FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
                             ----------------------

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


                            For the fiscal year ended
                                December 31, 1998

                             Commission file number
                                     0-26694

                 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
             (Exact name of registrant as specified in its charter)


               Delaware                                93-0945003  
(State or other  jurisdiction  of           (IRS Employer Identification No.)
      incorporation)

                    585  West 500  South,  Bountiful,  Utah  84010  (Address  of
                    principal executive offices)

                                 (801) 298-3360
              (Registrant's telephone number, including area code)


     Securities registered pursuant to Section 12(g) of the Act:

       Title of each class             Name of each exchange on which registered
  Common Stock, $.02 Par Value                              None

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. |X|

         The aggregate  market value of voting stock held by  non-affiliates  of
the  registrant  at April 5, 1999 was  $11,308,600.  On that  date,  there  were
12,356,440 outstanding shares of the registrant's common stock.


<PAGE>


                SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.


                       TABLE OF CONTENTS TO ANNUAL REPORT
                                  ON FORM 10-K
                          YEAR ENDED DECEMBER 31, 1998


                                     PART I

Item 1.    Business .........................................................3
Item 2.    Properties ......................................................15
Item 3.    Legal Proceedings ...............................................15
Item 4.    Submission of Matters to a Vote of Security Holders .............16

                                     PART II

Item 5.    Market for Registrant's Common Equity and Related 
           Stockholder Matters .............................................17
Item 6.    Selected Financial Data .........................................18
Item 7.    Management's Discussion and Analysis of Financial Condition 
           and Results of Operations .......................................19
Item 8.    Financial Statements and Supplementary Data .....................29
Item 9.    Changes in and Disagreements on Accounting and Financial 
           Disclosure ......................................................29

                                    PART III

Item 10.   Directors and Executive Officers of the Registrant ..............30
Item 11.   Executive Compensation ..........................................32
Item 12.   Security Ownership of Certain Beneficial Owners 
           and Management ..................................................35
Item 13.   Certain Relationships and Related Transactions ..................37

                                     PART IV

Item 14.   Exhibits, Financial Statement Schedules, and Reports 
           on Form 8-K .....................................................38

                                       2
<PAGE>

                                     PART I

Item 1. Business.

General

         The   Company   is   engaged   principally   in  the   development   of
cost-effective,  disposable, proprietary health care products designed to reduce
the incidence of accidental injury in the health care industry,  and thus reduce
the spread of disease. The Company has created a portfolio of proprietary health
care  products  that  are  in  various  stages  of  production,  pre-production,
development and research.  At present, the Company is focusing its resources and
activities  principally  on  completing  development  of products  under current
licensing and  development  arrangements,  developing  new safety medical device
products and identifying  marketing partners for the Company's sharps containers
and other new safety medical devices. All of the Company's products are designed
to reduce the risk of  acquiring  HIV/AIDS,  hepatitis  B and other  blood-borne
diseases through accidental needlesticks.

         In May 1997,  the  Company  entered  into an  agreement  (the  "License
Agreement") with Becton Dickinson and Company Infusion Therapy Division ("BDIT")
relating to a single  application  of the Company's  ExtreSafe(R)  safety needle
technology (the  "Technology").  Pursuant to the terms of the License Agreement,
BDIT made  payments of  $4,000,000  to the  Company.  Of these  total  payments,
$3,750,000 was for advanced  royalties for sales occurring  before the year 2002
and $250,000 was for a product  development fee. BDIT is required to pay ongoing
royalties to the Company based on sales of products utilizing the Technology. In
addition,  beginning in BDIT's fiscal year 2002, BDIT is required to pay minimum
royalties in order to maintain  exclusive  rights  under the License  Agreement.
BDIT has told the Company that BDIT expects to begin selling the product that is
the subject of the License  Agreement in the second quarter of 1999. The Company
will not be  manufacturing  product in  connection  with the License  Agreement.
There is no assurance  that the Company will realize  revenues under the License
Agreement or that the product will be launched in the second  quarter of 1999 as
anticipated.

         In December  1997, the Company  entered into a Development  and License
Agreement (the "JJM Agreement") with Johnson & Johnson Medical,  Inc. ("JJM") to
commercialize  two  applications  of  the  safety  needle  technology.  The  JJM
Agreement  provides for monthly  development  payments by JJM,  sharing of field
related patent costs,  the  possibility  of payments for initial  periods of low
volume  manufacturing,  an ongoing royalty stream and a JJM investment in molds,
assembly equipment and other capital costs related to  commercialization of each
product.  The JJM  Agreement  also  provides  for an ongoing  joint  cooperative
program  between the Company and JJM which derives future funding  directly from
sales of Company created products,  the possibility of low volume  manufacturing
revenue for the  Company and an ongoing  royalty  stream for  additional  safety
products which are jointly  approved for  development.  The Company  anticipates
that JJM will  perform  substantially  all of the  manufacturing  under  the JJM
Agreement  during 1999.  The Company and JJM also reached  arrangements  whereby
they are pursuing development and  commercialization of four additional products
under their joint  cooperative  program.  In connection  with the JJM Agreement,
Johnson  & Johnson  Development  Corporation  purchased  $2,000,000  of  Company
securities in a private  placement that closed in January 1998. In addition,  in
1998 the Company  recognized  $1,028,934 in development fee revenue  relating to
the JJM Agreement.  The Company anticipates that sales of two products under the
JJM Agreement  will begin in 1999.  There is no assurance  that the Company will
realize  revenues  under the JJM Agreement or that any of these products will be
launched as anticipated.

         The Company has an ongoing  program for  developing  products using its
ExtreSafe(R)  medical needle  technology and other medical needle  technologies.
These technologies allow a contaminated  needle to be protected without exposure
of the health care worker to the contaminated needle. Products under development
that incorporate these safety medical needle technologies include phlebotomy

                                       3
<PAGE>

devices,   catheters  inserters  and  several  different  syringe  applications.
Prototypes of the phlebotomy devices, catheters inserters and syringes have been
completed. The Company is developing other medical safety devices.

Company Background

         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"  or
"Registrant"),  a Delaware  corporation,  through a merger with a subsidiary  of
SHPI (the "Acquisition").

         The  Registrant  was  incorporated  as a Utah  corporation in 1986. The
Company's corporate domicile was changed to the State of Delaware,  and its name
was changed to Russco,  Inc., effective December 20, 1990, by merger into a then
newly created Delaware corporation. The Company had no operations until the date
of the  Acquisition.  On that date the Company  changed its name to "Specialized
Health  Products  International,  Inc." 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. Prior to the  Acquisition,  neither SHP nor any
affiliate of SHP had an interest in Russco, Inc.

Products

         Sharps Containers

         In January 1994, SHP acquired the Sharp-Trap(R) name and all technology
developed by Sharp-Trap,  Inc., a Michigan  corporation,  relating to a patented
container  entry system  designed to reduce the risk of accidental  needlesticks
and exposure to contaminated  needles,  blades and instruments when disposing of
such devices.  At the time of SHP's  purchase of the  Sharp-Trap(R)  technology,
Sharp-Trap,   Inc.  was   manufacturing   sharps   container   products  in  two
configurations,  a 0.5 quart and a 1.5 quart (the  "Sharp-Trap(R)"  Containers).
Following  additional research and discussions with medical product distributors
and end users, SHP designed an improved line of sharps containers (the Company's
"Safety Cradle(R)" line) which incorporated  improvements to the basic container
closure  technology to make them safer,  higher quality,  easier to use and less
costly to manufacture than the Sharp-Trap(R) Containers.

   
         The  self-closing  Safety  Cradle(R)  sharps  containers  allow for the
disposal  of  sharps  in  containers  that  incorporate  a  self-closing  sharps
containment  flap and  incorporate  both a  temporary  and a  permanent  locking
mechanism.  Especially  adapted for alternate site use (alternate  sites include
emergency  vehicles,  in-home  and  insurance  testing),  the  Company's  Safety
Cradle(R) sharps containers provide  convenience and safety for home health care
and other  portable  applications.  In addition,  each of the  Company's  sharps
containers  is designed to be used as a shipping  container for the transport of
medical  products.  The containers  then readily convert at the user's site into
safe and efficient  sharps  disposal  containers.  This special  design  feature
permits the Safety  Cradle(R)  container to fill a unique market niche.  Made of
polypropylene  material,  the Safety Cradle(R) sharps container's novel,  single
injection  molded part lid fits three sizes of containers,  allowing the Company
to offer  products  for a broad  spectrum  of sharps  containment  applications,
especially alternate site use. Because each Safety Cradle(R) sharps container is
formed  from  only two  molded  parts,  unit  manufacturing  costs are low which
enhances the Company's competitive position.     

         The Safety Cradle(R) can be used for a variety of purposes, including:

         Safety  Cradle(R)  Sharps Container - all three sizes (1.8, 3.4 and 5.3
quart) can be used as Safety  Cradle(R)  sharps  containers  for the disposal of
contaminated sharps.

                                       4
<PAGE>

         Transporter  - all three sizes are  designed to be shipping  containers
for new medical devices being sent to customers.  Each Safety  Cradle(R)  sharps
container can then be utilized by the customer for sharps disposal.

         Recycler - all three  sizes are  designed  for use by  medical  product
manufacturers  as secured  containers,  so that discarded  sharps may be shipped
back to the manufacturer for recycling or to a sharps disposal facility.

         While the Company has entered into several  marketing and  distribution
arrangements  relating  to its  sharps  container  products  in the  past,  such
arrangements  were not  successful  and no such  arrangements  are  currently in
effect.  The Company is actively seeking to enter into  distribution,  marketing
and/or licensing  arrangements.  There can be no assurance that the Company will
be successful in entering into such  arrangements,  or that if such arrangements
are consummated that they will be on terms that are favorable to the Company.

         Safety Lancets

         The Company attempted to market and sell its ExtreSafe(R) Lancet Strip.
Because of poor market  response,  the Company is no longer producing or selling
the ExtreSafe(R) Lancet Strip. Rather, it is developing two single safety lancet
products.  Accordingly,  certain  of the  Company's  ExtreSafe(R)  Lancet  Strip
manufacturing  assets  previously  held for sale were  written off or reduced to
their estimated  realizable value.  Those assets that were not written off total
$142,600 and are expected to be used in the Company's future operations.

Products Under Development

         Company sponsored research  activities resulted in expenses of $909,048
for  1998,   compared  with  $1,191,857  and   $1,264,186  for  1997  and  1996,
respectively.   Customers   sponsored  research   activities   relating  to  the
development  of new  products,  services or  techniques  or the  improvement  of
existing  products,  services or techniques for which the Company earned revenue
of $1,028,934 in 1998,  $250,000 in 1997 and $0 in 1996. The following  products
are currently under development.

         The Safety Lancets

         Lancets  are  small  devices  containing  needles  or  blades  used  to
penetrate  the  skin,  usually  a  finger,  to  obtain a few  drops of blood for
analysis. Lancets are used by health care workers on patients and by individuals
on themselves, such as by diabetics using insulin. The same safety concerns that
exist with handling needles exist with the handling of lancets,  because lancets
become contaminated after coming into contact with blood.

         There are a number of lancets on the market today. The most common is a
small "nail" type  instrument  which is pressed against the finger at which time
the "nail" penetrates the skin by hand pressure. Some lancets penetrate the skin
with a blade,  which generally  produces better blood flow. The nail type lancet
is often inserted into a spring loaded  activation  device,  about the size of a
large  pen.  The  device  is  pressed  against  the  patient's  finger  which is
penetrated when the spring is triggered. After triggering, the activation device
must be  emptied  and then  reloaded  with  another  lancet  for use on the next
patient.  Activation  devices  currently  marketed by other companies may become
contaminated by blood splattering when the finger is penetrated. To help prevent
contamination, activation devices should be sterilized or disposed of after each
use.  However,  while intended for use on multiple  patients,  these  activation
devices are not designed or intended to be sterilized,  thus increasing the risk
of cross contamination.

         The safety  lancets are being  designed such that they can only be used
one  time.  A lancet  activation  device  provides  for the safe and  convenient
triggering of each lancet. After a lancet is used once, the blade automatically

                                       5
<PAGE>

returns inside its protective  housing and the mechanism is disabled so that the
lancet cannot be reused.  The used lancet can be appropriately  discarded into a
sharps  container  which  provides  additional  protection.  In the  opinion  of
management,  the blade and blade  actuation  mechanism of the  Company's  safety
lancets have  revolutionary  designs.  Management  also believes that the safety
lancet's design makes it less painful than nail type lancets, although no formal
comparison  testing has been  conducted.  It is also noteworthy that the part of
the lancet in contact with the patient's  skin prior to lancing is sterile until
contaminated by the procedure.

         Safety Phlebotomy Devices (ExtreSafe(R), FlexLoc(TM) and AutoLoc(TM))

         The present  method for drawing  larger  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. (The
barrel is commonly known as a Vacutainer(R); Vacutainer(R) is not a trademark of
the  Company.)  After blood is drawn,  the needle is manually  removed  from the
patient.  While the health care worker continues  attending to the patient,  the
Vacutainer(R),  barrel  and  needle are often  placed on a tray,  bed,  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 (which  increases the risk of cross  contamination).  Management
believes the Company's  ExtreSafe(R)  phlebotomy device  technologies  provide a
safer  method.  The  ExtreSafe(R)  devices  quickly  retract the needle from the
patient  directly into a safe housing,  minimizing  the chance of an inadvertent
stick by a contaminated  needle.  Retraction is initiated by simply depressing a
designated  distortable portion of the housing which has been designed to ensure
that there is no action  directed  toward or away from the  patient  which might
affect  the  depth  of  needle  penetration.   Prototypes  of  the  ExtreSafe(R)
phlebotomy device have been completed. The Company's AutoLoc(TM) technology is a
special version of the ExtreSafe(R)  technology.  In the FlexLoc(TM)  technology
the needle is manually sheathed rather than being retracted.

         Safety Catheter Inserters

         Catheter  inserters  are devices  that insert  catheters  into veins or
other  areas of the body using a  catheter  insertion  needle to allow  blood or
other  fluids  to  be  removed  from  or  delivered  into  the  patient's  body.
Contemporary  catheter use has problems similar to those faced in drawing blood.
Inserting  a  catheter  involves  a  percutaneous   (i.e.,   through  the  skin)
needlestick  followed by threading the catheter over the needle into a patient's
vein or artery.  This  method  can be unsafe in two  respects.  First,  when the
needle is pulled out of the catheter,  there is often a discharge of blood which
could contaminate the health care worker. Second,  inadvertent  needlesticks can
occur when the needle is withdrawn from the catheter because, in most instances,
the needle is  temporarily  left  exposed  while the patient is tended to by the
health care worker.  Like the  ExtreSafe(R)  and AutoLoc(TM)  safety  phlebotomy
device, the Company's catheter inserters quickly retract the contaminated needle
from the patient and enclose it safely in a protective  housing.  Prototypes  of
the catheter inserters have been completed.

         Safety Syringes (ExtreSafe(R) and FlexLoc(TM))

   
         Another  area where there is  significant  risk of  needlesticks  is in
syringe  use.  Generally,  use of a  needle  for a  medical  procedure  involves
removing a cap over the needle 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 the
volume of accidental  needlesticks related to needle cap replacement resulted in
such  practice  being  prohibited.  Medical  personnel  began using  needles and
syringes  having sheaths which could be extended over the exposed needle after a
procedure.  Also,  medical  facilities  began  installing  sharps  containers in
patients  rooms (they had  previously  been  centrally  located) and health care
workers began disposing of exposed needles after use in the sharps containers

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<PAGE>

found in the patient's  room. The  ExtreSafe(R)  syringe  provides an extendible
needle  which  is  retracted  into a safe  housing  in a manner  similar  to the
retraction  of  the  ExtreSafe(R)  phlebotomy  devices  and  catheter  inserters
described above. Like phlebotomy,  in FlexLoc(TM) devise technology,  the needle
is sheathed.     

         Other Medical Safety Devices

         The Company has an ongoing  program for developing  additional  medical
safety devices.

         Filmless Digitized Imaging Technology

   
         The  procedures  for taking a large area x-ray image  having  generally
acceptable  resolution and  presenting  the x-ray to an attending  physician for
interpretation  has changed little over the past 40 years. The most common x-ray
image today is taken using film which requires  development  in a darkroom.  The
physician  personally handles the x-ray image, which is generally imprinted on a
14" x 17" plastic sheet. For record keeping  purposes,  hospitals usually retain
x-ray  images for at least six years.  X-ray  storage and  retrieval is a costly
problem for many medical facilities. While some filmless x-ray systems have been
introduced recently, none provide the resolution of standard x-rays.
    

         In October  1995,  SHP entered into a joint  venture with Zerbec,  Inc.
("Zerbec"),  whereby  Quantum  Imaging  Corporation  ("QIC")  was  organized  to
develop,  manufacture,  distribute and market products and technologies  using a
patented,  solid state,  filmless  digitized  imaging  technology.  The filmless
digitized  imaging  technology  involves  a  method  of  directly  producing  an
electrical  signal  from an image  recorded  on an x-ray  plate.  The  signal is
instantly  digitized  and stored on a CD-ROM  and the same  x-ray  plate is then
available for subsequent  procedures.  The filmless digitized imaging technology
eliminates film as the x-ray image recording  medium and enables x-ray images to
be  translated  to a CD-ROM  format to simplify  their  storage,  retrieval  and
handling.  The Company believes that QIC's filmless digitized imaging technology
can improve the way in which x-ray images are obtained,  interpreted and stored,
while also  providing  clearer  images having higher  resolutions  that are more
easily interpreted than x-ray films. Furthermore, the Company believes that this
technology  could be applicable  for use in x-ray  facilities in mobile  medical
emergency  units  which has not been  achieved  to date in part  because  of the
necessity of carrying chemical handling equipment required for film processing.

         Pursuant to the terms of the joint venture  agreement,  Zerbec assigned
patented filmless  digitized imaging  technology to QIC and will provide ongoing
support for the development and  commercialization of the technology.  The joint
venture  agreement  also  provides  that QIC is to finish  the  development  and
commercialize the filmless  digitized imaging  technology.  A prototype has been
produced  to  demonstrate   image  resolution   compatible  with  breast  cancer
diagnosis.

         In the fourth quarter of 1998, QIC entered into a non-binding letter of
intent for U.S.  Healthcare,  LC to acquire  QIC.  While  discussions  with U.S.
Healthcare are ongoing,  the transaction has not been completed and there can be
no assurance that the transaction will be completed or that if completed it will
be on terms that are  favorable to the Company.  In 1999,  Zerbec  exercised its
right to acquire  two-thirds of SHP's interest in QIC for nominal  consideration
under the parties joint venture  agreement  because certain  funding  objectives
were not satisfied. As a result of Zerbec exercising its rights, SHP's ownership
was reduced to approximately 17 percent of the outstanding  common stock of QIC.
The Company continues to negotiate alternative arrangements with Zerbec.

Company Strategy

         The  Company's  primary  objective is to establish  itself as a leading
developer of safety medical products.  To achieve this objective,  the Company's
growth strategy is focused on the following five principal elements.

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       o          Capturing significant market share of targeted segments of the
                  sharps  container,   lancet,   phlebotomy  device,   catheter,
                  catheter  inserter,  syringe,  and  specialty  medical  needle
                  markets  through   marketing,   license  and/or   distribution
                  arrangements.

        o         Broadening   the  Company's   existing   products   lines  and
                  developing new product lines to penetrate related markets.

        o         Seeking additional market opportunities based on the Company's
                  existing or new proprietary technologies.

        o         Entering   into   marketing,   licensing,   distribution   and
                  development    agreements    with   large   medical    product
                  organizations.

        o         Arranging for the  manufacture of these  products by reputable
                  manufacturers.

         Future Market Opportunities

         The Company intends to enter additional  markets where it believes that
it can gain  significant  market  share based on  proprietary  technology  or by
capitalizing on the sales and distribution channels it establishes.  There are a
number of possible future applications for the Company's  technology,  but there
can be no  assurance  that the Company  will  commence  development  of any such
products  or  that,  if  commenced,  such  development  will  be  successful  or
profitable.

Marketing and Sales

         The Company employs a limited number of sales and marketing  personnel.
The Company is and will seek third parties to market and distribute its products
in the United States and selected foreign countries.  The Company may enter into
contracts,  licensing  agreements  or joint  ventures  with such  third  parties
whereby the Company would  receive a licensing  fee or royalty  payment based on
the licensee's  revenues from licensed products.  The Company would likely enter
into such licensing  arrangements  with several  companies based on geographical
regions  or  product  types,  but may enter  into  exclusive  arrangements  with
individual companies having a major presence in the markets the Company seeks to
penetrate. There can be no assurance that the Company will be able to enter into
contracts, license agreements or joint ventures with third parties in the future
on terms  acceptable  to the  Company  or that  the  License  Agreement  and JJM
Agreement will be profitable for the Company.

         The Company  intends to support the marketing of its products by, among
other things,  attending trade shows and  advertising in industry  publications.
The Company  intends to  distribute  samples of its  products  free of charge to
various health care  institutions and  professionals in the United States and in
selected  foreign  countries to introduce and attempt to create a demand for its
products in the marketplace.

         Product Agreements

         Consistent with this strategy, in May 1997 the Company entered into the
License Agreement with BDIT relating to a single  application of the Technology.
Pursuant to the terms of the License Agreement, BDIT made payments of $4,000,000
to the Company.  Of these total payments,  $3,750,000 was for advanced royalties
for  sales  occurring  before  the year  2002  and  $250,000  was for a  product
development fee. BDIT is required to pay ongoing  royalties to the Company based
on sales of products utilizing the Technology. In addition,  beginning in BDIT's
fiscal year 2002, BDIT is required to pay minimum royalties in order to maintain
exclusive  rights  under the License  Agreement.  BDIT has told the Company that
BDIT  expects to begin  selling the  product  that is the subject of the License
Agreement in the second quarter of 1999.  The Company will not be  manufacturing
product in connection with the License Agreement. There is no assurance that the

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<PAGE>

Company will realize  revenues  under the License  Agreement or that the product
will be launched in the second quarter of 1999 as anticipated.

         Similarly,  in December 1997 the Company entered into the JJM Agreement
with JJM to commercialize two applications of safety needle technology.  The JJM
Agreement  provides for monthly  development  payments by JJM,  sharing of field
related patent costs,  the  possibility  of payments for initial  periods of low
volume  manufacturing,  an ongoing royalty stream and a JJM investment in molds,
assembly equipment and other capital costs related to  commercialization of each
product.  The JJM  Agreement  also  provides  for an ongoing  joint  cooperative
program  between the Company and JJM which derives future funding  directly from
sales of Company created products,  the possibility of low volume  manufacturing
revenue for the  Company and an ongoing  royalty  stream for  additional  safety
products which are jointly  approved for  development.  The Company  anticipates
that JJM will  perform  substantially  all of the  manufacturing  under  the JJM
Agreement  during 1999.  The Company and JJM also reached  arrangements  whereby
they are pursuing development and  commercialization of four additional products
under their joint  cooperative  program.  In connection  with the JJM Agreement,
Johnson  & Johnson  Development  Corporation  purchased  $2,000,000  of  Company
securities in a private  placement that closed in January 1998. In addition,  in
1998 the Company  recognized  $1,028,934 in development fee revenue  relating to
the JJM Agreement.  The Company anticipates that sales of two products under the
JJM Agreement  will begin in 1999.  There is no assurance  that the Company will
realize  revenues  under the JJM Agreement or that any of these products will be
launched as anticipated.

         The Company  currently intends to market and sell its other products in
the United States and selected  foreign  countries  through third  parties.  The
Company's plan for the sales and distribution of its products is to target major
segments of the respective markets for those products,  including major hospital
and  institutional  buying groups,  pharmaceutical  companies,  distributors and
wholesalers, and government and military agencies. The Company intends to market
and  distribute  its products  through one or more  companies  that have a major
presence  in these  major  segments.  The  Company  may  enter  into  contracts,
licensing  agreements  and joint  ventures with such third  parties  whereby the
Company  would  receive a  licensing  fee and/or  royalty  payment  based on the
licensee's  revenues from licensed products.  The Company will determine whether
or not it will  manufacture  products on a case by case basis  depending  on its
arrangements  with  marketing  and  distribution  partners,  if any. The Company
currently does not have distribution, marketing and/or licensing arrangements in
place with respect to its Safety  Cradle(R) sharps  container  products,  safety
lancets  products  or other  products  and there can be no  assurance  that such
arrangements  will be  completed  or if  completed  that  they  will be on terms
favorable to the Company.

         License and distribution  arrangements,  such as those discussed above,
create  certain  risks for the  Company,  including  (i)  reliance  for sales of
products  on  other  parties,  and  therefore  reliance  on the  other  parties'
marketing ability, marketing plans and credit-worthiness;  (ii) if the Company's
products are marketed under other parties' labels,  goodwill associated with use
of the  products may inure to the benefit of the other  parties  rather than the
Company;  (iii) the Company may have only  limited  protection  from  changes in
manufacturing  costs and raw materials costs; and (iv) if the Company is reliant
on other parties for all or  substantially  all of its sales, the Company may be
limited in its ability to negotiate with such other parties upon any renewals of
their agreements.  Further,  because such arrangements are generally expected to
provide the Company's  marketing  partners with certain  elements of exclusivity
with respect to the  products to be marketed by those  partners,  the  Company's
success will be highly dependent on the results obtained by its partners.

         The  Company  is not  permitted  to sell  products  based on its safety
medical  needle  technologies  for  commercial  use in the United  States  until
regulatory approval is obtained.  The Company must also comply with the laws and
regulations  of the various  foreign  countries  in which the Company  sells its
products.  Certain  foreign  countries may only require that the Company  submit
evidence of the FDA's  pre-market  clearance of the relevant  products  prior to
selling those products in such countries.  However,  some foreign  countries may
require additional testing and approval. See "--Government Regulation."

                                       9
<PAGE>

Industry

         Market

   
         Health care is one of the largest industries in the world and continues
to grow. There is increasing  demand in the health care market for products that
are safer,  more efficient and  cost-effective.  The Company's  products  target
segments of this market.  While traditional,  non-safety  products in the market
segments  which the Company seeks to address  compete  primarily on the basis of
price,  the  Company  expects to compete  generally  on the basis of health care
worker  safety,  ease of use,  reduced  cost of  disposal,  patient  comfort and
compliance  with  OSHA  regulations,  but not on the  basis of  purchase  price.
However,  the  Company  intends to be  competitive  on price  with other  safety
devices. The Company believes that when all indirect costs (disposal of needles,
and testing,  treatment and workers compensation expense) related to needlestick
injuries are considered,  the Company's  products will compete  effectively both
with  "traditional"  products  and with the  safety  products  of the  Company's
competitors.     

         There can be no assurance,  however, that purchasers will be willing to
pay any costs over and above that of traditional non-safety products.  This risk
may by reduced by the fact that there appears to be a national  movement  toward
the passage of legislation requiring the use of safety needle products. In March
1999,  Tennessee joined California in passing  legislation  requiring the use of
safety needles over conventional  needle products to protect health care workers
from hazardous  needlesticks.  Similar  legislation is under consideration in 18
other states and nationally. There is no assurance that additional safety needle
legislation will be implemented.

         Accidental Needlesticks

         Needles for hypodermic syringes, phlebotomy sets, intravenous catheters
and specialty medical needles are used for injecting 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 and  catheters  and  specialty  needles  are used for access to
patient  vessels.  There is an increasing  awareness of the potential  danger of
infections and illnesses  that result from  accidental  needlesticks  and of the
need for safer needle  devices to reduce the number of  accidental  needlesticks
that occur.

         Infections  contracted  as a result of  accidental  needlesticks  are a
major concern to health care institutions,  health care workers,  sanitation and
environmental  services  workers and  certain  regulatory  agencies.  Accidental
needlesticks  may result in the spread of infectious  diseases such as hepatitis
B, HIV (which may lead to AIDS), diphtheria, gonorrhea, typhus, herpes, malaria,
rocky  mountain  spotted  fever,   syphilis  and   tuberculosis.   According  to
International  Health Care worker Safety  Center at the  University of Virginia,
"the  average  rate of reported  sharp-object  injuries  is 30 injuries  per 100
occupied hospital beds per year. The total annual percutaneous and mucocutaneous
exposures to blood or at-risk  biological  substances in the U.S., based on 1996
Epinet data, was 786,885." Also, "in the two categories of devices that pose the
greatest  risk for  transmission  of  bloodborne  pathogens,  IV  catheters  and
blood-drawing  needles, only 28% and less than 10% of hospitals have switched to
safety technology, respectively."

   
         The  majority of health care  workers'  adverse  exposures to blood are
either product related (e.g.,  needlesticks) or could be prevented by the use of
appropriate products.  The Company believes that pressure is increasing from the
government and private  sectors for the health care industry to develop  medical
devices  that will  provide a safer  working  environment  for  health  care and
related  workers and  patients.  The Company's  products  attempt to address the
demand for  medical  devices  that  reduce the risk of  accidental  exposure  to
blood-borne diseases.     

                                       10
<PAGE>

Patents and Proprietary Rights

         The Company's policy is to seek patent protection for all developments,
inventions and  improvements  that are patentable and which have potential value
to  the  Company  and  to  protect  as  trade  secrets  other  confidential  and
proprietary   information.   The  Company  intends  to  vigorously   defend  its
intellectual property rights to the extent its resources permit.

         The Company  owns seven  United  States  patents  and has other  patent
applications  pending (in the United  States and in other  countries)  which are
directly applicable to the Company's Safety Cradle(R) sharps container products.
The Company also owns two United States patents and allowed patent  applications
relating to its safety lancet  technology,  and nine United  States  patents and
allowed patent applications  relating to its safety medical needle technologies.
The Company has additional United States and international  patent  applications
pending. The patents referred to above begin to expire on April 1, 2006.

         QIC owns four United  States  patents plus granted  claims in one other
applications, and has three Canadian patents, relating to its filmless digitized
imaging  technology.  These  patents  expire  in May  2001,  September  2002 and
September 2005.

         The future  success of the Company may depend upon the  strength of its
intellectual property. The Company believes that the scope of its patents/patent
applications  is  sufficiently  broad to prevent  competitors  from  introducing
devices of similar  novelty and design to compete with its current  products and
that such patents and patent  applications are or will be valid and enforceable.
There is no assurance, however, that if such patents are challenged, this belief
will prove correct. In addition,  patent applications filed in foreign countries
and patents granted in such countries are subject to laws,  rules and procedures
which  differ  from  those  in the  United  States.  Patent  protection  in such
countries may be different from patent protection  provided by U.S. laws and may
not  be  as  favorable  to  the  Company.  The  Company  plans  to  timely  file
international  patents in all  countries in which the Company is seeking  market
share.

         The Company is not aware of any patent  infringement claims against it.
Litigation  to enforce  patents  issued to the Company,  to protect  proprietary
information  owned by the  Company,  or to defend the  Company  against  alleged
infringement  by the Company of the rights of others may occur.  Such litigation
would be costly,  could  divert  resources  of the  Company  from other  planned
activities, and could have a material adverse effect on the Company's results of
operations and financial condition.

Manufacturing

         The  Company  has  designed,  paid for the  construction  of,  and owns
various molds and machinery  used to  manufacture  its Safety  Cradle(R)  sharps
containers.  Certain of the Company's  ExtreSafe(R)  Lancet Strip  manufacturing
assets  previously  held for sale were written off or reduced to their estimated
realizable value. Those assets that were not written off are expected to be used
in the Company's future operations.  The Company's other products are in various
stages of development  and are not currently being  manufactured.  The materials
used to produce the  Company's  products are  generally  widely  available.  The
Company does not anticipate difficulty in obtaining such materials.  At present,
there are a number of manufacturers that could produce sharps containers, safety
lancets and safety  needle  products and a number of suppliers  could supply the
necessary parts and materials.

Competition

         The health  care  products  market is highly  competitive.  Many of the
Company's  competitors  have longer  operating  histories and are  substantially
larger, better financed and better situated in the market than the Company.

         The  leading  suppliers  in the  sharps  container  market  are  Baxter
International,  Inc., Becton Dickinson and Company,  Kendall Healthcare Products
Company and Sage Products,  Inc. There are also numerous  smaller  suppliers.  A

                                       11
<PAGE>

variety of sharps disposal  products have been introduced into the  marketplace.
Some of these  disposal  containers  accommodate  only the needle  while  others
accommodate the needle,  syringe and limited surgical instruments.  The majority
of the sharps containers on the market, however, allow contaminated  instruments
to fall out when the  container  is inverted.  Many of these other  products are
unstable  if not  supported  by wall  supports or other  apparatus.  The Company
believes  its  products  are  more  stable,   safer  and  more   effective  than
competitively  priced  products on the market.  In addition,  to the best of the
Company's   knowledge,   there  are  no  sharps   disposable   transporters   or
recycler/transporter type products on the market today.

         The leading  suppliers in the lancet  market are Becton  Dickinson  and
Company,  Surgicutt,  Inc.,  Miles,  Inc.,  Diagnostic  Corporation,  Boehringer
Mannheim,  Inc. and Kendall Healthcare Products Company. There are also numerous
smaller suppliers.  To the best of the Company's knowledge,  there are no safety
lancets on the market  today that operate in a manner  similar to the  Company's
safety lancets.

         The leading  suppliers  of standard  needles are Becton  Dickinson  and
Company,  Kendall  Healthcare  Products  Company,  B. Braun and  Terumo  Medical
Corporation  of Japan.  The leading  developers of safety medical needle devices
include  Med-Design  Company,   Bio-Plexus,   Inc.,  Maxxon,  Inc.,  Retractable
Technologies,  Inc. and Univec,  Inc. The Company believes that its products are
superior to those presently being marketed by its competitors.  Applications for
the  Company's  safety  needle  technologies  may also be  found  in  phlebotomy
devices,  percutaneous catheter insertion devices,  syringes,  and other medical
needle devices.

         While traditional, non-safety products in the market segments which the
Company seeks to address  compete  primarily on the basis of price,  the Company
expects to  compete  on the basis of health  care  worker  safety,  ease of use,
reduced cost of disposal,  patient comfort and compliance with OSHA regulations,
but not on the basis of price except with respect to comparable safety products.
However, the Company believes that when all indirect costs (disposal of needles,
testing,  treatment  and workers'  compensation  expense)  related to accidental
needlestick injuries are considered,  the Company's products compete effectively
both with  "traditional"  products and with the safety products of the Company's
competitors. There can be no assurance, however, that purchasers will be willing
to  purchase at prices over and above that of  traditional  non-safety  products
unless  mandated by applicable law such as those  recently  passed in California
and Tennessee.

Research and Development/Acquisition of Technology

   
         The  Company  has  devoted a  substantial  portion  of its  efforts  to
acquiring,   designing  and  developing  health  care  products.   Research  and
development  costs were $909,048,  $1,191,857 and $1,264,186 for 1998,  1997 and
1996, respectively. The Company plans to acquire additional technologies that it
determines  support its business  strategy.  In addition,  the Company  plans to
continue  research  and  development  on its current  products  and possible new
products.  There is no assurance  that the  Company's  research and  development
activities will prove effective.     

                                       12
<PAGE>

Government Regulation

         The Company and its  products  are  regulated  by the FDA,  pursuant to
various  statutes,  including the FD&C Act, as amended and  supplemented  by the
Medical Device  Amendments of 1976 (the "1976  Amendments") and the Safe Medical
Devices Act of 1990. 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.  The good manufacturing  practice  regulation has
been  recently  replaced  by a  more  comprehensive  Quality  System  Regulation
("QSR").  QSRs include  implementation  of quality assurance  programs,  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.  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 II or Class III device, respectively.  If
a company states the device is unclassified,  it must explain the basis for that
determination.

         In some cases  obtaining  pre-market  approval can take several  years.
Product clearance pursuant to a 510(k) Notification can be obtained in much less
time. In general,  clearance of a 510(k)  Notification for a Class II device may
be obtained if the Company 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 the same 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 as a legally  marketed device and does not raise questions
of safety or efficacy that are different from the predicate device.

         The Company has  received a 510(k)  Notification  from the FDA that its
Sharp-Trap(R) sharps containers are substantially equivalent to legally marketed
predicate devices.  The Company's Safety Cradle(R) sharps containers are subject
to the general controls of the FD&C Act and the additional  controls  applicable
to Class II devices.  The Company has  received a clearance  on a second  510(k)
Notification  for its sharps  containers which includes all areas of use for the
Safety Cradle(R) sharps  container.  The Company has received FDA clearance on a
510(k) notification on a phlebotomy device.

         OSHA also  requires,  in part,  that  sharps  containers  be  closable,
disposable,  puncture-resistant,   leak  proof  on  the  sides  and  bottom  and
appropriately  labeled.  The Company's Safety Cradle(R) sharps containers are in
compliance with present OSHA regulations.  Future regulations,  however,  may be
imposed which could have a material adverse effect on the Company.

                                       13
<PAGE>

         The Company's  follow-on  products  (i.e.,  other products based on its
safety medical needle technologies,  intravenous flow gauge and blood collection
device) are still in the  development  stage.  In March  1995,  the FDA issued a
draft guidance document on 510(k)  Notifications for medical devices with sharps
injury  prevention  features,  a category that would cover most of the Company's
safety medical products.  The draft guidance  provisionally placed this category
of products  into Class II Tier 3 for  purposes of 510(k)  review,  meaning that
such  products  will be  subject to the FDA's most  comprehensive  and  rigorous
review for 510(k)  products.  The draft guidance also states that in most cases,
FDA will accept, in support of a 510(k) Notification,  data from tests involving
simulated use of such a product by health care  professionals,  although in some
cases the agency might require actual clinical data.

         The Company  expects its other follow-on  products  (i.e.,  intravenous
flow gauge and blood  collection  device) to be categorized as Class II devices.
The  Company  also  expects  that  these  follow-on  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 the Company will obtain 510(k)  Notification  clearance to
market its products, that the Company's products will be classified as set forth
above, or that, in order to obtain 510(k)  Notification  clearance,  the Company
will  not  be  required  to  submit  additional  data  or  meet  additional  FDA
requirements  which could  substantially  delay  sales and add to the  Company's
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 the Company's 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  which 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 United
States  meet  specific  requirements  before they are  exported.  The Company is
registered as a  manufacturer  with the FDA. To date, no incidents have occurred
with Company  products that have  necessitated  submission  of a Medical  Device
Report to the FDA.

         The FDA inspects medical device manufacturers and distributors, and has
broad  authority  to order  recalls of medical  devices,  to seize  noncomplying
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 the Company.

         In addition to the laws and  regulations  enforced by the FDA and OSHA,
the Company is subject to government  regulations  applicable to all businesses,
including,  among others, regulations related to occupational health and safety,
workers'  benefits  and  environmental  protection.   Moreover,  in  March  1999
Tennessee joined California in passing  legislation  requiring the use of safety
needles  over  conventional  needle  products.   Similar  legislation  is  under
consideration in 18 other states and nationally.

         Distribution  and sales of the  Company's  products in countries  other
than the United States is subject to regulations in those  countries.  There can
be no assurance that the Company will be able to obtain the approvals  necessary
to market its products outside the United States.

                                       14
<PAGE>

Seasonality of Business

         Sales of the Company's  products are not  anticipated  to be subject to
seasonal variations.

Backlog

         There is no  material  backlog  of  unfilled  orders  of the  Company's
products.

Employees

   
         As of April 5, 1999,  the  Company  employed 21 people,  including  ten
research and development  employees,  two sales and marketing  employees,  seven
accounting and administrative employees and two quality assurance employees. The
Company  expects  to add  additional  employees,  principally  in the  areas  of
marketing  and research and  development.  The planned  increase in personnel is
based  primarily on expected  increases in product  development,  production and
sales.  The Company's  employees are not represented by any labor union, and the
Company believes its relations with its employees are good.     

Item 2. Properties.

   
         The  Company's  principal  offices  are  located at 585 West 500 South,
Bountiful,  Utah,  under  terms of a lease  with an  unaffiliated  lessor  which
expires on June 30,  2003,  subject to the  Company's  right to extend the lease
term for an additional  three-year term. The offices comprise 17,273 square feet
of space. The Company believes that its current office space will be adequate to
meet the needs of current and expected  growth for the foreseeable  future.  The
Company may, however,  require additional manufacturing facilities in the future
depending upon the volume of products sold and the manufacturing arrangements to
which the Company is a party.

         The  Company  owns  production  molds for the Safety  Cradle(R)  sharps
containers and certain automated  assembly  equipment.  At present the molds and
automated  assembly equipment are not being utilized.  The Company  anticipates,
however, that it will utilize the molds and equipment in the future.
    

Item 3. Legal Proceedings.

         In April 1997, the Company entered into an agreement with Leerink Swann
& Company  ("Leerink"),  whereby Leerink agreed to assist the Company in raising
funds in a  private  placement  of equity  securities.  Sufficient  funding  was
deposited into escrow to hold an initial closing, but the closing did not occur.
Leerink alleges that the Company refused to close on the placement.  The Company
alleges that the closing did not occur because Leerink, as a condition precedent
to closing,  made certain  pre-closing demands that management believes went far
beyond the terms of the agreement and which demands Company management  believes
were not in the best  interests  of the Company or its  stockholders.  In August
1997, Leerink filed suit in the United States District Court for the District of
Massachusetts  alleging breach of contract,  misrepresentation  and violation of
M.G.L. c.93A, ss.11. Leerink is seeking compensatory damages exceeding $230,000,
113,251  warrants to purchase  113,251  shares of the  Company's  Common  Stock,
treble damages and reasonable attorneys' fees and costs.

         In October 1997,  the Company filed a counterclaim  alleging  breach of
contract and violation of M.G.L.  c.93A, ss.11. The Company is seeking in excess
of $60,000 in money damages,  treble  damages,  reasonable  attorneys'  fees and
costs. The case is scheduled to go to trial in July 1999.

                                       15
<PAGE>

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

         The  Company  held its annual  meeting of  stockholders  on October 23,
1998, at which meeting  certain members of the Company's Board of Directors (the
"Board") were elected.  The Company's  Board is divided into three classes.  One
class of  directors  is elected at each  annual  meeting of  stockholders  for a
three-year  term.  Each year a  different  class of  directors  is  elected on a
rotating  basis.  The term of David A.  Robinson  expired in 1998,  the terms of
David T. Rovee and Robert R. Walker expire in 1999, the terms of David G. Hurley
and Gale H. Thorne expire in 2000 and the term of Melinda S. Mitchell expires in
2001.

         David A.  Robinson,  who is  currently a director of the  Company,  was
nominated  by the Board for election to the class whose term expires at the 2001
annual meeting of stockholders.  The stockholders then elected David A. Robinson
by a vote of 7,629,598 for and 12,500 withheld authority.

         The  stockholders  also  considered a proposal to adopt the Specialized
Health  Products  International,  Inc. 1998 Stock Option Plan. The  stockholders
approved the plan by a vote of 7,316,347  in favor,  288,251  against and 37,500
abstained from voting.


                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


                                       16
<PAGE>


                                     PART II


Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.


Dividend Policy

         To date,  the Company has not paid  dividends on its common stock.  The
payment of  dividends,  if any,  in the future is within the  discretion  of the
Board and will depend upon the Company's earnings,  its capital requirements and
financial condition,  and other relevant factors.  See "Management's  Discussion
and Analysis of Financial  Condition and Operating  Results." The Board does not
intend to declare any dividends in the foreseeable  future,  but instead intends
to retain all earnings, if any, for use in the Company's operations.

Share Price History

         The Company's  common stock (the "Common Stock") has been quoted on the
Nasdaq  Small-Cap Market since October 1995 under the trading symbol "SHPI." The
following  table sets forth the high and low bid information of the Common Stock
for the periods  indicated.  Note that such  over-the-counter  market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
the quotations may not necessarily  represent actual  transactions in the Common
Stock.

            Quarter Ended                               High            Low

            1997
            March 31..............................      $3.56          $2.75
            June 30...............................      $3.37          $2.00
            September 30..........................      $2.31          $2.00
            December 31...........................      $2.19          $1.00

            1998
            March 31..............................      $3.50          $1.63
            June 30...............................      $2.38          $1.44
            September 30..........................      $2.25          $1.19
            December 31...........................      $1.56          $0.94

Holders of Record

         At April 5,  1999,  there were 317  holders of record of the  Company's
Common Stock. The number of holders of record was calculated by reference to the
Company's stock transfer agent's books.

Issuance of Securities

         In 1998,  the  Company  granted to two members of the  Company's  Board
stock  options to acquire  20,000 shares of the  Company's  common stock.  These
stock options were granted in equal quarterly installments at exercise prices of
$1.75,  $1.63,  $1.25 and $1.25 per share,  respectively.  In 1998,  the Company
granted two  employees  stock options to acquire a total of 15,000 shares of the
Company's common stock at exercise prices ranging from $1.81 to $2.06 per share.
The exercise prices of the above options were equal to the quoted market prices

                                       17
<PAGE>

of the  underlying  common stock on the date of grant.  The options  expire five
years from the date of grant.  The options were issued  pursuant to Section 4(2)
of the Securities Act.

Item 6. Selected Financial Data.

         The following  data have been derived from the  Company's  consolidated
financial  statements.  The  information  set  forth  below  is not  necessarily
indicative of the results of future operations and should be read in conjunction
with the consolidated financial statements and related notes appearing elsewhere
in this Form 10-K: <TABLE> <CAPTION>
                                                                       Period Ended
                                  ---------------------------------------------------------------------------------------
                                                                                                                Nov. 19,
                                     Dec. 31,       Dec. 31,       Dec. 31,      Dec. 31,       Dec. 31,          1993
                                       1998           1997           1996          1995           1994        (inception)
                                                                                                              to Dec. 31,
                                                                                                                  1998
                                    ------------   ------------   ------------  ------------   ------------   -------------
Statement of Operations Data:

<S>                                <C>            <C>            <C>           <C>            <C>            <C>
Net product sales and
   development fees                 $  1,039,136   $    432,363   $     74,563  $    447,844   $     33,256   $   2,027,162

Cost of product sales and
   development fees                      831,194        141,857         70,257       294,171         21,669       1,359,148
                                    ------------   ------------   ------------  ------------   ------------   -------------

         Gross margin                    207,942        290,506          4,306       153,673         11,587         668,014
                                    ------------   ------------   ------------  ------------   ------------   -------------
Operating expenses:

    Selling, general and
      administrative                   2,946,722      3,311,222      2,901,434     2,133,021        620,022      11,915,871
    Research and development             909,048      1,191,857      1,264,186       804,639        290,950       4,460,680
    Write-off of operating assets        754,803         92,557         72,363       255,072          --          1,174,795
                                    ------------   ------------   ------------  ------------   ------------   -------------

         Total operating expenses
                                       4,610,573      4,595,636      4,237,983     3,192,732        910,972      17,551,346
                                    ------------   ------------   ------------  ------------   ------------   -------------

         Operating loss               (4,402,631)    (4,305,130)    (4,233,677)   (3,039,059)      (899,385)    (16,883,332)

Net other income (expense)               205,064         31,127        140,289       119,570         (7,563)        488,487
                                    ------------   ------------   ------------  ------------   ------------   -------------

         Net loss                     (4,197,567)    (4,274,003)    (4,093,388)   (2,919,489)      (906,948)    (16,394,845)

Dividends on preference stock             --              --            --           (11,389)       (16,780)        (28,169)
                                    ------------   -----------    ------------  ------------   ------------   -------------

Net loss attributable to common
  stockholders                      $ (4,197,567)  $ (4,274,003)  $ (4,093,388) $ (2,930,878)  $   (923,728)  $ (16,423,014)
                                    ============   ============   ============  ============   ============   =============

Basic and diluted net loss per
   common share(1)                  $       (.35)  $       (.47)  $       (.48) $       (.69)  $       (.75)
                                    ============   ============   ============  ============   ============

Weighted average common shares
     outstanding (1)                  12,153,264      9,170,541      8,589,952     4,269,131      1,224,074
                                    ============   ============   ============  ============   ============
</TABLE>

                                       18
<PAGE>
<TABLE>
<CAPTION>
                                                                       Period Ended
                                  ---------------------------------------------------------------------------------------
                                                                                                                Nov. 19,
                                     Dec. 31,       Dec. 31,       Dec. 31,      Dec. 31,       Dec. 31,          1993
                                       1998           1997           1996          1995           1994        (inception)
                                                                                                              to Dec. 31,
                                                                                                                  1998
                                    ------------   ------------   ------------  ------------   ------------   -------------

Balance Sheet Data (at year end):
<S>                                <C>            <C>            <C>           <C>            <C>            <C>
Working capital (deficit)           $  2,877,205   $    609,962   $     30,754  $ 4,194,568    $  (287,723)
Total assets                           4,381,075      3,285,413      1,848,839    5,950,728        656,865
Long-term debt, less current
  maturities                              --              --             --          --            458,333
Total stockholders' equity
  (deficit)                              326,540        540,248      1,513,217    5,369,805       (355,878)
</TABLE>

 (1) Net loss per common share is based on the weighted average number of common
     shares outstanding.  Stock options and warrants, and preferred shares prior
     to conversion,  are not included in the calculation  because this inclusion
     would be anti-dilutive, thereby reducing the net loss per common share.


Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations.

         The  following  discussion  and  analysis  provides  information  which
management  believes is  relevant  to an  assessment  and  understanding  of the
Company's  consolidated  results of  operations  and  financial  condition.  The
discussion  should  be read  in  conjunction  with  the  consolidated  financial
statements and notes thereto.  Wherever in this discussion the term "Company" is
used,   it  should  be  understood  to  refer  to  SHPI  and  its  wholly  owned
subsidiaries,   SHP,  Specialized  Cooperative  Corporation  and  Iontophoretics
Corporation, on a consolidated basis, except where the context clearly indicates
otherwise.

Overview

         From its inception, the Company has incurred losses from operations. As
of December 31, 1998, the Company had  cumulative  net losses  applicable to the
common shares totaling  $16,423,014.  To date, the Company's principal focus has
been the design,  development,  testing,  and evaluation of its Safety Cradle(R)
sharps containers, safety lancets, safety needle technologies,  intravenous flow
gauge,  blood collection  devices,  and other safety medical  products,  and the
design and development of various molds and production processes.

Financial Position

         The Company had $2,480,083 in cash and cash  equivalents as of December
31, 1998.  This  represented  an increase of $1,038,527  from December 31, 1997.
Working capital as of December 31, 1998,  increased to $2,877,205 as compared to
$609,962  at  December  31,  1997.  These  increases  were  largely  due  to the
completion  of a private  placement of  securities by the Company that closed in
January  1998,  receipt  of  advanced  royalty  revenue  from  BDIT and  product
development payments from JJM.

Years Ended December 31, 1998, 1997 and 1996

         During  the year  ended  December  31,  1998,  the  Company  had  total
operating  revenues of  $1,039,136,  compared with total  operating  revenues of
$432,363  and  $74,563  for  the  years  ended   December  31,  1997  and  1996,
respectively.  During 1998,  $10,202 of the Company's revenues were from product
sales and the remaining  revenues were  development  fee revenues from JJM under
the JJM Agreement.  During 1997,  BDIT paid the Company  $250,000 in development
fees for  services  provided  in 1997 and the  Company  had  $182,363 in product
sales. During 1996, all of the Company's revenues were comprised of product

                                       19
<PAGE>

sales.  Substantially  all of the sales  during  these  periods  related  to the
Company's  sharps  containers.  As  discussed  below,  the Company  will look to
several other products and devices for future sales revenues.

         The JJM  Agreement  provides  that the  Company  and JJM  will  seek to
commercialize  two products  using safety  medical  needle  technology.  The JJM
Agreement  provides for monthly  development  payments by JJM,  sharing of field
related patent costs,  the  possibility  of payments for initial  periods of low
volume  manufacturing,  an ongoing royalty stream and a JJM investment in molds,
assembly equipment and other capital costs related to  commercialization of each
product.  The JJM  Agreement  also  provides  for an ongoing  joint  cooperative
program  between the Company and JJM which derives future funding  directly from
sales of Company created products,  the possibility of low volume  manufacturing
revenue for the  Company and an ongoing  royalty  stream for  additional  safety
products which are jointly  approved for  development.  The Company  anticipates
that JJM will  perform  substantially  all of the  manufacturing  under  the JJM
Agreement  during 1999.  The Company and JJM also reached  arrangements  whereby
they are pursuing development and  commercialization of four additional products
under their joint  cooperative  program.  In connection  with the JJM Agreement,
Johnson  & Johnson  Development  Corporation  purchased  $2,000,000  of  Company
securities in a private  placement that closed in January 1998. In addition,  in
1998 the Company  recognized  $1,028,934 in development fee revenue  relating to
the JJM Agreement.  The Company anticipates that sales of two products under the
JJM Agreement will begin in 1999.  The Company had previously  believed sales of
product  under the JJM Agreement  would begin in early 1999.  The reason for the
delay  primarily   related  to  design  changes  to  meet   anticipated   market
requirements. There is no assurance that the Company will realize revenues under
the JJM Agreement or that any of these products will be launched as anticipated.

         The BDIT  License  Agreement  relates  to a single  application  of the
Company's ExtreSafe(R) safety needle technology (the "Technology").  Pursuant to
the terms of the License  Agreement,  BDIT made  payments of  $4,000,000  to the
Company.  Of these total  payments,  $3,750,000  was for advanced  royalties for
sales occurring before the year 2002 and $250,000 was for a product  development
fee. BDIT is required to pay ongoing  royalties to the Company based on sales of
products utilizing the Technology. The Company will not be manufacturing product
in  connection  with the License  Agreement.  In  addition,  beginning in BDIT's
fiscal year 2002, BDIT is required to pay minimum royalties in order to maintain
exclusive  rights  under the License  Agreement.  BDIT has told the Company that
BDIT  expects to begin  selling the  product  that is the subject of the License
Agreement in the second quarter of 1999.  There is no assurance that the Company
will realize  revenues  under the License  Agreement or that the product will be
launched in the second quarter of 1999 as anticipated.

         In August 1996, the Company entered into a distribution  agreement (the
"BDSDS  Distribution  Agreement")  with  Becton  Dickinson  and  Company  Sharps
Disposal Systems ("BDSDS") whereby BDSDS was attempting to market and distribute
the Company's Safety Cradle(R) sharps containers. BDSDS began selling the Safety
Cradle(R) sharps containers under the BDSDS Distribution  Agreement in the first
quarter of 1997. During 1997, however,  BDSDS did not order the minimum required
amount of  product  under the terms of the  BDSDS  Distribution  Agreement  and,
therefore,   BDSDS'  exclusive  distribution  rights  became  nonexclusive.   In
addition,  on May 26, 1998 the BDSDS  Distribution  Agreement was terminated and
the Company has since been pursuing various alternatives with respect to the use
and distribution of the Company's Safety Cradle(R) sharps containers.

         The Company had previously  entered into a distribution  agreement with
New Alliance Of Independent  Medical  Distributors,  Inc. (the "New  Alliance"),
effective  September 1997. The agreement provided for the Company to manufacture
and the New  Alliance  to market and sell the  ExtreSafe(R)  Lancet  Strip on an
exclusive basis in various  markets.  Effective March 1, 1998, the agreement was
converted to a nonexclusive agreement with no sales minimums so that the Company
could pursue additional sources of distribution. Thereafter, the Company elected
to abandon the further  manufacture and distribution of the ExtreSafe(R)  Lancet
Strip.  Sales of the  ExtreSafe(R)  Lancet Strip through  December 31, 1998 were
minimal.

                                       20
<PAGE>

         During 1998, the Company's product sales were  substantially  less than
product  sales  during  1997 and 1996.  The  reason for the  reduction  in sales
primarily related to a reduction in the sale of sharps  containers.  The Company
does not  anticipate  that sales of its sharps  container  product will increase
until it enters into a distribution  and/or marketing  arrangement.  There is no
assurance  that such an  arrangement  will be  finalized or that if finalized it
will be on terms favorable to the Company.  The Company also anticipates  future
revenues under the License  Agreement and JJM Agreement.  Moreover,  the Company
expects that a substantial  majority of its future revenues will be derived from
the development and sale of safety needle products.

         License and distribution  arrangements,  such as those discussed above,
create  certain  risks for the  Company,  including  (i)  reliance  for sales of
products  on  other  parties,  and  therefore  reliance  on the  other  parties'
marketing ability, marketing plans and credit-worthiness;  (ii) if the Company's
products are marketed under other parties' labels,  goodwill associated with use
of the  products may inure to the benefit of the other  parties  rather than the
Company;  (iii) the Company may have only  limited  protection  from  changes in
manufacturing  costs and raw materials costs; and (iv) if the Company is reliant
on other parties for all or  substantially  all of its sales, the Company may be
limited in its ability to negotiate with such other parties upon any renewals of
their agreements.  Further,  because such arrangements are generally expected to
provide the Company's  marketing  partners with certain  elements of exclusivity
with respect to the  products to be marketed by those  partners,  the  Company's
success will be highly dependent on the results obtained by its partners.

         Research and  development  ("R&D")  expenses were $909,048 for the year
ended December 31, 1998,  compared with  $1,191,857 and $1,264,186 for the years
ended  December 31, 1997 and 1996,  respectively.  The Company's  efforts during
1998  focused  on  development  of several  additional  products  utilizing  the
ExtreSafe(R) and FlexLoc(TM) safety needle technology,  the safety single lancet
technology  and  continued  development  work on a  filmless  digitized  imaging
technology (which was performed by QIC, but was funded by the Company). The 1998
R&D effort was expanded beyond development of ExtreSafe(R)  products to manually
actuated safety sheathing devices.  The Company's R&D efforts in 1997 focused on
completing  final  development  of the  ExtreSafe(R)  Lancet Strip,  development
relating to several products  utilizing  safety medical needle  technologies and
development work on the filmless  digitized  imaging  technology.  The Company's
efforts in 1996 focused on making certain  improvements to the Safety  Cradle(R)
sharps  container  products,  development  of  the  ExtreSafe(R)  Lancet  Strip,
ExtreSafe(R)  medical  needle  technology,  intravenous  flow  gauge  and  blood
collection device.

         Research and development expenses during 1996 through 1998 were limited
because  of  funding   constraints.   Funding  constraints  also  set  back  the
anticipated  dates on which the Company's  products  under  development  will be
brought to market.  It is anticipated  that if the Company has adequate  funding
during 1999,  research and development  expenses will increase over 1998 levels.
Reductions in R&D  expenditures are not anticipated  unless funding  constraints
require  the Company to make such  reductions.  Reductions  in R&D  expenditures
would comprise  primarily  reductions in R&D staff.  Such staff reductions could
have a material adverse effect on product development and on the Company.
Management does not intend to downsize.

         Selling,  general and  administrative  expenses were $2,946,722 for the
year ended  December 31, 1998,  compared to $3,311,222  and  $2,901,434  for the
years  ended  December  31,  1997  and  1996,  respectively.   The  decrease  in
expenditures  resulted  mainly from  reductions in  professional  and consulting
fees.

         The Company  wrote-off  $754,803 in operating assets during 1998. These
assets were comprised primarily of molds,  production equipment and other assets
relating to the  ExtreSafe(R)  Lancet Strip.  These assets were  written-off  in
connection  with the Company's  decision to abandon the further  manufacture and
distribution of the ExtreSafe(R) Lancet Strip.

                                       21
<PAGE>

         Net other  income was  $205,064  for the year ended  December 31, 1998,
compared  with net other  income of $31,127  and  $140,289  for the years  ended
December  31, 1997 and 1996,  respectively.  The increase in net other income is
attributable  to  interest  earned on  higher  levels  of funds on  deposit  and
short-term  interest  bearing  investments.  As funds on  deposit  and  interest
bearing short-term investments have increased, so has the interest income.

Liquidity and Capital Resources

         To date,  the Company has financed its operations  principally  through
private placements of equity securities,  advanced  royalties,  development fees
and proceeds from the exercise of common stock  options.  The Company  generated
$16,125,885  and $3,813,159 in net proceeds  through  financing  activities from
inception through December 31, 1998 and in 1998, respectively.  The Company used
net cash for operating  activities of $2,069,322  during the year ended December
31, 1998. As of December 31, 1998, the Company's liabilities totaled $4,054,535,
which included  $3,750,000 in deferred royalty revenues  relating to the License
Agreement.  The  Company  had  working  capital  as  of  December  31,  1998  of
$2,877,205. The Company anticipates setting its subscriptions receivable through
collection or otherwise in the immediate future.

         The Company's  working capital and other capital  requirements  for the
foreseeable future will vary based upon a number of factors, including the costs
to  complete  development  and bring the  safety  medical  needle  technologies,
intravenous  flow  gauge,   blood  collection  devices  and  other  products  to
commercial  viability,  and the level of sales of and  marketing  for the Safety
Cradle(R) sharps containers,  safety lancets and other products. At December 31,
1998, the Company had not committed to spend any funds on capital  expenditures.
The Company  believes that existing funds,  development  fees from JJM under the
JJM Agreement,  license  revenues and funds generated from sales of products and
non-core  technologies,  will be sufficient to support the Company's  operations
and planned  capital  expenditures  through at least 1999.  See  "--Years  Ended
December 31, 1998, 1997 and 1996." The Company may,  however,  raise  additional
funds  through a  subsequent  public or private  offering  if, in the opinion of
management,  the Company is in need of additional funding. There is no assurance
that any such offering  will be completed or that,  if  completed,  the terms of
such offering will be favorable to the Company.

         At April 5, 1999,  the  Company  had  3,609,787  Series D Warrants  and
800,000 other warrants (the "SHPI Warrants")  outstanding  which are exercisable
for the same number of shares of Common Stock of the Company at $2.00 per share.
In the event that the closing price of the Common Stock for any ten  consecutive
trading  days  exceeds  $6.00 per share,  and subject to the  availability  of a
current  prospectus  covering the underlying  stock,  the Company may redeem the
Warrants.  The Series D Warrants expire on the earlier of (a) two years from the
date of  effectiveness  of a registration  statement  under the Act covering the
sale of the shares of Common Stock underlying such warrants,  which period shall
be extended  day-for-day for any time that a prospectus meeting the requirements
of the Act is not  available,  or (b) the  redemption  date if such warrants are
redeemed  (subject to the right of the holder to exercise the warrants within 20
days of notice of such  redemption).  The SHPI  Warrants  expire on December 31,
2002. The exercise of all the Warrants would result in an equity infusion to the
Company of $8,819,574. The Company presently intends to redeem the warrants when
and if the necessary conditions are met, but there can be no assurance that such
conditions will be satisfied.  A registration  statement  covering the resale of
the shares of Common Stock  underlying  the Series D Warrants and SHPI  Warrants
was  declared  effective  on May 8,  1998.  As of the  date  hereof,  all of the
warrants  are out of the money and there can be no  assurance  that any warrants
will ever be exercised.

         The Company has granted stock  options that are  currently  exercisable
for  1,307,905  shares of Common  Stock at exercise  prices of between  $.39 and
$2.625 per share.  The exercise of all of such stock  options would result in an
equity infusion to the Company of $2,698,452.  Most of the stock options are out
of the money and there can be no assurance that any of the stock options will be
exercised.

                                       22
<PAGE>

         In June 1998, the Company entered into an Option to Purchase  Agreement
(the "Option Agreement") with the University of Texas System to purchase certain
patents and related  technology,  research and  development for a total purchase
price of  $2,400,000.  In  accordance  with the  Option  Agreement,  a  $240,000
non-refundable  payment was made in July 1998 with the balance of  $2,160,000 to
be paid  within 30 days of the  exercise  of the  purchase  option.  The Company
retained the exclusive  right to exercise the option and acquire the patents and
related  technology  for a period of one year from the date of the  execution of
the Option Agreement, or within 14 days of notification of successful completion
of animal toxicity studies. The Company received notice of successful completion
of the  toxicity  studies in February  1999 and  subsequently  entered  into tow
amendments  to the Option  Agreement  resulting  in an extension of the exercise
period to May 1999 in  exchange  for  payments  totaling  $65,000.  The  Company
anticipates  reimbursement  of a portion of these fees from a third party who is
potentially  interested  in  acquiring  the  technology  from the  Company  upon
exercise of the option.

         In  connection  with this Option  Agreement,  the Company  entered into
consulting agreements with three individuals who were the principal inventors of
the  technology.  These  consulting  agreements  provide for the  individuals to
assist  the  Company  to  successfully  develop  the  related  technology.   The
individuals are to provide a minimum of 50 hours of services  annually for which
they  will be  compensated  at a rate of $150 per  hour.  Each  individual  also
executed  stock  option  agreements  with  the  subsidiary  corporation,  Ion to
Phorectics  Corporation  ("IPC"),  which is the entity  entering into the Option
Agreement and the individual consulting agreements.  The stock option agreements
provide for the  individuals to purchase up to 40,000 shares of IPC common stock
at an  exercise  price of $.01 per share in  10,000  share  increments  based on
achieving  certain  milestone  events in the future.  The  Company has  recorded
$7,200 of  consulting  expense  in the 1998  consolidated  financial  statements
related to the granting of these options.

Nasdaq Small-Cap Market Quotation

         The Company's  common stock is currently traded on the Nasdaq Small-Cap
Market  System.  In order to continue to qualify its stock for  quotation on the
Nasdaq Small-Cap  Market,  the Company must have, among other things, $2 million
in net tangible  assets,  a market  capitalization  of $35 million or annual net
income of $500,000.  The Company is also required to have a minimum bid price of
at least $1.

         As of  December  31,  1998,  the  Company  had net  tangible  assets of
$313,860 and the Company's bid price has recently been below the $1 minimum.  As
a  result,  the  Company  does not  meet the  Nasdaq  Small-Cap  Market  listing
requirements.  A  hearing  was held with  Nasdaq  on April 1,  1999 to  consider
delisting  and/or  suspension  of the  Company's  Common  Stock  from the Nasdaq
Small-Cap Market.  The panel has not made a decision  regarding this matter. The
Company  expects that delisting or suspension  will occur unless the Company can
bring itself into compliance with the requirements and demonstrate an ability to
maintain compliance with those requirements.  The Company is attempting to bring
itself into  compliance  with all  applicable  Nasdaq  Small-Cap  Market listing
requirements.  There can be no assurance  that the Company will be in compliance
and be able to demonstrate  the ability to maintain  compliance in the immediate
future or otherwise.  In the event of delisting or suspension,  trading, if any,
in  the  Company's   securities  would  be  expected  to  be  conducted  in  the
over-the-counter  market  in what is  commonly  referred  to as the  "Electronic
Bulletin Board." As a result,  an investor may find it more difficult to dispose
of,  or to  obtain  accurate  quotations  as  to  the  price  of  the  Company's
securities.  The loss of continued  price  quotations  as provided by the Nasdaq
System  could also cause a decline in the price of the Common  Stock,  a loss of
news coverage of the Company and difficulty in obtaining subsequent financing.

                                       23
<PAGE>

Inflation

         The Company does not expect the impact of inflation on operations to be
significant.

Year 2000

         The Company uses computer  networks,  personal  based  development  and
measurement equipment,  and personal microprocessors that have the potential for
operational  problems if they lack the ability to handle the  transition  to the
Year 2000. The Company has been aggressively proactive in pursuing solutions for
the Year 2000 problem. The Company has acquired new accounting software that the
vendor has  represented is Year 2000 compliant and has initiated  communications
with its suppliers,  dealers,  distributors  and other third parties in order to
assess and  reduce the risk that the  Company's  operations  could be  adversely
affected by the failure of these third  parties to  adequately  address the Year
2000 issue.

         The  Company's  principal  computer  systems  (including  the  embedded
microprocessor  systems)  have been  purchased  since  December 31, 1996 and the
vendors supplying such systems have generally  represented that such systems are
Year 2000 compliant.  The software utilized by the Company is generally standard
"off the shelf"  software,  typically  available  from a number of vendors.  The
Company is verifying  with its  software  vendors that the services and products
provided are, or will be, Year 2000 compliant. Subject to such verification, the
Company  believes that its computer  systems and software is Year 2000 compliant
in all material  respects.  The Company  estimates  that the cost to  redevelop,
replace or repair its  technology  that is not Year 2000  compliant  will not be
material.  The Company is not using any  independent  verification or validation
procedures. There can be no assurance, however, that its systems programs are or
will be Year 2000 compliant and that the failure of those systems would not have
a material adverse impact on the Company's business and operations.

         In connection with its business activities,  the Company interacts with
suppliers,  customers,  and  financial  service  organizations  who use computer
systems.  The Company is verifying  with those  parties their state of Year 2000
readiness. Based on its assessment activity to date, the Company believes that a
majority of the suppliers,  customers and financial service  organizations  with
whom it interacts are making acceptable progress toward Year 2000 readiness. The
Company  currently  believes that the most reasonable likely worst case scenario
is that there will be some localized  disruptions of supplier,  customer  and/or
financial  services  that  will  affect  the  Company  and  its  suppliers,  and
distribution  channels  for a short  time  rather  than  systemic  or  long-term
problems affecting its business operations as a whole. In view of the foregoing,
the Company does not currently  anticipate that it will experience a significant
disruption to its business as a result of the Year 2000 issue. However, there is
still  uncertainty  about the  broader  scope of the Year  2000  issue as it may
affect  the  Company  and  third  parties  that are  critical  to the  Company's
operations.  For example,  lack of readiness by electrical and water  utilities,
financial  institutions,  government  agencies  or other  providers  of  general
infrastructure  could pose significant  impediments to the Company's  ability to
carry on its normal operations in the area or areas so affected.  The Company is
currently  evaluating what  contingency  plans, if any, to make in the event the
Company or parties  with whom the Company  does  business  experience  Year 2000
problems.

         The  statements  made herein about the costs  expected to be associated
with the Year 2000  compliance  and the  results  that the  Company  expects  to
achieve, constitute forward-looking  information. As noted above, there are many
uncertainties involved in the Year 2000 issue, including the extent to which the
Company will be able to successfully  and adequately  provide for  contingencies
that may arise,  as well as the  broader  scope of the Year 2000 issue as it may
affect third parties that are not  controlled by the Company.  Accordingly,  the
costs and  results  of the  Company's  Year 2000  program  and the extent of any
impact on the  Company's  operations  could vary  materially  from those  stated
herein.

Forward-Looking Statements

                                       24
<PAGE>

         When used in this Form 10-K, in filings by the Company with the SEC, in
the Company's press releases or other public or stockholder  communications,  or
in oral statements made with the approval of an authorized  executive officer of
the Company,  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, the dates  disclosed  herein  upon  which  sales of or
royalty  payments  from  the  Company's  various  products  are  anticipated  to
commence.

         The  Company  cautions  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 risk of  product  demand,  market  acceptance,  economic  conditions,
competitive   products  and  pricing,   difficulties  in  product   development,
commercialization,  and  technology,  changes in the regulation of safety health
care products,  the level of marketing,  development and distribution efforts of
the Company's partners and other risks.  Furthermore,  manufacturing  delays may
result from  additional  mold redesigns or delays may result from the failure to
timely obtain FDA approval to sell future products. In addition, sales and other
revenues may not commence as anticipated due to delays or otherwise. If and when
product sales commence, sales may not reach the levels anticipated. As a result,
the Company's  actual  results for future periods could differ  materially  from
those anticipated or projected.

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

Other Factors

         The  Company  is  subject to  certain  other  risk  factors  due to its
development  stage  status,  the industry in which it competes and the nature of
its operations. These risk factors include the following.

         History  of  Losses/Profitability  Uncertain.  The  Company  is in  the
development  stage and has reported losses each year since 1993. At December 31,
1998, it had an accumulated  deficit of $16,423,014.  The Company's products are
in various stages of production,  pre-production,  development and research. The
Company has made only limited sales of its sharps container  products,  the only
product it was  selling as of  December  31,  1998.  The  Company  does not have
marketing or  distribution  agreements  in place for this  product.  There is no
assurance  that  the  Company's  products  will be  commercially  viable  and no
assurance  can be given that the Company  will become  profitable.  In addition,
prospects  for  the  Company's  profitability  will  be  affected  by  expenses,
operational  difficulties  and  other  factors  frequently  encountered  in  the
development of a business enterprise in a competitive environment, many of which
factors may be unforeseen and beyond the Company's control.

         Need for Additional  Funds. Due to the development  stage status of the
Company and the uncertainty of future profits,  the Report of Independent Public
Accountants  relating  to  the  Company's  1998  audited  financial  statements,
attached  hereto,   contains  a  "going  concern"  explanatory  paragraph.   See
Consolidated  Financial  Statements and related Notes. The Company believes that
its existing funds,  development fee revenues,  license fees and funds generated
from  sales  of  products  and  non-core  technologies  (such  as  QIC)  will be
sufficient to support the Company's  operations and planned capital expenditures
through at least December 31, 1999.  The level of the Company's  future need for
capital will depend on a number of factors,  including  the rate at which demand
for  products  expands,  the level of sales  and  marketing  activities  for the
Company's  products,  and the  level  of  expenditures  needed  to  develop  and
commercialize safety medical needle technologies,  intravenous flow gauge, blood
collection devices, and the imaging technology. Moreover, the Company's business
plans may  change or  unforeseen  events  may occur  which  affect the amount of
additional  funds required by the Company.  If additional funds are not obtained
if and when required,  the lack thereof could have a material  adverse effect on
the Company. Further, there

                                       25
<PAGE>

is no assurance  that the terms on which any funds  obtained by the Company will
be favorable to stockholders of the Company at that time.

         Manufacturing  Strategy/Dependence on Single Manufacturers. The Company
intends to subcontract the manufacture of certain of its products. This strategy
could result in various problems that could have a materially  adverse effect on
the Company. Further, the Company may not be able to arrange for the manufacture
of its products  through other  companies  which could delay sales and result in
increased expenses if the Company establishes its own manufacturing  capability.
This could have a material  adverse effect on the Company.  The Company's Safety
Cradle(R) sharps containers is its only product currently available for sale and
it is produced by a single manufacturer.  If the Company's manufacturer fails to
perform its obligations in a timely and  satisfactory  manner,  or if there is a
change in the Company's manufacturer, it could have a material adverse effect on
the Company.  There can be no assurance  that the Company would be successful in
replacing  its current  manufacturer  on terms  favorable to the Company.  Also,
there  can be no  assurance  that the  Company  will be  successful  in  finding
additional manufacturers to manufacture future products on favorable terms.

         Negative Pricing Pressures on the Company's Safety Products. Prices for
the  Company's  safety  products may be higher than for  competing  conventional
products which are not designed to provide the safety protection afforded by the
Company's  products.   The  Company's  prices,   however,  are  expected  to  be
competitive with those of competing safety  products.  Continuing  pressure from
third-party  payors to  reduce  costs in the  health  care  industry  as well as
increasing  competition  from safety  products  made by other  companies,  could
adversely  affect the Company's  selling  prices.  Reductions in selling  prices
could  adversely  affect  operating   margins  if  the  Company  cannot  achieve
corresponding reductions in manufacturing costs.

         Rapidly  Changing  Technology.  The  Company  is in  various  stages of
production, pre-production,  development and research with respect to its Safety
Cradle(R) sharps containers, safety lancets, medical safety needle technologies,
intravenous flow gauge,  blood collection  devices,  filmless  digitized imaging
technology  and  other  products.  There is no  assurance  that  development  of
superior products by competitors or changes in technology will not eliminate the
need for the Company's  products.  The introduction of competing  products using
different  technology could adversely  affect the Company's  attempts to develop
and market its products.

         Potential  Lack  of  Market  Acceptance.  The  use  of  safety  medical
products,  including the Company's  products,  is relatively  new. The Company's
products may not be accepted by the market and their  acceptance  will depend in
large part on (i) the  Company's  ability  (directly  or through  its  marketing
partners) to demonstrate  the  operational  advantages,  safety,  efficacy,  and
cost-effectiveness  of its products in comparison  with  competing  products and
(ii) its ability to  distribute  its products  through  major  medical  products
companies.  There can be no assurance  that the Company's  products will achieve
market  acceptance  or that  major  medical  products  companies  will  sell the
Company's products.

         Dependence on Continued  Research and  Development.  The safety medical
needle  technologies,   intravenous  flow  gauge,  safety  lancets  and  imaging
technology  are still in  various  stages of  development.  The  Company is also
exploring  additional  applications  for  all of  its  products.  The  continued
development of its products and development of additional  applications  and new
products is important to the long-term  success of the Company.  There can be no
assurance that such applications or products will be developed or, if developed,
that they will be successful.

         Dependence on Patents and  Proprietary  Rights.  The  Company's  future
success depends in part on its ability to protect its intellectual  property and
maintain the  proprietary  nature of its  technology  through a  combination  of
patents and other intellectual property arrangements.  There can be no assurance
that the  protection  provided by patents,  if issued,  will be broad  enough to
prevent  competitors from introducing  similar products or that such patents, if
challenged,   will  be  upheld  by  the  courts  of  any  jurisdiction.   Patent
infringement  litigation,  either to enforce the Company's patents or defend the
Company from  infringement  suits,  would be expensive and, if it occurs,  could
divert Company  resources  from other planned uses. Any adverse  outcome in such
litigation  could  have  a  material  adverse  effect  on  the  Company.  Patent
applications  filed in  foreign  countries  and  patents in such  countries  are
subject to laws and procedures that differ from those in the United States.

                                       26
<PAGE>

Patent  protection  in such  countries may be different  from patent  protection
under U.S. laws and may not be as favorable to the Company.  Certain portions of
the  Company's  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  effect the Company's  ability to prosecute
these patents. The Company also attempts to protect its proprietary  information
through the use of  confidentiality  agreements  and by  limiting  access to its
facilities.  There can be no assurance  that the  Company's  program of patents,
confidentiality  agreements  and  restricted  access to its  facilities  will be
sufficient to protect the Company's proprietary technology.

         Ability to Manage Expanding Operations. The Company intends to pursue a
strategy of rapid growth although there can be no assurance that any growth will
be achieved.  The Company plans to significantly expand its product lines and to
devote substantial  resources to support  operations,  research and development,
marketing  and  administrative  functions.  There can be no  assurance  that the
Company  will  obtain  sufficient  manufacturing  capacity on  favorable  terms,
arrange for the marketing and  distribution of its products,  attract  qualified
personnel or effectively  manage  expanded  operations.  The failure to properly
manage growth could have a material adverse effect on the Company.

         Competition/Potential Inability to Compete. The Company is engaged in a
highly  competitive  business  and will  compete  directly  with firms 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 that are better situated in
the market than the Company. The Company's competitors and potential competitors
include Baxter  International,  Inc.,  Becton  Dickinson and Company,  Johnson &
Johnson, Sage Products, Inc., Surgicutt, Inc., Miles, Inc., B. Braun, Diagnostic
Corporation,  Boehringer  Mannheim,  Inc., Kendall Healthcare  Products Company,
Terumo Medical Corporation,  Med-Design Company,  Bio-Plexus,  Inc., Maxon, Inc.
and Retractable Technologies,  Inc. and Univec, Inc. See "Business Competition."
Such  competitors  may use their  economic  strength to influence  the market to
continue to buy their existing products. These competitors may also be potential
strategic  partners with respect to various  products as are, for example,  BDIT
and JJM. The Company does not have an established customer base and is 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 the
Company's  products.  New competitors may emerge and may develop  products which
compete with the Company's products.  However, new laws passed in California and
Tennessee and under consideration in 18 other states are creating a new business
climate in which the Company is uniquely qualified to compete.  No assurance can
be given that the Company will be successful in competing in this industry.

         Product Liability. The sale of 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 the Company  will not be subject to
such claims, that any claim will be successfully  defended or, if the Company is
found  liable,  that the claim  will not  exceed  the  limits  of the  Company's
insurance.  The  Company's  current  insurance  coverage  is in the amount of $1
million per  occurrence  and $2 million in  aggregate.  The Company  also has an
umbrella  policy in the amount of $5 million.  In certain  cases the Company has
indemnification  arrangements  in place with its strategic  partners who will be
selling  Company  developed  products  under the  partner's  label.  There is no
assurance  that  the  Company  will  maintain  product  liability  insurance  on
acceptable terms in the future or that such insurance will be available. Product
liability claims could have a material adverse effect on the Company.

                                       27
<PAGE>

         Uncertainty  in the Health Care  Industry.  The health care industry is
subject to changing  political,  economic  and  regulatory  influences  that may
affect the  procurement  practices  and  operations  of health care  facilities.
During the past  several  years,  the health care  industry  has been subject to
increased government regulation of reimbursement rates and capital expenditures.
Among other things,  third-party  payors are increasingly  attempting to contain
health care costs by limiting both coverage and reimbursement  levels for health
care  products and  procedures.  Because  prices of the  Company's  products may
exceed  the  price of  conventional  products,  the  cost  control  policies  of
third-party payors,  including government agencies,  may adversely affect use of
the Company's  products.  The Company  believes that the costs  associated  with
accidental  needlesticks,  however,  exceed  the  procurement  costs  of  safety
products such as those of the Company.

         There are numerous  proposals to reform the U.S. health care system and
the health care systems of various states including the safety  initiatives that
were passed in California  and Tennessee  and which are under  consideration  in
eighteen other states and on a national  level.  Many of these proposals seek to
increase  government  involvement  in health care,  lower  reimbursement  rates,
contain costs and otherwise  change the operating  environment for the Company's
prospective  customers.  Health care providers may react to these  proposals and
the   uncertainty   surrounding   such  proposals  by  curtailing  or  deferring
investments in new technology and new products,  including those of the Company.
The Company  cannot  predict what impact,  if any, such proposals or health care
reforms  might  have  on  the  Company's  financial  condition  and  results  of
operations.

         Management/Dependence  on  Key  Personnel/Board.  The  success  of  the
Company  depends upon the skills,  experience  and efforts of its management and
other key  personnel.  Should the services of one or more members of its present
management  or other key  personnel  become  unavailable  to the Company for any
reason,  the business of the Company  could be adversely  affected.  There is no
assurance that the Company will be able to retain existing  employees or attract
new  employees of the caliber  needed to achieve the Company's  objectives.  The
Company has noncompetition agreements in place with its key personnel. The Board
currently consists of six members, two of whom are employed by the Company.

         Market  Volatility.  Market prices of securities of medical  technology
companies  are  highly  volatile  from time to time.  The  trading  price of the
Company's  securities  may be  significantly  affected  by  factors  such as the
announcement  of new  product or  technical  innovations  by the  Company or its
competitors, proposed changes in the regulatory environment, or by other factors
that may or may not relate directly to the Company. 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 the Common Stock.

         No Assurance of Dividends.  The Company has never paid dividends on its
Common  Stock.  The payment of  dividends,  if any,  on the Common  Stock in the
future is at the  discretion  of the Board and will  depend  upon the  Company's
earnings, if any, capital  requirements,  financial condition and other relevant
factors.  The Board does not intend to declare any dividends on the Common Stock
in the foreseeable future.

         Limitations  on  Director  Liability.   The  Company's  Certificate  of
Incorporation  provides,  as permitted by Delaware  law,  that a director of the
Company shall not be personally  liable to the Company or its  stockholders  for
monetary  damages  for any action or failure to take any  action,  with  certain
exceptions.  These  provisions  may discourage  stockholders  from bringing suit
against  a  director  for  breach  of duty  and may  reduce  the  likelihood  of
derivative litigation brought by stockholders on behalf of the Company against a
director.   In  addition,   the  Company  has  agreed  and  its  Certificate  of
Incorporation and Bylaws provide, for mandatory indemnification of directors and
officers to the fullest extent permitted by Delaware law and it has entered into
contracts with its directors and officers providing for such indemnification.

         Anti-Takeover  Provisions of Certificate and Bylaws. The Certificate of
Incorporation  of the Company  provides for the division of the Board 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 or by a two-thirds  vote of the  outstanding  stock entitled to
vote.  Meetings  of  stockholders  may be called  only by the  Board,  the Chief
Executive  Officer or the President of the Company,  and stockholder  action may
not be taken by written  consent.  These provisions could have the effect of (i)
discouraging  attempts at  non-negotiated  takeovers  of the  Company  which may
provide  for  stockholders  to receive a premium  price for their  stock or (ii)
delaying  or   preventing  a  change  of  control  of  the  Company  which  some
stockholders may believe is in their interest.

         Effect  of  the  Issuance  of  Preferred  Stock.  The  Company  has  an
authorized  class of  preferred  stock,  shares of which may be issued  with the
approval  of its  Board on such  terms  and with such  rights,  preferences  and
designations  as the Board  may  determine.  Issuance  of  additional  series of
preferred  stock,  depending  upon  the  rights,  preferences  and  designations
thereof, may have the effect of delaying, deterring or preventing a change in

                                       28
<PAGE>

control of the Company. In addition,  certain "anti-takeover"  provisions of the
Delaware General  Corporation Law, among other things,  may restrict the ability
of stockholders to effect a merger or business  combination or obtain control of
the  Company  and  may  be  considered  disadvantageous  by  some  stockholders.
Management  of the  Company  presently  does not  intend to issue any  shares of
preferred  stock.  Preferred stock may,  however,  be issued at some future date
which  stock  might  have  substantially  more  than one vote per share or other
provisions designed to deter a change in control of the Company. The issuance of
such  stock to a  limited  group  of  management  stockholders  may vest in such
persons absolute voting control of the Company,  including,  among other things,
the ability to elect all of the directors,  control certain matters submitted to
a vote of  stockholders  and  prevent  any change in  management  despite  their
performance.  Also,  preferred  stock may have the  right to vote  upon  certain
matters as a separate class.

         Current  Litigation.  In  April  1997,  the  Company  entered  into  an
agreement with Leerink Swann & Company  ("Leerink"),  whereby  Leerink agreed to
assist the Company in raising funds in a private placement of equity securities.
Sufficient funding was deposited into escrow to hold an initial closing, but the
closing did not occur.  Leerink alleges that the Company refused to close on the
placement.  The Company alleges that the closing did not occur because  Leerink,
as a condition precedent to closing,  made certain pre-closing demands that went
far beyond  the terms of the  agreement  and which  demands  Company  management
believes were not in the best interests of the Company or its  stockholders.  In
August 1997,  Leerink  filed suit in the United  States  District  Court for the
District of  Massachusetts  alleging breach of contract,  misrepresentation  and
violation  of M.G.L.  c.93A,  ss.11.  Leerink  is seeking  compensatory  damages
exceeding $230,000, 113,251 warrants to purchase 113,251 shares of the Company's
Common  Stock,  treble  damages and  reasonable  attorneys'  fees and costs.  In
October 1997, the Company filed a counterclaim  alleging  breach of contract and
violation of M.G.L. c.93A, ss.11. The Company is seeking in excess of $60,000 in
money damages, treble damages, reasonable attorneys' fees and costs.

         The Company  believes that Leerink's  claims are without merit and that
the Company will ultimately prevail. This matter has been scheduled for trial in
July 1999.  The litigation is subject to all of the risks and  uncertainties  of
litigation and the outcome cannot presently be predicted. Specifically, there is
no  assurance  that the Company will be  successful  in this lawsuit or that the
lawsuit  will be  resolved  on  acceptable  terms,  and the  Company  may  incur
significant costs in asserting its claims and defenses.

Item 8. Financial Statements and Supplementary Data.

         See index to financial  statements  and financial  statement  schedules
included herein as Item 14.

Item 9. Changes in and Disagreements on Accounting and Financial Disclosure.

         None.


                                       29
<PAGE>


                                    PART III


Item 10. Directors and Executive Officers of the Registrant.

         Set forth below is certain information concerning each of the directors
and executive officers of the Company as of April 5, 1999.

                                                                       With the
         Name            Age            Position                   Company Since

David A. Robinson (1)    55     President, Chairman of the Board,        1993
                                Chief Executive Officer and Director

Dr. Gale H. Thorne(1)    66     Vice President - Product Development     1994
                                and Director

Charles D. Roe           48     Vice President - Finance and Investor    1997
                                Relations, Chief Financial Officer, 
                                Secretary and Treasurer

David G. Hurley(2)(3)    63     Director                                 1999

Malinda S. Mitchell      54     Director                                 1999

David T. Rovee(2)(3)     59     Director                                 1998

Robert R. Walker(2)(3)   68     Director                                 1994

---------------

(1)      Member of Executive Committee.
(2)      Member of Audit Committee.
(3)      Member of Compensation Committee.

         David A. Robinson.  Mr. Robinson is President,  Chief Executive Officer
and Chairman of the Board of the Company.  He has been a director and officer of
the Company since November 1993 and his term expires in 2001. From November 1992
to  November  1993,  Mr.  Robinson  was  President  of  EPC  Products,  Inc.,  a
distribution  company based in Bountiful,  Utah. From 1981 to 1992, Mr. Robinson
was  President  of  Royce   Photo/Graphics   Supply,   Inc.,  a  distributor  of
photographic  and  graphic  arts  equipment  and  supplies  based  in  Glendale,
California.  He holds a Masters degree in Business  Administration and a Masters
degree in Management Science from the University of Southern California.

         Dr. Gale H. Thorne. Dr. Thorne is Vice President - Product Development,
for the Company.  He has been a director since January 1995 and his term expires
in 2000.  Dr. Thorne has held his present  position as Vice  President - Product
Development,  since  October  1994.  From  1993 to  1994,  Dr.  Thorne  was Vice
President - Engineering,  of Eneco,  Inc., a Utah company.  During Dr.  Thorne's
tenure at Eneco,  Inc.,  the company was engaged  primarily  in the  business of
prosecuting patent applications relating to cold-fusion technology. From 1989 to
1993,  Dr.  Thorne was  employed as a patent  consultant  and patent  agent with
Foster & Foster,  a Salt Lake City  intellectual  property law firm.  Dr. Thorne
holds thirty patents and has published numerous technical  publications.  He has
been a  technical  consultant  and a member of the  Board of the Small  Business
Innovation  Program of the State of Utah.  Dr. Thorne manages all the patent and
product development work for the Company and is a patent agent. He holds a Ph.D.

                                       30
<PAGE>

in Biophysics  from the  University  of Utah. He is a past  president of Thorne,
Smith, Astill,  Inc., an engineering director for Becton,  Dickinson and Company
Immunochemistry  Division and a vice  president and division  manager for Varian
and Diasonics Ultrasound.

         Charles D. Roe.  Mr. Roe is Chief  Financial  Officer,  Vice  President
Finance and Investor  Relations,  Secretary and Treasurer of the Company. He was
appointed  to his  position as Chief  Financial  Officer and  Vice-President  in
November  1997, he was appointed as Secretary and Treasurer in December 1997 and
he has been with the Company since October 1997.  Mr. Roe is a certified  public
accountant licensed in the State of Utah and has principally been engaged in the
practice  of public  accounting  since  1976,  including  four years with Arthur
Andersen LLP. From June 1995 through October 1997, Mr. Roe worked in association
with Jones,  Jensen & Co., a certified public  accounting firm which is a member
of the McGladrey Network of accounting  firms,  specializing in audits of public
companies.  Mr. Roe was employed by Wellshire  Services,  Inc. from June 1993 to
June 1995 providing various services to numerous public and private companies in
the United States and Europe.  From 1987 to October 1997,  Mr. Roe has owned and
operated a public accounting  practice focusing on financial audits,  individual
and  corporate  income  tax  consultation  and  preparation  and other  advisory
services.  Since  1987,  Mr.  Roe has  served on the board of  directors  and as
secretary  of  Covington  Capital  Corporation,   a  privately  owned  financing
business.  From June 1995 through  November  1996,  Mr. Roe was employed by that
company providing management services to various companies financed by Covington
Capital  Corporation.  Mr.  Roe  graduated  from the  University  of Utah with a
Bachelor of Arts degree in Accounting.

         David G. Hurley.  Mr.  Hurley has been a director of the Company  since
February  1999 and his term  expires in 2000.  He has spent the last 33 years in
the  management  consulting  and financial  advisory  business.  For 25 years at
Arthur D.  Little,  Inc.,  Mr.  Hurley was  involved  in  corporate  development
consulting with large and mid-sized firms throughout North America.  Since 1991,
Mr.  Hurley has been self  employed  and  working  principally  as a  management
consultant  and  financial  advisor.  He has a  Bachelors  degree in  Economics,
Masters  degree  in  Business  Administration  and has  completed  the  Advanced
Management Program at Harvard Graduate School of Business.

         Malinda S.  Mitchell.  Ms.  Mitchell has been a director of the Company
since  February 1999 and her term expires in 2001.  Since November 1998, she has
been the Senior Vice  President  and Chief  Operating  Officer of UCSF  Stanford
Health  Care.  From 1975 to 1997 she held a number of  additional  positions  at
Stanford  Hospital and Clinics,  a  predecessor  of UCSF  Stanford  Health Care,
including,  Interim  President and Chief Executive  Officer,  Vice President and
Chief Operating Officer and Associate Hospital Director and Director of Nursing.
Ms.  Mitchell has a Bachelors  degree in Nursing from the University of Illinois
with a Masters of Nursing degree from Indiana University and a Masters degree in
Management from Stanford University.

         Dr. David T. Rovee.  Dr. Rovee has been a director of the Company since
April 1998 and his term  expires in 1999.  He is currently  President  and Chief
Operating  Officer  of  Organogenesis,  Inc.,  a publicly  traded  biotechnology
company.  Dr. Rovee has been employed full time with  Organogenesis,  Inc. since
1991. Prior to his employment with  Organogenesis,  Inc., Dr. Rovee was employed
for a  twenty-five  year  period  by  Johnson & Johnson  in  various  capacities
including Vice President and Director of Research and  Development for Johnson &
Johnson  Patient  Care,  Inc. Dr.  Rovee has a Bachelors  degree in Biology from
Memphis  State  University,  a Masters  degree in Zoology from  Louisiana  State
University and a Ph.D. in Development Biology from Brown University.

         Robert R. Walker.  Mr. Walker is a director of the Company and has been
since March 1994 and his term expires in 1999. He is currently  self-employed as
a  consultant  in the health  care  industry  primarily  in the area of start-up
medical  device  companies.  From 1976 to 1992,  Mr.  Walker was employed by IHC
Affiliated  Services Division of Intermountain  Health Care, a regional hospital
company,  from which he retired as President of IHC Affiliated  Services.  He is
also a former Chairman of the Board of AmeriNet, Inc., which is a national group
purchasing organization for hospitals,  clinics,  detox/drug centers, emergency,
nursing homes, private laboratories, psychiatric centers, rehabilitation

                                       31
<PAGE>

facilities,  surgical centers and institutions such as schools and prisons.  Mr.
Walker  is a  member  of the  American  Hospital  Association  and the  Hospital
Financial  Management  Association.  He holds a Bachelor  of  Science  degree in
Business Administration.

         Executive officers of the Company are elected by the Board on an annual
basis and serve at the discretion of the Board.

Section 16(a) Beneficial Ownership Reporting Compliance

         Section  16(a) of the  Securities  Exchange  Act of 1934  requires  the
Company's  executive  officers,  directors and persons who beneficially own more
than 10% of the Company's  Common Stock to file initial reports of ownership and
reports of changes in ownership  with the  Securities  and  Exchange  Commission
("SEC").  Such  persons are required by SEC  regulations  to furnish the Company
with copies of all Section 16(a) forms filed by such persons.

         Based  solely on the  Company's  review of such forms  furnished to the
Company and representations from certain reporting persons, the Company believes
that all filing  requirements  applicable to the Company's  executive  officers,
directors and more than 10% stockholders were complied with during 1998.

 Item 11. Executive Compensation.

         The tables below set forth certain information concerning  compensation
paid by the  Company  to its Chief  Executive  Officer  and all other  executive
officers with annual compensation in excess of $100,000 (determined for the year
ended December 31, 1998) (the "Named  Executive  Officers").  The tables include
information related to stock options granted to the Named Executive Officers.

         Summary  Compensation  Table.  The  following  table  provides  certain
information  regarding  compensation  paid by the Company to the Named Executive
Officers.
<TABLE>
<CAPTION>

                                              SUMMARY COMPENSATION TABLE

                                            Annual Compensation               Long-Term Compensation Awards
                                                                            Restricted  Stock                     All Other
        Name and                                           Other Annual     Stock       Options/    LTIP        Compensation
   Principal Position       Year Salary($)  Bonus ($)   Compensation($)(1)  Awards ($)    SAR(#)    Payouts($)     ($)(2)
   ------------------       ---- -------    ---------   ------------------  ----------    ------    ----------     ------
<S>                         <C>   <C>        <C>           <C>               <C>         <C>        <C>           <C>  
David A. Robinson,          1996  240,000      ---             8,000            ---         ---         ---           2,777
President, CEO, Chairman    1997  240,000      ---             4,750            ---         ---         ---           4,150
of the Board and Director   1998  240,000     1,000           10,000            ---         ---         ---          10,428

Dr. Gale H. Thorne, VP      1996  150,000      ---             4,640            ---                     ---              72
                                                                                          40,000(3)
Product Development and     1997  150,000      ---             4,750            ---         ---         ---             429
Director                    1998  150,000     1,000            6,925            ---         ---         ---           6,925

Charles D. Roe, VP          1997   20,833      ---              ---             ---       50,000(3)     ---             ---
Finance and Investor        1998  100,000     1,000            5,050            ---         ---         ---             226
Relations and CFO

Bradley C. Robinson (4),    1996  160,000      ---             5,333            ---         ---         ---             898
Former Officer and          1997  160,000      ---             4,750            ---         ---         ---           1,952
Director                    1998  120,006      ---            59,130 (5)        ---         ---         ---           1,115
---------------
</TABLE>

(1)  Except as otherwise noted,  these amounts represent payments by the Company
     into its 401(k)  retirement  plan for the  benefit  of the Named  Executive
     Officer.

                                       32
<PAGE>

(2)  These  amounts  represent  the  amounts  paid by the  Company for term life
     insurance  on the  lives of the  Named  Executive  Officer  with  insurance
     proceeds  payable  to the  beneficiary  designated  by the Named  Executive
     Officer. These insurance policies have no cash surrender values.
(3) Options issued pursuant to the NQSOP.
(4)  Mr.  Bradley C.  Robinson  was a director  and  Vice-President  of Business
     Development prior to his resignation from the Company in September 1998.
(5)  Of said amount  $5,333  represents  payments by the Company into its 401(k)
     retirement plan and the balance  represents the payment of accrued vacation
     pay.

Compensation of Directors

         No cash fees or other  consideration were paid to employee directors of
the Company by the Company for service on the Board  during  1998.  During 1998,
the Company  compensated  non-employee  directors  at a rate of $10,000 per year
payable in equal  quarterly  installments  along with options to purchase 10,000
shares of the  Company's  common  stock  that were  granted  in equal  quarterly
installments  at an exercise  price equal to the market price of the  underlying
common  stock  on  the  date  of  grant.  The  Company  expects  that  the  1999
compensation  for   non-employee   directors  will  be  the  same  as  the  1998
compensation  with the exception  that options to purchase  16,000 shares of the
Company's  common stock will be granted in equal  quarterly  installments  at an
exercise price equal to the fair market value of the underlying  common stock on
the date of grant,  but in no event shall the exercise  price be less than $2.00
per share.  The Company has made no other agreements  regarding  compensation of
non-employee  directors.   All  directors  are  entitled  to  reimbursement  for
reasonable  expenses  incurred  in the  performance  of  their  duties  as Board
members.

Employment and Indemnity Agreements

         The Company has entered into  employment  agreements  with Mr. David A.
Robinson and Dr. Gale H. Thorne (collectively,  the "Senior Executives").  These
employment  agreements,  which have been amended from time to time, provide that
(i) Mr. David A. Robinson  receive a salary of $240,000 per year and Dr. Gale H.
Thorne receive a salary of $165,000 per year beginning January 1, 1999; (ii) the
Senior Executives'  employment agreements are for terms of three years, expiring
on January 1, 2002; (iii) the Senior Executives are entitled to a reasonable car
allowance, vacation pay and health insurance; (iv) if the employment of a Senior
Executive is terminated  by reason of  disability  or other than for cause,  the
salary  of  such  Senior  Executive  will  continue  for  the  full  term of the
agreement; (v) if a Senior Executive is terminated for cause, the salary of such
Senior  Executive  ceases as of the date of  termination;  (vi) the Company will
provide each Senior Executive with up to $1,000,000 of term life insurance while
the Senior Executive is employed by the Company; and (vii) the Senior Executives
shall keep all proprietary  information  relating to the business of the Company
confidential  both  during  and  after  the  term of the  agreements.  With  one
exception, the Company does not have employment agreements with any of its other
officers or employees. As of December 31, 1998, the Company had accrued vacation
pay of $68,508 and $17,957 owing to Mr. Robinson and Dr. Thorne, respectively.

         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  as an officer or director of the Company 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
officers  and  directors  of the Company 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 its
discretion.

                                       33
<PAGE>

401(k) Retirement Plan

         Effective in 1996, the Company adopted a 401(k) retirement plan whereby
the Company  contributes  five percent of payroll  compensation  to the plan and
matches  employee  contributions  to the plan on a dollar for dollar basis up to
the maximum  contribution  allowed by  applicable  tax law. The Named  Executive
Officers have invested all of the funds in their 401(k) accounts in common stock
of the Company.

Indemnification for Securities Act Liabilities

         Delaware  law  authorizes,  and  the  Company's  Bylaws  and  Indemnity
Agreements provide for,  indemnification of the Company's directors and officers
against  claims,  liabilities,  amounts  paid in  settlement  and  expenses in a
variety of circumstances.  Indemnification for liabilities arising under the Act
may be permitted for directors,  officers and controlling persons of the Company
pursuant to the  foregoing or otherwise.  However,  the Company has been advised
that,  in  the  opinion  of  the  Securities  and  Exchange   Commission,   such
indemnification  is  against  public  policy  as  expressed  in the  Act and is,
therefore, unenforceable.

Stock Options and Warrants

         During 1994, the Board of SHP approved the SHP NQSOP.  Options  granted
under the SHP NQSOP were required to have exercise prices not less than the fair
market value of the underlying stock at the date of grant as determined by SHP's
Board of Directors.  The number of shares,  terms and exercise period of options
granted under the SHP NQSOP were  determined by the SHP Board of Directors on an
option-by-option basis. On the date of the Acquisition, all options issued under
the  SHP  NQSOP  became  obligations  of the  Company  and  the  SHP  NQSOP  was
terminated.  As of April 5, 1999,  options to  acquire  an  aggregate  of 18,000
shares of Common  Stock  were  outstanding  in  connection  with the SHP  NQSOP.
Options issued under the SHP NQSOP expire in September 2000 and are  exercisable
at $.39 per share.

         On  September 1, 1995,  the Company  adopted the NQSOP and has reserved
1,500,000 shares of Common Stock for the possible  exercise of options under the
plan.  The exercise  price of options  granted  under the NQSOP must be not less
than  the fair  market  value  of the  underlying  stock at the date of grant as
determined by the Board.  Options granted under the NQSOP expire five years from
the date of grant.  As of April 5, 1999,  options to  acquire  an  aggregate  of
1,475,500 shares of Common Stock at exercise prices ranging from $1.25 to $2.625
per share had been granted and are presently  outstanding (not including options
granted under the SHP NQSOP).

         On October 22, 1998, the Company's  stockholders  approved the adoption
of the Specialized  Health Products  International,  Inc. 1998 Stock Option Plan
(the  "Option  Plan").  The  Option  Plan  will  permit  the  Company  to  grant
"non-qualified  stock  options"  and  "incentive  stock  options" to acquire the
Company's  Common Stock.  The total number of shares  authorized  for the Option
Plan may be allocated by the Board between the  non-qualified  stock options and
the 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  Option  Plan may not be less than the fair  market  value of a
share of Common Stock on the date on which the option is granted and in no event
can the exercise price be less than $2.00 per share. A total of 2,000,000 shares
are allocated to the Option Plan,  but the Option Plan also  restricts the total
number of shares of Common  Stock that the Company  can grant  option to acquire
under all of its stock option plans to  2,000,000  shares.  As of April 5, 1999,
options to acquire an aggregate of 206,000 shares of Common Stock at an exercise
price of $2.00 per share had been  granted and are  presently  outstanding  (not
including options granted under the SHP NQSOP and the NQSOP). Non of the options
granted under the Option Plan were granted to executive officers of the Company.

                                       34
<PAGE>

Possible Delisting of Securities from Nasdaq System.

         The Company's  common stock is currently traded on the Nasdaq Small-Cap
Market  System.  In order to continue to qualify its stock for  quotation on the
Nasdaq Small-Cap  Market,  the Company must have, among other things, $2 million
in net tangible  assets,  a market  capitalization  of $35 million or annual net
income of $500,000.  The Company is also required to have a minimum bid price of
at least $1 per share.

         As of  December  31,  1998,  the  Company  had net  tangible  assets of
$313,860  and the  Company's  bid price has  recently  been below the $1 minimum
price per share.  As a result,  the Company  does not meet the Nasdaq  Small-Cap
Market listing requirements.  A hearing was held with Nasdaq on April 1, 1999 to
consider  delisting or suspension of the Company's  Common Stock from the Nasdaq
Small-Cap Market.  The panel has not made a decision  regarding this matter. The
Company  expects  that such  delisting  will occur  unless the Company can bring
itself into  compliance  with the  requirements  and  demonstrate  an ability to
maintain  compliance with such requirements.  The Company is attempting to bring
itself into  compliance  with all  applicable  Nasdaq  Small-Cap  Market listing
requirements.  There can be no assurance  that the Company will be in compliance
and be able to demonstrate  the ability to maintain  compliance in the immediate
future or otherwise.  In the event of delisting or suspension,  trading, if any,
in  the  Company's   securities  would  be  expected  to  be  conducted  in  the
over-the-counter  market  in what is  commonly  referred  to as the  "Electronic
Bulletin Board." As a result,  an investor may find it more difficult to dispose
of,  or to  obtain  accurate  quotations  as  to  the  price  of  the  Company's
securities.  The loss of continued  price  quotations  as provided by the Nasdaq
System  could also cause a decline in the price of the Common  Stock,  a loss of
news coverage of the Company and difficulty in obtaining subsequent financing.

Compensation Committee Interlocks and Insider Participation

         No  executive  officers  of  the  Company  serve  on  the  Compensation
Committee (or in a like capacity) for the Company or any other entity.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

         The following table sets forth certain  information with respect to the
beneficial  ownership  of the Common  Stock of the  Company as of April 5, 1999,
for: (i) each person who is known by the Company to beneficially own more than 5
percent of the  Company's  Common Stock,  (ii) each of the Company's  directors,
(iii) each of the Company's Named Executive  Officers (defined below),  and (iv)
all  directors  and  executive  officers  as a group.  As of April 5, 1999,  the
Company had 12,356,440 shares of Common Stock outstanding.

                                Shares                 
  Name and Address           Beneficially   Percentage 
of Beneficial Owner(1)          Owned(2)    of Total(2)       Position
----------------------          --------    -----------       --------

David A. Robinson(3)             609,799       4.9%     President, CEO, Chairman
                                                        of the Board and
                                                        Director

Dr. Gale H. Thorne(4)            379,124       3.0%     Vice President - Product
                                                        Development and Director

Charles D. Roe(5)                  8,226          *     Chief Financial Officer,
                                                        VP Finance and Investor
                                                        Relations

David G. Hurley(6)                    --          *     Director

Malinda S. Mitchell(6)                --          *     Director

Dr. David T. Rovee(7)             11,000          *     Director

Robert R. Walker(8)              123,000          *     Director

Executive Officers and         1,131,149       8.9%
Directors as a Group (seven
persons)


                                       35
<PAGE>

                                Shares                 
  Name and Address           Beneficially   Percentage 
of Beneficial Owner(1)          Owned(2)    of Total(2)       Position
----------------------          --------    -----------       --------

Johnson & Johnson Development  2,000,000      15.0%
Corporation(9)
One Johnson & Johnson Plaza,
New Brunswick, NJ 08933

Asdale Ltd (10)                1,500,000      11.4%
44 Lowndes Street
London, England

* Less than 1%.
--------------

(1)  Except where otherwise  indicated,  the address of the beneficial  owner is
     deemed to be the same address as the Company.
(2)  Beneficial  ownership  is  determined  in  accordance  with SEC  rules  and
     generally  includes holding voting and investment power with respect to the
     securities. Shares of Common Stock subject to options or warrants currently
     exercisable,  or  exercisable  within 60 days, are deemed  outstanding  for
     computing the percentage of the total number of shares  beneficially  owned
     by the designated  person, but are not deemed outstanding for computing the
     percentage for any other person.
(3)  Includes 367,719 shares and stock options to purchase 212,500 shares.  Also
     includes 29,580 shares purchased through the Company's 401(k) plan.
(4)  Includes  18,000  shares,  stock  options to  purchase  115,000  shares and
     warrants to purchase  200,000 shares.  Also includes 25,000 shares that Dr.
     Thorne is deemed to  beneficially  own  through a trust and  21,124  shares
     purchased through the Company's 401(k) plan. See "Certain Relationships and
     Related Transactions."
(5)  Includes 8,226 shares purchased through the Company's 401(k) plan. Does not
     include stock  options to acquire  50,000  shares,  25,000 of which vest in
     October 1999 and 25,000 of which vest in October 2000.
(6)  Does not include  stock  options to purchase 4,000 shares for each director
     that vest in December  1999. 
(7)  Includes 1,000 shares and stock options to purchase 10,000 shares. Does not
     include stock options to purchase 4,000 shares that vest in December 1999.
(8)  Includes  stock options to purchase  60,000  shares.  Also includes  63,000
     shares that Mr. Walker is deemed to beneficially own through a trust.  Does
     not include  stock  options to acquire  4,000  shares that vest in December
     1999.
(9) Includes  1,000,000  shares and 1,000,000  Series D Warrants.  (10) Includes
750,000 shares and 750,000 Series D Warrants.

         The Company is not aware of any  arrangements,  the  operation of which
may, at a subsequent date, result in a change in control of the Company.

Item 13. Certain Relationships and Related Transactions.

         Dr. Gale H. Thorne, a director and officer of the Company, was entitled
to a  royalty  of two and  one-half  percent  on the  Company's  gross  revenues
received from the sale of products  utilizing the  ExtreSafe(R)  medical  needle

                                       36
<PAGE>

technology,  blood  collection  device and intravenous  flow gauge  technologies
(collectively, the "Thorne Products"). These royalties were agreed to in 1994 in
exchange for Dr.  Thorne's  assignment to the Company of  intellectual  property
rights he owned prior to his involvement  with the Company,  which  intellectual
property  rights  relate to the Thorne  Products.  In addition,  the Company was
required under the agreement to pay Dr. Thorne minimum  royalty  payments of not
less than $435,000 over a six-year  period  beginning in 1998.  Minimum  royalty
payments in 1998 and 1999 totaled in the aggregate  $195,000.  As a condition of
the private  placement  that closed in January  1998,  Dr.  Thorne  released the
Company from all royalty obligations relating to Thorne Products in exchange for
the issuance of 750,000 SHPI Warrants to Dr. Thorne and his assigns.

         The law firm of Blackburn & Stoll,  LC provides  legal  services to the
Company. Eric L. Robinson, a member of that firm, is the nephew of David A.
Robinson.

         In January  1997,  David A.  Robinson,  a director  and  officer of the
Company  exercised  options to purchase  87,500 shares of the  Company's  common
stock in order to provide needed working  capital for the Company.  Mr. Robinson
obtained the funds to exercise the options by margining  shares of the Company's
stock that he owned and all of the proceeds from the margin  transaction went to
the Company.  In August 1997,  his margin was called and Mr.  Robinson  borrowed
$182,577 from the Company to pay the margin call. In December 1997, Mr. Robinson
repaid in full the  $182,577  principal  amount plus  interest  thereon at eight
percent per annum.

         In December  1997, the Company  entered into a development  and license
agreement with JJM to  commercialize  two  applications of medical safety needle
technology.  The JJM Agreement provides for monthly development payments by J&J,
sharing of field  related  patent  costs,  payments  for initial  periods of low
volume  manufacturing,  an ongoing royalty stream and a J&J investment in molds,
assembly equipment and other capital costs related to  commercialization of each
product.  The JJM  Agreement  also  provides  for an ongoing  joint  cooperative
program  between the Company and JJM which derives future funding  directly from
sales of Company  created  products,  low volume  manufacturing  revenue for the
Company and an ongoing  royalty stream for additional  safety products which are
jointly approved for development. In connection with the JJM Agreement,  Johnson
& Johnson Development  Corporation purchased $2,000,000 of Company securities in
a private placement that closed in January 1998.

                                       37
<PAGE>

                                     PART IV


Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

         (a)      The following documents are filed as part of this report:

                  (1) Financial Statements

                  Listed on page F-1.

                  (2) Financial Statement Schedules

                  None required.

         (b)      Reports on Form 8-K

                  None.

(c)      Exhibits

                  Listed on page 40 hereof.


                                       38
<PAGE>



                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                           SPECIALIZED HEALTH PRODUCTS
                                           INTERNATIONAL, INC.
                                           (Registrant)


Date: April 14, 1999                       By  /s/ David A. Robinson
                                              ----------------------
                                           David A. Robinson
                                           President, Chief Executive Officer 
                                           and Director


         Pursuant to the  requirements  of the  Securities  and  Exchange Act of
1934,  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/ David A. Robinson        President, Chief Executive          April 14, 1999
---------------------        Officer and Director (Principal         
David A. Robinson            Executive Officer)


/s/ Charles D. Roe           Vice President, Chief Financial     April 14, 1999
----------------------       Officer, Secretary and             
Charles D. Roe               Treasurer (Principal Financial 
                             and Accounting Officer)


/s/ Gale H. Thorne           Director and Vice President         April 14, 1999
----------------------                  
Gale H. Thorne


/s/ David G. Hurley          Director                            April 14, 1999
----------------------          
David G. Hurley


/s/ Malinda S. Mitchell      Director                            April 14, 1999
-----------------------          
Malinda S. Mitchell


/s/ Robert R. Walker         Director                            April 14, 1999
-----------------------          
Robert R. Walker


                                       39
<PAGE>



                                  EXHIBIT INDEX

 EXHIBIT NO.                                DESCRIPTION OF EXHIBIT


  3(i).1                Restated  Certificate of  Incorporation  of the Company.
                        (Incorporated  by  reference  to  Exhibit  3(i).1 of the
                        Company's  current  report on Form 8-K,  dated  July 28,
                        1995)

  3(i).2                Certificate of Amendment of Certificate of Incorporation
                        of the  Company.  (Incorporated  by reference to Exhibit
                        3(i).2 of the Company's  Form 10-K,  dated  December 31,
                        1996).

  3(i).3                Articles   of   Incorporation   of   Specialized  Health
                        Products,  Inc.  ("SHP")  (Incorporated  by reference to
                        Exhibit  3(i).2  of  the  Company's  Form  10-K,   dated
                        December 31, 1995)

  3(i).4                Articles of Amendment of SHP  (Incorporated by reference
                        to Exhibit  3(i).3 of the  Company's  Form  10-K,  dated
                        December 31, 1995)

  3(ii).1               Second  Amended  and  Restated  Bylaws  of  the  Company
                        (Incorporated  by  reference  to Exhibit  3(ii).1 of the
                        Company's Annual Report on Form 10-K, dated December 31,
                        1997)..

  3(ii).2               Bylaws of SHP  (Incorporated  by  reference  to  Exhibit
                        3(ii).2 of the Company's  Form 10-K,  dated December 31,
                        1995)

  4.1                   Form of Series D  Warrant  Certificate  (Incorporated by
                        reference  to Exhibit  4.3 of the  Company's  Form 10-K,
                        dated December 31, 1997)

  4.2                   Form  of  SHPI  Warrant   Certificate  (Incorporated  by
                        reference  to Exhibit  4.4 of the  Company's  Form 10-K,
                        dated December 31, 1997)

  10.1                  Form of Employment  Agreement  with  Executive  Officers
                        (Incorporated  by  reference  to  Exhibit  10.3  of  the
                        Company's Form 10-K, dated December 31, 1995)

  10.2                  Form of Indemnity  Agreement with Executive Officers and
                        Directors  (Incorporated by reference to Exhibit 10.4 of
                        the Company's Form 10-K, dated December 31, 1995)

  10.3                  Form  of  Confidentiality  Agreement   (Incorporated  by
                        reference  to Exhibit 10.5 of the  Company's  Form 10-K,
                        dated December 31, 1995)

  10.4                  Joint Venture  Agreement  between SHP and Zerbec,  Inc.,
                        dated  October 30, 1995  (Incorporated  by  reference to
                        Exhibit 10.6 of the Company's Form 10-K,  dated December
                        31, 1995)

  10.5                  Distribution Agreement between SHP and Becton, Dickinson
                        and Company  (Incorporated  by reference to Exhibit 10.1
                        of the  Company's  Current  Report  on Form  8-K,  dated
                        August 26, 1996)

  10.6                  License Agreement between SHP and Becton,  Dickinson and
                        Company  (Incorporated  by  reference to Exhibit 10.1 of
                        the Company's  Current Report on Form 8-K, dated June 4,
                        1997)

  10.7                  Distribution  and  License  Agreement  between  SHP  and
                        Johnson  and  Johnson  Medical,  Inc.  (Incorporated  by
                        reference  to  Exhibit  10.1  of the  Company's  Current
                        Report on Form 8-K, dated December 22, 1997)

  21.1                  Schedule of subsidiaries.

  23.1                  Consent  of  Arthur  Andersen  LLP,  Independent Public\
                        Accountants

  27.1                  Financial Data Schedule


                                       40

<PAGE>


        SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
                      (A Company in the Development Stage)





                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




                                                                      Page


Report of Independent Public Accountants                              F - 2

Consolidated Balance Sheets as of December 31, 1998 and 1997          F - 3

Consolidated Statements of Operations for the Years Ended
  December 31, 1998, 1997 and 1996 and for the Period
  from Inception to December 31, 1998                                 F - 5

Consolidated  Statements of  Stockholders' Equity (Deficit) 
  for the Years Ended December 31, 1998, 1997 and 1996 and
  for the Period from Inception to December 31, 1998                  F - 6

Consolidated  Statements  of Cash Flows for the Years Ended  
  December  31, 1998, 1997 and 1996 and for the Period
  from Inception to December 31, 1998                                F - 11

Notes to Consolidated Financial Statements                           F - 13

                                      F-1
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Specialized Health Products International, Inc.:

We have audited the  accompanying  consolidated  balance  sheets of  Specialized
Health Products  International,  Inc. (a Delaware corporation in the development
stage) and  subsidiaries  as of  December  31,  1998 and 1997,  and the  related
consolidated  statements of operations,  stockholders' equity (deficit) and cash
flows for each of the three years in the period ended  December 31, 1998 and the
related statements of operations,  stockholders' equity (deficit) and cash flows
for the period from  inception  (November 19, 1993) to December 31, 1998.  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  did  not  audit  the  consolidated   financial  statements  of
Specialized Health Products International,  Inc. and subsidiaries for the period
from  inception  to December  31,  1995.  Such  statements  are  included in the
cumulative   inception  to  December  31,  1998  totals  of  the  statements  of
operations,  stockholders'  equity  (deficit)  and cash flows and reflect  total
revenues and net loss of 23 percent and 24 percent, respectively, of the related
cumulative totals. Those statements were audited by other auditors whose reports
have been furnished to us and our opinion,  insofar as it relates to amounts for
cumulative totals, is based solely upon the reports of the other auditors.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
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  and the  reports  of  other  auditors  provide  a
reasonable basis for our opinion.

In our  opinion,  based on our audits and the  reports  of other  auditors,  the
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, 1998 and 1997, and the
results of their  operations and their cash flows for each of the three years in
the period ended December 31, 1998 and for the period from inception to December
31, 1998, in conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated  financial  statements,  the Company has experienced  recurring net
losses of  $4,197,567,  $4,274,003,  and $4,093,388 and negative cash flows from
operating activities of $2,069,322,  $1,389,016, and $3,558,778 during the years
ended December 31, 1998, 1997 and 1996,  respectively.  As of December 31, 1998,
the Company had an  accumulated  deficit of  $16,423,014.  These  matters  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
Management's  plans in regard to these matters are also described in Note 1. The
accompanying  consolidated  financial  statements do not include any adjustments
relating to the  recoverability  and classification of asset carrying amounts or
the amount and  classification  of  liabilities  that  might  result  should the
Company be unable to continue as a going concern.




ARTHUR ANDERSEN LLP

Salt Lake City, Utah
  April 14, 1999

                                      F-2
<PAGE>
<TABLE>
<CAPTION>

                           SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
                                         (A Company in the Development Stage)


                                             CONSOLIDATED BALANCE SHEETS


         ASSETS                                                                                 December 31,
                                                                                 -----------------------------------------
                                                                                         1998                 1997
                                                                                 -----------------------------------------
CURRENT ASSETS:
<S>                                                                               <C>                 <C>             
   Cash and cash equivalents                                                      $     2,480,083     $      1,441,556
   Accounts receivable                                                                    494,484               34,328
   Unbilled receivables on contracts                                                      142,414                    -
   Inventories                                                                              2,520               72,352
   Prepaid expenses and other                                                              37,431               56,891
   Amounts due from related parties                                                        24,808                    -
                                                                                 -----------------------------------------

       Total current assets                                                             3,181,740            1,605,127
                                                                                 -----------------------------------------

PROPERTY AND EQUIPMENT, at cost:
   Manufacturing molds                                                                    474,633              812,994
   Office furnishings and fixtures                                                        531,215              352,925
   Assembly and manufacturing equipment                                                   339,356               46,138
   Leasehold improvements                                                                 132,326                    -
   Construction-in-progress                                                               152,599              546,372
                                                                                 -----------------------------------------
                                                                                        1,630,129            1,758,429
   Less accumulated depreciation and amortization                                        (442,331)            (308,000)
                                                                                 -----------------------------------------

       Net property and equipment                                                       1,187,798            1,450,429
                                                                                 -----------------------------------------

OTHER ASSETS                                                                               11,537              229,857
                                                                                 -----------------------------------------

                                                                                  $     4,381,075     $      3,285,413
                                                                                 =========================================
</TABLE>

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

                                      F-3
<PAGE>
<TABLE>
<CAPTION>

                           SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
                                         (A Company in the Development Stage)


                                       CONSOLIDATED BALANCE SHEETS (Continued)


                       LIABILITIES AND STOCKHOLDERS' EQUITY                                    December 31,
                                                                                 ----------------------------------------
                                                                                         1998                1997
                                                                                 ----------------------------------------
CURRENT LIABILITIES:
<S>                                                                               <C>                 <C>             
   Accounts payable                                                               $        17,238     $        469,948
   Accrued liabilities                                                                    287,297              398,022
   Amounts due to related parties                                                               -              127,195
                                                                                 ----------------------------------------

       Total current liabilities                                                          304,535              995,165
                                                                                 ----------------------------------------

DEFERRED ROYALTY REVENUES                                                               3,750,000            1,750,000
                                                                                 ----------------------------------------

COMMITMENTS AND CONTINGENCIES (Notes 1,3,4,5 and 6)

STOCKHOLDERS' EQUITY:
   Preferred stock, $.001 par value; 5,000,000 shares authorized, no shares
     outstanding                                                                                -                    -
   Common stock, $.02 par value; 50,000,000 shares authorized, 12,356,440 and
     10,129,842 shares outstanding, respectively                                          247,129              202,597
   Common stock subscriptions receivable                                                 (200,200)            (209,200)
   Additional paid-in capital                                                          14,788,373           12,113,346
   Series C warrants to purchase common stock                                                   -              310,994
   Series D warrants to purchase common stock                                           1,954,452              388,158
   Deficit accumulated during the development stage                                   (16,423,014)         (12,225,447)
   Deferred consulting expense                                                            (40,200)             (40,200)
                                                                                 ----------------------------------------

       Total stockholders' equity                                                         326,540              540,248
                                                                                 ----------------------------------------

                                                                                  $     4,381,075     $      3,285,413
                                                                                 ========================================
</TABLE>

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

                                      F-4
<PAGE>
<TABLE>
<CAPTION>

                           SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
                                         (A Company in the Development Stage)

                                        CONSOLIDATED STATEMENTS OF OPERATIONS
                                                                                                          
                                                                                                            Period from 
                                                              Year Ended December 31,                      Inception to 
                                             ------------------------------------------------------------  December 31, 
                                                    1998               1997                 1996               1998
                                             -------------------------------------------------------------------------------
<S>                                            <C>                 <C>                 <C>                <C>            
NET PRODUCT SALES                              $       10,202      $      182,363      $       74,563     $       748,228
COST OF PRODUCT SALES                                   8,048             141,857              70,257             536,002
                                             -------------------------------------------------------------------------------
       Gross margin on product sales                    2,154              40,506               4,306             212,226
                                             -------------------------------------------------------------------------------

DEVELOPMENT FEES                                    1,028,934             250,000                   -           1,278,934
COST OF DEVELOPMENT FEES                              823,146                   -                   -             823,146
                                             -------------------------------------------------------------------------------
      Gross margin on development fees                205,788             250,000                   -             455,788
                                             -------------------------------------------------------------------------------

OPERATING EXPENSES:
   Selling, general and administrative              2,946,722           3,311,222           2,901,434          11,915,871
   Research and development                           909,048           1,191,857           1,264,186           4,460,680
   Write-off of operating assets                      754,803              92,557              72,363           1,174,795
                                             -------------------------------------------------------------------------------
      Total operating expenses                      4,610,573           4,595,636           4,237,983          17,551,346
                                             -------------------------------------------------------------------------------

LOSS FROM OPERATIONS                               (4,402,631)         (4,305,130)         (4,233,677)        (16,883,332)
                                             -------------------------------------------------------------------------------

OTHER INCOME (EXPENSE):
   Interest income                                    199,287              18,236             108,701             461,889
   Interest expense                                         -                   -                 -               (23,658)
   Other income, net                                    5,777              12,891              31,588              50,256
                                             -------------------------------------------------------------------------------

     Net other income                                 205,064              31,127             140,289             488,487
                                             -------------------------------------------------------------------------------

NET LOSS                                           (4,197,567)         (4,274,003)         (4,093,388)        (16,394,845)

LESS PREFERENCE STOCK DIVIDENDS
                                                            -                 -                   -               (28,169)
                                             -------------------------------------------------------------------------------

NET LOSS APPLICABLE TO COMMON SHARES           $   (4,197,567)   $     (4,274,003)     $   (4,093,388)   $    (16,423,014)
                                             ===============================================================================

BASIC AND DILUTED NET LOSS PER COMMON SHARE    $         (.35)   $           (.47)     $         (.48)
                                             ============================================================

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING         12,153,264           9,170,541           8,589,952
                                             ============================================================
</TABLE>

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

                                      F-5
<PAGE>
<TABLE>
<CAPTION>

                           SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
                                         (A Company in the Development Stage)

                              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                                                                                                              Deficit
                                                                    Common     Addi-                        Accumulated
                           Preferred Stock      Common Stock       Stock Sub-  tional                        During the    Deferred
                       -----------------------------------------   scriptions  Paid-in  Series C  Series D   Development  Consulting
                          Shares    Amount    Shares     Amount    Receivable  Capital  Warrants  Warrants     Stage       Expense
                       ------------------------------------------------------------------------------------------------------------
<S>                       <C>     <C>       <C>        <C>        <C>        <C>        <C>      <C>       <C>         <C>
Issuance of 
  common stock for
  cash at inception          -     $    -    1,170,000  $  1,300   $     -     $   -     $   -    $   -     $     -      $  -   
                                                                                                                         
Net loss                     -          -          -         -           -         -         -        -        (3,450)      -  
                      -------------------------------------------------------- -------- --------- --------- ------------ ----------
                                                                                                                         
BALANCE as of                                                                                                            
December 31, 1993                                                                                                        
                             -          -    1,170,000     1,300         -         -         -        -        (3,450)      -  
                                                                                                                         
Issuance of                                                                                                              
  preferred stock                                                                                                        
  for cash             1,440,000    560,000        -         -           -         -         -        -           -         -  
                                                                                                                         
Issuance of common                                                                                                       
  stock for services                                                                                                     
  and stock                                                                                                              
  subscriptions                                                                                                          
  receivable                -          -      193,500   208,500    (198,500)      -         -        -           -         -  
                                                                                                                         
Unpaid dividends                                                                                                         
  on preference                                                                                                          
  stock                      -          -          -         -           -         -         -        -       (16,780)      -  
                                                                                                                         
Net loss                     -          -          -         -           -         -         -        -      (906,948)      -  
                      -------------------------------------------------------- -------- --------- --------- ------------ ----------
                                                                                                                         
BALANCE as of                                                                                                            
  December 31, 1994                                                                                                      
                       1,440,000    560,000  1,363,500   209,800    (198,500)      -         -        -      (927,178)      -  
                                                                                                                         
Issuance of                                                                                                              
  preferred stock                                                                                                        
  for cash               362,403    604,001        -         -           -         -         -        -           -         - 
</TABLE>
                                                                              
           The accompanying notes to consolidated financial statements
           are an integral part of these consolidated balance sheets.

                                      F-6
<PAGE>                                                                       
<TABLE>
<CAPTION>


                           SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
                                         (A Company in the Development Stage)

                        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)

                                                                                                                 Deficit   
                                                                        Common      Addi-                       Accumulated Deferred
                            Preferred Stock         Common Stock        Stock Sub-  tional                       During the Consult-
                       ----------------------------------------------   scriptions  Paid-in  Series C  Series D  Development  ing 
                           Shares     Amount     Shares       Amount    Receivable  Capital  Warrants  Warrants  Stage      Expense
                       ------------------------------------------------------------------------------------------------------------
<S>                     <C>       <C>          <C>            <C>       <C>        <C>        <C>      <C>       <C>        <C>
Issuance of common 
  stock for
  stock subscriptions
  receivable                   -   $       -       70,000    $   1,400  $(140,000)  $  138,600  $-      $ -         $    -    $ -

Reduction in stock
  subscriptions 
  receivable
  (cash and services)          -           -          -            -      288,500          -     -        -              -      -  
                                                                                                                  

Unpaid dividends on
   preference stock            -           -          -            -          -            -     -        -          (11,389)   -  

Exchange of debt for 
   common stock                -           -      396,500      386,000        -         99,000   -        -              -      -  

Issuance of common 
   shares to
   stockholders under
   antidilution 
   provisions                  -           -       90,000      180,000        -       (180,000)  -        -              -      -  

Business combination    (1,802,403) (1,164,001) 2,102,403     (696,752)       -      1,860,753   -        -              -      -  

Issuance of 
   common stock for
   cash, net of expenses       -           -    4,256,250       85,125        -      7,193,935   -        -              -      -  
</TABLE>

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

                                      F-7
<PAGE>
<TABLE>
<CAPTION>

                           SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
                                         (A Company in the Development Stage)

                        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)

                                                                                                              Deficit
                                                                    Common     Addi-                        Accumulated
                           Preferred Stock      Common Stock       Stock Sub-  tional                        During the    Deferred
                       -----------------------------------------   scriptions  Paid-in  Series C  Series D   Development  Consulting
                          Shares    Amount    Shares     Amount    Receivable  Capital  Warrants  Warrants     Stage       Expense
                       ------------------------------------------------------------------------------------------------------------
<S>                       <C>     <C>      <C>         <C>        <C>         <C>        <C>      <C>       <C>         <C>
Exercise of 
   stock options
   for common stock
   subscriptions 
   receivable              -       $   -     288,000    $   5,760  $(209,500)  $  203,740   $-     $-       $       -     $    - 
                                                                                                                                  

Net loss                   -           -         -            -          -            -      -      -        (2,919,489)       -  
                                                                                                                     
                       -------------------------------------------------------------------------------------------------------------

BALANCE as of 
   December 31, 1995       -           -   8,566,653     171,333    (259,500)   9,316,028    -      -        (3,858,056)       -
                                                                                                                                

Cash received 
   for stock
   subscriptions
   receivable              -           -         -            -       50,300          -      -      -               -          -
                                                                                                                       

Exercise of 
   common stock
   options                 -          -       45,000         900         -         16,650    -       -               -          -

Exercise of 
   common stock
   warrants                -          -       45,000         900         -         74,250    -       -               -          -

Grant of stock 
   options for
   consulting 
   services                -          -          -           -           -        134,000    -       -               -      (40,200)

Net loss                   -          -          -           -           -            -      -       -        (4,093,388)       -  
                       -------------------------------------------------------------------------------------------------------------

BALANCE as of 
    December 31, 1996      -          -    8,656,653     173,133    (209,200)   9,540,928    -       -        (7,951,444)   (40,200)

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

                                      F-8
<PAGE>


                           SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
                                         (A Company in the Development Stage)

                        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)

                                                                                                              Deficit
                                                                    Common     Addi-                        Accumulated
                           Preferred Stock      Common Stock       Stock Sub-  tional                        During the    Deferred
                       -----------------------------------------   scriptions  Paid-in  Series C  Series D   Development  Consulting
                          Shares    Amount    Shares     Amount    Receivable  Capital  Warrants  Warrants     Stage       Expense
                       ------------------------------------------------------------------------------------------------------------
<S>                       <C>     <C>       <C>         <C>        <C>        <C>        <C>      <C>       <C>           <C>
Exercise of 
   common stock
   options                   -      $ -        110,000   $  2,200    $    -    $  181,575  $    -  $     -    $        -   $     -

Issuance of 
   common stock and
   common stock 
   warrants for
   cash, net 
   of expenses               -        -      1,263,189     25,264         -      2,180,343  310,994  388,158           -        -

Issuance of 
   common stock 
   for services              -        -        100,000      2,000         -        210,500      -        -             -        -

Net loss                     -        -            -          -           -            -        -        -      (4,274,003)     -  
                      --------------------------------------------------------------------------------------------------------------

BALANCE as of 
  December 31, 1997          -        -     10,129,842    202,597    (209,200)  12,113,346  310,994  388,158   (12,225,447) (40,200)

Exercise of 
   common stock                                                                                                         
   warrants                  -        -         85,000      1,700         -        168,300      -        -             -        - 

Issuance of 
   common stock and
   conversion of 
   Series C
   warrants to 
   Series D
   warrants                  -        -        256,598      5,132         -         (5,132)(310,994) 310,994           -        -  
</TABLE>

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

                                      F-9
<PAGE>
<TABLE>
<CAPTION>


                           SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
                                         (A Company in the Development Stage)

                        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)

                                                                                                              Deficit
                                                                    Common     Addi-                        Accumulated
                           Preferred Stock      Common Stock       Stock Sub-  tional                        During the    Deferred
                       -----------------------------------------   scriptions  Paid-in  Series C  Series D   Development  Consulting
                          Shares    Amount    Shares     Amount    Receivable  Capital  Warrants  Warrants     Stage       Expense
                       ------------------------------------------------------------------------------------------------------------
<S>                       <C>     <C>       <C>        <C>        <C>        <C>        <C>     <C>         <C>         <C>
Issuance of 
   common stock and
   common stock 
   warrants for
   cash, net 
   of expenses            -         $ -       1,860,000  $ 37,200  $     -    $ 2,518,159  $-    $1,078,800 $        -       $ - 

Issuance of 
   common stock
   warrants for 
   service                -           -             -         -          -            -     -       163,500          -         -  

Cash received 
   for stock
   subscriptions 
   receivable             -           -             -         -        9,000          -     -           -            -         -  

Issuance of 
   common stock
   options for 
   services               -           -             -         -          -          7,200   -           -            -         -  

Issuance of 
   common stock 
   for services           -           -          25,000       500        -        (13,500)  -        13,000          -         -  

Net loss                  -           -             -         -          -            -     -           -     (4,197,567)      -  
                      --------------------------------------------------------------------------------------------------------------
BALANCE as of 
   December 31, 1998      -         $ -      12,356,440  $247,129  $(200,200) $14,788,373  $-    $1,954,452 $(16,423,014) $(40,200)
                      ==============================================================================================================
</TABLE>

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

                                      F-10
<PAGE>
<TABLE>
<CAPTION>

                           SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
                                         (A Company in the Development Stage)

                                        CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   Increase (Decrease) in Cash and Cash Equivalents


                                                                                                                         
                                                                                                                   Period from
                                                                      Year Ended December 31,                      Inception to
                                                       -------------------------------------------------------     December 31,
                                                              1998              1997              1996                1998
                                                       ----------------------------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                     <C>                 <C>                <C>              <C>             
    Net loss                                            $   (4,197,567)     $ (4,274,003)      $ (4,093,388)    $   (16,394,845)
    Adjustments to reconcile net loss to net cash 
      used in operating activities:
        Depreciation and amortization                          430,315           220,276            203,523             957,973
        Common stock issued for services                             -           212,500                  -             231,000
        Noncash consulting expense                              23,700           147,000             93,800             264,500
        Loss on disposition of assets                          754,803            92,557             72,363           1,176,086
        Changes in operating assets and liabilities:
             Accounts receivable                              (460,156)          (33,169)           349,559            (494,484)
             Unbilled receivables on contracts                (142,414)                -                 -             (142,414)
             Inventories                                        69,832           (56,642)               612              (2,520)
             Prepaid expenses and other                         19,460            39,922            (62,796)            (37,431)
             Amounts due from related parties                  (24,808)                -            122,850             (24,808)
             Other assets                                        1,143                 -                 -                1,143
             Accounts payable                                 (452,710)          369,262            (33,763)             25,038
             Accrued liabilities                                36,275            89,238           (284,690)            279,497
             Amounts due to related parties                   (127,195)           54,043             73,152                   -
             Deferred royalty revenues                       2,000,000         1,750,000                 -            3,750,000
                                                       ----------------------------------------------------------------------------

              Net cash used in operating activities         (2,069,322)       (1,389,016)        (3,558,778)        (10,411,265)
                                                       ----------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment                        (709,827)         (510,656)          (580,468)         (2,882,908)
    Purchase of patents and technology                               -                 -             (2,644)           (356,146)
    Proceeds from the sale of assets                             4,517                 -                  -               4,517
                                                       ----------------------------------------------------------------------------

              Net cash used in investing activities           (705,310)         (510,656)          (583,112)         (3,234,537)
                                                       ----------------------------------------------------------------------------
</TABLE>
           The accompanying notes to consolidated financial statements
           are an integral part of these consolidated balance sheets.

                                      F-11
<PAGE>
<TABLE>
<CAPTION>

                           SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
                                         (A Company in the Development Stage)

                                  CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

                                   Increase (Decrease) in Cash and Cash Equivalents


                                                                                                                
                                                                                                                   Period from
                                                                       Year Ended December 31,                     Inception to
                                                         -----------------------------------------------------     December 31,
                                                              1998             1997              1996                  1998
                                                         -------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
<S>                                                        <C>              <C>               <C>               <C>            
   Proceeds from issuance of common stock                  $   2,725,359    $   2,389,382     $      92,700     $    12,487,801
   Proceeds from issuance of common stock warrants             1,078,800          699,152               -             1,777,952
   Proceeds from stock subscriptions                               9,000              -              50,300             339,300
   Proceeds from issuance of preferred stock                         -                -                 -             1,164,001
   Proceeds from issuance of redeemable preference stock             -                -                 -               240,000
   Payments on redeemable preference stock and dividends             -                -                 -              (268,169)
   Net repayments on stockholder loans                               -                -                 -               385,000
                                                         -------------------------------------------------------------------------

              Net cash provided by financing activities        3,813,159        3,088,534           143,000          16,125,885
                                                         -------------------------------------------------------------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                                               1,038,527        1,188,862        (3,998,890)          2,480,083

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD
                                                               1,441,556          252,694         4,251,584                 -  
                                                         -------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD
                                                           $   2,480,083    $   1,441,556     $     252,694     $     2,480,083
                                                         =========================================================================
</TABLE>

 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
   FINANCING ACTIVITIES:

   For the period from  inception  to December 31,  1998,  the Company  recorded
     in-kind dividends on the redeemable preferred stock of $28,169.

   For the period from inception to December 31, 1998, the Company issued common
     stock for subscriptions receivable of $548,000.

   For the period from  inception to December 31,  1998,  the Company  converted
     certain  stockholder  loans and amounts due to stockholders to common stock
     totaling $485,000.

                                      F-12
<PAGE>

        SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
                      (A Company in the Development Stage)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)    NATURE OF OPERATIONS AND BUSINESS COMBINATION

Nature of Operations

Specialized Health Products  International,  Inc. together with its wholly owned
subsidiaries, Specialized Health Products, Inc. ("SHP"), Specialized Cooperative
Corporation ("SCC") and Iontophoretics  Corporation ("IPC")  (collectively,  the
"Company")  is a  development  stage  company  which  is  primarily  engaged  in
developing cost-effective,  disposable, proprietary healthcare products designed
to limit or prevent the risk of  accidental  needle  sticks  which may cause the
spread of  blood-borne  diseases such as HIV/AIDS and hepatitis B. The Company's
activities since inception have focused on research and development of products,
obtaining  financing,  recruiting personnel and identifying and contracting with
manufacturers,  distributors and strategic partners. The Company has a portfolio
of  proprietary,  safety  healthcare  products  that are in  various  stages  of
production,  pre-production,  development and research.  The Company principally
intends to use third parties to manufacture,  market and distribute its products
worldwide.

Development Stage Presentation

The Company is in the  development  stage and from its  inception  has  incurred
losses.  During the years ended  December 31, 1998,  1997 and 1996,  the Company
experienced net losses of $4,197,567, $4,274,003, and $4,093,388,  respectively,
and negative cash flows from operating activities of $2,069,322, $1,389,016, and
$3,558,778,   respectively.  As  of  December  31,  1998,  the  Company  had  an
accumulated deficit of $16,423,014.  These matters raise substantial doubt about
the Company's  ability to continue as a going concern.  The Company's  continued
existence is dependent upon several factors  including the Company's  success in
raising sufficient funding, bringing its products to commercialization, reducing
costs and entering into  favorable  contracts  with  third-party  manufacturers,
distributors and strategic partners.

The Company believes that existing cash, funds from potential  technology sales,
proceeds from sale of its interest in Quantum Imaging  Corporation  (see Note 4)
and funds from potential development and licensing agreements (see Note 3), will
be sufficient to support the Company's  operations at least through December 31,
1999.  The Company's  operating  plan also  includes  raising  additional  funds
through issuing common stock upon the potential exercise of outstanding warrants
and/or proceeds from potential new strategic partner  relationships in order for
commercialization  of its products under  development to not be further delayed.
Management  has  negotiated  agreements  with  third  parties  to  assist in the
development,  financing,  manufacturing  and  distribution of its products under
development or near commercialization.  Nonetheless,  the Company's inability to
obtain  additional  funding,  as required,  could  severely  impair its business
operations and there can be no assurance that the Company's  operating plan will
be successful.

The  Company is subject to certain  other risk  factors  due to its  development
stage  status,  the  industry  in  which  it  competes  and  the  nature  of its
operations.  Many of these  factors may be  unforeseen  and beyond the Company's
control. These risk factors include:

a)   The Company has experienced  limited sales of its Safety  Cradle(R)  sharps
     container products,  the Company's only currently  commercialized  product.
     There is no assurance that other products will be  commercially  viable and
     no assurance can be given that the Company will have sufficient  sales or a
     sufficient  customer base to become  profitable.  The business prospects of
     the  Company  will  be  affected  by  expenses,   operational   issues  and
     uncertainties  frequently  encountered  in the  development  of a  business
     enterprise in a competitive environment.

                                      F-13

<PAGE>

b)   The Company's need for capital during the next year or more will vary based
     upon a number of factors,  including  the rate at which demand for products
     expands,  the  level of  sales  and  marketing  activities  for the  Safety
     Cradle(R)  sharps  container  product  and the  level of  effort  needed to
     develop and  commercialize  other products  utilizing the Company's medical
     needle and other  technologies.  If additional  funds are not  successfully
     raised, the lack of liquidity will likely have a material adverse effect on
     the Company.

c)   The Company's  safety  medical  products may not be accepted by the market.
     Market acceptance of the Company's  products will depend in large part upon
     the Company's  ability to demonstrate the operational  advantages,  safety,
     efficacy,  and  cost-effectiveness  of its  products  compared to competing
     products and its ability to distribute  through major medical  distributors
     and strategic partners.

d)   Regulation is a significant  factor in the development and marketing of the
     Company's products and in the Company's ongoing  manufacturing and research
     and development activities.  The Company and its products are regulated, in
     part, by the Federal Food,  Drug, and Cosmetic Act which is administered by
     the United  States Food and Drug  Administration.  The process of obtaining
     required   regulatory   clearances   or  approvals   for  products  can  be
     time-consuming and expensive.

e)   The Company  anticipates that it will be dependent on third party contracts
     for the distribution of its products, none of which have been successful to
     date.

f)   The Company operates in a very competitive market and there is no assurance
     that development of superior  competing  products and changes in technology
     will not eliminate the need for the Company's products. The introduction of
     competing products could adversely affect the Company's attempts to develop
     and market its products successfully.

g)   The Company's  future success depends in part on its ability to protect its
     intellectual property and maintain the proprietary nature of its technology
     through  a  combination   of  patents  and  other   intellectual   property
     arrangements.  There can be no assurance  that the  protection  provided by
     patents  will be broad  enough  to  prevent  competitors  from  introducing
     similar products or that such patents, if challenged, will be upheld by the
     courts of any jurisdiction.

h)   The sale of medical  devices  entails an inherent  risk of liability in the
     event of product failure or claim of harm caused by product operation.  The
     Company currently maintains product liability insurance;  however, there is
     no  assurance  that the Company will be able to maintain  adequate  product
     liability insurance with acceptable terms in the future.

Business Combination

SHP was organized in November  1993.  In July 1995,  SHP entered into a business
combination  with Russco,  Inc.  wherein it became a wholly owned  subsidiary of
Russco  and  Russco's   name  was  changed  to   Specialized   Health   Products
International,  Inc. ("SHPI"). Russco was organized in February 1986. Russco had
no  significant  operations  and  minimal  capital  with  which to  conduct  its
business.

                                      F-14
<PAGE>

At the closing of the business  combination,  Russco's  300,000 shares of common
stock  remained  outstanding  as common  stock of the Company and Russco  issued
3,602,403  shares of its  common  stock for all of the  issued  and  outstanding
shares of SHP's common stock and preferred stock.  The business  combination was
treated as a reverse  merger for accounting  purposes.  SHP was determined to be
the acquiring company even though Russco issued its common shares to acquire SHP
because  the  stockholders  of SHP  received  the  significant  majority  of the
outstanding common stock of the Company.  In addition,  management of SHP became
the  management  of the  Company.  Because  Russco had limited  operations,  the
business  combination was accounted for as a purchase  transaction  with the net
assets of Russco (which were  insignificant)  being recorded at their  estimated
fair value at the date of closing and  operating  results of Russco prior to the
business combination not being included with the historical operating results of
SHP.


(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying  consolidated financial statements include the accounts of SHPI
and its wholly  owned  subsidiaries.  All  material  intercompany  balances  and
transactions have been eliminated in consolidation.

Pervasiveness of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
effect  the  reported  amounts  of assets  and  liabilities  and  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 those estimates.

Cash and Cash Equivalents

Cash and cash equivalents are comprised of checking and money market accounts at
a bank. As of December 31, 1998 and 1997,  the Company had demand  deposits at a
bank in excess  of the  $100,000  limit for  insurance  by the  Federal  Deposit
Insurance  Corporation.  Also included in cash and cash  equivalents at December
31, 1998 are investments in commercial  paper having maturity dates from January
4, 1999 to March 4, 1999 with  interest  rates ranging from 5.50 percent to 5.53
percent.  The Company intends to hold these investments  until maturity.  All of
the  Company's  cash  equivalents  have an original  maturity of three months or
less.

Inventories

Inventories are stated at the lower of cost or market value.  Cost is determined
using the first-in, first-out method.

Inventory consisted of the following at December 31, 1998 and 1997:

                                           1998               1997
                                     ------------------ -----------------

       Raw materials                    $     2,520       $     19,973
       Work-in-process                           -               4,555
       Finished goods                            -              47,824
                                     ------------------ -----------------

                                        $     2,520       $     72,352
                                     ================== =================

                                      F-15
<PAGE>

Property and Equipment

Property and equipment are stated at cost and consist primarily of manufacturing
molds and equipment, office furniture and fixtures and construction-in-progress.
Manufacturing molds and equipment are depreciated using the straight-line method
over seven years or the  units-of-production  method,  whichever is greater. All
other  property and equipment are  depreciated  using the  straight-line  method
based on the estimated useful lives of the related assets which are five years.

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

Costs  incurred  in  connection  with  the   fabrication  and   construction  of
manufacturing  molds and equipment are capitalized as  construction-in-progress.
No depreciation is recognized on these assets until they are placed in service.

Other Assets

Other assets consist primarily of purchased  technology rights and patents,  and
related patent costs such as outside legal fees. These costs are being amortized
on a  straight-line  basis over seven years.  Accumulated  amortization  totaled
approximately $431,000 and $221,000 at December 31, 1998 and 1997, respectively.
Management  evaluates  the  recoverability  of these costs on a periodic  basis,
based on sales of the product  related to the  technology,  existing or expected
sales contracts, revenue trends and projected cash flows.

Long-Lived Assets

The Company  accounts for  impairment  of long-lived  assets in accordance  with
Statement of Financial  Accounting Standards No. 121, "Accounting for Impairment
of  Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of" ("SFAS No.
121").  SFAS No. 121 requires that long-lived  assets be reviewed for impairment
when events or changes in circumstances indicate that the book value of an asset
may not be  recoverable.  The Company  evaluates,  at each  balance  sheet date,
whether  events  and   circumstances   have  occurred  that  indicate   possible
impairment.  In  accordance  with SFAS No. 121,  the Company uses an estimate of
future  undiscounted net cash flows of the related asset or group of assets over
the remaining life in measuring whether the assets are recoverable.

During 1998, the Company elected,  for various  reasons,  to abandon the further
manufacture and distribution of the ExtreSafe(R) Lancet Strips. As a result, the
Company  wrote  off  $49,853  of  inventory,  $7,380  of  patent  costs,  net of
accumulated  amortization,  and  $739,924 of fixed  assets,  net of  accumulated
depreciation, related to the discontinued product that cannot be utilized by the
Company for other purposes.

Also during 1998,  the Company  adjusted the  estimated  useful lives of certain
patents in order to properly  reflect  the fair  market  value of the patents at
December 31, 1998.  As a result of the  adjustment,  an  additional  $144,169 of
amortization expense was recognized during 1998.

Revenue Recognition

Sales are recognized when product is shipped to the customer.  Development  fees
are recognized in the period that the related  services are performed.  Deferred
royalty  revenues will be  recognized as revenues when the related  products are
sold.

Research and Development Costs

Research and development costs are expensed as incurred.

                                      F-16
<PAGE>

Income Taxes

The Company recognizes a liability or asset for the deferred tax consequences of
temporary  differences between the tax basis 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.

Fair Value of Financial Instruments

The book values of the Company's financial  instruments  approximates their fair
values.  The estimated fair values have been determined using appropriate market
information and valuation methodologies.

Recent Accounting Pronouncements

During 1998, the Company adopted  Statements of Financial  Accounting  Standards
("SFAS") No. 130,  "Reporting  Comprehensive  Income,"  ("SFAS No. 130") and No.
131,  "Disclosures  about  Segments of an  Enterprise  and Related  Information"
("SFAS No.  131").  SFAS No. 130  requires  an  "all-inclusive"  approach  which
specifies that all revenues,  expenses,  gains and losses  recognized during the
period be reported in income  regardless  of whether they are  considered  to be
results of operations of the period.  SFAS No. 131 establishes new standards for
public companies to report information about their operating segments,  products
and services,  geographic  areas and major  customers.  These statements did not
have an impact on the Company's  consolidated  financial statements for the year
ended  December  31,  1998.  As the  Company  generated  no  amounts  within the
definitional  requirements of comprehensive  income and the Company has only one
operating segment.

In June 1998,  the  Financial  Accounting  Standards  Board issued SFAS No. 133,
"Accounting for Derivatives  Instruments and Hedging Activities." This statement
establishes  accounting and reporting  standards requiring that every derivative
instrument  be  recorded on the  balance  sheet as either an asset or  liability
measured  at fair  value.  The  statement  also  requires  that  changes  in the
derivative's  fair value be  recognized  currently in earnings  unless  specific
hedge accounting  criteria are met. This statement is effective for fiscal years
beginning  after June 15, 1999, and is not expected to have a material impact on
the Company's consolidated financial statements.

Basic and Diluted Net Loss Per Common Share

As a result of the Company incurring net losses for all periods presented,  both
basic and diluted net loss per common  share are based on the  weighted  average
number of  common  shares  outstanding.  Stock  options  and  warrants  prior to
conversion  are not included in the  calculation  of diluted net loss per common
share because their inclusion would be  antidilutive,  thereby  reducing the net
loss per common  share.  The  Company  has common  stock  options  and  warrants
outstanding  at  December  31,  1998 that,  if  exercised,  would  result in the
issuance of an additional 5,903,287 shares of common stock.

Reclassifications

Certain  reclassifications  have  been  made in the  prior  years'  consolidated
financial statements to conform to the current year presentation.

                                      F-17
<PAGE>

(3)      DISTRIBUTION AND LICENSE AGREEMENTS

Becton Dickinson and Company

In August 1996,  the Company  entered into an exclusive  distribution  agreement
with Becton Dickinson and Company Sharps Disposal  Systems Division  relating to
the Company's Safety Cradle(R) sharps container products.  The agreement granted
Becton  Dickinson  an exclusive  worldwide  right to market and  distribute  the
Company's  sharps  containers  products for an initial term of three years.  The
first sales  pursuant to the  agreement  occurred in the first  quarter of 1997;
however,  as a result of Becton  Dickinson's  failure to meet  minimum  purchase
requirements  set forth in the agreement,  the Company  terminated the agreement
during 1998. Sales of the Safety Cradle(R)  sharps  containers  through December
31, 1998 have been minimal.

In May 1997, the Company entered into an exclusive license agreement with Becton
Dickinson and Company Infusion Therapy Division relating to a single application
of the Company's ExtreSafe(R) safety needle withdrawal  technology.  Pursuant to
the terms of the agreement,  Becton  Dickinson paid $1,750,000 to the Company in
June 1997,  $250,000 in September  1997 and  $2,000,000  in April 1998. Of these
total payments,  $3,750,000 represents prepaid royalties and $250,000 represents
a one-time  product  development  fee. Becton  Dickinson is also required to pay
ongoing  royalties  to the  Company  based on sales of  products  utilizing  the
technology. In addition, beginning in Becton Dickinson's fiscal year 2002, it is
required to pay minimum  royalties in order to maintain  exclusive  rights under
the agreement.

Johnson & Johnson Medical, Inc.

In December 1997,  the Company  entered into an agreement with Johnson & Johnson
Medical,  Inc. to commercialize  two applications of the Company's safety needle
technologies  in one  restricted  field-of-application  of the  technology.  The
agreement  provides  for  monthly  development  payments  by  Johnson & Johnson,
sharing of field  related  patent  costs,  payments  for initial  periods of low
volume  manufacturing,  an  ongoing  royalty  stream  and a  Johnson  &  Johnson
investment  in molds,  assembly  equipment  and other  capital  costs related to
commercialization of each product.

The agreement  also provides for an ongoing joint  cooperative  program  between
Johnson & Johnson and the Company which  derives  future  funding  directly from
sales of Company  created  products,  low volume  manufacturing  revenue for the
Company and an ongoing  royalty stream for additional  safety products which are
jointly approved for development. During 1998, the Company and Johnson & Johnson
reached arrangements whereby they are pursuing development and commercialization
of four additional products under their joint cooperative program.


Alliance Medical

The  Company  entered  into  a  distribution  agreement  with  New  Alliance  of
Independent  Medical  Distributors,   Inc.,  dba  Alliance  Medical,   effective
September  1997.  The  agreement  provided  for the Company to  manufacture  and
Alliance  Medical  to  market  and  sell  the  ExtreSafe(R)  Lancet  Strip on an
exclusive basis in various  markets.  Effective March 1, 1998, the agreement was
converted  to a  non-exclusive  agreement  with no  sales  minimums  so that the
Company could pursue additional sources of distribution. Thereafter, the Company
elected to abandon the further  manufacture and distribution of the ExtreSafe(R)
Lancet  Strip (see Note 2).  Sales of the  ExtreSafe(R)  Lancet  Strips  through
December 31, 1998 were minimal.

                                      F-18
<PAGE>

(4)      INVESTMENT IN QUANTUM IMAGING CORPORATION

In October 1995, the Company entered into a joint venture agreement with Zerbec,
Inc. ("Zerbec"). Under the terms of the agreement, the Company and Zerbec formed
Quantum  Imaging   Corporation   ("QIC"),   a  Utah  corporation,   to  develop,
manufacture,  distribute and market products and  technologies  using a patented
solid state filmless  digitized imaging system. For a 50 percent interest in QIC
(before  considering  potential  dilution  as a result  of not  meeting  funding
requirements),  the Company was  obligated to pay QIC $15,000 a month,  which in
turn was paid to Zerbec to perform  research  and  development  on QIC's  behalf
through  March 31, 1997.  The Company was also  obligated to pay the general and
administrative  expenses of QIC up to $15,000 per month  through March 31, 1997.
Subsequent to March 31, 1997, the Company  continued to pay certain research and
development  and  general and  administrative  expenses.  The  Company  provided
funding to QIC of  approximately  $469,300,  $244,800 and $435,200  during 1998,
1997 and 1996,  respectively,  all of which the Company expensed and QIC used to
fund research and development and to cover administrative  expenses. The Company
accounts for its investment  using the equity method.  Assets and liabilities of
QIC were insignificant as of December 31, 1998 and 1997.

In the fourth quarter of 1998,  QIC entered into a non-binding  letter of intent
for  U.S.  Healthcare,  LC  to  acquire  QIC.  Although  discussions  with  U.S.
Healthcare are ongoing,  the transaction has not been completed and there can be
no assurance that the transaction will be completed or that if completed it will
be on terms that are favorable to the Company.  Subsequent to December 31, 1998,
Zerbec  exercised its option to acquire two thirds of the Company's  interest in
QIC for nominal consideration.  As a result of Zerbec exercising its rights, the
Company's  ownership was reduced to  approximately 17 percent of the outstanding
common stock of QIC. The Company continues to negotiate alternative arrangements
with Zerbec.

(5)      TECHNOLOGY OPTION TO PURCHASE AGREEMENTS

In June 1998,  the Company  entered  into an Option to Purchase  Agreement  (the
"Option  Agreement")  with the  University  of Texas System to purchase  certain
patents and related  technology,  research and  development for a total purchase
price of  $2,400,000.  In  accordance  with the  Option  Agreement,  a  $240,000
non-refundable  payment was made in July 1998 with the balance of  $2,160,000 to
be paid  within 30 days of the  exercise  of the  purchase  option.  The Company
retained the exclusive  right to exercise the option and acquire the patents and
related  technology  for a period of one year from the date of the  execution of
the Option Agreement, or within 14 days of notification of successful completion
of  an  animal  toxicity  study.  The  Company  received  notice  of  successful
completion  of the toxicity  studies in February 1999 and  subsequently  entered
into two  amendments  to the Option  Agreement  resulting in an extension of the
exercise  period to May 1999 in exchange  for  payments  totaling  $65,000.  The
Company anticipates  reimbursement of a portion of these fees from a third party
who is potentially  interested in acquiring the technology from the Company upon
exercise of the option.

In connection  with this Option  Agreement,  the Company entered into consulting
agreements  with  three  individuals  who were the  principal  inventors  of the
technology.  These consulting  agreements  provide for the individuals to assist
the Company to successfully develop the related technology.  The individuals are
to provide a minimum  of 50 hours of  services  annually  for which they will be
compensated  at a rate of $150 per hour.  Each  individual  also executed  stock
option  agreements  with the  subsidiary  corporation,  IPC, which is the entity
entering into the Option Agreement and the individual consulting agreements. The
stock option  agreements  provide for the  individuals  to purchase up to 40,000
shares  of IPC  common  stock at an  exercise  price of $.01 per share in 10,000
share increments based on achieving certain milestone events in the future.  The
Company  has  recorded  $7,200  of  consulting   expense  in  the   accompanying
consolidated financial statements related to the granting of these options.

                                      F-19
<PAGE>

(6)      COMMITMENTS AND CONTINGENCIES

Lease Obligations

The Company leases office space,  equipment,  and vehicles  under  noncancelable
operating leases.  The following  summarizes future minimum lease payments under
operating leases at December 31, 1998:

                     Year Ending December 31,

                                  1999                   $      305,736
                                  2000                          285,425
                                  2001                          276,963
                                  2002                          276,368
                                  2003                           69,092
                                                        -----------------

                                                         $    1,213,584
                                                        =================

Rental  expense for the years ended  December  31,  1998,  1997 and 1996 totaled
approximately $204,000, $80,300 and $72,000, respectively.

Royalty Agreements

In connection with acquiring  technology rights and patents, the Company entered
into various royalty agreements. Generally, the agreements required royalties to
be paid based on various  percentages  of  revenues  generated  from the related
technologies or patents. In order to maintain certain licenses,  the Company was
obligated to pay minimum  royalties,  of which the Company  paid $20,000  during
1998.  As the Company has not  generated  any revenue from  licensed  technology
rights and patents at December 31, 1998, no additional royalties were accrued or
paid.

The Company elected to abandon the further  manufacture and  distribution of the
product utilizing the technology encompassed by one of these royalty agreements.
As a result,  the royalty  agreement  was  terminated by the Company and related
technology rights and patents were forfeited during 1998. All inventory, patents
and fixed assets used in the  manufacture  of the  discontinued  product,  which
cannot be utilized by the Company for other  purposes,  were  written off in the
current year (see Note 2).

In January 1998, the Company issued  warrants to purchase  750,000 common shares
with an  exercise  price of $2.00 per share to a  director  and  officer  of the
Company and his  assigns in  consideration  of the  Company's  release  from its
obligations under certain royalty agreements (see Note 11). As a result of these
events,  the Company has no further  obligations under royalty  agreements as of
December 31, 1998.

Employment Agreements

The  Company  has  entered  into  employment  agreements  with  three of its key
employees.  The agreements are each for a term of three years and provide for an
annual aggregate base salary of $486,000 to be reviewed annually by the Board of
Directors and adjusted as deemed  appropriate.  Upon  termination  of employment
without cause,  salary and certain benefits will continue to be paid through the
expiration of the applicable agreement. The agreements have customary provisions
for other benefits and include noncompetition clauses.

In  December  1998,  one of the  agreements  was  amended  to allow for two cash
payments  totaling  $107,500 in exchange for  outstanding  common stock warrants
held by the  employee.  The  exchange may be elected by the employee if the fair
market value of the Company's  common stock does not reach specified  amounts by
January  31,  1999 and  January  31,  2000.  Additionally,  the January 31, 2000
exchange may be  accelerated,  at the  employee's  option,  should the Company's

                                      F-20
<PAGE>

consolidated  cash position fall below a specified  level during the period June
30, 1999 through January 31, 2000. On January 31, 1999, the Company paid $50,000
to the employee upon exercise of the first option (see Note 13).

Litigation

In April 1997,  the Company  entered  into an  agreement  with  Leerink  Swann &
Company,  whereby  Leerink  agreed to assist the  Company in raising  funds in a
private placement of equity  securities.  Sufficient  funding was deposited into
escrow to hold an  initial  closing,  but the  closing  did not  occur.  Leerink
alleges that the Company refused to close on the placement.  The Company alleges
that the closing did not occur  because  Leerink,  as a condition  precedent  to
closing,  made certain pre-closing demands that went far beyond the terms of the
agreement and which  demands  Company  management  believes were not in the best
interest of the Company. In August 1997, Leerink filed suit in the United States
District Court for the District of  Massachusetts  alleging  breach of contract.
Leerink is seeking  compensatory  damages,  warrants to  purchase  shares of the
Company's common stock, treble damages and reasonable attorneys' fees and costs.
In October  1997,  the Company  filed a  counterclaim  also  alleging  breach of
contract.  The Company is seeking  money  damages,  treble  damages,  reasonable
attorneys'  fees and costs.  This  matter has been  scheduled  for trial in July
1999. The Company  believes that Leerink's claims are without merit and that the
Company will ultimately  prevail.  The litigation is subject to all of the risks
and  uncertainties of litigation and thus there is no assurance that the Company
will be  successful  in this  lawsuit or that the  lawsuit  will be  resolved on
acceptable  terms, and the Company may incur  significant costs in asserting its
claims and defenses.  As of December 31, 1998,  management,  after  consultation
with legal counsel,  believes that the potential  liability to the Company under
such action will not  materially  affect the  Company's  consolidated  financial
position or results of operations.


(7)      STOCK OPTIONS

During 1994, the Board of Directors of SHP approved a nonqualified  stock option
plan for its officers, directors and employees, and authorized 396,000 shares of
common stock for issuance. During 1994, options to acquire 396,000 common shares
were granted at prices ranging from $.39 to $1.11 per share. The exercise prices
of the  options  were  equivalent  to the  estimated  fair  market  value of the
underlying  stock as  determined  by SHP's  Board of  Directors  at the dates of
grant.  No options  were  exercised or lapsed  during  1994.  On the date of the
business  combination,  as discussed in Note 1, all of the options  issued under
the plan became  outstanding  obligations of the Company.  On September 1, 1995,
options to acquire  288,000  shares were  exercised,  primarily by directors and
officers  of  the  Company,   from  which  the  Company  received   $209,500  in
non-interest  bearing common stock  subscriptions  receivable.  All common stock
subscriptions  receivable are due upon demand.  During 1996,  options to acquire
45,000 shares were exercised at $.39 per share and 22,500 options were canceled.
The remaining  40,500  options became  exercisable  during 1997, of which 22,500
were  exercised at $.39 per share.  As of December 31, 1998,  18,000 options are
exercisable at $.39 per share.

Effective September 1995, the Company's Board of Directors approved the adoption
of the Specialized  Health Products  International,  Inc. Stock Option Plan. The
plan is a  nonqualified  stock option plan and is  administered  by the Board of
Directors.  The plan  provided for the  issuance of  1,500,000  shares of common
stock to officers,  directors, other key employees and consultants. The exercise
prices of the options  granted under this plan were not less than 100 percent of
the fair market value of the underlying  common stock on the date of grant.  The
options are  exercisable  for the period as defined by the Board of Directors at
the date granted;  however,  no stock option will be exercisable  more than five
years from the date of grant.

Effective   August   1998,   adoption  of  the   Specialized   Health   Products
International,  Inc. 1998 Stock Option Plan was approved by the Company's  Board
of Directors.  The plan is a nonqualified  stock option plan and is administered
by the Board of Directors. The plan provides for the issuance of up to 2,000,000
shares of common stock to directors,  officers,  employees and consultants.  The
exercise  prices of the  options  granted  will not be less than the  greater of
$2.00 per share of common stock or the fair market value (or 110 percent of such
fair  market  value  when the  optionee  is a ten  percent  stockholder)  of the

                                      F-21
<PAGE>

underlying  common stock on the date of grant. The options are exercisable for a
period not to exceed ten years (or five years when the optionee is a ten percent
shareholder) from the date of grant.

As permitted  by SFAS No. 123, the Company  applies APB Opinion No. 25 ("APB No.
25") and  related  interpretations  in  accounting  for  certain  aspects of its
stock-based  compensation  plans.  Accordingly,  no  compensation  cost has been
recognized  for stock  options  granted  to  officers,  directors  and other key
employees  as options  were  granted at the  intrinsic  fair market  value.  The
Company recognized $23,700,  $147,000,  and $93,800 of consulting expense during
1998,  1997,  and 1996,  respectively,  related to certain  options and warrants
granted to nonemployee consultants in accordance with SFAS No. 123.

Had compensation  cost been determined based on the fair value at the grant date
for awards under its plans  consistent  with the method  prescribed  by SFAS No.
123,  the  Company's  net loss and basic and diluted  net loss per common  share
would have been increased to the pro forma amounts presented below:

                                      1998         1997          1996
                                  ------------ ------------ --------------
Net loss:            As reported  $(4,197,567) $(4,274,003)  $(4,093,388)
                     Pro forma     (4,769,148)  (4,445,885)   (4,130,140)

Basic and diluted 
  net loss per 
  common share:      As reported         (.35)        (.47)         (.48)
                     Pro forma           (.39)        (.48)         (.48)

Because the SFAS No. 123 method of  accounting  has not been  applied to options
and certain  warrants  granted prior to January 1, 1995, the resulting pro forma
compensation  cost may not be  representative  of that to be  expected in future
years.

A summary of the status of the  Company's  option plans as of December 31, 1998,
1997 and 1996,  and changes  during the years ended on those dates is  presented
below:
<TABLE>
<CAPTION>

                                           1998                            1997                             1996
                              ------------------------------- -------------------------------- --------------------------------
                                                Wtd. Avg.                        Wtd. Avg.                       Wtd. Avg.
                                                 Exercise                         Exercise                        Exercise
                                  Shares          Prices           Shares          Prices          Shares           Prices
                              --------------- --------------- ---------------- --------------- --------------- ----------------
<S>                           <C>               <C>           <C>                <C>          <C>                 <C>
Outstanding at beginning of
  year                            1,481,500       $2.11            1,531,500       $2.10           1,279,810       $1.95
Granted                              35,000        1.65               60,000        2.16             319,190        2.63
Exercised                                 -                         (110,000)        .88             (45,000)        .39
Forfeited                           (23,000)       1.55                  -                           (22,500)        .39
                              ---------------                 ----------------                 ---------------
Outstanding at
  end of year                     1,493,500        2.11            1,481,500        2.11           1,531,500        2.10
                              ===============                 ================                 ===============

Exercisable at
  end of year                     1,307,905        2.06            1,217,405        2.06           1,187,000        2.04
                              ===============                 ================                 ===============

Weighted average fair value
of options granted              $       .74                     $      1.00                      $     1.24
                              ===============                 ================                 ===============
</TABLE>

                                      F-22
<PAGE>
<TABLE>
<CAPTION>

The following table summarizes  information about the stock options  outstanding
at December 31, 1998:

                                           Options Outstanding                           Options Exercisable
                                 Number           Wtd. Avg.                           Number
                               Outstanding        Remaining        Wtd. Avg.        Exercisable         Wtd. Avg.
          Range of             At December       Contractual       Exercise         at December          Exercise
       Exercise Prices          31, 1998            Life             Price           31, 1998             Price
   ------------------------ ------------------ ----------------- -------------- -------------------- -----------------

<S> <C>                        <C>             <C>               <C>                 <C>              <C>         
    $     0.3900                     18,000         0.57 years    $   0.3900              18,000       $     0.3900
          1.2500                     10,000         4.85              1.2500              10,000             1.2500
          1.6250                      5,000         4.60              1.6250               5,000             1.6250
          1.7500                      5,000         4.44              1.7500               5,000             1.7500
          1.8125                     10,000         4.38              1.8125                   -               -  
          2.0000                  1,074,310         1.67              2.0000           1,074,310             2.0000
          2.0625                     55,000         3.93              2.0625                   -               -  
          2.6250                    316,190         2.82              2.6250             195,595             2.6250
                            ==================                                  ====================
    $.39 to 2.625                 1,493,500                       $   2.1070           1,307,905       $     2.0630
                            ==================                                  ====================
</TABLE>

The fair value of each option  granted is  estimated  on the date of grant using
the  Black-Scholes  option  pricing  model with the  following  weighted-average
assumptions used for grants in 1998, 1997, and 1996:  risk-free interest rate of
6.0 percent, 6.0 percent, and 5.95 percent, respectively;  expected lives of 2.4
years, 3 years, and 2.3 years,  respectively;  expected  dividend yields of zero
percent in all years; expected volatility of 68 percent in all years.

In  calculating  the pro forma net loss and pro forma basic and diluted net loss
per share,  the Company has also  included  the effect of 800,000  common  stock
warrants  issued to a director  and officer (see Notes 6 and 11) and an employee
of the Company  during 1998.  The issuance of the warrants were accounted for in
accordance with APB No. 25. For disclosure purposes under SFAS No. 123, the fair
value of each  warrant  granted  was  estimated  on the date of grant  using the
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions used:  risk-free  interest rate of 6.0 percent;  expected lives of 2
years; expected dividend yield of zero; expected volatility of 68 percent.


(8)      RECENT CAPITAL TRANSACTIONS

In March  1997,  the Company  closed a private  placement  offering  wherein the
Company raised  $1,539,570,  net of expenses,  through offering Units to certain
accredited  investors at $45 per Unit.  Each Unit  consisted of 15 shares of the
Company's  common  stock and Series C warrants  to  purchase  five shares of the
Company's  common  stock at a price of $3.00 per share.  The  Company  allocated
$1,228,576  of the total net proceeds to the common stock issued and $310,994 to
the Series C warrants issued.

During  1997,  the  Company  issued  100,000  shares  of its  common  stock to a
nonaffiliated  stockholder  of the Company  for  consulting  and other  services
provided.  The Company recorded consulting expense of $212,500,  which was equal
to the fair market value of the stock on the date of issue.

In January 1998, the Company completed a private placement  offering in which it
sold 2,610,000 units at $2.00 per unit for total  consideration of approximately
$4,948,500,  net of expenses.  Each unit  consists of one share of the Company's
common stock and one Series D warrant to purchase one share of common stock at a
price of $2.00. Of the total net proceeds, approximately $1,365,200 was received
in December 1997 and approximately  $3,583,300 was received in January 1998. The
Company allocated approximately $1,350,800 of the total proceeds to the Series D
warrants based on their relative fair values.  Of the total units,  750,000 were
sold in December 1997 and 1,860,000 were sold in January 1998.

                                      F-23
<PAGE>

Pursuant to requirements of the private placement  offering in January 1998, the
Company  provided  accredited  investors  in the  Company's  March 1997  private
placement offering with the opportunity to exchange the securities  purchased in
the March 1997 placement for a number of units the investor could have purchased
in the January 1998  placement  had the  investment  been made under the January
1998 placement  terms rather than the March 1997 terms. In February 1998, all of
the March 1997  accredited  investors  elected to  convert to the  January  1998
placement terms in reliance on the  registration  exemption found in Rule 506 of
Regulation D and Sections  3(9) and 4(2) of the  Securities  Act. As a result of
the conversion,  all outstanding Series C warrants were canceled and the Company
issued 256,598 additional shares of common stock and 769,787 additional Series D
warrants.

The  Series D  warrants  are  exercisable  for a period  of two  years  from the
effective date of a registration  statement covering the resale of the shares of
common stock underlying the Series D warrants by the holder,  which period shall
be extended  day-for-day for any time that a prospectus meeting the requirements
of the Securities  Act of 1933 is not available.  The Company may accelerate the
expiration  of the Series D warrants in the event that the average  market price
of the  Company's  common  stock  exceeds  $6.00 per  share for ten  consecutive
trading days. In the event the Company  accelerates the expiration of the Series
D warrants,  the holders of the Series D warrants would be permitted to exercise
the Series D warrants during a period of not less than 20 days following  notice
of such event.

In March  1998,  the Company  issued  25,000  shares of common  stock and 25,000
Series D warrants to an  unaffiliated  financial  advisor in connection with the
January  Private  Placement.  The fair market  value of these shares and options
were offset against the gross private placement proceeds as offering costs.

In July 1998, certain Series B warrants were exercised resulting in the issuance
of 85,000 shares of common stock with  proceeds to the Company of $170,000.  The
remaining outstanding Series A and B warrants have expired.


(9)      INCOME TAXES

The Company  recognized no income tax expense in 1998,  1997 and 1996 due to net
operating losses. The Company did not record the expected tax benefit related to
the net operating losses and other deferred tax assets as management established
a valuation  allowance  against the entire amount of those  assets.  Significant
components of the Company's  deferred  income tax assets and deferred income tax
liabilities as of December 31, 1998 and 1997, are comprised of the following:

                                                   1998               1997
                                              ----------------------------------
Deferred income tax assets:
   Net operating loss carryforwards           $    4,015,349   $     3,638,806
   Deferred royalty revenue                        1,398,750           652,750
   Non cash compensation expense                      63,671            54,831
   Accrued vacation                                   32,251            48,870
   Loss on disposition of assets                     267,780            38,268
   Patent costs                                      212,956           121,186
   Other                                              44,847             9,882
                                              ----------------------------------
       Total gross deferred income tax assets      6,035,604         4,564,593
   Less valuation allowance                       (5,701,271)       (4,329,105)
                                              ----------------------------------
       Net deferred income tax assets                334,333           235,488

Deferred income tax liability -
  Property and equipment                            (334,333)         (235,488)
                                              ----------------------------------

       Net deferred income tax liability      $           -    $            - 
                                              ==================================

                                      F-24
<PAGE>


The net change in the total valuation allowance for the years ended December 31,
   1998 and 1997, was an increase of $1,372,166 and $1,534,223, respectively.

At  December  31,  1998,  the  Company  had  total tax net  operating  losses of
approximately  $10,765,000  that can be carried forward to reduce federal income
taxes. If not utilized, the tax net operating loss carryforwards begin to expire
in 2009. As defined in Section 382 of the Internal Revenue Code, the Company has
undergone a greater than 50 percent  ownership change.  Consequently,  a certain
amount of the Company's tax net operating loss carryforwards available to offset
future  taxable  income in any one year may be limited.  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.


(10)     EMPLOYEE BENEFIT PLAN

Effective  January 1, 1996, the Company adopted the Specialized  Health Products
401(k) Plan. Employees who are 21 years of age are eligible for participation in
the 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 combined contribution to the plan was
approximately  $66,900,  $52,100 and $37,100  for the years ended  December  31,
1998, 1997 and 1996, respectively.


(11)     RELATED-PARTY TRANSACTIONS

In 1995,  the Company  entered into an  agreement  with a former  director,  the
president and a vice president of the Company, whereby these individuals had the
opportunity  to receive up to an  aggregate of  2,000,000  additional  shares of
common stock based upon  pre-tax  consolidated  income over a certain  period of
time.  The Company did not reach the levels  specified in the  agreement for any
period.  As such,  the earn-out  shares did not vest and the  agreement  expired
effective December 31, 1998.

During 1998, 1997 and 1996, the Company advanced approximately  $28,700,  $7,600
and $121,800, respectively, to a former director and stockholder of the Company.
The advances were  non-interest  bearing and were repaid in full during 1998. In
addition,  the  Company  paid to an  entity,  owned in part by this same  former
director  and  stockholder,   approximately  $100,300  and  $203,100  (including
reimbursement of costs) during 1997 and 1996,  respectively,  for consulting and
professional services rendered on behalf of the Company.

The Company had entered  into  certain  license  agreements  with a director and
officer of the  Company  as a result of the  acquisition  of certain  technology
rights and patents. Under the terms of the agreements, the Company was obligated
to pay minimum  royalty  payments  totaling  $435,000 over six years. In January
1998, the Company issued  750,000 common stock warrants as  consideration  for a
release from its obligations  under these royalty  agreements (see Note 6). Each
warrant is redeemable for one share of the Company's  common stock at a price of
$2.00 per share.  The warrants are currently  exercisable and expire on December
31, 2002.

During  1997,  the Company made a loan of  approximately  $182,500 to one of its
directors and  officers.  The loan bore interest at eight percent and was repaid
in full prior to December 31, 1997.

In December  1997,  the Company  borrowed  $45,000 from one of its directors and
officers to assist in the cash flow needs of the Company. The loan bore interest
at 10 percent and was repaid in full in January 1998.

In January 1998,  1,000,000  shares of the Company's  common stock and 1,000,000
Series D common  stock  warrants  were  issued to Johnson & Johnson  Development
Corporation in conjunction with the private placement offering closed on January
20, 1998. Johnson & Johnson owns 8.3 percent of the Company.

                                      F-25
<PAGE>

During  1998,  the  Company  paid  certain  consulting  and  other  expenses  of
approximately $10,000 on behalf of QIC. The resulting receivable, which has been
included in "amounts due from related parties" in the accompanying  consolidated
balance sheet,  will be repaid upon  completion of the proposed sale of QIC (see
Note 4).

As of December 31, 1998, the Company was due approximately  $9,000 from a former
officer and  director of the Company for a  non-interest  bearing  advance  made
during the year. The balance was repaid in full in January 1999.

During 1998, the Company advanced approximately $3,700 to an employee and $1,700
to a director and officer of the Company. The advances are non-interest bearing,
are repayable  during 1999,  and have been included in "amounts due from related
parties" as of December 31, 1998 in the accompanying 1998  consolidated  balance
sheet.

In January and February 1999,  the Company  entered into  consulting  agreements
with a former  director  and officer of the Company and  relatives of a director
and  officer  of the  Company.  Under  the  agreements,  the  Company  will  pay
approximately  $22,700 per month for consulting  services rendered in connection
with financing and development activities.


(12)     SUBSEQUENT EVENTS

In January 1999,  the Company  granted to various  employees  options to acquire
190,000  shares of the Company's  common stock at an exercise price of $2.00 per
share.  The options  vest over a  three-year  period and are  exercisable  for a
period of ten years from the date of grant.

In February  1999,  the Company  granted to  non-employee  directors  options to
acquire a total of 16,000  shares of the  Company's  common stock at an exercise
price  of $2.00  per  share.  The  options  vest on  December  31,  1999 and are
exercisable for a period of ten years from the date of grant.

In February  1999,  the  Company  paid  $50,000 to an  employee in exchange  for
cancellation of 25,000 common stock warrants held by the employee.  The exchange
was made  pursuant to exercise of the  employee's  option as provided for in the
employment agreement (see Note 6).

                                      F-26