
      in Section 382 of the Internal Revenue Code, the Company has undergone a greater
      than 50 percent ownership change as a result of the financing initiatives taken
      in 1998 and 2002. Consequently, there are limitations on the amount of the
      Company's NOL’s which may be utilized to offset future taxable income in any one
      year. The maximum amount of carryforwards available in a given year is limited
      to the product of the Company's value on the date of ownership change and the
      federal long-term tax-exempt rate, plus any limited carryforwards not utilized
      in prior years, as well as any post-change NOL’s generated by the Company. As
      part of the Med-Design Corporation acquisition in June of 2006, the Company
      acquired approximately $64,800,000 of net operating losses.  These losses
      are subject to an annual limitation of approximately $79,000 under Internal
      Revenue Code Section 382, and consequently, approximately $63,300,000 will
      expire prior to utilization. In addition, SFAS 109 requires that as the Company
      realizes a tax benefit from the Med-Design NOL’s, that any benefit shall first,
      be applied against and reduce to zero, goodwill related to the acquisition,
      and
      second, reduce to zero other noncurrent assets related to the acquisition and
      third, reduce income tax expense.





In
      July
      2006, the FASB issued FASB Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes — an interpretation of FASB Statement
      No. 109* ”
      (“FIN 48“), which clarifies the accounting and disclosure for uncertainty
      in tax positions, as defined. FIN 48 seeks to reduce the diversity in
      practice associated with certain aspects of the recognition and measurement
      related to accounting for income taxes. As required by FIN 48, the Company
      recognizes the financial statement benefit of a tax position only after
      determining that the relevant tax authority would more likely than not sustain
      the position following an audit. For tax positions meeting the
      more-likely-than-not threshold, the amount recognized in the financial
      statements is the largest benefit that has greater than 50 percent likelihood
      of
      being realized upon ultimate settlement with the relevant tax authority. The
      Company is subject to the provisions of FIN 48 as of January 1, 2007,
      and has analyzed filing positions in all of the federal and state jurisdictions
      where it is required to file income tax returns. As a result of the
      implementation of FIN 48, the Company impaired approximately $1.9 million of
      deferred tax assets related to research and experimentation tax credits, which
      had a full valuation allowance and therefore, did not result in a reduction
      to
      the January 1, 2007 balance of retained earnings.




F-22


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


The
      amount of unrecognized tax benefits as of January 1, 2007 was $1.9 million.
      That
      amount includes unrecognized tax benefits, which, if ultimately recognized,
      would not have an impact on the Company’s annual effective tax rate due to the
      full valuation allowance. The Company is subject to audit by the IRS and various
      states dating back to 1992.




The
      Company’s policy for recording interest and penalties associated with taxes is
      to recognize it as a component of income tax expense. The Company recorded
      an
      immaterial amount of interest and penalties for the year ended December 31,
      2007.





(13)
            EMPLOYEE
                BENEFIT PLAN





Employees
      who are 21 years of age are eligible for participation in the Specialized Health
      Products International, Inc. 401(k) Plan and may elect to make contributions
      to
      the plan. The Company matches 100 percent of such contributions up to five
      percent of the individual participant’s compensation. The Company’s
      contributions to the plan were approximately $131,000 and $124,000 for the
      years
      ended December 31, 2007 and 2006, respectively.





(14)
            SUBSEQUENT
                EVENTS





**Merger
      Agreement**




On
      March
      10, 2008, the Company entered into an Agreement and Plan of Merger (the “Merger
      Agreement”), with C.R. Bard, Inc. (“C.R. Bard”) and Pelican Merger Acquisition
      Sub Co. (“Merger Sub”), a wholly owned subsidiary of C.R. Bard .




Pursuant
      to the terms of the Merger Agreement, Merger Sub will merge with and into the
      Company, with the Company as the surviving corporation of the merger (the
“Merger”). At the effective date of the Merger, each share of common stock of
      the Company then outstanding, other than those held as treasury stock and those
      owned by C.R. Bard or Merger Sub, and other than those with respect to which
      appraisal rights are properly exercised, will be converted into the right to
      receive $1.00 per share in cash, without interest.




Completion
      of the transaction is subject to the affirmative vote of the Company’s
      stockholders, expiration or termination of the applicable anti-trust waiting
      periods and other customary closing conditions.




**Amendment
      to Restricted Stock Agreements**




On
      March
      10, 2008, the Compensation Committee of the Company approved an Amendment to
      Restricted Stock Agreement for grants of restricted stock made to certain
      employees, including certain executive officers, of the Company under the
      Company’s 2004 Stock Incentive Plan (the “2004 Plan”).




The
      revisions to the Restricted Stock Agreements clarify that the shares of common
      stock subject to the Restricted Stock Agreements will immediately vest in full
      upon a change in control (as defined in the 2004 Plan) of the Company.




**2008
      Executive Bonus Plan**




On
      March
      10, 2008, the Compensation Committee of the Board of Directors of the Company
      amended the Specialized Health Products International, Inc. 2008 Executive
      Bonus
      Plan Proposal (the “2008 Plan”) to clarify that bonuses will be payable after
      review and formal approval by the Compensation Committee but in any event will
      be paid on or before March 15, 2009.  Pursuant
      to the terms of the 2008 Plan, the Company’s executives are eligible to receive
      an annual bonus of 30% to 40% of their annual salary based upon the achievement
      of the Company’s 2008 revenue, net income and cash flow goals.




F-23


**SPECIALIZED
        HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




Actual
      bonus payouts for each employee participating in the 2008 Plan will be adjusted
      based upon achievement of pre-determined qualitative objectives for such
      individual for 2008.




In
      addition to calculated bonus payouts, plan participants will be eligible to
      receive incremental bonus payments for achievement of strategic initiatives
      beyond those contemplated in the 2008 Plan. The amount of such incremental
      payment, if any, will be based upon the recommendation of the Compensation
      Committee and submitted to the Board of Directors for approval prior to
      payment.




**Executive
      Incentive Bonus Program**




On
      March
      10, 2008, the Compensation Committee of the Board of Directors of the Company
      adopted the Specialized Health Products International, Inc. Executive Incentive
      Bonus Program (the “Bonus Program”). Pursuant to the terms of the Bonus Program,
      the Compensation Committee established a bonus pool of $1,000,000 to be
      allocated to the participants in the Bonus Program. The Compensation Committee
      may designate that the bonus pool will be funded by proceeds from a Change
      in
      Control (as defined in the Bonus Program).




F-24