SECURITIES AND EXCHANGE COMMISSION

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

                                   FORM 10-KSB


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


                            For the fiscal year ended
                            -------------------------
                                December 31, 2004

                             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 incorporation) (IRS Employer Identification No.)

  585 West 500 South, Bountiful, Utah 84010              (801) 298-3360
  (Address of principal executive offices)      (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

         Check whether the issuer (1) 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. Yes [X] No [ ]

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B 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-KSB or any amendment to
this Form 10-KSB. [X]

         The issuer's revenue for its most recent fiscal year was $5,765,278

         The aggregate market value of the common stock held by non-affiliates
(i.e., does not include directors, executive officers or ten percent
stockholders identified in Item 11 hereof) of the issuer as of March 7, 2005 was
approximately $23,123,773.

         As of March 7, 2005, the Company had 44,457,995 shares of common stock
outstanding.

<PAGE>

                 Specialized Health Products International, Inc.

                       TABLE OF CONTENTS TO ANNUAL REPORT
                                 ON FORM 10-KSB
                          YEAR ENDED DECEMBER 31, 2004




                                     PART I

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


                                     PART II

Item 5.     Market for Common Equity and Related Stockholder Matters..........17
Item 6.     Management's Discussion and Analysis or Plan of Operation.........17
Item 7.     Financial Statements..............................................31
Item 8.     Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosures.......................................32
Item 8A.    Controls and Procedures...........................................32
Item 8B.    Other Information.................................................32

                                    PART III

Item 9.     Directors, Executive Officers, Promoters and Control Persons;
              Compliance With Section 16(a) of the Exchange Act...............33
Item 10.    Executive Compensation............................................37
Item 11.    Security Ownership of Certain Beneficial Owners and Management
              and Related Stockholder Matters.................................37
Item 12.    Certain Relationships and Related Transactions....................39
Item 13.    Exhibits..........................................................39
Item 14.    Principal Accountant Fees and Services............................39

                                       2
<PAGE>

                         Forward-Looking Statements

         When used in this Form 10-KSB, in our filings with the Securities and
Exchange Commission ("SEC"), in our press releases or other public or
stockholder communications, or in oral statements made with the approval of an
authorized executive officer, 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, launch dates for licensed
products; dates upon which we will receive royalty payments; the generation of
royalty revenues from our licensees; acceptance of safety products by health
care professionals; plans to rely on our joint venture partners to pursue
commercialization of licensed products; expectations regarding the ability of
our products to compete with the products of our competitors; acceptance of our
products by the marketplace as cost-effective; factors affecting the ability of
our licensees to sell licensed products; sufficiency and timing of available
resources to fund operations; plans regarding the raising of capital; the size
of the market for safety products; plans regarding sales and marketing;
strategic business initiatives; intentions regarding dividends and the launch
dates of our licensed products.

         We caution readers not to place undue reliance on any forward-looking
statements, which speak only as of the date made, are based on certain
assumptions and expectations which may or may not be valid or actually occur,
and which involve various risks and uncertainties, including but not limited to
risk of a lack of demand or low demand for our products or for safety products
generally; a determination of one or more licensees to focus their marketing
efforts on products other than those licensed from us; the inability to license
or enter into joint venture or similar arrangements relating to products that
are not being commercialized; competitive products and pricing; delays in
introduction of products licensed by us due to manufacturing difficulties or
other factors; difficulties in product development, commercialization and
technology; changes in the regulation of safety healthcare products; a failure
to timely obtain Food and Drug Administration ("FDA") or other necessary
approvals to sell future products and other risks set forth in Item 6 "Risk
Factors" and elsewhere herein. If and when product sales commence, sales may not
reach the levels anticipated. As a result, our actual results for future periods
could differ materially from those anticipated or projected.

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

                                     PART I

Item 1. Description of Business

Overview

         We design, develop, manufacture and market proprietary disposable
medical devices for clinician and patient safety. Our innovative safety devices
are designed to maximize the efficiency and quality of healthcare, while
minimizing the risk of accidental needlesticks, which are a leading cause of the
spread of blood-borne diseases such as human immunodeficiency virus and
autoimmunodeficiency syndrome ("HIV/AIDS"), hepatitis B virus ("HBV") and
hepatitis C virus ("HCV"). Through proprietary design and manufacturing
processes, we have developed multiple products based upon two patented
technology platforms, FlexLoc(R) and SecureLoc(TM), which apply to virtually all
medical needles used today.

         Our business model is to enter into licensing, original equipment
manufacturing ("OEM") supply, or distribution agreements for our products,
rather than engage in direct sales of products to end-users on our own. We have
entered into product agreements relating to specific technologies and product
lines with The Kendall Company ("Kendall"), a division of Tyco Healthcare Group
LP, Bard Access Systems, Inc. ("Bard"), Becton, Dickinson and Company ("BD"),
TAP Pharmaceutical Products Inc. ("TAP"), Merit Medical Systems, Inc. ("Merit"),

                                       3
<PAGE>

and Exelint International Co. ("Exel"). We have distribution agreements in place
with Cardinal Health ("Cardinal"), Medline Industries, Inc. ("Medline"),
Physician Sales and Service, Inc. ("PSS"), and several other specialty
distributors for products marketed under our own SHPI ("SHPI" is used for
Specialized Health Products International, Inc.) label. Additional discussions
are ongoing with potential partners for other product applications of our
proprietary technologies.

         Our primary objective is to be a leading innovator, developer and
manufacturer of disposable medical devices for clinician and patient safety. We
will seek to commercialize products providing the following features and
benefits:

         o        Excellent functionality for the intended medical use;
         o        Similar or enhanced clinical technique versus conventional
                  product offerings;
         o        Comparable, improved or additional ancillary patient benefits
                  (e.g., comfort, convenience, etc.);
         o        Efficient/low cost manufacturability to provide attractive
                  margins at a reasonable price; and
         o        Superior safety technology to prevent accidental exposure to
                  blood-borne pathogens.

         We introduced our first safety needle products into the U.S. market in
2002. Five product lines based upon our proprietary safety needle technologies
are currently marketed in the U.S. These products are discussed in detail in the
Our Products section below and include the following:

         o        Monoject Magellan(TM) -- safety syringe needle (Kendall)
         o        LiftLoc(R) Safety Infusion Set -- safety Huber needle (Bard
                  and Exel private label and SHPI branded)
         o        Majestik(TM) Shielded Needle -- safety angiographic introducer
                  needle (Merit)
         o        LuproLoc(TM) -- pre-filled syringe safety needle (TAP)
         o        Monoject Magellan(TM) -- safety blood collection device
                  (Kendall)

         We expect to launch several new products over the next three years
based upon our SecureLoc(TM) platform technology. SecureLoc(TM) comprises an
integral safety capsule that automatically senses the end of the needle as it is
advanced down the needle shaft, and instantly locks-out to fully encapsulate the
needle tip. This innovative technology is ideal for long specialty needles and
introducer needle applications. It is designed to work on virtually any gauge or
length of needle, and addresses several categories without a currently available
safety solution.

         We expect to launch SecureLoc(TM) Safety Introducer Needle, the first
commercial product based upon the SecureLoc(TM) platform technology, into the
U.S. market in 2005. We have received 510(k) clearance from the FDA for this new
product line and are in the process of completing manufacturing scale-up. We
plan to supply SecureLoc(TM) Safety Introducer Needle to OEM customers in the
fields of cardiology, radiology, and general vascular access.

         We have product agreements in place pertaining to two additional
product lines based upon our SecureLoc(TM) platform technology. In 2003, we
signed a worldwide development and license agreement for safety-engineered
spinal and epidural needles with BD, the worldwide leader in spinal needles.
Products subject to this agreement will compete in the estimated $200 million
U.S. spinal and epidural needle market. In June 2004, we completed a development
and OEM supply agreement for safety and conventional bone marrow biopsy needles
with Tyco Healthcare, one of the leading U.S. marketers of bone marrow biopsy
needles. We believe that the safety spinal needles we are developing for BD and
the safety bone marrow biopsy needles we are developing for Tyco Healthcare have
the potential to be the first safety products available in their respective
categories.

         We see a significant and growing market opportunity for our medical
safety needle products. The U.S. market for disposable medical needles is in
excess of $1.4 billion. Most of this market is directly impacted by broad
reaching state and federal safety legislation, culminating in the U.S.
Needlestick Safety and Prevention Act, which was signed into federal law in
November 2000, and became effective in April 2001. This law requires healthcare

                                       4
<PAGE>

employers to review new safety needle products and mandates their usage by
employees. As various government agencies increase their efforts to monitor
compliance and better designed safety products become available at reasonable
pricing, we anticipate that conversion to safety products will continue to
accelerate.

         While foreign safety needle legislation lags behind that of the U.S.,
certain countries, such as Germany, France, Italy, Australia, and Canada are
increasing efforts to protect their healthcare workers in a similar manner. As
these efforts continue, we expect foreign demand for medical safety needle
products to expand.

Our Products

         We have multiple product applications based upon our two primary
platform safety needle technologies, FlexLoc(R) and SecureLoc(TM). These
proprietary technologies are protected by over fifty issued or pending U.S.
patents, with corresponding foreign filings. Our primary research and
development, business development and marketing efforts are focused on the
following product lines:

         Safety Syringe Needles

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

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

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

         Kendall initiated its U.S. market launch of a proprietary line of
safety syringe needles based upon this technology in the second calendar quarter
of 2002, subsequent to receiving 510(k) clearance from the FDA in 2001. Kendall
is marketing the product line under the brand name Monoject Magellan(TM). The
Monoject Magellan(TM) product line includes a wide variety of needle lengths and
gauges, and competes in the $260 million U.S. safety needle and syringe market.

                                       5
<PAGE>

         Safety Huber Needle Devices

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

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

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

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

         We distribute LiftLoc(R) Safety Infusion Set under the SHPI label
through non-exclusive distribution agreements with Cardinal Health, Medline,
PSS, Medical Specialties Distributors, Inc. ("Medical Specialties"), Omni
Medical Supply, Inc. ("Omni"), Briggs Corporation ("Briggs"), Wolf Medical
Supply, Inc. ("Wolf Medical"), and Henry Schein, Inc. ("Henry Schein"),
distributors with a strong presence in the oncology, chronic hematology, and
long-term intravenous nutritionals markets. In addition, we have entered into
distribution agreements with Medical Mart Supplies Ltd. ("Medical Mart") for the
distribution of our LiftLoc(R) product in Canada and Biometrix Ltd.
("Biometrix") for the distribution of LiftLoc(R) in Israel. Under the terms of
the distribution agreements, LiftLoc(R) distributors purchase product from us
for resale to their end-user customers.

         We received 510(k) clearance from the FDA for LiftLoc(R) Safety
infusion Set in 2001, and initiated the U.S. market launch of the product line
under our SHPI label in September 2002. Bard initiated its U.S market launch of
LiftLoc(R) Safety Infusion Set under the Bard label in December 2002. The
LiftLoc(R) Safety Infusion Set product line includes a wide variety of needle
lengths and gauges. It competes in the $55 million U.S. Huber needle market.

         Pre-filled Syringe Safety Needle Devices

         Pre-filled syringes are a significant drug delivery modality, with a
strong need for an effective, cost-efficient safety needle solution. A wide
range of drugs, from high volume vaccines to many of today's newer drugs, are
delivered via pre-filled syringes. Typically, the pre-filled syringe is made of

                                       6
<PAGE>

glass to ensure appropriate shelf life and inertness to the drug. Pre-filled
syringes are used to deliver drugs in a variety of forms, including liquids,
gels, lyophilized (freeze-dried) drugs, or a combination of liquid and dry in a
multiple chamber syringe.

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

         In July 2002, we entered into a Development and License Agreement (the
"TAP Agreement") with TAP Pharmaceutical Products Inc. (a joint venture between
Abbott Laboratories and Takeda Chemical Industries, Ltd.), whereby TAP acquired
the right to attach our proprietary safety needle device to their pre-filled
syringes. The TAP Agreement has an effective date of January 1, 2002. Under the
TAP Agreement, we have and will receive reimbursement for research and
development expenses, payments related to the achievement of certain development
and regulatory milestones, and on-going royalty payments based upon the number
of pre-filled syringes manufactured with our proprietary safety needle device.
The TAP Agreement is for a minimum period of three years.

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

         Safety Blood Collection (Phlebotomy) Devices

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

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

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

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

                                       7
<PAGE>

         Safety Angiographic Needles

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

         We have entered into a License Agreement (the "Merit Agreement") with
Merit Medical Systems, Inc. relating to the manufacture and marketing of safety
needle devices for angiographic guidewire introducers. Merit is a leading
manufacturer and marketer of proprietary disposable products used in cardiology
and radiology procedures. We received an upfront license fee payment of $100,000
in January 2001, which is being recognized ratably by us over the estimated
five-year life of the Merit Agreement. Under the terms of the Merit Agreement,
we will receive ongoing royalties on net product sales and began receiving
minimum royalty payments in 2002.

         Merit initiated its U.S. market launch of a safety angiographic needle
based upon our proprietary safety needle technology in November 2002. Merit
designed and developed the product, and is marketing it under the Majestik(TM)
Shielded Needle brand name. The Majestik(TM) Shielded Needle is intuitive and
easy-to-use. After using the introducer needle, the clinician simply presses a
button to mechanically extend a safety shield over the needle. After the safety
device is locked around the needle, the entire unit is then discarded into an
approved sharps container. The Majestik(TM) Shielded Needle competes in the
estimated $17 million U.S. angiographic introducer needle market.

         Safety Long Specialty Needles

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

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

         We are developing multiple product applications of this technology, and
expect to launch our first commercial product based upon SecureLoc(TM) into the
U.S. market in 2005. This product line will be marketed under the brand name
SecureLoc(TM) Safety Introducer Needle, and will compete in the estimated $29
million U.S. introducer needle market. We have received 510(k) clearance from
the FDA for this product line and are in the process of completing manufacturing
scale-up. We plan to supply SecureLoc(TM) Safety Introducer Needle to OEM
customers in the fields of cardiology, radiology, and general vascular access.

         We have product agreements in place pertaining to two additional
product lines based upon our SecureLoc(TM) platform technology. In August 2003,
we entered into a License Agreement (the "BD Agreement") with BD relating to the
manufacture and marketing of safety-engineered spinal and epidural needles and
certain other specialty needles sold by BD. Under the terms of the agreement, we
will receive reimbursement for certain research and development expenses,
payments related to the achievement of certain regulatory and commercialization
milestones, and on-going royalty payments on all product sales. Products subject

                                       8
<PAGE>

to this agreement will compete in the estimated $200 million U.S. spinal and
epidural needle market.

         In June 2004, we entered into a worldwide Development and OEM
Supply/Distribution agreement with Tyco Healthcare for the marketing and sale of
safety bone marrow biopsy needles. Under the terms of the agreement, Tyco
Healthcare will purchase safety and conventional bone marrow biopsy needles from
us, as well as reimburse us for certain research and development expenses
related to product commercialization. Tyco Healthcare is one of the leading U.S.
marketers of bone marrow biopsy needles. We believe that the safety bone marrow
biopsy needles we are developing for Tyco Healthcare have the potential to be
the first safety products available in the field.

Industry

         Market

         Healthcare is one of the largest industries in the world and grows
larger each year. Healthcare worker safety is and will remain a high priority,
high profile issue. Healthcare workers in the U.S. use about 6 billion needles
and suffer an estimated 800,000 injuries from accidental needlesticks and other
sharps annually. Diseases that can be acquired from such accidents include
HIV/AIDS, HBV, HCV, diphtheria, gonorrhea, typhus, herpes simplex virus,
malaria, syphilis and tuberculosis. Recent federal and state legislation in
conjunction with increased awareness of these statistics is projected to spur
significant growth in the safety needle and syringe market, as sales are
converted from the traditional disposable needle and syringe market. The current
U.S. market for disposable medical needles is in excess of $1.4 billion and
growing.

         User efficiency and cost effective solutions are being sought with
increasing demand. Our products target this market segment. Non-safety products
today compete primarily on price. Although our strategy includes being priced
competitively with other safety devices, we also seek to compete on the basis of
healthcare worker safety, ease of use, reduced cost of disposal, patient
comfort, and compliance with Occupational Safety and Health Administration
("OSHA") regulations. We believe that when all indirect costs (needle disposal,
testing, labor savings and costs, treatment and workers compensation expense)
are considered, our products will compete effectively both with "traditional"
products and with the safety products of our competitors.

         Accidental Needlestick Injuries

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

         It is estimated that at least 1,000 healthcare workers annually
contract serious infections from accidental needlestick and sharps injuries in
the U.S. Estimates also suggest that safety needle devices may prevent more than
80% of all needlestick injuries. Testing and treatment of needlestick injuries
costs the U.S. healthcare system between $750 million and $1 billion each year.
The average cost of treating a needlestick injury not resulting in the
transmission of a disease is between $450 and $800 per incident, which only
considers the direct costs associated with HBV, HCV and HIV screens and employee
lost time. According to the American Hospital Association, a single case of
serious blood-borne pathogen infection can cost more than $1 million in expenses
for follow-up testing, lost work time and disability payments. Even if no
infection occurs as a result of the injury, the average cost of treating a
high-risk exposure is estimated to be about $3,000 per needlestick. According to
the CDC, the 1998 infection rate following a single needlestick injury with a
contaminated needle or other sharp was between 6% and 30% for HBV, 0.5% and 2%

                                       9
<PAGE>

for HCV, and about 0.3% for HIV. 85% of the healthcare workers infected with HCV
become chronic carriers of the virus. Treatment of HCV is very expensive,
averaging $1,700 per month. Treatment for HIV is also expensive, with costs
averaging up to $6,000 per month. Accidental needlesticks are the cause of 86%
of all occupationally acquired cases of HIV/AIDS.

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

         Legislative Response

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

Our Strategy

         Our mission is to be a leading innovator, developer and manufacturer of
disposable medical devices for clinician and patient safety. We are seeking to
accomplish this objective by capturing significant market share of targeted
product segments, broadening existing product lines, developing new products and
seeking additional market opportunities.

         Our business model is to enter into licensing, OEM supply, or
distribution agreements for our products, rather than engage in direct sales of
products to end-users on our own. OEM supply or distribution arrangements are
our preferred business relationship for targeted specialty products.
Out-licensing agreements are pursued for high volume product opportunities where
efficient and low cost manufacturing is unfeasible at a contract manufacturer,
or when a large capital investment is required to scale-up manufacturing.

Marketing and Sales

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

         For products that we supply on an OEM private label basis or market
under our own SHPI label, such as LiftLoc(R) Safety Infusion Set, we have
established a small field sales force and customer service operation to provide
sales and marketing support to our corporate partners and qualified
distributors. This support includes development and supply of marketing
materials, active lead generation through participation in trade shows, outbound
telemarketing and sales presentations, in-service participation and customer
service support.

                                       10
<PAGE>

Manufacturing and Facilities

         Products being developed under OEM supply or distribution agreements
are manufactured under our authority and supervision by a qualified contract
manufacturer headquartered in Vista, California, with FDA and ISO compliant
assembly facilities in Tijuana, Mexico. In 2002, we began producing our
LiftLoc(R) Safety Infusion Set and Patient Comfort Pad(TM) at an ISO 9002
qualified contract manufacturer. Products subject to licensing agreements are
manufactured by our corporate partners. The materials used to produce our
products are generally widely available. We do not anticipate difficulty in
obtaining such materials.

         In 2003, we were certified to ISO 9001:94, ISO 13485:96 and EN 46001:96
international quality systems standards by our registrar, Orion Registrar, Inc.
Certification to these international quality systems standards allows us to
apply for CE Marking required for product distribution in Europe and to seek
product registrations for our manufactured products in other international
markets. We have also been certified to CMDCAS ("Canadian Medical Device
Conformity Assessment System"), which allows us to market our manufactured
products in Canada.

         Our facilities include 15,574 square feet of leased space. Our primary
use of the space is for offices. However, our facility also includes designated
laboratory space for the development and testing of product prototypes, and a
dedicated machine shop to support our product development activities. In 2002,
we established a controlled warehouse, customer service and pick, pack and ship
operation at our facility to support sales of LiftLoc(R) Safety Infusion Set and
additional manufactured products.

Patents and Proprietary Rights

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

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

         Our future success may depend upon the strength of our intellectual
property. We believe that our 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 U.S. Patent
protection in such countries may be different from patent protection provided by
U.S. laws and may not be as favorable to us.

         We are not aware of any patent infringement claims against us directly.
In December 2002, BD filed a lawsuit against Tyco Healthcare Group LP ("Tyco
Healthcare"), asserting that the Monoject Magellan(TM) safety products infringe
upon a BD patent. See Item 3. "Legal Proceedings." On October 26, 2004, a jury
found in favor of BD that Tyco Healthcare's Monoject Magellan(TM) safety
products willfully infringed the `544 Patent and awarded damages of $4.4
million. On November 1, 2004, the court entered the judgment in favor of BD.
Tyco Healthcare is challenging the jury finding in post-trial motions, and, if
necessary, in an appeal. Under the Kendall Agreement, Tyco Healthcare has the
right to withhold up to fifty percent (50%) of royalties due as an offset
against litigation expenses related to charges of infringement by a third part
for the manufacture, use or sale of licensed product. This right continues
during the period in which such litigation is pending. If, as a result of a
judgment in the litigation or settlement with BD, Tyco Healthcare is required to
pay royalty and/or other monies to BD, Tyco Healthcare may thereafter deduct
from the amount of royalties due us on unit sales of products alleged to
infringe, an amount which is the lesser of all royalties and/or other monies
paid by Tyco Healthcare to BD, or fifty percent (50%) of all royalty payments
otherwise payable to us. Based on information obtained during the fourth quarter
of 2003 related to costs incurred by Tyco Healthcare, we recorded a liability of

                                       11
<PAGE>

approximately $1,300,000 at December 31, 2003, which amount was our estimate of
the portion of costs associated with BD's lawsuit against Tyco Healthcare that
Tyco Healthcare will withhold against the royalties due SHPI through 2005.
During the twelve month contract period ended September 30, 2004, Tyco
Healthcare withheld fifty percent of royalty payments due us, which amounts
totaling $500,000 have been offset against the accrual. In the event litigation
continues beyond 2005, additional liabilities may accrue. If Tyco Healthcare is
unsuccessful in post-trial motions and on appeal, Tyco Healthcare may be
prohibited from selling the Monoject Magellan(TM) safety products in their
current form. Additional litigation to enforce patents, to protect proprietary
information, or to defend us against alleged infringement of the rights of
others may occur. Such litigation would be costly, could divert our resources
from other planned activities, and could have a material adverse effect on our
results of operations and financial condition.

Research and Development

         We have devoted a substantial portion of our efforts to designing and
developing healthcare products. To date, research and development expenditures
have resulted in our ownership of, or right to, in excess of 120 patents and
patent applications worldwide. We spent $2,437,880 in 2004 and $2,595,022 in
2003 on research and development activities. Customer sponsored research
activities relating to the development of new products, services or techniques
or the improvement of existing products, services or techniques for which we
earned revenues were $508,602 in 2004 and $59,880 in 2003. We plan to continue
research and development on our current products under development and new
products. There is no assurance that our ongoing research and development
activities will prove effective.

Government Regulation

         Product Approvals

         We are regulated by the FDA, pursuant to various statutes, including
the Federal Food, Drug and Cosmetic ("FD&C") Act, as amended and supplemented by
the Medical Device Amendments of 1976 (the "1976 Amendments") and the Safe
Medical Devices Act of 1990. Although our focus in the past has been on the
design and development of devices, we anticipate that as we engage in more OEM
manufacturing, we will become increasingly active in pursuing regulatory
approvals. We have submitted and received FDA clearance for our LiftLoc(R)
Safety Infusion Set. In addition, our strategic partners have received FDA
clearances for Monoject Magellan(TM) Safety Syringe Needle, Monoject
Magellan(TM) Safety Blood Collection Device, LuproLoc(TM) Pre-filled Syringe
Safety Needle, and Majestik(TM) Shielded Angiographic Needle. We submitted a
510(k) application for our SecureLoc(TM) Safety Introducer Needle in January
2005 and received marketing clearance in February 2005. We plan to submit
additional 510(k) applications for safety needle devices based upon our
SecureLoc(TM) technology during 2005.

         Pursuant to the 1976 Amendments, the FDA classifies medical devices
intended for use with humans into three classes, Class I, Class II and Class
III. The controls applied to the different classifications are those the FDA
believes are necessary to provide reasonable assurance that a device is safe and
effective. Many Class I devices have been exempted from pre-market notification
requirements by the FDA. These products can be adequately regulated by the same
types of controls the FDA has used on devices since the passage of the FD&C Act
in 1938. These "general controls" include provisions related to labeling,
producer registration, defect notification, records and reports and good
manufacturing practices ("GMP"). The GMP regulation has been recently replaced
by a more comprehensive Quality System Regulation ("QSR"). QSRs include
implementation of quality assurance programs, formalized product development
procedures, written manufacturing specifications and processing procedures,
written distribution procedures and record keeping requirements. Class II
devices are products for which the general controls of Class I devices are
deemed not sufficient to assure the safety and effectiveness of the device and

                                       12
<PAGE>

thus require special controls. Special controls for Class II devices include
performance standards, post-market surveillance, patient registries and the use
of FDA guidelines. Standards may include both design and performance
requirements. Class III devices have the most restrictive controls and require
pre-market approval by the FDA. Generally, Class III devices are limited to
life-sustaining, life-supporting or implantable devices. None of our currently
proposed products are believed to be to be Class III products. The FDA has
further established three tiers or levels of scientific review - Tier 1, Tier 2,
and Tier 3 within each class. Submissions for Tier 1 devices receive limited
review while submissions for Tier 2 and 3 devices receive more comprehensive
reviews.

         Section 510(k) of the FD&C Act requires individuals or companies
manufacturing medical devices intended for use with humans to file a notice with
the FDA at least 90 days before introducing a product not exempted from
notification requirements into the marketplace. The notice (a "510(k)
Notification") must state the class in which the device is classified and the
actions taken to comply with performance standards or pre-market approval which
may be needed if the device is a Class 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 for Class III devices can
take several years. Product clearance pursuant to a 510(k) Notification can be
obtained in much less time. The average time for 510(k) clearance for safety
devices is currently 90 days. In general, clearance of a 510(k) Notification for
a Class II device may be obtained if we 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 and does not raise
questions of safety or efficacy that are different from the predicate device.

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

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

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

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

                                       13
<PAGE>

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

         Safety Product Mandates

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

          Twenty-six U.S. states have passed safety legislation requiring use of
safety needle products. OSHA also issued a national directive in November 1999
requiring use of safety medical devices. In November 2000, the CDC and OSHA
issued safety alerts urging healthcare workers to use safety devices having
engineered controls.

         Foreign Regulation

         Distribution and sales of our products in countries other than the U.S.
are subject to regulations in those countries. In December of 2003, we received
certification to ISO 9001:94, ISO 13485:96 and EN46001:96 international quality
systems standards. Following ISO certification we were granted a CE Mark for our
LiftLoc(R) Safety Infusion Set product line. The granting of the CE mark enables
us to distribute products in Europe and to seek product registrations in other
international markets. We have also been certified to CMDCAS ("Canadian Medical
Device Conformity Assessment System"), which certification allows us to market
products in Canada.

Competition

         The healthcare products market is highly competitive. Many of our
competitors have longer operating histories, are substantially larger and are
better financed and better situated in the market than we are. Our major
competitors are identified below.

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

         Competitive suppliers of safety Huber needle products with an integral
safety feature or mechanism include Now Medical, Smiths Medical, Horizon Medical
Products, Inc., B. Braun, and Churchill Medical Ltd. We believe our LiftLoc(R)
Safety Infusion Set provides significant advantages versus competitive safety
Huber needle products on the market.

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

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

                                       14
<PAGE>

         Conventional needle products have competed primarily on the basis of
price. However, we believe the safety needle market offers substantial
opportunities for premium priced products. We expect to compete on the basis of
healthcare worker safety, ease of use, patient comfort, added product features
and compliance with state, federal and OSHA regulations. We believe our products
will perform well based on product design features and provide attractive
margins for our partners and us at a reasonable cost to the end user.

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 SHPI, a Delaware corporation, through a merger with a subsidiary
of SHPI (the "Acquisition"). On that date SHP changed its name to "Specialized
Health Products International, Inc ("SHPI")." The persons serving as officers
and directors of SHP immediately prior to the consummation of the Acquisition
were elected to the same offices with SHPI and retained their positions as
directors and officers of SHP. In addition, the outstanding securities of SHP
became outstanding securities of SHPI.

         We restructured our management team and board of directors in November
2001 following a private placement of preferred stock to Galen Partners III,
L.P., Galen Partners International III, L.P., Galen Employee Fund III, L.P.
(collectively, "Galen Partners"), and other accredited investors. In conjunction
with the investment, we recruited a new president and CEO and appointed five new
members to our board of directors. Our leadership team is highly experienced in
both the healthcare and medical safety product sectors. See Item 9 "Directors,
Executive Officers, Promoters and Control Persons."

Seasonality of Business

         Sales of our products are not subject to seasonal variations.

Backlog

         There is no backlog of unfilled orders of our products.

Employees

         As of March 7, 2005, we employed 26 people, 14 of which are engineers.
All but four of our employees are actively engaged in our research, product
development, or sales and marketing efforts.

         Our employees are not represented by any labor union, and we believe
our relations with employees are good.

Item 2. Description of Property

         Our principal offices are located at 585 West 500 South, Bountiful,
Utah, under the terms of a lease with an unaffiliated lessor, which expires on
May 31, 2006, subject to our right to extend the lease term for an additional
three years. The offices and laboratories comprise 15,574 square feet of space.
We believe that our current office space will be adequate to meet the needs of
current and expected growth for the foreseeable future. We may, however, require
additional warehousing or manufacturing facilities in the future depending upon
the volume of products sold and the manufacturing arrangements we develop.

Item 3. Legal Proceedings

         In December 2002, Becton Dickinson ("BD") filed a lawsuit against Tyco
Healthcare in the United States Court of the District of Delaware, asserting
that Tyco Healthcare's Monoject Magellan(TM) safety products infringe upon BD's

                                       15
<PAGE>

U.S. Patent No. 5,348,544 (`544 Patent), titled "Single-Handedly Actuable Safety
Shield for Needles."

         On October 26, 2004, a jury found in favor of BD that Tyco Healthcare's
Monoject Magellan(TM) safety products willfully infringed the `544 Patent and
awarded damages of $4.4 million. On November 1, 2004, the court entered the
judgment in favor of BD. Tyco Healthcare is challenging the jury finding in
post-trial motions, and, if necessary, in an appeal. Tyco Healthcare developed
the Monoject Magellan(TM) safety products in association with us. We are not a
party to the patent infringement lawsuit.

         Under the Kendall Agreement, Tyco Healthcare has the right to withhold
up to fifty percent (50%) of royalties due as an offset against litigation
expenses related to charges of infringement by a third party for the
manufacture, use or sale of licensed product. This right continues during the
period in which such litigation is pending. If, as a result of judgment in the
litigation or settlement with BD, Tyco Healthcare is required to pay royalty
and/or other monies to BD, Tyco Healthcare may thereafter deduct from the amount
of royalties due us on unit sales of products alleged to infringe, an amount
which is the lesser of all royalties and/or other monies paid by Tyco Healthcare
to BD, or fifty percent (50%) of all royalty payments otherwise payable to us.

         Based on information obtained during the fourth quarter of 2003 related
to costs incurred by Tyco Healthcare, we recorded a liability of approximately
$1,300,000 at December 31, 2003, which amount was our estimate of the portion of
costs associated with BD's suit against Tyco Healthcare that Tyco Healthcare
will withhold against the royalties due SHPI through 2005. During the twelve
month contract period ended September 30, 2004, Tyco Healthcare withheld fifty
percent of royalty payments due us, which amounts totaling $500,000 have been
offset against the accrual. In the event litigation continues beyond 2005,
additional liabilities may accrue. If Tyco Healthcare is unsuccessful in
post-trial motions and on appeal, Tyco Healthcare may be prohibited from selling
the Monoject Magellan(TM) safety products in their current form.

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

         We held our annual meeting of stockholders on April 29, 2004, at which
meeting two director nominees were submitted for approval by the stockholders.
At the annual meeting, Stuart A. Randle and Donald D. Solomon, Ph.D., were
nominated for election to the class of directors whose term expires at the 2007
annual meeting of stockholders. The stockholders elected Mr. Randle and Dr.
Solomon by a vote of 32,503,456 for and 0 withheld authority. The 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 terms of the directors expire as
follows: Guy J. Jordan, Ph.D., Jeffrey M. Soinski, and Stephen I. Shapiro in
2005, David W. Jahns and Robert R. Walker in 2006; and Stuart A. Randle and
Donald D. Solomon, Ph.D., in 2007.

         We held a special meeting of stockholders on October 19, 2004. The only
matter submitted to our stockholders for vote was the approval of the 2004 Stock
Incentive Plan. Our stockholders approved the adoption of the 2004 Stock
Incentive Plan with 22,254,816 stockholder votes for approval of the plan,
173,752 votes against approval of the plan, and 75,600 withholding authority to
vote.

                                       16
<PAGE>

                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters


Dividend Policy

         To date, we have not paid dividends on our common stock. The payment of
dividends on our common stock, if any, is at the discretion of the board and
will depend upon our earnings, if any, our capital requirements and financial
condition, and other relevant factors. See Item 6. "Management's Discussion and
Analysis or Plan of Operation." We do not intend to declare any dividends in the
foreseeable future, but instead intend to retain all earnings, if any, for use
in our operations.

Share Price History

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

                  Quarter Ended                            High         Low
                  -------------                            ----         ---

                  2003
                  ----
                  March 31..............................   $0.90       $0.61
                  June 30...............................   $0.75       $0.60
                  September 30..........................   $1.01       $0.64
                  December 31...........................   $0.99       $0.80

                  2004
                  ----
                  March 31..............................   $1.74       $0.97
                  June 30...............................   $1.13       $0.83
                  September 30..........................   $0.97       $0.76
                  December 31...........................   $1.33       $0.98


Holders of Record

         At March 7, 2005, there were approximately 316 holders of record of our
common stock. The number of holders of record was calculated by reference to our
stock transfer agent's books.

Issuance of Securities

         None.

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

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

                                       17
<PAGE>

Overview

         We design, develop, manufacture and market proprietary disposable
medical devices for clinician and patient safety. Our innovative safety devices
are designed to maximize the efficiency and quality of healthcare, while
minimizing the risk of accidental needlesticks, which are a leading cause of the
spread of blood-borne diseases such as HIV/AIDS and the hepatitis B and C
viruses. Through proprietary design and manufacturing processes, we have
developed multiple products based upon two patented technology platforms,
FlexLoc(R) and SecureLoc(TM), which apply to virtually all medical needles used
today. We manufacture and market certain products, including LiftLoc(R) Safety
Infusion Set, under our own label. We license or supply other products on an OEM
basis to leading manufacturers and marketers in the disposable medical products
industry.

Financial Position

         We had $1,571,926 in cash and cash equivalents as of December 31, 2004,
a decrease of $833,700 from December 31, 2003. Working capital as of December
31, 2004 was $1,430,590 as compared to $1,506,455 at December 31, 2003. These
decreases were primarily due to the net cash used to fund operations during
2004.

Product Agreements

License Agreements

         Kendall

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

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

         Merit Medical

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

         TAP Pharmaceutical Products

         In July 2002, we entered into a Development and License Agreement with
TAP Pharmaceutical Products Inc. whereby TAP acquired the right to attach our
proprietary safety needle device to TAP's pre-filled syringes. The TAP Agreement

                                       18
<PAGE>

has an effective date of January 1, 2002. Under the TAP Agreement, we receive
reimbursement for research and development expenses, payments related to the
achievement of certain development and regulatory milestones, and on-going
royalty payments based upon the number of pre-filled syringes manufactured with
our proprietary safety needle device. The TAP Agreement is for a minimum period
of three years.

         Becton, Dickinson and Company

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

Distribution Agreements

         Bard Access Systems

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

         Physician Sales & Service

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

         Medline Industries

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

         Cardinal Health

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

                                       19
<PAGE>

         ExelInt International

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

         Other LiftLoc(R) Distribution Agreements

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

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

         In February 2004, we entered into a Distribution Agreement with Medical
Mart Supplies Ltd. whereby Medical Mart acquired the non-exclusive right to
distribute and sell LiftLoc(R) Safety Infusion Set in Canada. Under the terms of
the agreement, Medical Mart purchases SHPI branded product from us for resale to
their end-user customers. The agreement runs through December 2005 and shall be
renewed automatically for additional, consecutive one-year terms unless
terminated by either party in writing not less than 90 days prior to the
expiration of the initial term or any renewal term.

         Tyco Healthcare

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

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

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

                                       20
<PAGE>

Critical Accounting Policies

         Revenue Recognition

         Pursuant to Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition," we recognize license revenue when the following criteria have been
met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred
or services have been rendered, (3) the price is fixed or determinable and (4)
collectibility is reasonably assured.

         We received no upfront fees in 2004, but received $1,080,000 in
payments related to the Tyco Healthcare agreements in 2003. These upfront
payments are being recognized ratably over the life of the respective
agreements.

         Product revenues are recognized upon the shipment date of the product,
and transfer of both title and risk of loss to the customer.

         Royalty revenue is recognized when the related products are sold or
upon our fulfillment of any future obligation under the related agreements.
Revenue from development agreements is recognized as the services are performed
in accordance with the stated terms of the agreements.

         Long-Lived Assets

         We regularly evaluate whether events or circumstances have occurred
that indicate the carrying value of our long-lived assets may not be
recoverable. When factors indicate the asset may not be recoverable, we compare
the related undiscounted future net cash flows to the carrying value of the
asset to determine if impairment exists. If the expected future net cash flows
are less than the carrying value, an impairment charge is recognized based on
the fair value of the asset. No such impairments were recorded during the years
ended December 31, 2004 and 2003.

         Stock Based Compensation

         We have chosen to account for stock options granted to employees and
directors under the recognition and measurement principles of APB Opinion 25
instead of the fair value recognition provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation", as amended by SFAS No. 148.

Years Ended December 31, 2004 and 2003

         During the year ended December 31, 2004, we had total revenues of
$5,765,278, compared with total revenues of $3,606,574 for the year ended
December 31, 2003, an increase of $2,158,704 or 60%. During 2004, we recognized
$4,361,052 in product sales and royalties, $895,624 in technology fees and
licensing revenues, and $508,602 in development fees and related services
revenue. Cost of revenues in 2004 was $1,082,131. Our gross profit in 2004 was
$4,683,147, representing an 81% gross profit margin. During 2003, we recognized
$2,768,570 in product sales and royalties, $778,124 in technology fees and
licensing revenues and $59,880 in development fees and related services revenue.
Cost of revenues in 2003 was $582,575. Our gross profit in 2003 was $3,023,999,
representing an 84% gross profit margin. The substantial growth in product sales
and royalties in 2004 reflects increased marketplace acceptance of our safety
products. The increase in development fees and related services in 2004 as
compared to 2003 reflects additional work performed under existing development
agreements and the securing of additional work under new agreements in 2004. We
will look to our existing product agreements, sales of our own branded products
through distributors, introduction of new products, and additional development
and strategic arrangements for future revenue growth.

                                       21
<PAGE>

         Research and development ("R&D") expenses in 2004 were $2,437,880
(excluding $82,772 of amortization of deferred compensation) compared to
$2,595,022 in 2003, a decrease of $157,142 or 6%. This decrease was primarily
due to a portion of our R&D effort being funded by third parties in 2004.

         Sales and marketing ("S&M") expenses in 2004 were $1,007,338 (excluding
$11,895 of amortization of deferred compensation), compared to $1,203,310 in
2003, a decrease of $195,972 or 16%. This decrease was primarily due to the
reorganization and streamlining of our sales and marketing department to achieve
greater efficiencies and decreased travel expenses required for our in-market
support of LiftLoc(R) Safety Infusion Set in 2004.

         General and administrative ("G&A") expenses in 2004 were $1,334,639
(excluding $161,788 of amortization of deferred compensation) compared to
$1,139,699 in 2003, an increase of $194,940 or 17%. Increases of $156,330 in
fees paid to consultants and $96,400 in board of directors related expenses
account for the total increase in G&A expenses.

         On September 15, 2004, the 2004 Stock Incentive Plan ("Stock Plan") was
approved by the Board of Directors and became effective on that date, subject to
the Stock Plan being approved by the stockholders within six months after that
date. The Stock Plan provides that 6,000,000 shares of our authorized but
unissued common stock be reserved pursuant to the terms and conditions of the
plan. On October 19, 2004, a special meeting of stockholders was held, at which
time the stockholders approved the 2004 Stock Incentive Plan. The Stock Plan
will allow the Company, under the direction of the Compensation Committee, to
make broad-based grants of restricted stock and stock units, any of which may or
may not require the satisfaction of performance objectives, to employees and
non-employee directors. The purpose of these stock awards is to attract and
retain talented employees and further align employee and stockholder interests.
The Board approved and recommended the Stock Plan after consultation with a
compensation consulting firm that was retained by the Company. The Stock Plan
provides an essential component of the total compensation package offered to
employees, reflecting the importance that we place on motivating and rewarding
superior results with long-term, performance-based incentives. Under the Stock
Plan, current directors and employees holding stock option grants were given the
election of retaining those stock option grants or surrendering them for grants
of common stock. This resulted in the surrender of 5,738,190 stock options in
exchange for the issuance of 3,375,397 shares of common stock. The stock
issuance resulted in a non-cash charge of $3,825,521, which will be expensed
ratably over the three-year vesting period of the stock grants. The charge to
expense for the year ended December 31, 2004 relating to this transaction was
$247,155.

         During the fourth quarter of 2003, we recorded a liability of
$1,300,000, which amount is our estimate of the portion of costs associated with
BD's suit against Tyco Healthcare that Tyco Healthcare will withhold against the
royalties due SHPI through 2005. The balance of this liability remaining at
December 31, 2004, was $791,365.

         Operating expenses in 2004, including amortization of deferred
compensation, were $5,036,312 compared to $6,238,031 in 2003, a decrease of
$1,201,719 or 19%. Excluding the amortization of deferred compensation in 2004
and the non-cash patent litigation expense in 2003, operating expenses were
$4,779,857 and $4,938,031, respectively, a decrease of $158,174 or 3%. Reduced
expense levels in research and development and sales and marketing were
partially offset by an increase in general and administrative expenses.

         Other income was $9,526 in 2004 compared to $94,910 in 2003. This
decrease was due to $20,919 in amortization of deferred finance costs coupled
with lower interest earned on lower cash balances during 2004.

         We did not recognize any income tax benefit in our consolidated
statement of operations for the years ended December 31, 2004 and 2003. At
December 31, 2004, we had total tax net operating losses ("NOLs") of $25,546,244

                                       22
<PAGE>

and research and experimentation tax credits of $608,207 that can be carried
forward to future years. Our ability to realize the benefit of these NOL's and
tax credits will depend on the generation of future taxable income through
profitable operations.

         Our net loss in 2004 was $343,639 compared to $3,119,122 in 2003, an
improvement of $2,775,483 or 89%. We achieved this significant reduction in net
operating loss by delivering substantial revenue growth in combination with
reduced operating expenses.

         Our basic and diluted net loss per share for the year ended December
31, 2004 was ($0.01) per share. This compares to a net loss per share of ($0.17)
for the year ended December 31, 2003, an improvement of $0.16 per share.

Liquidity and Capital Resources

         To date, we have financed our operations principally through private
placements of equity securities, the sale of products, technology and patents,
advanced royalties, development fees, technology and license fees and proceeds
from the sale of common stock. We used net cash for operating activities of
$1,683,723 during 2004, compared to net cash used of $2,845,885 during 2003,
representing a decrease of $1,162,162, or 41%. This improvement in operating
cash flow is directly related to our ability to generate significantly higher
sales volumes while maintaining operating expense levels. In addition, during
2004, $232,572 was used for the purchases of intangible assets and property and
equipment, compared to $256,069 during 2003. During 2004, net cash of $1,082,595
was provided from a private placement of 1,250,000 shares of restricted common
stock to certain accredited and sophisticated investors and the purchase of
139,720 shares of common stock by The SHP 401(k) plan. No financing activities
were entered into during 2003. As of December 31, 2004, our working capital was
$1,430,590 and our current liabilities were $1,803,484.

         Our working capital requirements for the foreseeable future will vary
based upon a number of factors, including the costs to complete development
work, the cost of bringing safety medical needle technologies and other products
to commercial viability, the timing of the market launches of new products and
the level of sales of our current products. As of December 31, 2004, we had
accounts payable and accrued liabilities totaling $718,278. We also had a
current portion of accrued patent litigation expense of $791,365 and current
deferred revenue of $293,841, neither of which will require the use of cash. At
December 31, 2004, we had cash and cash equivalents of $1,571,926. This cash,
along with cash generated from the sale of products, development fees and
royalties and $1,000,000 of committed funding in the form of a convertible note
from Galen Partners (as detailed in Item 12 "Certain Relationships and Related
Transactions"), will provide sufficient cash for us to execute our business plan
in 2005.

         As of March 7, 2005, we have outstanding stock options that are
exercisable for 124,250 shares of common stock at exercise prices ranging from
$1.00 to $2.00 per share and issued warrants that are exercisable for 120,000
shares of common stock at an exercise price of $0.02 per share. The exercise of
all such stock options and warrants would result in an equity infusion of
$190,958. A portion of the stock options are out of the money, certain options
are not yet exercisable, and there can be no assurance that any of the stock
options or warrants will be exercised.

Off-Balance Sheet Arrangements

         We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to
investors.

                                       23
<PAGE>

Recent Accounting Pronouncements

         In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4"
("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4 to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and waster material (spoilage). The provisions of SFAS 151 are effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
The adoption of SFAS 151 is not expected to have a material effect on the
Company's financial condition or results of operations.

         In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary
Assets - an amendment of APB Opinion No. 29". SFAS 153 amends APB Opinion 29 to
eliminate the similar productive asset exception and establishes that exchanges
of productive assets should be accounted for at fair value, rather than at
carryover basis unless (1) neither the asset received nor the asset surrendered
has a fair value that is determinable within reasonable limits, (2) the
transaction is an exchange transaction to facilitate sales to customers, or (3)
the transaction lacks commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provisions of SFAS 153 are
effective for nonmonetary exchanges occurring in fiscal periods beginning after
June 15, 2005. The adoption of SFAS 153 is not expected to have a material
effect on the Company's financial condition or results of operations.

         In December 2004, the FASB issued SFAS 123R, "Share-Based Payment".
SFAS 123R establishes that employee services received in exchange for
share-based payment result in a cost that should be recognized in the income
statement as an expense when the services are consumed by the enterprise. It
further establishes that those expenses be measured at fair value determined as
of the grant date. As the Company qualifies as a small business issuer, the
provisions of SFAS 123R become effective as of the beginning of the first
interim reporting period that begins after December 15, 2005. We are currently
evaluating the effect the adoption of SFAS 123R will have on the Company's
financial condition and results of operations.

Contractual Obligations

         Our contractual obligations as of December 31, 2004 were as follows:

                                               Payments Due by Year
                                   ---------------------------------------------
Obligation             Total          2005           2006         Thereafter
------------------- -------------- ------------- -------------- ----------------
Operating leases        $ 621,804      $260,397       $107,499               $0

         We lease office space under a non-cancellable operating lease.

Inflation

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

Risk Factors

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

         We have a history of losses.

         We have accumulated deficits totaling $37,152,712 since inception in
November 1993. With the exception of the second quarter of 1999 and the third
quarter of 2004, all quarters have had operating losses. Among other things, our
ability to achieve sustainable profitability is dependent on:

                                       24
<PAGE>

         o        Successful marketing of our products by our distribution
                  partners and licensees;

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

         o        Our ability to develop additional safety medical products.

         There can be no assurance that we will achieve sustainable
profitability.

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

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

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

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

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

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

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

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

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

         o        We may be limited in our ability to negotiate with new
                  business partners upon any renewals of agreements;

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

         o        In December 2002, Becton Dickinson ("BD") filed a lawsuit
                  against Tyco Healthcare in the United States Court of the
                  District of Delaware, asserting that Tyco Healthcare's
                  Monoject Magellan(TM) safety products infringe upon BD's U.S.
                  Patent No. 5,348,544 (`544 Patent", titled "Single-Handedly
                  Actuable Safety Shield for Needles." On October 26, 2004, a
                  jury found in favor of BD that Tyco Healthcare's Monoject
                  Magellan(TM) safety products willfully infringed the `544
                  Patent and awarded damages of $4.4 million. On November 1,
                  2004, the court entered the judgment in favor of BD. Tyco
                  Healthcare is challenging the jury finding in post-trial
                  motions, and, if necessary, in an appeal. Under the Kendall
                  Agreement, Tyco Healthcare has the right to withhold up to
                  fifty percent (50%) of royalties due as an offset against
                  litigation expenses related to charges of infringement by a
                  third part for the manufacture, use or sale of licensed
                  product. This right continues during the period in which such
                  litigation is pending. If, as a result of judgment in the
                  litigation or settlement with BD, Tyco Healthcare is required

                                       25
<PAGE>

                  to pay royalty and/or other monies to BD, Tyco Healthcare may
                  thereafter deduct from the amount of royalties due us on unit
                  sales of products alleged to infringe, an amount which is the
                  lesser of all royalties and/or other monies paid by Tyco
                  Healthcare to BD, or fifty percent (50%) of all royalty
                  payments otherwise payable to us. Based on information
                  obtained during the fourth quarter of 2003 related to costs
                  incurred by Tyco Healthcare, we recorded a liability of
                  approximately $1,300,000 at December 31, 2003, which amount
                  was our estimate of the portion of costs associated with BD's
                  suit against Tyco Healthcare that Tyco Healthcare will
                  withhold against the royalties due SHPI through 2005. During
                  the twelve month contract period ended September 30, 2004,
                  Tyco Healthcare withheld fifty percent of royalty payments due
                  us, which amounts totaling $500,000 have been offset against
                  the accrual. In the event litigation continues beyond 2005,
                  additional liabilities may accrue. If Tyco Healthcare is
                  unsuccessful in post-trial motions and on appeal, Tyco
                  Healthcare may be prohibited from selling the Monoject
                  Magellan(TM) safety products in their current form;

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

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

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

         In 2004, over fifty percent of our revenues were generated under
         agreements with two of our corporate partners.

         The significant amount of revenues we received in 2004 under these
arrangements presents additional risks to our commercial success. If
arrangements with either of these partners were terminated or if there is a
decline in revenues under either of these arrangements, it could have a material
adverse effect on us and our revenues and could require us to significantly
curtail or even cease operations. In assessing the value of these arrangements,
you should consider the fact that one of these arrangements may be terminated on
fifteen days notice and the other arrangement is subject to annual renewal. In
addition, these arrangements are subject to the marketing ability, marketing
plans and credit-worthiness of these business partners and the other factors
identified in the prior risk factor. There can be no assurance that one or both
of these arrangements will not be terminated or that our business partners will
be successful in their marketing and sale of the products that are subject to
these arrangements.

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

         Under our licensing arrangements, we are primarily relying on licensees
to arrange for the commercial manufacture of products. LiftLoc(R) Safety
Infusion Set is manufactured at a contract manufacturer under our authority and
supervision. Contracting with third parties or relying on licensees to
manufacture products presents the following risks:

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

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

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

                                       26
<PAGE>

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

         o        We may not be able to find substitute manufacturers, if
                  necessary.

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

         Possible Need for Additional Funding.

         At December 31, 2004, we had cash and cash equivalents of $1,571,926.
This cash, along with anticipated cash generated from the sale of products,
development fees and royalties and $1,000,000 of committed funding in the form
of a convertible note from Galen Partners, will provide sufficient cash for us
to execute our business plan in 2005. If we are not able to reduce our operating
losses, our liquidity will be adversely affected and we may be required to seek
additional sources of financing to fund operations. If we are not able to reduce
our operating losses, we may be required to seek additional sources of financing
to fund operations. We may not be able to obtain adequate financing when needed
or upon satisfactory terms. Failure to raise capital when needed could prevent
us from achieving our business objectives and may require us to significantly
curtail or even cease operations.

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

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

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

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

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

         There are negative pricing pressures on safety products.

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

                                       27
<PAGE>

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

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

         Our products may not be accepted by the market.

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

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

         Many of our safety medical needle technologies and products are still
in various stages of pre-production, development and research. We are also
exploring additional product applications for our technologies. The continued
development of our products and development of additional applications and new
products is important to our long-term success. There can be no assurance that
our technologies or products will be developed or, if developed, that they will
be successful.

         Our success is dependent on our patents and proprietary rights.

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

         We may not have adequate resources to manage anticipated growth.

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

         o        Improve existing and implement management information systems,
                  operating, administrative, financial and accounting systems
                  and controls;

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

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

                                       28
<PAGE>

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

         We are dependent on Management and Technical Personnel.

         Our success depends upon the skills, experience and efforts of our
management, and technical personnel (the "working team"). Should the services of
one or more members of our present working team become unavailable for any
reason, our business could be adversely affected. The employment agreements that
we have in place with the working team allow members of the working team to
terminate their employment at any time. There is no assurance that we will be
able to retain the existing working team or attract new employees of the caliber
needed to achieve our objectives.

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

         We are engaged in a highly competitive business and will compete
directly with companies that have longer operating histories, more experience,
substantially greater financial resources, greater size, more substantial
research and development and marketing organizations, established distribution
channels and are better situated in the market than us. Our competitors and
potential competitors include Arrow, Baxter International, B. Braun, Becton,
Dickinson and Company, Boston Scientific, Churchill Medical Ltd., Cook, Inc.,
Horizon Medical Products, ICU Medical, Inc., Johnson & Johnson, Kendall, Manan
Medical Products, Medamicus, Med-Design Corporation, Medi-Hut Co., Inc., Medisys
Technologies, Inc., NMT Group PLC, Now Medical Technologies, Smiths Medical,
Retractable Technologies, Inc., Terumo, and several others identified in Item 1
"Description of Business-Competition". Our competitors may use their economic
strength to influence the market to continue to buy their existing products. Our
competitors may also be potential strategic partners with respect to various
products as are, for example, Kendall, Bard and Merit. We do not have an
established customer base and are likely to encounter a high degree of
competition in developing a customer base. One or more of these competitors
could use their resources to improve their current products or develop new
products that may compete more effectively with our products. New competitors
may emerge and may develop products that compete with our products. No assurance
can be given that we will be successful in competing in this industry.

                                       29
<PAGE>

         Potential product liability relating to failure of our safety products.

         The sale of safety medical devices entails an inherent risk of
liability in the event of product failure or claim of harm caused by product
operation. There can be no assurance that we will not be subject to such claims,
that any claim will be successfully defended or, if we are found liable, that
the claim will not exceed the limits of our insurance. Our current insurance
coverage is in the amount of $1 million per occurrence and $2 million in
aggregate. We also have an umbrella policy in the amount of $4 million. In some
cases, we have indemnification arrangements in place with strategic partners who
are selling our products under their label or distributing our branded products.
There is no assurance that we will maintain product liability insurance in the
future, that such insurance will be available, or that we will not be subject to
product liability claims in excess of our insurance coverage.

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

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

         Limitations on director liability.

         Our Certificate of Incorporation provides, as permitted by Delaware
law, that our directors are not personally liable to the company or its
stockholders for monetary damages for any action or failure to take any action,
with specified 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, our Certificate of Incorporation and
Bylaws provide for mandatory indemnification of directors and officers to the
fullest extent permitted by Delaware law and we have entered into contracts with
our directors and officers providing for such indemnification.

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

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

         Our common stock price may continue to be volatile.

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

                                       30
<PAGE>

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

         In October 2001, we entered into an Investor Rights Agreement with the
purchasers of our Series A Preferred Stock. These shares were automatically
converted into 21,861,369 shares of our common stock in 2004. Holders of these
shares have been granted demand and piggyback registration rights with respect
to these shares. In addition, on March 22, 2004, we entered into an agreement
whereby Galen Partners agreed to make up to $1,000,000 in funding available to
us under the terms of a convertible note. As partial consideration for this
commitment, we issued to these stockholders warrants to acquire 80,000 shares of
our common stock. On March 7 2005, Galen Partners agreed to a six-month
extension of the promissory note agreement in exchange for the issuance of
warrants to purchase an additional 40,000 shares of our common stock. At our
sole option, we may extend the agreement for an additional six-month period for
the issuance of a second warrant to purchase an additional 40,000 shares of our
common stock. We have also granted demand and piggyback registration rights with
respect to the common stock underlying these warrants and the common stock into
which the $1,000,000 convertible promissory note, if issued, may be convertible.
Sales of this common stock in the public market could materially and adversely
affect the market price of the common stock.

         We do not anticipate paying dividends in the foreseeable future.

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

         Our common stock is subject to dilution.

         As of December 31, 2004, there were 44,457,995 shares of our common
stock issued and outstanding. In addition there are an additional 124,250 shares
of our common stock that are issuable pursuant to stock options granted under
our stock option plans and 80,000 shares issuable under warrant agreements.

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

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

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

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

Item 7. Financial Statements

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

                                       31
<PAGE>

Item 8. Changes In and Disagreements With Accountants on Accounting and
        Financial Disclosure

         None.

Item 8A. Controls and Procedures

         We have evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of the design and
operation of our disclosure controls and procedures as of December 31, 2004,
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to that which is required to be included in our periodic
SEC filings. There have been no significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation.

Item 8B.  Other Information

         None.



                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       32
<PAGE>

                                    PART III

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

         Set forth below is certain information concerning each of our directors
and executive officers as of March 7, 2005.
<TABLE>
<CAPTION>
                                                                                              With the
         Name                    Age                        Position                       Company Since
         ----                    ---                        --------                       -------------

<S>                              <C>    <C>                                                     <C>
Jeffrey M. Soinski               43     President, Chief Executive Officer and Director         2001

Guy J. Jordan, Ph.D.(1)(2)(3)    56     Chairman of the Board                                   2001

Donald D. Solomon, Ph.D.         54     Vice President, Chief Operating Officer, Chief          2000
                                        Technical Officer and Director

Paul S. Evans                    42     Vice President, Business Development, General           2000
                                        Counsel and Secretary

Keith L. Merrell                 59     Controller, Acting Chief Financial Officer and          2000
                                        Treasurer

David W. Jahns (2)               39     Director, Chairman of Compensation Committee            2001

Stuart A. Randle (1) (3)         45     Director, Chairman of Nominating Committee              2001

Stephen I. Shapiro (2)           60     Director                                                2001

Robert R. Walker (1) (3)         74     Director, Chairman of Audit Committee                   1994
---------------
</TABLE>
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Nominating Committee.

         Jeffrey M. Soinski. Mr. Soinski is our President, Chief Executive
Officer and a director. His term as a director expires at the 2005 annual
meeting of stockholders. Mr. Soinski brings 22 years of general management,
business development and marketing experience to our company, including several
years as the President and Chief Executive Officer of ViroTex Corporation
("ViroTex"), a venture-backed pharmaceutical company focused on the development
and commercialization of proprietary drug delivery systems. Mr. Soinski was with
ViroTex from 1992 through 1999. He merged ViroTex into Atrix Laboratories, Inc.
(Nasdaq: ATRX) in 1998, and continued working with Atrix on a transitional basis
through 1999. From 2000 through 2001, Mr. Soinski was the Managing Partner and
Chief Executive Officer of Mad Dogs & Englishmen, a marketing communications
firm with offices in New York and San Francisco. Mr. Soinski has a BA degree
from Dartmouth College.

         Guy J. Jordan, Ph.D. Dr. Jordan is our Chairman of the board. His term
as a director expires at the 2005 annual meeting of stockholders. Dr. Jordan
brings a wealth of senior management healthcare experience to our company, with
a strong focus in the areas of vascular disease and oncology. Dr. Jordan
recently retired as Group President for C.R. Bard, Inc. with global operating
responsibility for their oncology businesses, geographic responsibility for
Canada, Australia, Latin America and Asia Pacific, and functional responsibility
for all of Bard's research and development. Prior to joining C.R. Bard in 1986,
Dr. Jordan held senior product development positions at American Cyanamid. Dr.
Jordan has a Ph.D. degree from Georgetown University and an MBA from Fairleigh
Dickinson University.

                                       33
<PAGE>

         Donald D. Solomon, Ph.D. Dr. Solomon is Chief Operating Officer, Chief
Technology Officer, a Vice President and a director. His term as a director
expires at the 2007 annual meeting of stockholders. Dr. Solomon joined us in
October 2000 and has served as a director since March 2001. He has over 25 years
of medical product experience in research, product development, engineering and
manufacturing. Prior to joining our Company, Dr. Solomon was the Vice President
of Research and Development at Johnson & Johnson Medical - Vascular Access from
1997 to 2000. Prior to that Dr. Solomon spent 14 years at Becton Dickinson
("BD"), and held positions as Worldwide Director of R&D for BD Pharmaceutical
Systems Division based in France, and Director of R&D for Biocompatible Polymer
Development at the BD Infusion Therapy Division. Dr. Solomon holds 38 patents
and is the author of 52 scientific publications. He received Masters and Ph.D.
degrees from Case Institute of Technology at Case Western Reserve University.

         Paul S. Evans. Mr. Evans is our Vice President, Business Development,
General Counsel and corporate Secretary. He is a registered patent attorney and
joined us in June 2000. Mr. Evans manages our intellectual property portfolio
and corporate legal matters, and is extensively involved in business development
efforts. Mr. Evans brings a wide range of intellectual property and corporate
legal experience to us, having previously represented SHPI since 1994 as outside
patent counsel with the law firm of Snow, Christensen & Martineau. Prior to
earning his law degree, Mr. Evans worked as a Project/Design Engineer for Morton
International (now Autoliv). He holds JD, MBA and BS degrees from the University
of Utah.

         Keith L. Merrell. Mr. Merrell is our Controller, Acting Chief Financial
Officer and Treasurer. He joined us in July 2000. Mr. Merrell draws on 29 years
of accounting experience to manage all of our accounting functions and to
interface with our independent public accountants. He spent two years in the
field of public accounting, and served as Chief Financial Officer or Controller
of four companies prior to his joining us. His business career also includes
extensive experience in management, sales and marketing, and consulting. He
served as Vice President - Western Operations for Michelex, an injection molding
company with corporate headquarters in New York, from 1998 to 2000. From 1991 to
1998 he served as Director of Finance for The Duplication Group, planning,
implementing and bringing online the first CD manufacturing facility in the
intermountain area. He graduated from Arizona State University with a BS degree
in Accounting.

         David W. Jahns. Mr. Jahns serves as one of our directors. His term as a
director expires at the 2006 annual meeting of stockholders. Mr. Jahns is a
General Partner and principal of Galen Partners. Since joining Galen in 1993,
Mr. Jahns has been responsible for making and managing investments in several of
the firm's portfolio companies. He is an experienced board member and currently
serves on the boards of DAOU Systems, Inc. and several of Galen's privately held
portfolio companies. Prior to joining Galen, Mr. Jahns worked in the Corporate
Finance Division at Smith Barney, where he worked on a variety of corporate
finance and merger and acquisition related transactions, and assisted in the
marketing of public offerings. Mr. Jahns has an MBA degree from the J. L.
Kellogg Graduate School of Management at Northwestern University and a BA degree
from Colgate University.

         Stuart A. Randle. Mr. Randle serves as one of our directors. His term
as a director expires at the 2007 annual meeting of stockholders. Mr. Randle is
a highly experienced healthcare executive with over 20 years of operating
experience. He is currently Chief Executive Officer of GI Dynamics, a medical
device company focused on the treatment of obesity. From 1998 to 2001, Mr.
Randle was the President and CEO of ACT Medical, Inc., a leading company
providing outsourcing services to the medical device, biotech and diagnostic
industries. He merged ACT Medical, Inc. with MedSource Technologies in 2001.
From 1996 through 1998, Mr. Randle was President, Northeast Region, for
Allegiance Corporation, a $5 billion medical products distribution and
manufacturing company. He is also the past President, New England Region, for
Baxter Healthcare Corporation. Mr. Randle has an MBA degree from the J. L.
Kellogg Graduate School of Management at Northwestern University and a BS degree
from Cornell University.

         Stephen I. Shapiro. Mr. Shapiro serves as one of our directors. His
term as a director expires at the 2005 annual meeting of stockholders. Mr.
Shapiro has over 30 years of relevant medical device and equipment industry

                                       34
<PAGE>

experience, with special expertise in a wide variety of healthcare markets,
particularly high-volume sterile disposables, critical care instruments, and
cardiovascular devices. Mr. Shapiro began his career at Union Carbide Clinical
Diagnostics and Becton Dickinson, where he was Director of Advanced R&D and New
Business Development. In 1982, he joined The Wilkerson Group, a leading
management consultancy to pharmaceutical, medical device, and diagnostic
companies. Mr. Shapiro was Managing Director and a principal of The Wilkerson
Group at the time of its acquisition by IBM in 1996. In 1999, Mr. Shapiro left
The Wilkerson Group (now IBM Healthcare Consulting) to focus on sourcing and
evaluating investments for two premier healthcare venture capital firms,
including Galen Partners. He currently serves on the board of Novoste
Corporation and Closure Medical Corporation. Mr. Shapiro has a BS degree from
the Massachusetts Institute of Technology and an MS degree in biomedical
engineering from the University of California, Berkley.

         Robert R. Walker. Mr. Walker serves as one of our directors. His term
as a director expires at the 2006 annual meeting of stockholders. Since 1992,
Mr. Walker has been principally self-employed as a consultant in the healthcare
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 Healthcare, a regional hospital company. He retired as President
of IHC Affiliated Services in 1992. He is also a former Chairman of the board of
AmeriNet, Inc., a national group purchasing organization for hospitals, clinics,
detox/drug centers, emergency, nursing homes, private laboratories, psychiatric
centers, rehabilitation facilities, surgical centers and other institutions. Mr.
Walker is a member of the American Hospital Association and the Hospital
Financial Management Association. He has a BS degree in Business Administration
from the University of Utah.

         Our executive officers are elected by the board on an annual basis and
serve at the discretion of the board.

         The Company has adopted a Code of Ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer and
other senior financial officers. Our Code of Ethics is posted on the Company's
Web site, which is located at www.shpi.com.

Board Committees

         We have a standing Audit Committee established in accordance with
section 3(a)(58)(A) of the Exchange Act, a Compensation Committee and a
Nominating Committee.

         The Audit Committee

         The Company's Audit Committee held four meetings during 2004. The
function of the Audit Committee as detailed in the Audit Committee Charter (as
amended November 2004) is to provide assistance to the Board in fulfilling their
responsibility to the stockholders, potential stockholders, and investment
community relating to corporate accounting, reporting practices of the Company
and the quality and integrity of the financial reports of the Company. In so
doing, it is the responsibility of the Audit Committee to maintain free and open
means of communication between the directors, the independent auditors and
Company management. The Company believes that the members of the Audit Committee
are independent as defined by Rule 4200(a) of NASD's listing standards. The
members of the Audit Committee are Guy J. Jordan, Stuart A. Randle and Robert R.
Walker. Mr. Walker, Chairman of our Audit Committee, serves as our financial
expert on that committee.

         The Compensation Committee

         The Company's Compensation Committee held four meetings during 2004.
The Compensation Committee administers the Company's stock option and stock
grant plans, establishes a general compensation policy for the Company and,
except as prohibited by applicable law, may take any and all actions that the
Board could take relating to the compensation of employees, directors and other

                                       35
<PAGE>

parties. The members of the Compensation Committee are David W. Jahns, Guy J.
Jordan, and Stephen I. Shapiro. David W. Jahns is Chairman of our Compensation
Committee.

         The Nominating Committee

         The Nominating Committee was formed in January 2004. The Nominating
Committee's Charter and Policies are available on the Company's website, which
is located at www.shpi.com. The Company believes that the members of the
Nominating Committee are independent as defined by Rule 4200(a) of NASD's
listing standards. The members of the Nominating Committee are Guy J. Jordan,
Stuart A. Randle and Robert R Walker. Stuart A. Randle is Chairman of our
Nominating Committee.

         The Nominating Committee held two meetings during 2004, during which it
recommended the nomination of Messrs. Randle and Solomon for reelection to the
Board. The function of the Nominating Committee, as detailed in the Nominating
Committee's Charter, is to recommend to the Board the slate of director nominees
for election to the Board and to identify and recommend candidates to fill
vacancies occurring between annual stockholder meetings. It is the policy of the
Nominating Committee to consider candidates recommended by security holders,
directors, officers and other sources, including, but not limited to,
third-party search firms. Security holders of the Company may submit
recommendations for candidates for the Board. All recommendations shall be
submitted to Paul Evans at SHPI, Inc, 585 West 500 South, Bountiful, Utah 84010
(telephone: 801-298-3360, email: pevans@shpi.com). Such submissions should
include the name, contact information, a brief description of the candidate's
business experience and such other information as the person submitting the
recommendation believes is relevant to the evaluation of the candidate. Paul
Evans will then pass all such recommendations on to the Nominating Committee for
consideration. For candidates to be considered for election at the next annual
meeting stockholders, the recommendation must be received by the Company no
later than 120 calendar days prior to the date that the Company's proxy
statement is released to security holders in connection with such meeting.

         The Nominating Committee has not established any fixed minimum
qualifications in order to consider a proposed candidate for election to the
Board. However, the Nominating Committee has a strong preference for candidates
with prior board of director experience with public companies. The Nominating
Committee will also consider such other factors as it deems appropriate to
assist in developing a board and committees that are diverse in nature and
comprised of experienced and seasoned advisors. These factors include judgment,
skill, diversity (including factors such as race, gender or experience),
integrity, experience with businesses and other organizations of comparable
size, the interplay of the candidate's experience with the experience of other
Board members, and the extent to which the candidate would be a desirable
addition to the Board and any committees of the Board.

         The Nominating Committee will evaluate whether an incumbent director
should be nominated for re-election to the Board or any committee of the Board
upon expiration of such director's term using the same factors as described
above for other Board candidates and the committee will also take into account
the incumbent director's performance as a Board member. Failure of any incumbent
director to attend at least seventy-five percent (75%) of the Board meetings
held in any calendar year will be viewed negatively by the Nominating Committee
in evaluating the performance of such director.

Section 16(a) Beneficial Ownership Reporting Compliance

         Section 16(a) of the Securities Exchange Act requires our executive
officers, directors and persons who beneficially own more than 10% of our common
stock to file initial reports of ownership and reports of changes in ownership
with the SEC. Such persons are required by SEC regulations to furnish us with
copies of all Section 16(a) forms filed by such persons.

         Based solely on our review of forms furnished to us and representations
from reporting persons, we believe that all filing requirements applicable to
our executive officers, directors and more than 10% stockholders were complied
with during 2004.

                                       36
<PAGE>

Item 10. Executive Compensation

         Incorporated by reference to the Company's definitive proxy statement,
which the Company intends to file with the Securities and Exchange Commission
within 120 days after the close of its fiscal year.

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

         The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of March 7, 2005, for: (i) each
person who is known by us to beneficially own more than five percent of our
common stock, (ii) each of our directors, (iii) each of our Named Executive
Officers, and (iv) all directors and executive officers as a group. On March 7,
2005 the Company had 44,457,995 shares of Common Stock outstanding.
<TABLE>
<CAPTION>
                                      Shares
       Name and Address            Beneficially            Percentage of
    of Beneficial Owner(1)           Owned(2)                Total(2)                    Position
    ----------------------         ------------            -------------                 --------
<S>                                 <C>                       <C>              <C>
Jeffrey M. Soinski (3)               1,487,652                  3.3            President, CEO and Director

Guy J. Jordan, Ph.D. (4)               235,294                    *            Chairman of the Board


Donald D. Solomon, Ph.D. (5)           569,688                  1.3            Vice President, COO, CTO and
                                                                                Director

Paul S. Evans (6)                      405,116                    *            Vice President, Business
                                                                                Development, General
                                                                                Counsel, and Secretary

Keith L. Merrell (7)                   183,426                    *            Controller, Acting CFO and
                                                                                Treasurer

David W. Jahns (8)                  15,435,236                 34.7            Director

Stuart A. Randle (9)                   117,647                    *            Director

Stephen I. Shapiro (10)                124,326                    *            Director

Robert R. Walker (11)                  206,529                    *            Director

Executive Officers and
  Directors as a Group
  (9 persons)                       18,764,914                 42.2

* Less than 1%.
--------------
</TABLE>
(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 17,064 shares of common stock purchased through our 401(k) plan
     and 1,470,588 shares of common stock that are currently unvested and
     non-transferable.
(4)  Includes 235,294 shares of common stock that are currently unvested and
     non-transferable.

                                       37
<PAGE>

(5)  Includes 75,666 shares of common stock, 82,238 shares of common stock
     purchased through our 401(k) plan and 411,764 shares of common stock that
     are currently unvested and non-transferable.
(6)  Includes 61,000 shares of common stock, 49,999 shares of common stock
     purchased through our 401(k) plan and 294,117 shares of common stock that
     are currently unvested and non-transferable.
(7)  Includes 36,000 shares of common stock, 41,544 shares of common stock
     purchased through our 401(k) plan and 105,882 shares of common stock that
     are currently unvested and non-transferable.
(8)  Includes 58,823 shares of common stock that are currently unvested and
     non-transferable. Also includes 13,937,735 shares of common stock held of
     record by Galen Partners III, L.P., 1,261,605 shares of common stock held
     of record by Galen Partners International III, L.P., and 57,073 shares of
     common stock held of record by Galen Employee Fund III, L.P. Information
     regarding Galen Partners III, L.P. and its affiliates is derived from the
     Form 4 filed by Galen Partners III, L.P. with the Securities and Exchange
     Commission Also includes warrants to purchase 120,000 shares of common
     stock. William R. Grant, Bruce F. Wesson, L. John Wilkerson, David W.
     Jahns, Srini Conjeevaram, and Zubeen Shroff are all natural persons and are
     the members of Claudius, L.L.C., a Delaware limited liability company, the
     general partner of Galen Partners III, L.P. and Galen Partners
     International III, L.P. Bruce F. Wesson is the President of Wesson
     Enterprises, Inc., a Delaware corporation, which is the general partner of
     Galen Employee Fund III, L.P. David Jahns is a member of Claudius, L.L.C.,
     a Delaware limited liability company, and a general partner of Galen
     Partners III, L.P. and Galen Partners International III, L.P.
(9)  Includes 117,647 shares of common stock that are currently unvested and
     non-transferable.
(10) Includes 65,503 shares of common stock and 58,823 shares of common stock
     that are currently unvested and non-transferable.
(11) Includes 143,529 shares of common stock that are currently unvested and
     non-transferable and 63,000 shares of common stock that Mr. Walker is
     deemed to beneficially own through a trust.

Securities Issued through Private Placement

     On August 30, 2004, the Company completed a private placement of 1,250,000
shares of restricted common stock to certain accredited and sophisticated
investors. Net proceeds of $943,090, after accounting for transaction expenses,
were realized from this transaction.

Securities Authorized for Issuance Under Equity Compensation Plans

         The following table sets forth certain information with respect to
equity securities of the Company that are authorized for issuance as of the year
ended December 31, 2004.
<TABLE>
<CAPTION>
                                          Equity Compensation Plan Information

                              Number of securities to       Weighted average
                              be issued upon exercise       exercise price of        Number of securities
                              of outstanding options,     outstanding options,      remaining available for
                              warrants and rights (1)    warrants and rights (1)      future issuance (1)
                              -----------------------    -----------------------      -------------------
<S>                                  <C>                         <C>                      <C>
Equity compensation plans
   approved by security
   holders                            204,250                     $0.93                    7,375,750
Equity compensation plans
   not approved by
   security holders                      0                                                     0
                             -------------------------- -------------------------- --------------------------
Total                                 204,250                     $0.93                    7,375,750
</TABLE>
                                       38
<PAGE>

(1)      All of the securities referenced in the table are shares of our common
         stock. Does not include common stock issuable under the Specialized
         Health Product International, Inc. 2004 Employee Stock Purchase Plan,
         which was adopted in January 2004 or the Specialized Health products
         International, Inc. 2004 Stock Incentive Plan that was approved at the
         special meeting of stockholders on October 19, 2004.

Item 12. Certain Relationships and Related Transactions

         On March 22, 2004, we entered into an agreement with Galen Partners
III, L.P., Galen Partners International III, L.P., and Galen Employee Fund III,
L.P. (collectively, "Galen Partners") whereby Galen Partners agreed to purchase
a convertible promissory note ("Note") in the aggregate principal amount of
$1,000,000 upon our request made at any time between March 31, 2004 and March
31, 2005. As consideration for entering into this purchase agreement, Galen
Partners received a warrant that provides them the right, but not the
obligation, to purchase 80,000 shares of our common stock at an exercise price
of $0.02 per share. The warrant shall expire and be no longer exercisable after
5:00 p.m., Eastern Time, on March 22, 2007. Further, we paid $9,991 in legal
fees related to this transaction. The Note has a term of three years and bears
interest at the rate of 12% per annum, with accrued interest to be paid July 1
and January 1 of each year the Note remains outstanding. The entire outstanding
principal amount due on the Note may, at Galen Partner's option, be converted
into fully paid and nonassessable shares of our common stock. The conversion
price will be 110% of the average closing share price for our common stock as
reported on NASDAQ or the OTC Bulletin Board for the twenty (20) consecutive
trading days prior to the date of the issuance of the Note.

         On March 7 2005, Galen Partners agreed to a six-month extension of the
promissory note agreement through September 30, 2005 in exchange for the
issuance of warrants to purchase 40,000 shares of the our common stock at an
exercise price of $.02 per share. At our sole option, we may extend the
agreement for an additional six-month period through March 31, 2006 for the
issuance of warrants to purchase an additional 40,000 shares of our common stock
at an exercise price of $.02 per share. All other terms and conditions of the
original agreement remain unchanged in the subsequent agreement.

Item 13. Exhibits and Reports on Form 8-K

Exhibits

         Listed on page 42 hereof.

Item 14. Principal Accountant Fees and Services

Audit Fees

         The aggregate fees billed for professional services rendered by our
principal accountant for the audit of our financial statements, review of
financial statements included in our quarterly reports and other fees that are
normally provided by the accountant in connection with statutory and regulatory
filings or engagements for the fiscal years ended December 31, 2004 and 2003
were $101,725 and $76,855, respectively.

Audit Related Fees

         The aggregate fees billed for assurance and related services by our
principal accountant that are reasonably related to the performance of the audit
or review of our financial statements, other than those previously reported in
this Item 14, for the fiscal years ended December 31, 2003 and 2002 were $0 and
$0, respectively.

                                       39
<PAGE>

Tax Fees

         The aggregate fees billed for professional services rendered by our
principal accountant for tax compliance, tax advice and tax planning for the
fiscal years ended December 31, 2004 and 2003 were $10,000 and $9,500,
respectively.

All Other Fees

         The aggregate fees billed for products and services provided by the
principal accountant, other than those previously reported in this Item 14, for
the fiscal years ended December 31, 2004 and 2003 were $9,260 and $0,
respectively.

Audit Committee

         Our audit committee is comprised of three independent directors. It is
the Company's policy that the Audit Committee pre-approves all audit, tax and
related services. All of the services described above in this Item 14 were
approved in advance by our Audit Committee. No items were approved by the audit
committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.




                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       40
<PAGE>

                                   SIGNATURES

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

                                                  Specialized Health Products
                                                  International, Inc.
                                                  (Registrant)


Date: March 7, 2005                               By  /s/ Jeffrey M. Soinski
                                                  ------------------------------
                                                  Jeffrey M. Soinski
                                                  President, Chief Executive
                                                  Officer and Director


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

      Signature                           Title                     Date
      ---------                           -----                     ----

/s/ Jeffrey M. Soinski           President, Chief Executive       March 7, 2005
-----------------------------    Officer and Director (Principal
Jeffrey M. Soinski               Executive Officer)


/s/ Keith L. Merrell             Controller, Acting Chief         March 7, 2005
-----------------------------    Financial Officer and Treasurer
Keith L. Merrell                 (Principal Financial and
                                 Accounting Officer)


/s/ Guy J. Jordan, Ph.D.         Chairman of the Board            March 7, 2005
-----------------------------
Guy J. Jordan, Ph.D.


/s/ Donald D. Solomon, Ph.D.     Director, Vice President,        March 7, 2005
-----------------------------    COO and CTO
Donald D. Solomon, Ph.D.


/s/ David W. Jahns               Director                         March 7, 2005
-----------------------------
David W. Jahns


/s/ Stuart A. Randle             Director                         March 7, 2005
-----------------------------
Stuart A. Randle


/s/ Stephen I. Shapiro           Director                         March 7, 2005
-----------------------------
Stephen I. Shapiro


/s/ Robert R. Walker             Director                         March 7, 2005
-----------------------------
Robert R. Walker

                                       41
<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
                  Form 10-QSB, dated September 30, 2001).

3(i).2            Certificate of Designations, Preferences and Limitations of
                  Series A Preferred Stock, dated November 6, 2001 (Incorporated
                  by reference to Exhibit 3(i).2 of the Company's Form 10-QSB,
                  dated September 30, 2001).

3(i).3            Articles of Incorporation of Specialized Health Products, Inc.
                  ("SHP") (Incorporated by reference to Exhibit 3(i).2 of the
                  Company's Registration Statement on Form S-1 filed December
                  11, 1995 (File No. 33-901014)).

3(i).4            Articles of Amendment of SHP (Incorporated by reference to
                  Exhibit 3(i).3 of the Company's Registration Statement on Form
                  S-1 filed December 11, 1995 (File No. 33-901014)).

3(ii).1           Second Amended and Restated Bylaws of the Company
                  (Incorporated by reference to Exhibit 3(ii).1 of the Company's
                  Form 10-KSB, dated December 31, 2002).

3(ii).2           Bylaws of SHP (Incorporated by reference to Exhibit 3(ii).2 of
                  the Company's Registration Statement on Form S-1 filed
                  December 11, 1995 (File No. 33-901014)).

10.1              Employment Agreement with Jeffrey M. Soinski, dated November
                  8, 2001 (Incorporated by reference to Exhibit 10.1 of the
                  Company's Form 10-QSB, dated September 30, 2001).

10.2              Employment Agreement with Donald D. Solomon, Ph.D.
                  (Incorporated by reference to Exhibit 10.2 of the Company's
                  Form 10-KSB, dated December 31, 2001).

10.3              Employment Agreement with Mr. Paul S. Evans. (Incorporated by
                  reference to Exhibit 10.2 of the Company's Form 10-KSB, dated
                  December 31, 2001).

10.4              Form of Indemnity Agreement with Executive Officers and
                  Directors (Incorporated by reference to Exhibit 10.4 of the
                  Company's Form 10-KSB, dated December 31, 2000).

10.5              License Agreement by and among Merit Medical Systems, Inc. and
                  Safety Syringe Corporation (Incorporated by reference to
                  Exhibit 10.7 of the Company's Form 10-KSB, dated December 31,
                  2000).

10.6              Specialized Health Products International, Inc. 2000 Stock
                  Option Plan (Incorporated by reference to Exhibit 10.7 of the
                  Company's Quarterly Report on Form 10-QSB, dated June 30,
                  2000).

10.7              Specialized Health Products International, Inc. 2001 Stock
                  Option Plan (Incorporated by reference to Exhibit 10.9 of the
                  Company's Quarterly Report on Form 10-QSB, dated September 30,
                  2001).

10.8              Series A Stock Purchase Agreement, dated October 5, 2001, by
                  and between the Company and the investors identified therein
                  (Incorporated by reference to Exhibit 10.1 of the Company's
                  Current Report on Form 8-K, dated November 7, 2001).

10.9              Investors' Rights Agreement, dated October 5, 2001, by and
                  between the Company and the investors identified therein
                  (Incorporated by reference to Exhibit 10.2 of the Company's
                  Current Report on Form 8-K, dated November 7, 2001).

10.10             Distribution Agreement, dated September 17, 2001, by and
                  between the Company and Bard Access Systems, Inc.
                  (Incorporated by reference to Exhibit 10.12 of the Company's
                  Current Report on Form 8-K, dated November 7, 2001).

                                       42
<PAGE>

EXHIBIT NO.                           DESCRIPTION OF EXHIBIT
-----------                           ----------------------

10.11             Second Development and License Agreement, effective date of
                  April 12, 2002, by and among Safety Syringe Corporation, a
                  wholly owned subsidiary of the Company and Tyco Healthcare
                  Group LP. (Incorporated by reference to Exhibit 10.13 of the
                  Company's Quarterly Report on Form 10-QSB, dated June 30,
                  2001).

10.12             Development and License Agreement, effective as of January 1,
                  2002, by and among Safety Syringe Corporation and TAP
                  Pharmaceutical Products, Inc. (Incorporated by reference to
                  Exhibit 10.14 of the Company's Quarterly Report on Form
                  10-QSB, dated June 30, 2001).

10.13             OEM Supply and Distribution Agreement, effective as of May 21,
                  2003, by and between Specialized Health Products, Inc., a
                  wholly owned subsidiary of the Company and ExelInt
                  International, Company. (Incorporated by reference to Exhibit
                  10.16 of the Company's Quarterly Report on Form 10-QSB, dated
                  June 30, 2002).

10.14             License Agreement, effective August 8, 2003, by and between
                  Specialized Health Products, Inc. and Becton, Dickinson and
                  Company. (Incorporated by reference to Exhibit 10.17 of the
                  Company's Quarterly Report on Form 10-QSB, dated June 30,
                  2002).

10.15             Specialized Health Products International, Inc. 2004 Employee
                  Stock Purchase Plan. (Incorporated by reference to Exhibit
                  10.18 of the Company's Annual Report on Form 10-KSB, dated
                  December 31, 2003).

10.16             Purchase Agreement, dated March 22, 2004, by and between
                  Specialized Health Products International, Inc. and Galen
                  Partners III, L.P., Galen Partners International III, L.P. and
                  Galen Employee Fund III, L.P. (Incorporated by reference to
                  Exhibit 10.19 of the Company's Annual Report on Form 10-KSB,
                  dated December 31, 2003).

10.17             Amendment No. 1 to Investors' Rights Agreement, effective date
                  of March 22, 2004, by and between the Company and the
                  Initiating Holders as identified on the signature page.
                  (Incorporated by reference to Exhibit 10.19 of the Company's
                  Annual Report on Form 10-KSB, dated December 31, 2003).

10.18             Development and OEM Supply/Distribution Agreement, effective
                  as of June 15, 2004, by and between Specialized Health
                  Products International, Inc. and Tyco Healthcare Group LP.
                  (Incorporated by reference to Exhibit 10.20 of the Company's
                  Quarterly Report on Form 10-QSB, dated June 30, 2004).

10.19             Specialized Health products International, Inc. 2004 Stock
                  Incentive Plan (Incorporated by reference to Exhibit 4.5 of
                  the Company's Registration Statement on Form S-8 filed
                  September 27, 2004 (File 333-119306)).

10.20             Purchase Agreement, dated March 7, 2005, by and between
                  Specialized Health Products International, Inc. and Galen
                  Partners III, L.P., Galen Partners International III, L.P. and
                  Galen Employee Fund III, L.P.

21.1              Schedule of subsidiaries (Incorporated by reference to Exhibit
                  21.1 of the Company's Form 10-KSB, dated December 31, 2000).

23.1              Consent of Independent Registered Public Accounting Firm

31.1              Certification by Jeffrey M. Soinski under Section 302 of the
                  Sarbanes-Oxley Act of 2002.

31.2              Certification by Keith L. Merrell under Section 302 of the
                  Sarbanes-Oxley Act of 2002

32.1              Certification of Jeffrey M. Soinski pursuant to 18 U.S.C.
                  Section 1350, as adopted pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.

32.2              Certification of Keith L. Merrell pursuant to 18 U.S.C.
                  Section 1350, as adopted pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.

                                       43
<PAGE>

SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




                                                                     Page
                                                                     ----


Report of Independent Registered Public Accounting Firm              F - 2


Consolidated Balance Sheet as of December 31, 2004                   F - 3

Consolidated Statements of Operations for the Years Ended
  December 31, 2004 and 2003                                         F - 5

Consolidated Statement of Stockholders' Equity
  for the Years Ended December 31, 2004 and 2003                     F - 6

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2004 and 2003                                         F - 7

Notes to Consolidated Financial Statements                           F - 8

                                      F-1
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of
Specialized Health Products International, Inc.:


In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Specialized
Health Products International, Inc. and its subsidiaries at December 31, 2004,
and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 2004 and 2003 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Salt Lake City, Utah
March 8, 2005

                                      F-2
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET


                                                                                           December 31,
                                                                                               2004
                                                                                         ---------------
      <S>                                                                                <C>
      Assets
      Current assets:
         Cash and cash equivalents                                                       $     1,571,926
         Accounts receivable                                                                   1,228,647
         Inventory                                                                               286,577
         Prepaid expenses and other                                                              146,924
                                                                                         ---------------
             Total current assets                                                              3,234,074
                                                                                         ---------------
      Property and equipment, net:
         Research and development machinery and equipment                                        363,464
         Office furniture and fixtures                                                           158,085
         Computer equipment and software                                                         204,075
         Leasehold improvements                                                                  139,350
         Molds                                                                                   201,090
         Manufacturing equipment                                                                  75,440
         Construction in process                                                                 207,795
                                                                                         ---------------
                                                                                               1,349,299
         Less accumulated depreciation and amortization                                         (901,392)
                                                                                         ---------------
             Total property and equipment, net                                                   447,907
                                                                                         ---------------
      Intangible assets, net                                                                    261,115
                                                                                         ---------------
      Other assets                                                                              114,633
                                                                                         ---------------
                                                                                         $     4,057,729
                                                                                         ===============





                           See accompanying notes to consolidated financial statements.

                                                       F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEET (Continued)


                                                                                           December 31,
                                                                                               2004
                                                                                         ---------------
      <S>                                                                                <C>
      Liabilities and Stockholders' Equity
      Current liabilities:
         Accounts payable                                                                $       295,598
         Accrued liabilities                                                                     422,680
         Accrual for patent litigation expenses                                                  791,365
         Deferred revenue                                                                        293,841
                                                                                         ---------------
             Total current liabilities                                                         1,803,484
                                                                                                  77,500
      Deferred revenue, net of current portion
      Deferred rent                                                                               10,797
                                                                                         ---------------
             Total liabilities                                                                 1,891,781
                                                                                         ---------------
      Commitments and contingencies (Note 4)

      Stockholders' equity:
         Series A preferred stock, $.001 par value; 30,000,000 shares authorized, no                   -
           shares issued and outstanding at December 31, 2004
         Common stock, $.02 par value; 70,000,000 shares authorized, 44,457,995
           shares issued and outstanding at December 31, 2004                                    889,160
         Additional paid-in capital                                                           42,007,866
         Deferred compensation                                                                (3,578,366)
         Accumulated deficit                                                                 (37,152,712)
                                                                                         ---------------
             Total stockholders' equity                                                        2,165,948
                                                                                         ---------------
             Total liabilities and stockholders' equity                                  $     4,057,729
                                                                                         ===============


                           See accompanying notes to consolidated financial statements.

                                                       F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                   Years ended December 31
                                                                                  2004                   2003
                                                                            -----------------    -----------------
<S>                                                                         <C>                  <C>
Revenues:
    Product sales and royalties                                             $       4,361,052    $       2,768,570
    Technology fees and licensing revenues                                            895,624              778,124
    Development fees and related services                                             508,602               59,880
                                                                            -----------------    -----------------
                                                                                    5,765,278            3,606,574
 Cost of revenues                                                                   1,082,131              582,575
                                                                            -----------------    -----------------

       Gross profit                                                                 4,683,147            3,023,999
                                                                            -----------------    -----------------

Operating expenses:
   Research and development (2004 total excludes
     amortization of deferred compensation of
     $82,772)                                                                       2,437,880            2,595,022
   Sales and marketing (2004 total excludes
     amortization of deferred compensation of
     $11,895)                                                                       1,007,338            1,203,310
   General and administrative (2004 total excludes
     amortization of deferred compensation of
     $161,788)                                                                      1,334,639            1,139,699
   Amortization of deferred compensation                                              256,455                    -
   Patent litigation expense                                                                -            1,300,000
                                                                            -----------------    -----------------
       Total operating expenses                                                     5,036,312            6,238,031
                                                                            -----------------    -----------------
Loss from operations                                                                 (353,165)          (3,214,032)
                                                                            -----------------    -----------------
Other income (expense):
   Interest income                                                                     30,040               93,158
   Other income (expense)                                                             (20,514)               1,752
                                                                            -----------------    -----------------
       Other income (expense)                                                           9,526               94,910
                                                                            -----------------    -----------------

Net loss                                                                    $        (343,639)   $      (3,119,122)
                                                                            =================    =================

Basic and diluted net loss per common share                                 $            (.01)   $            (.17)
                                                                            =================    =================

Basic and diluted weighted average number of common
  shares outstanding                                                               36,970,882           17,831,479
                                                                            =================    =================


                           See accompanying notes to consolidated financial statements.

                                                        F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY




                                       Series A
                                    Preferred Stock            Common Stock        Additional    Deferred
                                ------------------------------------------------    Paid-in       Compen-     Accumulated
                                  Shares       Amount       Shares       Amount     Capital       sation        Deficit
                                ----------    ---------   ----------   ---------  -----------   -----------   ------------
<S>                             <C>           <C>         <C>          <C>        <C>             <C>         <C>
BALANCE as of
  December 31, 2002             21,861,369    $  21,861   17,921,479   $ 358,430  $37,500,757     $       -   $(33,689,951)

Cancellation of shares                   -            -      (90,000)     (1,800)       1,800             -              -

Net loss                                 -            -            -           -            -             -     (3,119,122)
                                ----------    ---------   ----------   ---------  -----------   -----------   ------------
BALANCE as of
  December 31, 2003             21,861,369       21,861   17,831,479     356,630   37,502,557             -    (36,809,073)

Conversion of Series A
   Preferred stock to common
   stock                       (21,861,369)     (21,861)  21,861,369     437,227     (415,366)            -              -
Compensation expense for
   extension of 46,250 stock
   options                               -            -            -           -        9,300        (9,300)             -

Deferred finance cost for
   issuance of 80,000 warrants           -            -            -           -       98,561             -              -

Common stock issued through
   private placement, net of
   offering costs                        -            -    1,250,000      25,000      918,090             -              -

Common stock issued in
   exchange for stock options            -            -    3,375,397      67,508    3,758,014    (3,825,521)             -

Common stock purchased by
   SHPI 401(k) Plan                      -            -      139,750       2,795      136,710             -              -

Amortization of deferred
   compensation expense                  -            -            -           -            -       256,455              -

Net loss                                 -            -            -           -            -             -       (343,639)
                                ----------    ---------   ----------   ---------  -----------   -----------   ------------
BALANCE as of
  December 31, 2004                      -    $       -   44,457,995   $ 889,160  $42,007,866   $(3,578,366)  $(37,152,712)
                                ==========    =========   ==========   =========  ===========   ===========   ============



                           See accompanying notes to consolidated financial statements.

                                                      F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS




                                                                             Years Ended December 31,
                                                                              2004              2003
                                                                         -------------     -------------
<S>                                                                      <C>               <C>
Cash flows from operating activities:
    Net loss                                                             $    (343,639)    $  (3,119,122)
                                                                         -------------     -------------
    Adjustments to reconcile net loss to net cash used in operating
      activities:
        Depreciation and amortization                                           86,714           135,342
        Amortization of deferred compensation                                  256,455              -
        Amortization of deferred finance cost                                   10,928              -
        Changes in operating assets and liabilities:
           Accounts receivable                                                (501,032)         (484,680)
           Inventory                                                           (87,533)          194,844
           Prepaid expenses and other                                           20,803           125,289
           Accounts payable                                                     66,476            28,448
           Accrued liabilities                                                 103,861             3,522
           Accrual for patent litigation expenses                             (500,000)        1,291,365
           Deferred revenue                                                   (795,624)       (1,019,026)
           Deferred rent                                                        (1,132)           (1,867)
                                                                         -------------     -------------
              Net cash used in operating activities                         (1,683,723)       (2,845,885)
                                                                         -------------     -------------
Cash flows from investing activities:
    Purchase of intangible assets                                              (44,819)          (95,865)
    Purchase of property and equipment                                        (187,753)         (160,204)
                                                                         -------------     -------------
              Net cash used in investing activities                           (232,572)         (256,069)
                                                                         -------------     -------------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net of offering costs             1,082,595                 -
                                                                         -------------     -------------
              Net cash provided by financing activities                      1,082,595                 -
                                                                         -------------     -------------
Net decrease in cash and cash equivalents                                     (833,700)       (3,101,954)
Cash and cash equivalents at beginning of year                               2,405,626         5,507,580
                                                                         -------------     -------------
Cash and cash equivalents at end of year                                 $   1,571,926     $   2,405,626
                                                                         =============     =============

                     See accompanying notes to consolidated financial statements.

                                                  F-7
</TABLE>
<PAGE>

SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) HISTORY AND NATURE OF OPERATIONS


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

SHPI designs, develops, manufactures, and licenses safety healthcare products
that minimize the risk of accidental needle sticks. The Company has developed
multiple products based upon two patented technology platforms, FlexLoc(R) and
SecureLoc(TM). These technologies apply to the following: syringe, pre-filled
syringe, IV catheter, guidewire introducer, PICC introducer, blood collection,
epidural, spinal, Huber, biopsy, and other specialty needles. The Company
operates in one business segment.

The Company's business model is to enter into licensing, original equipment
manufacturing ("OEM") supply, or distribution agreements for its products,
rather than engage in direct sales of products to end-users on its own. SHPI has
entered into product agreements relating to specific technologies and product
lines with The Kendall Company ("Kendall"), a division of Tyco Healthcare Group
LP, Bard Access Systems, Inc. ("Bard"), TAP Pharmaceutical Products Inc.
("TAP"), Merit Medical Systems, Inc. ("Merit") and Exelint International Co.
("Exel"). SHPI has distribution agreements in place with Cardinal Health,
Medline Industries, Inc. ("Medline"), Physician Sales and Service, Inc. ("PSS"),
Medical Specialties Distributors, Inc., Omni Medical Supply, Inc., Briggs
Corporation, Henry Schein, Inc., Wolf Medical Supply, Inc., Biometrix Ltd. and
Medical Mart Supplies Ltd. for products marketed under the SHPI label.

The Company's working capital requirements for the foreseeable future will vary
based upon a number of factors, including the costs to complete development
work, the cost of bringing safety medical needle technologies and other products
to commercial viability, the timing of the market launches of new safety needle
products and the level of sales of current products. As of December 31, 2004,
the Company had accounts payable and accrued liabilities totaling $718,278. The
Company also had the current portion of accrued litigation expenses of $791,365
and deferred revenue of $293,841, neither of which will require the use of cash.
At December 31, 2004, the Company had cash and cash equivalents of $1,571,926.

The Company believes existing cash, along with cash generated from the sale of
products, development fees and royalties and $1,000,000 of committed funding
from Galen Partners (Note 6) will provide sufficient cash for the Company to
execute its business plan in 2005.

(2) SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial

                                      F-8
<PAGE>

statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.

Concentrations of Risk

The Company's distribution and license agreements are primarily with partners
operating in the United States. At December 31, 2004, one partner accounted for
approximately 46% of the accounts receivable balance. For the years ended
December 31, 2004 and 2003, two partners accounted for approximately 55% of
total revenues each year.

The Company is currently utilizing a single contract manufacturer headquartered
in Vista, California, with FDA and ISO compliant assembly facilities in Tijuana,
Mexico to produce its LiftLoc(R) Safety Infusion Set. The Company believes that
other contract manufacturers could provide similar services on comparable terms.
A change in contract manufacturers, however, could cause a delay in
manufacturing and a possible loss of sales, which would affect operating results
adversely.

Cash and Cash Equivalents

The Company considers all certificates of deposit with an original maturity date
of three months or less to be cash equivalents. Cash and cash equivalents are
deposited with financial institutions located in Salt Lake City, UT and at times
may exceed insured depository limits.

Inventory

Inventory is valued at the lower of cost or market. Cost is determined using the
first-in first-out ("FIFO") basis. At December 31, 2004, inventory is comprised
of the following:

                                                  December 31, 2004
                                                  -----------------
         Raw materials                               $  182,202
         Work in process                                  4,045
         Finished goods                                 112,330
         Less: Allowance for obsolescence and
           shrinkage                                    (12,000)
                                                     ----------
         Total                                       $  286,577
                                                     ==========

Property and Equipment

Property and equipment are stated at cost. Manufacturing equipment is
depreciated using the straight-line method over seven years or the
units-of-production method, whichever is greater. Leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful life of the asset. All other property and equipment are
depreciated using the straight-line method based on the estimated five-year
useful life of the related assets, except for computer equipment and software,
which have a useful life of three 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 or amortization are removed from the
accounts and resulting gains or losses are reflected in current operations.

                                      F-9
<PAGE>

Long-Lived Assets

The Company regularly evaluates whether events or circumstances have occurred
that indicate the carrying value of its long-lived assets may not be
recoverable. When factors indicate the asset may not be recoverable, the Company
compares the related undiscounted future net cash flows to the carrying value of
the asset to determine if impairment exists. If the expected future net cash
flows are less than the carrying value, an impairment charge is recognized based
on the fair value of the asset. No such impairments were recorded during the
years ended December 31, 2004 and 2003.

Other Assets

Other assets consist of a building security lease deposit for the Company's
headquarters building.

Intangible Assets

Intangible assets consist of outside legal patent costs that have been
capitalized and are being amortized using the straight-line method over 17
years. Accumulated amortization at December 31, 2004 was $19,289. The following
summarizes estimated amortization expense that will be recorded over the next
five years:

            Year Ending December 31        Amortization Expense
            -----------------------        --------------------
                     2005                         $  20,000
                     2006                            20,000
                     2007                            20,000
                     2008                            20,000
                     2009                            20,000
                                                 ----------
                                                 $  100,000
                                                 ==========

Stock Options

The Company recorded compensation expense of $256,455 during 2004. Of this
amount $247,155 relates to charges for restricted stock and $9,300 is the charge
resulting from the extension of certain option agreements. As of December 31,
2004, approximately $3,578,000 remains to be amortized over the remaining
vesting periods of the restricted stock. The Company accounts for stock options
granted using Accounting Principles Board APB Opinion No. 25. Accordingly, no
compensation cost has been recognized for its fixed stock option plans, with the
exception noted above. Had compensation cost for the Company's stock-based
compensation plans (See Note 5) been determined based on the fair value at the
grant dates for awards under those plans consistent with Statement of Financial
Accounting Standards ("SFAS") No. 123, as amended by SFAS No. 148, the Company's
net loss and net loss per common share would have changed to the pro forma
amounts indicated below:

                                                     Years Ended December 31,
                                                     2004              2003
                                                ------------      ------------
Net loss, as reported                           $   (332,711)     $ (3,119,122)
Add: Stock compensation expense
  included in reported net income                    256,455                 -
Less: Stock compensation cost
  determined under fair value based
  method for all awards                           (1,034,259)       (1,199,150)
                                                ------------      ------------

Pro forma net loss                              $ (1,110,515)     $ (4,318,272)
                                                ============      ============

                                      F-10
<PAGE>

Basic and diluted net loss per   As reported    $       (.01)     $       (.17)
   common share:                 Pro forma              (.03)             (.24)

Revenue Recognition

Pursuant to Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition",
the Company recognizes license revenue when the following criteria has been met:
(a) persuasive evidence of an arrangement exists, (b) delivery has occurred or
services have been rendered, (c) the price is fixed or determinable, and (d)
collectibility is reasonably assured.

The Company received no upfront fees in 2004 and received upfront fees totaling
$1,080,000 in payments related to the Tyco Healthcare agreements in 2003. These
upfront payments are being recognized ratably over the life of the respective
agreements.

Product revenues are recognized upon the shipment date of the product, and
transfer of both title and risk of loss to the customer.

Royalty revenue is recognized when the related products are sold or upon the
Company's fulfillment of any future obligation under the related agreements.
Revenue from development agreements is recognized as the services are performed,
in accordance with the terms of the agreements.

Research and Development Costs

Research and development costs are expensed as incurred.

Income Taxes

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

Fair Value of Financial Instruments

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

Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4" ("SFAS 151").
SFAS 151 amends the guidance in ARB No. 43, Chapter 4 to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). The provisions of SFAS 151 are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
adoption of SFAS 151 is not expected to have a material effect on the Company's
financial condition or results of operations.

In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets -
an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 amends APB Opinion 29
to eliminate the similar productive asset exception and establishes that
exchanges of productive assets should be accounted for at fair value, rather
than at carryover basis unless (1) neither the asset received nor the asset
surrendered has a fair value that is determinable within reasonable limits, (2)
the transaction is an exchange transaction to facilitate sales to customers, or
(3) the transaction lacks commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to

                                      F-11
<PAGE>

change significantly as a result of the exchange. The provisions of SFAS 153 are
effective for nonmonetary exchanges occurring in fiscal periods beginning after
June 15, 2005. The adoption of SFAS 153 is not expected to have a material
effect on the Company's financial condition or results of operations.

In December 2004, the FASB issued SFAS 123R, "Share-Based Payment". SFAS 123R
establishes that employee services received in exchange for share-based payment
result in a cost that should be recognized in the income statement as an expense
when the services are consumed by the enterprise. It further establishes that
those expenses be measured at fair value determined as of the grant date. As the
Company qualifies as a small business issuer, the provisions of SFAS 123R become
effective as of the beginning of the first interim reporting period that begins
after December 15, 2005. We are currently evaluating the effect the adoption of
SFAS 123R will have on the Company's financial condition and results of
operations.

Basic and Diluted Net Loss Per Common Share

As a result of the Company incurring net losses for the years ended December 31,
2004 and 2003, the basic and diluted net loss per common share for these years
are based on the weighted average number of common shares outstanding.
Outstanding stock options and warrants prior to conversion are not included in
the calculation of diluted earnings per share for 2004 and 2003 because their
inclusion would be antidilutive, thereby reducing the net loss per common share.
Options and warrants to purchase 204,250 and 7,185,690 shares of common stock at
exercise prices ranging from $0.02 to $2.00 per share were outstanding at
December 31, 2004 and 2003, respectively.

At December 31, 2004 there were no shares of Series A Preferred Stock
outstanding. At December 31, 2003, there were 21,861,369 shares of Series A
Preferred Stock outstanding, which were converted into common stock on a
one-for-one basis during 2004. Such shares were not included in the computation
of diluted earnings per share for 2003 because their inclusion would be
antidilutive.

(3) DISTRIBUTION AND LICENSE AGREEMENTS

License Agreements

         Kendall

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

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

                                      F-12
<PAGE>

         Merit Medical

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

         TAP Pharmaceutical Products

         In July 2002, the Company entered into a Development and License
Agreement with TAP Pharmaceutical Products Inc. whereby TAP acquired the right
to attach the Company's proprietary safety needle device to TAP's pre-filled
syringes. The TAP Agreement has an effective date of January 1, 2002. Under the
TAP Agreement, the Company receives reimbursement for research and development
expenses, payments related to the achievement of certain development and
regulatory milestones, and on-going royalty payments based upon the number of
pre-filled syringes manufactured with the Company's proprietary safety needle
device. The TAP Agreement is for a minimum period of three years.

         Becton, Dickinson and Company

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

Distribution Agreements

         Bard Access Systems

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

         Physician Sales & Service

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

         Medline Industries

         In August 2002, the Company entered into a Distribution Agreement with
Medline Industries, Inc. whereby Medline acquired the non-exclusive right to
distribute and sell LiftLoc(R) Safety Infusion Set. Under the terms of the
agreement, Medline purchases SHPI branded product for resale to Medline's

                                      F-13
<PAGE>

end-user customers. The Medline Agreement is for a one-year period, which
automatically renews for successive one-year terms unless terminated by either
party in writing not less than 45 days prior to the expiration of the initial
term or any renewal term.

         Cardinal Health

         In August 2002, the Company entered into a Distribution Agreement with
Cardinal Health, formerly named Allegiance Healthcare Corporation, whereby
Cardinal acquired the non-exclusive right to distribute and sell LiftLoc(R)
Safety Infusion Set. Under the terms of the agreement, Cardinal purchases SHPI
branded product for resale to Cardinal's end-user customers. The Cardinal
Agreement shall continue until 90 days after written notice of termination is
received by either party.

         ExelInt International

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

         Other LiftLoc(R) Distribution Agreements

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

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

         In February 2004, the Company entered into a Distribution Agreement
with Medical Mart Supplies Ltd. whereby Medical Mart acquired the right to
distribute and sell SHPI branded LiftLoc(R) Safety Infusion Set in Canada. Under
the terms of the agreement, Medical Mart purchases SHPI branded product for
resale to their end-user customers. The agreement runs through December 2005 and
shall be renewed automatically for additional, consecutive one-year terms unless
terminated by either party in writing not less than 90 days prior to the
expiration of the initial term or any renewal term.

         Tyco Healthcare

         In June 2004, the Company entered into a worldwide Development and OEM
Supply/Distribution agreement with Tyco Healthcare for the marketing and sale of
safety bone marrow biopsy needles. Under the terms of the agreement, Tyco
Healthcare will purchase safety and conventional bone marrow biopsy needles from
the Company, as well as make reimbursement for certain research and development
expenses related to product commercialization.

                                      F-14
<PAGE>

(4) COMMITMENTS AND CONTINGENCIES

Lease Obligations

         The Company leases office space under a non-cancelable operating lease,
which is effective through May 31, 2006. The following summarizes future minimum
lease payments under the operating lease at December 31, 2004:

                                                   Minimum
               Year Ending December 31          Lease Payments
               -----------------------          --------------

                       2005                    $        260,397
                       2006                             107,499
                                               ----------------
                                               $        367,896
                                               ================

         Rental expense for the years ended December 31, 2004, and 2003 totaled
approximately $253,908 and $244,800, respectively.

Employment and Indemnity Agreements

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

         In January 2003, the Compensation Committee approved a 2003 Executive
Officer Bonus Plan. In February 2004, the Compensation Committee approved a 2004
Executive Officer Bonus Plan. Under both plans, executive officers eligible for
bonuses included the Company's President and CEO, Chief Operating Officer, and
Vice President, General Counsel and Business Development. Plan participants were
eligible to earn 20% of their annual salary based upon 100% achievement of
certain financial goals outlined in the approved budget plan. The maximum base
bonus that could be paid under each plan was $124,200 in 2003 and $126,750 in
2004. In January 2004, the board of directors approved total payments of
$105,729 under the 2003 Plan. In February 2005, the board of directors approved
total payments of $120,015 under the 2004 Plan. In connection with these plans,
the Company also adopted an Employee Bonus Plan for employees other than the
Named Executive Officers to reward specific individual or team achievements. The
total approved for this plan was $75,000 in both 2003 and 2004. During 2003 and
in February 2004, payments of $61,000 were made against the 2003 Plan. During
2004 and in February 2005, payments of $75,000 were made against the 2004 Plan.

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

Litigation

         In December 2002, Becton Dickinson ("BD") filed a lawsuit against Tyco
Healthcare in the United States Court of the District of Delaware, asserting

                                      F-15
<PAGE>

that Tyco Healthcare's Monoject Magellan(TM) safety products infringe upon BD's
U.S. Patent No. 5,348,544 (`544 Patent), titled "Single-Handedly Actuable Safety
Shield for Needles."

         On October 26, 2004, a jury found in favor of BD that Tyco Healthcare's
Monoject Magellan(TM) safety products willfully infringed the `544 Patent and
awarded damages of $4.4 million. On November 1, 2004, the court entered the
judgment in favor of BD. Tyco Healthcare is challenging the jury finding in
post-trial motions, and, if necessary, in an appeal. Tyco Healthcare developed
the Monoject Magellan(TM) safety products in association with the Company. The
Company is not a party to the patent infringement lawsuit.

         Under the Kendall Agreement, Tyco Healthcare has the right to withhold
up to fifty percent (50%) of royalties due as an offset against litigation
expenses related to charges of infringement by a third party for the
manufacture, use or sale of licensed product. This right continues during the
period in which such litigation is pending. If, as a result of judgment in the
litigation or settlement with BD, Tyco Healthcare is required to pay royalty
and/or other monies to BD, Tyco Healthcare may thereafter deduct from the amount
of royalties due the Company on unit sales of products alleged to infringe, an
amount which is the lesser of all royalties and/or other monies paid by Tyco
Healthcare to BD, or fifty percent (50%) of all royalty payments otherwise
payable to the Company.

         Based on information obtained during the fourth quarter of 2003 related
to costs incurred by Tyco Healthcare, the Company recorded a liability of
approximately $1,300,000 at December 31, 2003, which amount was the Company's
estimate of the portion of costs associated with BD's suit against Tyco
Healthcare that Tyco Healthcare will withhold against the royalties due SHPI
through 2005. During the twelve months ended September 30, 2004, Tyco Healthcare
withheld fifty percent of royalty payments due, which amounts totaling $500,000
have been offset against the accrual. In the event litigation continues beyond
2005, additional liabilities may accrue. If Tyco Healthcare is unsuccessful in
post-trial motions and on appeal, Tyco Healthcare may be prohibited from selling
the Monoject Magellan(TM) safety products in their current form.

(5) STOCK OPTIONS

         Effective November 2001, the Company's Board of Directors and
stockholders approved the adoption of the Specialized Health Products
International, Inc. 2001 Stock Option plan. The plan permits the Company to
grant non-qualified stock options and incentive stock options to acquire common
stock. The total number of shares authorized for the plan may be allocated by
the board between non-qualified stock options and incentive stock options from
time to time, subject to certain requirements of the Internal Revenue Code of
1986, as amended. The option exercise price per share under the plan may not be
less than the fair market value (or 110% of such fair market value when the
optionee is a 10 percent stockholder) on the date on which the option is
granted. A total of 5,000,000 shares are available for issuance under the plan.
The options are exercisable for a period not to exceed 10 years (or five years
when the optionee is a 10 percent stockholder) from the date of grant. At
December 31, 2004, options to acquire an aggregate of 13,000 shares of common
stock at exercise prices of $1.19 were outstanding under the 2001 Stock Option
plan.

         Effective June 2000, adoption of the Specialized Health Products
International, Inc. 2000 Stock Option plan was approved by the Company's Board
of Directors. The plan is administered by the Board of Directors. The plan
provides for the issuance of up to 2,500,000 shares of common stock to
directors, officers, employees and consultants. The exercise price of the
options granted will be the greater of $1.00 per share or the fair market value
(or 110 percent of such fair market value when the optionee is a 10 percent
stockholder) of the underlying common stock on the date of grant. The options
are exercisable for a period not to exceed 10 years (or five years when the
optionee is a 10 percent stockholder) 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

                                      F-16
<PAGE>

of Directors. The plan 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 may not be less than the greater of $2.00 per share or the fair
market value (or 110 percent of such fair market value when the optionee is a 10
percent stockholder) of the underlying common stock on the date of grant. The
options are exercisable for a period not to exceed 10 years (or five years when
the optionee is a 10 percent stockholder) from the date of grant.

         As of December 31, 2004, options to acquire an aggregate of 111,250
shares of common stock at exercise prices ranging from $1.00 to $2.00 were
outstanding under the 2000 and 1998 stock option plans.

         A summary of the status of the Company's option plans as of December
31, 2004 and 2003, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
                                        2004                     2003
                           ---------------------------------------------------------
                                            Wtd. Avg.                     Wtd. Avg.
                                             Exercise                     Exercise
                                Shares        Prices        Shares         Prices
                                ------      ---------       ------        --------
<S>                         <C>             <C>          <C>              <C>

Outstanding at beginning
  of year                      6,685,690   $  1.24       6,547,500       $    1.26
Granted                          100,000      1.35         473,000            1.00
Surrendered                   (5,738,190)     1.21               -
Forfeited                       (923,250)     1.38        (334,810)           1.41
                            ------------              --------------
Outstanding at end
  of year                        124,250      1.52       6,685,690            1.24
                            ============              ==============
Exercisable at end
  of year                        121,644      1.53       3,749,822            1.31
                            ============              ==============
Weighted average fair
  value of options
  granted                   $       1.07                $     0.69
                            ------------              --------------

The following table summarizes information about stock options outstanding at
December 31, 2004:
<CAPTION>
                                           Options Outstanding                        Options Exercisable
                         -------------------------------------------------- ----------------------------------
                             Number           Wtd. Avg.                           Number
                           Outstanding        Remaining        Wtd. Avg.        Exercisable       Wtd. Avg.
        Range of         as of December      Contractual        Exercise      as of December       Exercise
     Exercise Prices        31, 2004             Life            Price           31, 2004           Price
   -------------------- ------------------ ------------------ ------------- -------------------- -------------
    <S>                        <C>             <C>            <C>                  <C>           <C>
    $     1.00                    5,000         8.08 years    $         1.00           2,394     $         1.00
          1.12                   10,000         5.47                    1.12          10,000               1.12
          1.19                   29,250         3.66                    1.19          29,250               1.19
          1.25                   30,000         1.08                    1.25          30,000               1.25
          2.00                   50,000         0.87                    2.00          50,000               2.00
                        ------------------                                  --------------------
    $1.00 to 2.00               124,250                                              121,644
                        ==================                                  ====================
</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 2004 and 2003: average risk-free interest rate
ranging from 3.25% to 3.75% were used for 2004, with a rate range of 4.23% to
4.71% being used for 2003; expected lives of 10 years; expected dividend yields
of zero percent in each year; expected volatility of 73 and 81 percent,
respectively.

                                      F-17
<PAGE>

The following summarizes all warrant activity for the Company for the years
ended December 31, 2004, and 2003.
<TABLE>
<CAPTION>
                                          2004                            2003
                             ------------------------------- ---------------------------
                                                 Wtd. Avg.                     Wtd. Avg.
                                                 Exercise                      Exercise
                                  Shares          Prices          Shares        Prices
                             --------------- --------------- -------------- ------------
   <S>                             <C>           <C>               <C>          <C>
   Outstanding at beg-
     inning of the year             500,000       $  2.00           800,000      $ 1.72
   Granted                           80,000           .02                 -           -
   Forfeited                       (500,000)         2.00          (300,000)       1.25
                             ---------------                 --------------
   Outstanding at end of
     the year                        80,000       $   .02           500,000      $ 2.00
                             ===============                 ==============
   Exercisable at end of
     the year                        80,000                         500,000
                             ===============                 ==============
</TABLE>

         On September 15, 2004, The 2004 Stock Incentive Plan ("Stock Plan") was
approved by the Board of Directors and became effective on that date, subject to
the Stock Plan being approved by the stockholders within six months after that
date. The Stock Plan provides that 6,000,000 shares of the Company's authorized
but unissued common stock be reserve pursuant to the terms and conditions of the
plan. On October 19, 2004, a special meeting of stockholders was held, at which
time the stockholders approved the Stock Plan. The Stock Plan will allow the
Company, under the direction of the Compensation Committee, to make broad-based
grants of restricted stock and stock units, any of which may or may not require
the satisfaction of performance objectives, to employees and non-employee
directors. Under the Stock Plan, current directors and employees holding stock
option grants were given the election of retaining those stock option grants or
surrendering them for grants of common stock. This resulted in the surrender of
5,738,190 stock options in exchange for the issuance of 3,375,397 shares of
common stock. The stock issuance resulted in a non-cash charge of $3,825,521,
which will be expensed ratably over the three year vesting period of the stock
grants. The total charge relating to the exchange is $3,825,521, which will be
recognized ratably over the three-year vesting period of the grants. The charge
to expense for the year ended December 31, 2004 relating to this transaction was
$247,155.

(6) CAPITAL TRANSACTIONS

         At December 31, 2004, no shares of Series A Preferred Stock were
outstanding, a reduction of 21,861,369 shares as compared to the number of
shares of Series A Preferred Stock outstanding at December 31, 2003. The Series
A Preferred Stock Purchase Agreement contained an automatic conversion feature
whereby the Series A Preferred Stock automatically converted into common stock
when the average closing shares price of the Company's common stock, as reported
on the OTC Bulletin Board, exceeded $1.374 for at least twenty consecutive
trading days. Between January 26 and February 23, 2004, the common stock closed
each trading day at $1.39 per share or more. On February 23, 2004, the closing
price was $1.48 per share. As a result, all of the Series A Preferred Stock was
automatically converted into common stock on a one-for-one basis.

         On March 22, 2004, we entered into an agreement with Galen Partners
III, L.P., Galen Partners International III, L.P., and Galen Employee Fund III,
L.P. (collectively, "Galen Partners") whereby Galen Partners agreed to purchase
a convertible promissory note ("Note") in the aggregate principal amount of
$1,000,000 upon our request made at any time between March 31, 2004 and March
31, 2005. As of December 31, 2004, Galen Partners owned approximately 34,390 of
the Company's common stock. As consideration for entering into this purchase
agreement, Galen Partners received a warrant that provides them the right, but
not the obligation, to purchase 80,000 shares of our common stock at an exercise


                                      F-18
<PAGE>

price of $0.02 per share. The warrant shall expire and be no longer exercisable
after 5:00 p.m., Eastern Time, on March 22, 2007. Further, we paid $9,991 in
legal fees related to this transaction. The Note has a term of three years and
bears interest at the rate of 12% per annum, with accrued interest to be paid
July 1 and January 1 of each year the Note remains outstanding. The entire
outstanding principal amount due on the Note may, at Galen Partner's option, be
converted into fully paid and nonassessable shares of the Company's common
stock. The conversion price will be 110% of the average closing share price for
the Company's common stock as reported on NASDAQ or the OTC Bulletin Board for
the twenty (20) consecutive trading days prior to the date of the issuance of
the Note.

         On March 7, 2005, Galen Partners agreed to a six-month extension of the
promissory note agreement through September 30, 2005 in exchange for the
issuance of warrants to purchase 40,000 shares of the Company's common stock at
an exercise price of $.02 per share. At the sole option of the Company, the
agreement may be extended for an additional six-month period through March 31,
2006 for the issuance of warrants to purchase an additional 40,000 shares of the
Company's common stock at an exercise price of $.02 per share. All other terms
and conditions of the original agreement remain unchanged in the subsequent
agreement.

         On August 30, 2004, the Company completed a private placement of
1,250,000 shares of restricted common stock to certain accredited and
sophisticated investors. Net proceeds of $943,090, after accounting for
transaction expenses, were realized from this transaction.

(7) INCOME TAXES

         The Company recognized no income tax benefit for the years ended
December 31, 2004 and 2003 from its net operating losses. Significant components
of the Company's net deferred income tax assets as of December 31, 2004 are as
follows:

                                                                  2004
                                                         --------------------
         Deferred income tax assets:
            Net operating loss carryforwards             $         9,528,749
            Non cash compensation expense                             95,658
            Accrued liabilities                                      338,141
            Intangible assets                                         89,392
            Research and experimentation tax
              credits/carryforwards                                  608,207
            Deferred revenue                                         138,510
            Depreciation                                               8,277
                                                         --------------------
                Total gross deferred income tax asset             10,806,934
            Less valuation allowance                             (10,806,934)
                                                         --------------------
                Net deferred income taxes                $                 -
                                                         ====================

         The net change in the valuation allowance for the years ended December
31, 2004 and 2003 was an increase of $2,733 and $1,343,824, respectively.

         SFAS 109 requires that a valuation allowance be provided if it is more
likely than not that some portion or all of a deferred tax asset will not be
realized. Because the Company has a history of operating losses, the Company's
ability to realize the benefit of its deferred tax asset will depend on the
generation of future taxable income. The Company has recorded a full valuation
allowance as of December 31, 2004.

         At December 31, 2004, the Company had total tax net operating losses
("NOLs") of $25,546,244 and Research and Experimentation tax credits of $608,207
that can be carried forward to reduce federal income taxes, if any.
Approximately $30,000 of NOLs expired in 2004. As defined in Section 382 of the
Internal Revenue Code, the Company has undergone a greater than 50 percent
ownership change as a result of the financing initiatives taken in 2001 and

                                      F-19
<PAGE>

2002. Consequently, there are limitations on the amount of the Company's tax net
operating loss carryforwards available to offset future taxable income in any
one year. The maximum amount of carryforwards available in a given year is
limited to the product of the Company's value on the date of ownership change
and the federal long-term tax-exempt rate, plus any limited carryforwards not
utilized in prior years.

(8) EMPLOYEE BENEFIT PLAN

         Employees who are 21 years of age are eligible for participation in the
Specialized Health Products International, Inc. 401(k) Plan and may elect to
make contributions to the plan. The Company matches 100 percent of such
contributions up to five percent of the individual participant's compensation.
The Company's contributions to the plan were approximately $104,400 and $106,300
for the years ended December 31, 2004 and 2003, respectively.






                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                      F-20
<PAGE>