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, 2002

                             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 $1,630,948

         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 14, 2003
was approximately $12,532,000.

         As of March 14, 2003, the Company had 17,921,479 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, 2002




                                     PART I

Item 1.     Description of Business...........................................3
Item 2.     Description of Property..........................................14
Item 3.     Legal Proceedings................................................14
Item 4.     Submission of Matters to a Vote of Security Holders..............15


                                     PART II

Item 5.     Market for Common Equity and Related Stockholder Matters.........16
Item 6.     Management's Discussion and Analysis or Plan of Operation........17
Item 7.     Financial Statements.............................................28
Item 8.     Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosures......................................28


                                    PART III

Item 9.     Directors, Executive Officers, Promoters and Control
              Persons; Compliance With Section 16(a) of the Exchange Act.....29
Item 10.    Executive Compensation...........................................31
Item 11.    Security Ownership of Certain Beneficial Owners and Management...35
Item 12.    Certain Relationships and Related Transactions...................38
Item 13.    Exhibits and Reports on Form 8-K.................................38
Item 14.    Controls and Procedures..........................................38

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                           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
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
approval 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 license cost-effective, innovative
safety healthcare products that minimize the risk of accidental needle sticks,
which are a leading cause of the spread of blood-borne diseases such as human
immunodeficiency virus and autoimmunodeficiency syndrome ("HIV/AIDS") and
hepatitis B virus ("HBV") and hepatitis C virus ("HCV"). We have 20 highly
differentiated, patented safety needle technologies. These technologies apply to
virtually all medical needles used today including: syringe, pre-filled syringe,
IV catheter, guidewire introducer, PICC introducer, winged needle sets, blood
collection, epidural, spinal, plasma aphaeresis sets, dialysis sets, Huber,
biopsy, and other specialty needles.

         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"), TAP Pharmaceutical Products Inc. ("TAP")

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and Merit Medical Systems, Inc. ("Merit"). We have distribution agreements in
place with Cardinal Health ("Cardinal", formerly Allegiance), Medline
Industries, Inc. ("Medline"), and Physician Sales and Service, Inc. ("PSS") 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 several other product applications of our proprietary
technologies.

         Our primary objective is to be the leader and innovator in disposable
medical safety sharps products, with an initial focus on safety medical needles.
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.

         In 2002 and January 2003, the first four product lines based upon our
proprietary safety needle technologies were introduced into the U.S. market.
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
                  private label and SHPI branded)
         o        Majestik(TM) Shielded Needle -- safety angiographic introducer
                  needle (Merit)
         o        LuproLoc(TM) -- pre-filled syringe safety needle (TAP)

         We see a significant and growing market opportunity for our medical
safety needle products. The current U.S. market for disposable medical needles
is well in excess of $1 billion. Most of this market is directly impacted by
recent state and federal safety legislation, culminating in the Needlestick
Safety and Prevention Act, which was signed into federal law in November 2000,
and became effective in April 2001. This law requires healthcare employers to
review new safety needle products and mandates their usage by employees. As
various government agencies increase their efforts to monitor compliance and
better designed safety products become available at reasonable pricing, we
anticipate that conversion to safety products will continue to accelerate.

         While foreign safety needle legislation lags behind that of the U.S.,
certain countries, such as France, have already demonstrated an interest in
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 20 highly differentiated, patented safety needle technologies
that are the basis for a wide range of safety needle products. These proprietary
technologies are protected by 22 U.S. patents and over 90 U.S. patents and
international patent applications pending. 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.

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<PAGE>

         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 being 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 15 stock-keeping units ("SKUs") in a
variety of needle lengths and gauges, and competes in the $260 million U.S.
safety needle and syringe market.

         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. Bard is subject to minimum purchase requirements. 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 Bard in writing not
less than 180 days prior to the expiration of the initial term or any renewal
term.

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         In the third calendar quarter of 2002, we entered into distribution
agreements with Allegiance Healthcare (now named Cardinal Health), Medline and
PSS, leading distributors with a strong presence in the oncology, chronic
hematology, and long-term intravenous nutritionals markets, for distribution of
LiftLoc(R) Safety Infusion Set under the SHPI label. Under the terms of the
distribution agreements, LiftLoc(R) distributors purchase product from us for
resale to their end-user customers. The Allegiance agreement shall continue
until 90 days after written notice of termination is received by either party.
The PSS and Medline agreements are for a one-year period, and automatically
renew 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.

         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 19 SKUs in a variety of
needle lengths and gauges. It competes in the $46 million U.S. Huber needle
market.

         Pre-filled Syringe Safety Needle Device

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

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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 will be 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 will 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.

         The FDA has already granted 510(k) clearance for marketing this
proprietary safety blood collection device. It will compete in the $130 million
U.S. blood collection needle market.

         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. introducer needle market.

         Safety Long Specialty Needles

         We have a significant program underway for developing safety long
specialty needles based upon our SecureLoc(TM) 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. Together long specialty needles represent a combined market opportunity
in excess of $200 million annually in the U.S.

         Due to their length, these specialty needles present unique challenges
for developing an effective safety system that does not interfere with clinical
technique. We have developed and filed patents for SecureLoc(TM), an innovative
safety needle technology that we believe effectively addresses these problems.
SecureLoc(TM) can be efficiently manufactured and installed onto existing long
specialty needles. We are currently engaged in active discussions with potential
corporate partners for several specialty long needle product applications of the
SecureLoc(TM) technology.

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         Safety Catheter Introducers

         Catheter introducers are devices that insert catheters into veins or
other areas of the body using a catheter insertion needle to allow blood or
other fluids to be removed from or delivered into the patient's body. Peripheral
IV catheter use has problems similar to those faced in drawing blood. Inserting
a catheter involves a percutaneous (i.e., through the skin) needlestick followed
by threading the catheter over the needle into a patient's vein or artery. This
method can be unsafe in two respects. First, when the needle is pulled out of
the catheter, there is often a discharge of blood that could contaminate the
healthcare worker. Second, inadvertent needlesticks can occur when the needle is
withdrawn from the catheter, because, in some instances, the needle is
temporarily left exposed while the healthcare worker tends to the patient.

         We have developed proprietary safety needle products for catheter
insertion, which provide passive needle protection in an intuitive design that
is integral to the catheter introducer. These products are also based upon our
SecureLoc(TM) technology. Clinicians would be able to use our passive safety
catheter introducers without modification to their current technique and still
have effective protection. Our device also minimizes the issue of blood splatter
or loss of control as is the case with some of the existing technologies. This
device will compete in the $255 million U.S. IV catheter market. We are
currently engaged in active licensing discussions on this product line.

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 well in excess of $1 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.

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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
health 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%
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 may be adequate supply and 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 primary objective is to be the leader and innovator in disposable
medical safety sharps products, with an initial focus on safety medical needles.
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 license 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.

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         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 provide
significant 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. We significantly expanded our sales and marketing capabilities
in 2002, by hiring a highly experienced Vice President of Sales & Marketing and
establishing full-time customer service support. In addition, we have put in
place four geographically dispersed Regional Sales Managers to train our
distributors' representatives and guide and support their efforts in the field.

Manufacturing and Facilities

         Products being developed under OEM supply or distribution agreements
are manufactured under our authority and supervision by a qualified contract
manufacturer. 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.

         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.

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 22 U.S. patents relating to our safety medical needle
technologies. We have over 90 U.S. and international patents and patent
applications pending. The patents referred to above first begin to expire in
2013. We filed 10 U.S. utility patent applications during 2002.

         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, Becton, Dickinson and Company ("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." 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.

                                       10
<PAGE>

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 100 patents and
patent applications worldwide and the creation of 20 highly differentiated,
patented safety needle technologies. These technologies apply to virtually all
medical needles used today including: syringe, pre-filled syringe, IV catheter,
guidewire introducer, PICC introducer, winged needle sets, blood collection,
epidural, spinal, plasma aphaeresis sets, dialysis sets, Huber, biopsy, and
other specialty needles. We spent $2,468,347 in 2002 and $1,815,082 in 2001on
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 $636,425 in 2002 and $202,615 in 2001. 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 Act) ("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, Safety
Blood Collection Device, LuproLoc(TM) Pre-filled Syringe Safety Needle, and
Majestik(TM) Shielded Angiographic Needle. We plan to submit an additional
510(k) application for one or more safety needle devices based upon the
SecureLoc(TM) technology during 2003.

         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
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)

                                       11
<PAGE>

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.

         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.

                                       12
<PAGE>

          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.
is subject to regulations in those countries. In December of 2002, SHPI received
a medical device license and approval to sell our LiftLoc(R) Safety Infusion Set
in Canada. There can be no assurance that we will be able to obtain the
approvals necessary to market our products in other countries outside the U.S.

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
Becton, Dickinson and Company and Kendall. Terumo Medical Corporation ("Terumo")
holds a minor U.S. market share. B. Braun Medical 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 Portex, Inc.

         Competitive suppliers of safety Huber needle products with an integral
safety feature or mechanism include Now Medical, Horizon Medical Products, Inc.,
Churchill Medical Ltd., and Portex, Inc. We also anticipate that B. Braun will
soon enter the U.S. market with a competitive safety Huber needle product. 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
opthalmic needles. Numerous companies compete within the various markets
associated with each of these needles. These companies include Cardinal Health,
Arrow, Bard, B. Braun Medical, 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, Medamicus, Needle Tech, Terumo, Daum, U.S. Biopsy, Ballard and Abbott
Laboratories.

         The leading suppliers in the IV catheter market are BD and Johnson &
Johnson. Other suppliers of IV catheters with minor positions in this market
include B. Braun Medical and Terumo.

         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.

                                       13
<PAGE>

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 14, 2003, we employed 27 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. We have four Regional Sales
Managers reporting to our Vice President, Sales & Marketing, and employ a
full-time customer service representative to provide product support and
ordering assistance.

         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, 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." BD is seeking injunctive relief as well as damages,
including attorneys' fees and costs, in an unspecified amount. Tyco Healthcare
responded in court filings that the Monoject Magellan(TM) safety products do not
infringe the `544 Patent. Moreover, Tyco Healthcare asserted in court filings
that the `544 patent is invalid and unenforceable.

                                       14
<PAGE>

         Under a Development and License Agreement executed between Tyco
Healthcare and us related to the Monoject Magellan(TM) safety products, 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.

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

         None




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                                       15
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                                    PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

Dividend Policy

         The holders of our Series A Preferred Stock are entitled to receive
dividends at the rate of eight percent per share per annum, payable
semi-annually, when, if and as declared by the board of directors, out of any
assets legally available therefore. The right to dividends on the Series A
Preferred Stock is not cumulative, and the holders of Series A Preferred Stock
have no right to any accrued or future dividend payment by reason of the fact
that dividends on such shares are not declared or paid in any prior year.

         To date, we have not paid dividends on our common stock. The payment of
dividends on the 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." Moreover, we are prohibited from paying a
dividend on our common stock unless a dividend is also concurrently declared and
paid on the Series A Preferred Stock. In addition, no dividend paid on the
common stock may exceed the dividend paid on the Series A Preferred Stock. 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 America Online ("AOL") and
its information suppliers. Note that the over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and that the quotations may not necessarily represent actual transactions in the
common stock.

         Quarter Ended                                High              Low
         -------------                                ----              ---
         2001
         ----
         March 31..............................        $1.18            $0.81
         June 30...............................        $0.95            $0.31
         September 30..........................        $0.83            $0.62
         December 31...........................        $1.90            $0.70

         2002
         ----
         March 31..............................        $1.73            $1.25
         June 30...............................        $1.43            $1.05
         September 30..........................        $1.05            $0.60
         December 31...........................        $1.03            $0.65


Holders of Record

         At March 14, 2003, there were approximately 320 holders of record of
our common stock. The number of holders of record was calculated by reference to
our stock transfer agent's books.

                                       16
<PAGE>

Issuance of Securities

         The Series A Preferred Stock Purchase Agreement (the "Series A
Agreement") entered into in November 2001 provided that the investors had the
right, but not the obligation to acquire additional shares of Series A Preferred
Stock at $.458 per share ($5,000,000 total) during the 12 months following the
initial closing date of November 7, 2001. In September 2002, Galen Partners
exercised their option to purchase the additional shares to which they held
rights. Under the terms of the Series A Agreement, the options to purchase held
by the remaining qualified investors would expire in thirty days if not
exercised. All of those holding options to purchase exercised some or all of
their rights, purchasing an additional 10,944,339 shares of Series A Preferred
stock. We realized net proceeds of $5,002,957 from the transaction. A non-cash
beneficial conversion charge of $3,281,564 was recognized related to this
transaction. This amount has been treated as a preferred stock dividend in the
2002 financial statements.

         The issuance of the securities described above was exempt from
registration pursuant to Sections 4(2) and 4(6) of the Securities Act of 1933
and pursuant to Regulation D as promulgated under the Securities Act of 1933. We
did not use an underwriter in connection with these transactions.

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.

Overview

         We design, develop, manufacture, and license cost-effective, innovative
safety healthcare products that minimize the risk of accidental needle sticks,
which are a leading cause of the spread of blood-borne diseases such as human
immunodeficiency virus and autoimmunodeficiency syndrome ("HIV/AIDS") and
hepatitis B virus ("HBV") and hepatitis C virus ("HCV"). We have 20 highly
differentiated, patented safety needle technologies. These technologies apply to
virtually all medical needles used today including: syringe, pre-filled syringe,
IV catheter, guidewire introducer, PICC introducer, winged needle sets, blood
collection, epidural, spinal, plasma aphaeresis sets, dialysis sets, Huber,
biopsy, and other specialty needles.

Financial Position

         We had $5,507,580 in cash as of December 31, 2002, an increase of
$2,136,173 from December 31, 2001. Working capital as of December 31, 2002 was
$4,719,110 as compared to $2,317,175 at December 31, 2001. These increases were
primarily due to the $5 million investment by Galen Partners and other
accredited investors in September and November 2002.

                                       17
<PAGE>

Product Agreements

         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. Both of these payments are being recognized ratably
over the life of the Kendall Agreement. 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. Kendall is
marketing the product line under the brand name Monoject Magellan(TM). The
Monoject Magellan(TM) product line includes 15 stock-keeping units ("SKUs") in a
variety of needle lengths and gauges, and competes in the $260 million U.S.
safety needle and syringe market.

         In January 2001, we 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 is marketing this product under the
Majestik(TM) Shielded Needle brand name. It competes in the estimated $17
million U.S. introducer needle market.

         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. Bard is subject to minimum purchase requirements. 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 Bard in writing not
less than 180 days prior to the expiration of the initial term or any renewal
term. 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 19 SKUs in a variety of needle lengths and gauges. It
competes in the $46 million U.S. Huber needle market.

         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.

         In April 2002, the Company 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, SHPI will 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. The
FDA has already granted 510(k) clearance for marketing this proprietary safety
blood collection device. It will compete in the $130 million U.S. blood
collection needle market.

         In July 2002, we entered into a Distribution Agreement (the "PSS
Agreement") with Physician Sales and Service, Inc. ("PSS") 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 their end-user customers. The PSS Agreement is for a one-year period,
which automatically renews for successive one-year terms unless terminated by
either party in writing not less than 45 days prior to the expiration of the
initial term or any renewal term.

         In August 2002, we entered into a Distribution Agreement (the "Medline
Agreement") with Medline Industries, Inc. whereby Medline acquired the
non-exclusive right to distribute and sell the LiftLoc(R) Safety Infusion Set.

                                       18
<PAGE>

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

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

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

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

Critical Accounting Policies

         Revenue Recognition

         Pursuant to Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements," 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 have received upfront fees totaling $2,500,000 from Tyco Healthcare
and $100,000 from Merit. These upfront payments are being recognized ratably
over the life of the respective agreements.

         Product revenues are recognized upon the shipment of the product.

         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 review long-lived assets for impairment when events or changes in
circumstances indicate that the book value of an asset may not be recoverable.
We evaluate, at each balance sheet date, whether events and circumstances have
occurred that indicate possible impairment. We use an estimate of future
undiscounted net cash flows of the related asset or group of assets over the
remaining life in measuring whether the assets are recoverable. As of December
31, 2002, management did not consider any of our long-lived assets to be
impaired.

Years Ended December 31, 2002 and 2001

         During the year ended December 31, 2002, we had total operating revenue
of $1,630,948, compared with total operating revenue of $520,074 for the year
ended December 31, 2001. During 2002, we recognized $636,425 in development fee
revenue, $506,900 in technology and licensing fee revenue, $225,804 from product

                                       19
<PAGE>

sales and $261,819 in royalty revenue. Cost of goods sold combined with costs
incurred to generate development fee revenue in 2002 was $295,921. During 2001,
we recognized $202,615 in development fee revenue and $317,459 in technology and
licensing fee revenue. Costs incurred to generate development fee revenue in
2001 were $206,974. We will look to our product agreements, sales of our own
branded products through distributors, and additional development and strategic
arrangements for future revenue growth.

         Research and development ("R&D") expenses in 2002 were $2,468,347
compared to $1,815,082 in 2001. The increase was primarily due to costs incurred
in bringing the LiftLoc(R) Safety Infusion Set product line to market and hiring
additional R&D personnel.

         Sales and marketing ("S&M") expenses in 2002 were $437,256 compared to
$342,803 in 2001. A significant amount of the increase results from sales and
marketing expenses related to the market introduction of LiftLoc(R) Safety
Infusion Set, including hiring a Vice President, Sales & Marketing, and
establishing an internal customer service department.

         General and administrative ("G&A") expenses in 2002 were $1,079,927
compared to $1,766,423 in 2001, a reduction of $686,496. G&A expenses in 2001
included $316,974 in one-time severance expenses related to contractual
obligations to the former CEO. A concerted effort continues to minimize G&A
expenses as a percentage of our total operating expenses.

         Total operating expenses in 2002 were $3,985,530 compared to $3,924,308
in 2001, relatively flat on a year-to-year basis.

         Other income (expense) was $36,112 in 2002 compared to ($64,714) in
2001. The change was primarily due to $4,897 in interest expenses and finance
charges paid in 2002 compared to $79,040 in 2001. The decrease was due to the
retirement of bridge loan financing entered into in 2001 prior to the
capitalization concluded with Galen Partners and other accredited investors in
November 2001.

         Our net loss (not including preferred stock dividends) in 2002 was
$2,614,391, compared to $3,675,922 in 2001. The primary factor contributing to
the reduced loss in 2002 was our ability to generate a significant increase in
revenue, while holding total operating expenses at the prior year level.

         The Series A Preferred Stock Purchase Agreement (the "Series A
Agreement") entered into in November 2001 provided that the investors had the
right, but not the obligation to acquire additional shares of Series A Preferred
Stock at $.458 per share ($5,000,000 total) during the 12 months following the
initial closing date of November 7, 2001. In September 2002, Galen Partners
exercised their option to purchase the additional shares to which they held
rights. Under the terms of the Series A Agreement, the options to purchase held
by the remaining qualified investors would expire in thirty days if not
exercised. All of those holding options to purchase exercised some or all of
their rights, purchasing an additional 10,944,339 shares of Series A Preferred
stock. We realized net proceeds of $5,002,957 from the transaction. A non-cash
beneficial conversion charge of $3,281,564 was recognized related to this
transaction. This amount has been treated as a preferred stock dividend in the
2002 financial statements.

Liquidity and Capital Resources

         To date, we have financed our operations principally through private
placements of equity securities, the sale of technology and patents, advanced
royalties, development fees, technology and license fees and proceeds from the
exercise of common stock rights. We used net cash for operating activities of
$2,568,832 during 2002, compared to net cash used of $2,889,601 for 2001. In
addition, during 2002, $279,952 was used for the purchases of capital property
and equipment, compared to $53,112 during 2001. Net cash provided from financing
activities in 2002 was $5,002,957, all coming from the placement of preferred
stock. In 2001, net cash of $6,303,525 was provided through the sale of both
preferred and common stock. As of December 31, 2002, our working capital was
$4,719,110 and our current liabilities were $1,718,310.

                                       20
<PAGE>

         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 safety needle
products and the level of sales of our current products. As of December 31,
2002, we had accounts payable and accrued liabilities totaling $515,972. We also
had current deferred revenue of $1,202,338, which will not require the use of
cash. At December 31, 2002, we had cash of $2,007,580, with an additional
$3,500,000 invested in certificates of deposit. This cash, along with cash
generated from the sale of products, development fees and royalties, is expected
to provide sufficient cash for us to execute our business plan in 2003. 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. We may not be able to obtain adequate financing when needed or
obtain it on terms which are satisfactory. Failure to raise capital when needed
could prevent us from achieving our business objectives.

         As of March 14, 2003, we had granted stock options that were
exercisable for 6,657,500 shares of common stock at exercise prices ranging from
$1.00 to $2.00 per share and issued warrants that are exercisable for 800,000
shares of common stock at exercise prices of $1.25 and $2.00 per share. The
exercise of all such stock options and warrants would result in an equity
infusion of $9,760,169. All of these stock options and warrants are out of the
money and there can be no assurance that any of the stock options or warrants
will be exercised.

Recent Accounting Pronouncements

         In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. SFAS No. 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the accounting
for goodwill and other intangible assets subsequent to their acquisition. SFAS
No. 142 provides that intangible assets with finite useful lives be amortized
and that goodwill and intangible assets with indefinite lives will not be
amortized, but rather will be tested at least annually for impairment. The
adoption of SFAS No. 141 and No. 142 on January 1, 2002, did not have a material
impact on our financial position or results of operations.

         In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." Under SFAS No. 143, the fair value of a liability for
an asset retirement obligation must be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material
impact on our financial position or results of operations.

         In August 2001, the FASB issued SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lives Assets and for Long-Lived
Assets to be Disposed of", and addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The statement is effective for
fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 on
January 1, 2002, did not have a material impact on our financial position or
results of operations.

         In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4,
44, and 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 145,
which is effective for fiscal years beginning after May 15, 2002, among other
things, eliminates the requirement that gains and losses from the
extinguishments of debt be classified as extraordinary items. We do not believe
the adoption of SFAS No. 145 will have a significant effect on our financial
position and results of operations.

         In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," Which is effective for exit or
disposal activities that are initiated after December 31, 2002. SFAS No. 146
addresses significant issues related to the recognition, measurement, and

                                       21
<PAGE>

reporting of costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." We do not believe that the adoption
of SFAS No. 146 will have a significant effect on our financial position and
results of operations.

         In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure - an amendment of FASB
Statement No. 123." SFAS No. 148 is effective for years ending after December
15, 2002, provides alternative methods for a voluntary change to the fair value
based method of accounting for stock-based employee compensation and required
prominent disclosure about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The adoption
of SFAS No. 148 did not have a significant effect on our financial position and
results of operations.

         In November 2002, the FASB issued FASB Interpretation Number, or FIN.
45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (an interpretation of SFAS No. 5,
57, and 107 and rescission of FIN 34." FIN 45 clarifies the requirements of SFAS
No. 5, "Accounting for Contingencies," relating to a guarantor's accounting for,
and disclosure of, the issuance of certain types of guarantees. The adoption of
FIN 45 did not have a significant effect on our financial position and results
of operations.

         In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, and interpretation of ARB 51." The primary objectives of FIN
46 are to provide guidance on the identification of entities for which control
is achieved through means other than through voting rights ("variable interest
entities" or "VIE's") and how to determine when and which business enterprise
should consolidate the VIE (the "primary beneficiary"). This new model for
consolidation applies to an entity in which either (1) the equity investors (if
any) do not have a controlling financial interest or (2) the equity investment
at risk is insufficient to finance that entity's activities without receiving
additional subordinated financial support from other parties. In addition, FIN
46 requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE make additional disclosures. We do not
believe that the adoption of FIN 46 will have a significant effect on our
financial position and results of operations.

Contractual Obligations

         Our contractual obligations as of December 31, 2002 were as follows:

                                              Payments Due by Year
                                  ----------------------------------------------
    Obligation           Total          2003            2004         Thereafter
--------------------- ----------- ------------- --------------- ----------------
Operating leases       $ 866,627      $244,823        $253,908         $367,896

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

Recent Financing Activities

         The Series A Preferred Stock Purchase Agreement (the "Series A
Agreement") entered into in November 2001 provided that the investors had the
right, but not the obligation to acquire additional shares of Series A Preferred
Stock at $.458 per share ($5,000,000 total) during the 12 months following the
initial closing date of November 7, 2001. In September 2002, Galen Partners
exercised their option to purchase the additional shares to which they held
rights. Under terms of the Series A Agreement, the options to purchase held by
the remaining qualified investors would expire in thirty days if not exercised.
All of those holding options to purchase exercised some or all of their rights,
purchasing an additional 10,944,339 shares of Series A Preferred stock. We
realized net proceeds of $5,002,957 from the transaction. A non-cash beneficial
conversion charge of $3,281,564 was recognized related to this transaction. This
amount has been treated as a preferred stock dividend in the 2002 financial
statements.

                                       22
<PAGE>

Inflation

         We do not expect the impact of inflation on 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 and may never become profitable.

         We have incurred total net losses of $25,507,638 since inception in
November 1993. With the exception of the second quarter of 1999, all quarters
have had operating losses. Among other things, our ability to achieve
profitability is dependent on:

         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 become profitable.

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

         We have entered into licensing arrangements with Kendall, TAP and
Merit. In addition, we have entered into a private label distribution agreement
with Bard, and distribution agreements for our branded products with Cardinal
Health, Medline and PSS. 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;

                                       23
<PAGE>

         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        BD has filed a lawsuit against Tyco Healthcare asserting that
                  the Monoject Magellan(TM)safety products infringe upon a BD
                  patent. BD is seeking injunctive relief as well as damages,
                  including attorneys' fees and costs, in an unspecified amount.
                  Under a Development and License Agreement Tyco Healthcare has
                  the right to withhold up to fifty percent (50%) of royalties
                  due us 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;

         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.

         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(TM) 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;

         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.

                                       24
<PAGE>

         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, and
blood collection devices, 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.

         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.

                                       25
<PAGE>

         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.

         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, Portex, Inc.,
Retractable Technologies, Inc., Terumo, and several others identified in Item 1
"Description of Business-Competition". Our competitors may use their economic

                                       26
<PAGE>

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.

         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.

                                       27
<PAGE>

         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 upon conversion of the
Series A Preferred Stock), or the perception that such sales may occur, could
adversely affect the trading price of our 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, 2002, there were 17,921,479 shares of our common
stock issued and outstanding. On this date we also had outstanding 21,861,369
shares of Series A Preferred Stock which is convertible into the same number of
shares of common stock. The conversion rate of the Series A Preferred Stock can
be adjusted upon the happening of certain triggering events. In addition, an
aggregate of 7,347,500 additional shares of our common stock are issuable
pursuant to stock options granted under our stock option plans and 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. 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 and consolidated
financial statement schedules beginning on page F-1 hereof.

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

         None.

                                       28
<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 15, 2003.

                                                                      With the
         Name                 Age           Position               Company Since
         ----                 ---           --------               -------------

Jeffrey M. Soinski            41     President, Chief Executive         2001
                                     Officer and Director

Guy J. Jordan, Ph.D. (1)(2)   54     Chairman of the Board              2001

Donald D. Solomon, Ph.D.      52     Vice President, Chief              2000
                                     Operating Officer, Chief
                                     Technical Officer and Director

Paul S. Evans                 40     Vice President, Business           2000
                                     Development, General Counsel
                                     and Secretary

Larry D. Sheldon              52     Vice President, Sales              2002
                                     and Marketing

Keith L. Merrell              57     Controller, Acting Chief           2000
                                     Financial Officer and Treasurer

David W. Jahns (2)            37     Director, Chairman of              2001
                                     Compensation Committee

Stuart A. Randle (1)          43     Director                           2001

Stephen I. Shapiro (2)        58     Director                           2001

Robert R. Walker (1)          72     Director, Chairman of              1994
                                     Audit Committee
---------------------
(1) Member of Audit Committee.
(2) Member of Compensation 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 20 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.

                                       29
<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 2005 annual meeting of stockholders. Dr. Solomon joined us in
October 2000 and has served as a director since March 2001. He has over 23 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 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 served as Vice President, General Counsel for a R&D company (1994 to
2000), and as a patent attorney 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 BS and JD degrees from
the University of Utah.

         Larry D. Sheldon. Mr. Sheldon is our Vice President, Sales and
Marketing. He joined us in November 2002. Mr. Sheldon brings over 24 years of
relevant healthcare experience to our company, including domestic and
international management of sales, marketing, national accounts, and customer
service. Most of his experience is from Johnson & Johnson ("J&J"), where he was
employed from 1978 to 1997. While at J&J, Mr. Sheldon served as Vice President,
Corporate Distributor Business, responsible for managing distributor
relationships for medical/surgical products with annual sales of $1.7 billion.
Mr. Sheldon also held several senior sales management positions at J&J in both
the Patient Care and Hospital Services divisions. From 1998 to 2000, Mr. Sheldon
was Senior Vice President, Sales and Marketing, for Paper Pak Products, Inc.
From 2000 until joining our company in 2002, Mr. Sheldon was Senior Vice
President, Sales and Marketing, at Tillotson Healthcare Corporation, a domestic
medical and non-medical glove manufacturer. He has a BS degree from Fairleigh
Dickinson University.

         Keith L. Merrell. Mr. Merrell is our Controller, Acting Chief Financial
Officer and Treasurer. He joined us in July 2000. Mr. Merrell draws on 28 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 2003 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.

                                       30
<PAGE>

         Stuart A. Randle. Mr. Randle serves as one of our directors. His term
as a director expires at the 2004 annual meeting of stockholders. Mr. Randle is
a highly experienced healthcare executive with over 20 years of operating
successes. 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 2004 annual meeting of stockholders. Mr.
Shapiro has over 30 years of relevant medical device and equipment industry
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 Noveste
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 2003 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.

Section 16(a) Beneficial Ownership Reporting Compliance

         Section 16(a) of the Securities Exchange Act of 1934 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 2002.

Item 10. Executive Compensation

         The tables below set forth certain information concerning compensation
paid by us to our Chief Executive Officer and all other executive officers with
annual compensation in excess of $100,000 (determined for the year ended
December 31, 2002) (the "Named Executive Officers"). The tables include
information related to stock options granted to the Named Executive Officers.

                                       31
<PAGE>

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

                                             Annual Compensation                    Awards           Payouts
                                                                            Restricted  Stock                     All Other
        Name and                                           Other Annual     Stock       Options/    LTIP        Compensation
    Principal Position       Year  Salary ($)  Bonus($)  Compensation($)(1) Awards ($)    SAR(#)    Payouts($)       ($)
    ------------------       ----  ----------  -----     ------------------ ----------  --------    ----------  -------------
<S>                          <C>   <C>       <C>          <C>               <C>        <C>          <C>         <C>
Jeffrey M. Soinski (2),      2001    14,615      ---            ---            ---      2,500,000      ---           ---
President, CEO & director    2002   240,000    43,200(6)        ---            ---         ---         ---          610(4)

Donald D. Solomon, Ph.D.     2000    31,942      ---          1,375            ---       100,000       ---            ---
(3), VP, CTO, COO &          2001   165,000      ---          8,250            ---       600,000       ---          273(4)
director                     2002   190,000    34,200(6)      9,500            ---         ---         ---        1,081(4)

Paul S. Evans (3), VP,       2000    86,798      ---          2,406           28,125     100,000       ---          268(4)
Business Development,        2001   165,000      ---          7,219            ---       400,000       ---          460(4)
General Counsel &            2002   175,000    31,500(6)        ---            ---         ---         ---          579(4)
Secretary

Larry D. Sheldon (5)         2002    21,923      ---            ---            ---       500,000       ---             ---
VP, Sales and Marketing

Keith L. Merrell (3)         2000    41,250      ---          2,062            ---        50,000       ---          179(4)
Acting CFO, Controller &     2001    90,000      ---          4,500            ---        55,000       ---          410(4)
Treasurer                    2002   102,000     3,000         5,100            ---         ---         ---          456(4)
--------------------
</TABLE>
(1)  These amounts represent payments by us into our 401(k) retirement plan for
     the benefit of the Named Executive Officer.
(2)  Mr. Soinski joined SHPI in November 2001. Salary represents partial year
     from the date of his employment.
(3)  Dr. Solomon and Messrs. Evans and Merrell joined SHPI in 2000. Salaries for
     2000 represent partial year from the date of their employment
(4)  Represents amounts paid by us for life insurance on the lives of Mr.
     Soinski, Dr. Solomon, Mr. Evans and Mr. Merrell with insurance proceeds
     payable to the beneficiary designated by them.
(5)  Mr. Sheldon joined SHPI in November 2002. Salary represents partial year
     from the date of his employment. (6) Bonuses accrued and expensed in 2002;
     paid out in 2003.

         Option Grants in Fiscal Year 2002. The following table sets forth
certain information with respect to stock options grants during the year ended
December 31, 2002 to Named Executive Officers.
<TABLE>
<CAPTION>
                                                   OPTION/SAR GRANTS IN LAST FISCAL YEAR
                                                            (Individual Grants)

                                 Number of        Percent of Total
                                Securities           Options/SAR
                                Underlying           Granted to
                                Options/SAR         Employees in       Exercise or Base
            Name              Granted (#) (1)        Fiscal Year        Price ($/Share)    Expiration Date
            ----              ---------------        -----------        ---------------    ---------------
<S>                               <C>                   <C>                  <C>              <C>
   Larry D. Sheldon               500,000               100%                 $1.00            12/30/2012
----------------------
</TABLE>
(1)  These options were granted pursuant to our 2000 Stock Option Plan.

                                       32
<PAGE>

Compensation of Directors

         No cash fees or other consideration were paid to our employee directors
for service on the board during 2002. We did not provide cash compensation to
non-employee directors in 2002 and do not plan to do so in 2003. Prior to 2002
we granted stock options, which vest over a three year period, to our
non-employee directors as compensation for service on the board. We have made no
other agreements regarding compensation of non-employee directors. All directors
are entitled to reimbursement for reasonable out-of-pocket travel related
expenses incurred in the performance of their duties as board members.

Employment and Indemnity Agreements

         We have entered into an employment agreement with Mr. Jeffrey Soinski.
The employment agreement provides that (i) Mr. Soinski receive a beginning base
salary of $240,000 per year in addition to performance based bonuses; (ii) Mr.
Soinski receive stock options to acquire 2.5 million shares of our common stock
at market value on the date of grant which stock options vest over a four-year
period; (iii) Mr. Soinski is entitled to vacation pay, health insurance and life
insurance; (iv) Mr. Soinski's employment contract may be terminated at any time
by us; (v) if the employment of Mr. Soinski is terminated by reason of
disability, death or for cause, his salary and benefits (except as otherwise
required by law) will terminate as of the date of termination; (vi) if Mr.
Soinski is terminated for reasons other than disability, death or for cause,
then Mr. Soinski's salary and medical benefits will continue for a period of 18
months from the date of termination and his other benefits will cease as of the
date of termination.

         We have entered into an employment agreement with Donald Solomon, Ph.D.
The employment agreement provides that (i) Dr. Solomon receive a beginning base
salary of $190,000 per year in addition to performance based bonuses; (ii) Dr.
Solomon receive stock options to acquire 600,000 shares of our common stock at
market value on the date of grant which stock options vest over a four-year
period; (iii) Dr. Solomon is entitled to vacation pay, health insurance and life
insurance; (iv) Dr. Solomon's employment contract may be terminated at any time
by us; (v) if the employment of Dr. Solomon is terminated by reason of
disability, death or for cause, his salary and benefits (except as otherwise
required by law) will terminate as of the date of termination; (vi) if Dr.
Solomon is terminated for reasons other than disability, death or for cause,
then Dr. Solomon's salary and medical benefits will continue for a period of 12
months from the date of termination and his other benefits will cease as of the
date of termination.

         We have entered into an employment agreement with Mr. Paul Evans. The
employment agreement provides that (i) Mr. Evans receive a beginning base salary
of $175,000 per year in addition to performance based bonuses; (ii) Mr. Evans
receive stock options to acquire 400,000 shares of our common stock at market
value on the date of grant which stock options vest over a four-year period;
(iii) Mr. Evans is entitled to vacation pay, health insurance and life
insurance; (iv) Mr. Evans' employment contract may be terminated at any time by
us; (v) if the employment of Mr. Evans is terminated by reason of disability,
death or for cause, his salary and benefits (except as otherwise required by
law) will terminate as of the date of termination; (vi) if Mr. Evans is
terminated for reasons other than disability, death or for cause, then Mr.
Evans' salary and medical benefits will continue for a period of 12 months from
the date of termination and his other benefits will cease as of the date of
termination.

         We have entered into an employment agreement with Mr. Keith Merrell.
The employment agreement provides that (i) Mr. Merrell receive a beginning base
salary of $102,000 per year in addition to performance based bonuses; (ii) Mr.
Merrell receive stock options to acquire 55,000 shares of our common stock at
market value on the date of grant which stock options vest over a four-year
period; (iii) Mr. Merrell is entitled to vacation pay and health insurance; (iv)
Mr. Merrell's employment contract may be terminated at any time by us; (v) if
the employment of Mr. Merrell is terminated by reason of disability, death or
for cause, his salary and benefits (except as otherwise required by law) will
terminate as of the date of termination; (vi) if Mr. Merrell is terminated for
reasons other than disability, death or for cause, then Mr. Merrell's salary and
medical benefits will continue for a period of 3 months from the date of
termination and his other benefits will cease as of the date of termination.

                                       33
<PAGE>

         We have entered into an employment agreement with Mr. Larry D. Sheldon.
Mr. Sheldon's employment agreement provides that (i) Mr. Sheldon receive a
beginning base salary of $180,000 per year; (ii) Mr. Sheldon's current
employment agreement terminates on November 30, 2004 should he fail to relocate
to Salt Lake City by that date; (iii) Mr. Sheldon receive stock options to
acquire 500,000 shares of our common stock at a price of one dollar per share
which stock options vest over a four-year period; (iv) Mr. Sheldon is entitled
to vacation pay, health insurance and life insurance; (v) Mr. Sheldon's
employment contract may be terminated at any time by us; (vi) if the employment
of Mr. Sheldon is terminated by reason of disability, death or for cause, his
salary and benefits (except as otherwise required by law) will terminate as of
the date of termination; (vii) if Mr. Sheldon is terminated for reasons other
than disability, death or for cause, then Mr. Sheldon's salary and medical
benefits will continue for a period of 6 months from the date of termination and
his other benefits will cease as of the date of termination. However, in the
event Mr. Sheldon is not employed at the end of the 6-month period following
termination, Mr. Sheldon shall be entitled to salary and medical benefits for up
to an additional 6 months.

         In January 2003, we approved a 2003 Executive Officer Bonus Plan. Under
the plan executive officers eligible for bonuses during 2003 include the CEO,
COO, VP of Sales and Marketing and VP of Business Development and General
Counsel. Plan participants will earn 20% of their annual salary based upon 100%
achievement of the overall revenue goal outlined in our approved budget plan.
Also, plan participants will be eligible to receive incremental bonus payments
for performing beyond the budget plan. The amount of incremental payments, if
earned, will be based upon the recommendation of the Compensation Committee and
approved by the board of directors. The maximum base bonus that could be paid
under this plan is $160,200. In connection with this plan, we also adopted an
Employee Bonus Plan for employees other than the Named Executive Officers to
reward specific individual or team achievements during 2003.

         We have entered into indemnity agreements (the "Indemnity Agreements")
with each of our executive officers and directors pursuant to which we have
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
us as an officer or director that takes place prior to or after the execution of
the Indemnity Agreement. The Indemnity Agreements obligate us to reimburse or
advance expenses relating to any proceeding arising out of an indemnifiable
event. Under the Indemnity Agreements, our 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 us in certain
cases at our discretion.

401(k) Retirement Plan

         Effective in 1996, we adopted a 401(k) retirement plan whereby we
contribute up to five percent of payroll compensation to the plan, matching
employee contributions to the plan on a dollar for dollar basis up to the
maximum five percent contribution.

Accrued Vacation Pay

         Our current policy allows all employs to carry over maximum days of
vacation pay from year to year equivalent to a one-year accrual at the rate
earned.

Indemnification for Securities Act Liabilities

         Delaware law authorizes, and our Bylaws and Indemnity Agreements
provide for, indemnification of our directors and officers against claims,
liabilities, amounts paid in settlement and expenses in a variety of
circumstances. Indemnification for liabilities arising under the Act may be
permitted for our directors, officers and controlling persons pursuant to the
foregoing or otherwise. However, we have been advised that, in the opinion of
the SEC, such indemnification is against public policy as expressed in the
Securities Exchange Act of 1934 and is, therefore, unenforceable.

                                       34
<PAGE>

Stock Options and Warrants

         In November 2001, our stockholders approved the adoption of the
Specialized Health Products International, Inc. 2001 Stock Option Plan (the
"2001 Option Plan"). The 2001 Option Plan permits us to grant "non-qualified
stock options" and "incentive stock options" to acquire our common stock. The
total number of shares authorized for the Option Plan may be allocated by the
board between the non-qualified stock options and the incentive stock options
from time to time, subject to certain requirements of the Internal Revenue Code
of 1986, as amended. The option exercise price per share under the Option Plan
may not be less than the fair market value of a share of common stock on the
date on which the option is granted. A total of 5,000,000 shares are allocated
to the Option Plan. As of December 31, 2002, options to acquire an aggregate of
4,984,690 shares of common stock at exercise prices ranging from $1.00 to $2.00
were outstanding under the Option Plan.

         We have also issued stock options under stock options plans that
preceded the 2001 Option Plan ("Prior Plans"). As of December 31, 2002, options
to acquire an aggregate of 1,562,810 shares of common stock at exercise prices
ranging from $1.00 to $2.00 were outstanding under Prior Plans.

         In addition to the stock options detailed above, we have outstanding
warrants to buy 800,000 shares of common stock at exercise prices of $1.25 to
$2.00.

Compensation Committee Interlocks and Insider Participation

         None of our executive officers serve on our Compensation Committee or
in a like capacity in any other entity.

Item 11. Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of March 14, 2003, 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.
<TABLE>
<CAPTION>
                                      Shares
       Name and Address            Beneficially            Percentage
    of Beneficial Owner(1)           Owned(2)              of Total(2)                 Position
    ----------------------           --------              -----------                 --------
<S>                               <C>                       <C>              <C>
Jeffrey M. Soinski (3)                 892,354                 4.74           President, CEO and Director

Guy J. Jordan, Ph.D. (4)               188,555                 1.04           Chairman of the Board

Donald D. Solomon, Ph.D. (5)           422,541                 2.30           Vice President, COO, CTO and
                                                                                Director

Paul S. Evans (6)                      327,309                 1.79           Vice President, Business
                                                                                Development, General
                                                                                Counsel, and Secretary

Larry D. Sheldon(7)                      3,132                    *           Vice President, Sales and
                                                                                Marketing

Keith L. Merrell (8)                   152,214                    *           Controller, Acting CFO and
                                                                                Treasurer

David W. Jahns (9)                      47,218                    *           Director

                                       35
<PAGE>

<CAPTION>
                                      Shares
       Name and Address            Beneficially            Percentage
    of Beneficial Owner(1)           Owned(2)              of Total(2)                 Position
    ----------------------           --------              -----------                 --------
<S>                               <C>                       <C>              <C>
Stuart A. Randle (10)                   44,441                    *           Director

Stephen I. Shapiro (11)                112,721                    *           Director

Robert R. Walker (12)                  184,218                 1.02           Director

Executive Officers and               2,370,388                 5.6%
  Directors as a Group (10 persons)

Galen Partners III, L.P. and        15,256,413                38.3%
   affiliates (13)

* 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 6,911 shares of common stock purchased through our 401(k) plan and
     options to acquire 885,410 shares of common stock. Does not include options
     to acquire 1,614,590 shares of common stock that vest in equal monthly
     installments between May 14, 2003 and November 14, 2006.
(4)  Includes options to acquire 188,555 shares of common stock. Does not
     include options to acquire 211,445 shares of common stock that vest 60 days
     beyond March 14. Those options vest, in cumulative fashion, in equal
     monthly installments ending on the four-year anniversary of the date of
     grant.
(5)  Includes 10,000 shares of common stock, 65,666 shares of Series A Preferred
     Stock that is immediately convertible into the same number of shares of
     common stock, 44,380 shares of common stock purchased through our 401(k)
     plan and options to acquire 312,495 shares of common stock. Does not
     include options to acquire 278,646 shares of common stock that vest in
     equal monthly installments between May 14, 2003 and November 14, 2006.
(6)  Includes 61,000 shares of common stock, 24,649 shares of common stock
     purchased through our 401(k) plan and options to acquire 241,660 shares of
     common stock. Does not include options to acquire 258,340 shares of common
     stock that vest 60 days beyond March 14. Those options vest, in cumulative
     fashion, in equal monthly installments ending on the four-year anniversary
     of the date of grant.
(7)  Includes 3,132 shares of common stock purchased through our 401(k) plan.
(8)  Includes 36,000 shares of common stock, 26,284 shares of common stock
     purchased through our 401(k) plan and options to acquire 50,000 shares of
     common stock. Does not include options to acquire 15,070 shares of common
     stock that vest in equal monthly installments between May 14, 2003 and
     November 14, 2006.
(9)  Includes options to acquire 47,218 shares of common stock. Does not include
     options to acquire 52,782 shares of common stock that vest in equal monthly
     installments between May 14, 2003 and November 14, 2006. Does not include
     shares held by Galen Partners 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. See note (13) below.

                                       36
<PAGE>

(10) Includes options to acquire 44,441 shares of common stock. Does not include
     options to acquire 55,559 shares of common stock that vest in equal monthly
     installments between May 27, 2003 and December 27, 2006.
(11) Includes 65,503 shares of Series A Preferred Stock that is immediately
     convertible into the same number of shares of common stock and options to
     acquire 47,218 shares of common stock. Does not include options to acquire
     52,782 shares of common stock that vest in equal monthly installments
     between May 14, 2003 and November 14, 2006.
(12) Includes stock options to purchase 121,218 shares of common stock and
     63,000 shares of common stock that Mr. Walker is deemed to beneficially own
     through a trust. Does not include options to acquire 52,782 shares of
     common stock that vest in equal monthly installments between May 14, 2003
     and November 14, 2006.
(13) 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 on September 9 and September 26, 2002.
     Shares owned represent 13,937,735 shares of Series A Preferred Stock held
     of record by Galen Partners III, L.P., 1,261,605 shares of Series A
     Preferred Stock held of record by Galen Partners International III, L.P.,
     and 57,073 shares of Series A Preferred Stock held of record by Galen
     Employee Fund III, L.P. 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.

Series A Preferred Stock

         The Company currently has issued and outstanding 21,861,369 shares of
Series A Preferred Stock which is convertible into the same number of shares of
common stock. The conversion rate of the Series A Preferred Stock can be
adjusted upon the happening of certain triggering events. Galen Partners III,
L.P. and affiliates own 15,256,413 of these shares as described in the above
table, which comprises 69.78% of the outstanding Series A Preferred Stock. No
other stockholder owns more than 5% of the outstanding Series A Preferred Stock.

Securities Authorized for Issuance Under Equity Compensation Plans

         The following table sets forth certain information with respect to the
Company's equity compensation plans approved by security holders and plans not
approved by security holders for the year ended December 31, 2002.
<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
       Plan Category            warrants and rights        warrants and rights          future issuance
       -------------          -----------------------     --------------------      -----------------------
<S>                                  <C>                          <C>                       <C>
Equity compensation plans
   approved by security
   holders                           7,347,500                    $1.31                     952,500

Equity compensation plans
   not approved by
   security holders                      0                                                     0
                             --------------------------                            --------------------------
Total                                7,347,500                    $1.31                     952,500
</TABLE>
                                       37
<PAGE>

Item 12. Certain Relationships and Related Transactions

         On November 7, 2001, our stockholders approved the issuance to Galen
Partners and other accredited and sophisticated investors of a total of
10,917,030 shares of Series A Preferred Stock for an aggregate purchase price of
$5 million, or $.458 per share. Galen Partners purchased their shares for
$3,500,000 and the other investors purchased their shares in exchange for the
cancellation of $1,500,000 of debt.

         In September and November 2002, Galen Partners and other accredited and
sophisticated investors exercised rights to acquire an additional 10,944,339
shares of Series A Preferred Stock for an aggregate net purchase price of
$5,002,957, or $.458 per share. The Series A Preferred Stock is immediately
convertible into the same number of shares of our common stock and the
conversion rate is subject to adjustment if we issue additional shares of common
stock for an amount less than the then current conversion price and upon the
happening of certain other events.

Item 13. Exhibits and Reports on Form 8-K

Exhibits

         Listed on page 43 hereof.

Reports on Form 8-K

         None

Item 14. Controls and Procedures

         Within the 90 days prior to this report, we carried out an evaluation,
under the supervision and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. 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 the Company (including our consolidated subsidiaries) 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.





                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       38
<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 14, 2003                          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 14, 2003
----------------------------   Officer and Director (Principal
Jeffrey M. Soinski             Executive Officer)


 /s/ Keith L. Merrell          Controller, Acting Chief           March 14, 2003
----------------------------   Financial Officer and Treasurer
Keith L. Merrell               (Principal Financial and
                               Accounting Officer)


 /s/ Guy J. Jordan, Ph.D.      Chairman of the Board              March 14, 2003
----------------------------
 Guy J. Jordan, Ph.D.


 /s/ Donald D. Solomon, Ph.D.  Director, Vice President,          March 14, 2003
-----------------------------  COO and CTO
Donald D. Solomon, Ph.D.


 /s/ David W. Jahns            Director                           March 14, 2003
------------------------------
David W. Jahns


 /s/ Stuart A. Randle          Director                           March 14, 2003
------------------------------
Stuart A. Randle


 /s/ Stephen I. Shapiro        Director                           March 14, 2003
------------------------------
Steve I. Shapiro


 /s/ Robert R. Walker          Director                           March 14, 2003
------------------------------
Robert R. Walker

                                       39
<PAGE>

                                 CERTIFICATIONS

                               CEO Certification

         I, Jeffrey M. Soinski, as Chief Executive Officer of the Company,
certify that:

         1. I have reviewed this annual report on Form 10-KSB of Specialized
Health Products International, Inc.;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         a.       designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this annual report is being prepared;

         b.       evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         c.       presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

         a.       all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

         b.       any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

         6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: March 14, 2003                                  /s/ Jeffrey M. Soinski
                                                     ---------------------------
                                                     Jeffrey M. Soinski
                                                     President, Chief Executive
                                                     Officer, Director

                                       40
<PAGE>

                               CFO Certification

         I, Keith L. Merrell, as acting Chief Financial Officer of the Company,
certify that:

         1. I have reviewed this annual report on Form 10-KSB of Specialized
Health Products International, Inc.;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         a.       designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this annual report is being prepared;

         b.       evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         c.       presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

         d.       all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

         e.       any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

         6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: March 14, 2003                               /s/ Keith L. Merrell
                                                  ------------------------------
                                                  Keith L. Merrell
                                                  Acting Chief Financial Officer

                                       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.

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              Employment Agreement with Mr. Larry Sheldon.

10.6              Development and License Agreement, effective date of March 29,
                  2000, by and among Safety Syringe Corporation, a wholly owned
                  subsidiary of the Company and The Kendall Company
                  (Incorporated by reference to Exhibit 10.1 of the Company's
                  Current Report on Form 8-K, dated March 29, 2000).

10.7              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).

10.8              Specialized Health Products International, Inc. 1998 Stock
                  Option Plan (Incorporated by reference to Appendix A to the
                  Company's Amended Proxy Statement filed October 1, 1998).

10.9              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).

10.10             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).

10.11             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).

                                       42
<PAGE>

 EXHIBIT NO.                           DESCRIPTION OF EXHIBIT
 -----------                           ----------------------
10.12             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).

10.13             Distribution Agreement, dated September 17, 2001, by and
                  between the Company and Bard Access Systems, Inc. (certain
                  portions of the agreement were omitted from the exhibit
                  pursuant to a request for confidential treatment)
                  (Incorporated by reference to Exhibit 10.12 of the Company's
                  Current Report on Form 8-K, dated November 7, 2001).

10.14             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 Current Report on Form 10-QSB, dated June 30, 2001).

10.15             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 Current Report on Form 10-QSB,
                  dated June 30, 2001).

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 Public Accountants

99.1              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.

99.2              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 Public Accountants                               F - 2

Report of Previous Independent Public Accountants                      F - 3

Consolidated Balance Sheet as of December 31, 2002                     F - 4

Consolidated Statements of Operations for the Years Ended
  December 31, 2002 and 2001                                           F - 6

Consolidated Statement of Stockholders' Equity
  for the Years Ended December 31, 2002 and 2001                       F - 7

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2002 and 2001                                           F - 8

Notes to Consolidated Financial Statements                             F - 9

                                      F-1
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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, 2002
and the results of their operations and their cash flows for the years ended
December 31, 2002 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 audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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.

The financial statements of Specialized Health Products International, Inc. and
subsidiaries for the year ended December 31, 2001, were audited by other
independent accountants who have ceased operations. Those independent
accountants expressed an unqualified opinion on those financial statements with
an explanatory paragraph discussing matters that raised substantial doubt about
the Company's ability to continue as a going concern in their report dated March
8, 2002.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Salt Lake City, Utah
February 28, 2003

                                      F-2
<PAGE>

The following report is a copy of a report previously issued by Arthur Andersen
LLP (Andersen). This report has not been reissued by Andersen and Andersen did
not consent to the incorporation by reference of this report (as included in
Form 10-KSB) into any of the Company's registration statements.

   OPINION LETTER FOR FINANCIAL STATEMENTS OF THE YEAR ENDED DECEMBER 31, 2001


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Specialized Health Products International, Inc.:

We have audited the accompanying consolidated balance sheet of Specialized
Health Products International, Inc. (a Delaware corporation in the development
stage) and subsidiaries as of December 31, 2001, and the related statements of
operations, stockholders' equity (deficit) and cash flows for the years ended
December 31, 2001 and 2000 and the related statements of operations,
stockholders' equity (deficit) and cash flows for the period from inception
(November 19, 1993) to December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Specialized Health Products International, Inc. and
subsidiaries for the period from inception to December 31, 1995. Information
from those financial statements is included in the cumulative inception to
December 31, 2001 totals of the statements of operations, stockholders' equity
(deficit) and cash flows and includes total revenues and net loss of 6 percent
and 2 percent, respectively, of the related cumulative totals. Those financial
statements were audited by other auditors whose reports have been furnished to
us and our opinion, insofar as it relates to those specified amounts included in
the cumulative totals, is based solely upon the reports of the other auditors.

We conducted our audits in accordance with auditing standards generally accepted
in the 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits and the reports of the other
auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Specialized Health Products
International, Inc. and subsidiaries as of December 31, 2001, and the results of
their operations and their cash flows for the years ended December 31, 2001 and
2000 and for the period from inception to December 31, 2001, in conformity with
accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred significant
cumulative losses since inception. The Company incurred negative cash flows from
operating activities of $2,889,601 and $749,413 for the years ended December 31,
2001 and 2000, respectively. To date, sales of products based on the Company's
proprietary technologies have been minimal. As of December 31, 2001, the Company
had an accumulated deficit of $27,794,005. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.

/s/ ARTHUR ANDERSEN LLP

ARTHUR ANDERSEN LLP
Salt Lake City, Utah
March 8, 2002

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


                                                                                           December 31,
                                                                                               2002
                                                                                         ---------------
      Assets
      <S>                                                                                <C>
      Current assets:
         Cash and cash equivalents                                                       $     5,507,580
         Accounts receivable, net of an allowance of zero                                        242,935
         Inventory                                                                               393,888
         Prepaid expenses and other                                                              293,017
                                                                                         ---------------
             Total current assets                                                              6,437,420
                                                                                         ---------------
      Property and equipment, net:
         Research and development machinery and equipment                                        352,055
         Office furniture and fixtures                                                           158,085
         Computer equipment and software                                                         192,484
         Leasehold improvements                                                                  139,350
         Molds                                                                                    14,711
         Manufacturing equipment                                                                  39,120
         Construction in process                                                                 105,537
                                                                                         ---------------
                                                                                               1,001,342
         Less accumulated depreciation and amortization                                         (711,167)
                                                                                         ---------------
             Total property and equipment, net                                                   290,175
                                                                                         ---------------

      Other assets                                                                                27,000
      Intangible assets, net                                                                     152,261
                                                                                         ---------------
                                                                                         $     6,906,856
                                                                                         ===============

                      See accompanying notes to consolidated financial statements.

                                                   F-4
<PAGE>
<CAPTION>
                        SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
                                     CONSOLIDATED BALANCE SHEET (Continued)


                                                                                           December 31,
                                                                                               2002
                                                                                         ---------------
      <S>                                                                                <C>
      Liabilities and stockholders' equity
      Current liabilities:
         Accounts payable                                                                $       200,675
         Accrued liabilities                                                                     315,297
         Deferred revenue                                                                      1,202,338
                                                                                         ---------------
             Total current liabilities                                                         1,718,310
      Deferred revenue, net of current portion                                                   983,653
      Deferred rent                                                                               13,796
                                                                                         ---------------
             Total liabilities                                                                 2,715,759
                                                                                         ---------------
      Commitments and contingencies (Note, 4)

      Stockholders' equity:
         Series A preferred stock, $.001 par value; 30,000,000 shares authorized,
           21,861,369 shares issued and outstanding  at December 31, 2002
           (liquidation preference of  $10,621,915 at December 31, 2002)                          21,861
         Common stock, $.02 par value; 70,000,000 shares authorized, 17,921,479
           shares issued and outstanding at December 31, 2002                                    358,430
         Additional paid-in capital (common and preferred)                                    37,500,766
         Accumulated deficit                                                                 (33,689,960)
                                                                                         ---------------
             Total stockholders' equity                                                        4,191,097
                                                                                         ---------------
             Total liabilities and stockholders' equity                                  $     6,906,856
                                                                                         ===============


                     See accompanying notes to consolidated financial statements.

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

                                                                                   2002                 2001
                                                                          -------------------    -----------------
<S>                                                                       <C>                    <C>
Revenue:
    Technology fees and licensing revenue                                 $           506,900    $         317,459
    Development fees and related services                                             636,425              202,615
    Product royalties                                                                 261,819                    -
    Net product sales                                                                 225,804                    -
                                                                          -------------------    -----------------
                                                                                    1,630,948              520,074
                                                                          -------------------    -----------------
 Cost of revenue:
   Cost of development fees and related services                                      210,501              206,974
   Cost of product sales                                                               85,420                  -
                                                                          -------------------    -----------------
       Total cost of revenue                                                          295,921              206,974
                                                                          -------------------    -----------------
       Gross profit                                                                 1,335,027              313,100
                                                                          -------------------    -----------------

Operating expenses:
   Research and development                                                         2,468,347            1,815,082
   Sales and marketing                                                                437,256              342,803
   General and administrative                                                       1,079,927            1,766,423
                                                                          -------------------    -----------------
       Total operating expenses                                                     3,985,530            3,924,308
                                                                          -------------------    -----------------
Loss from operations                                                               (2,650,503)          (3,611,208)
                                                                          -------------------    -----------------
Other income (expense):
   Interest income                                                                     39,086               15,185
   Interest expense                                                                    (4,897)             (79,040)
   Other income (expense), net                                                          1,923                 (859)
                                                                          -------------------    -----------------
       Other income (expense), net                                                     36,112              (64,714)
                                                                          -------------------    -----------------
Net loss                                                                           (2,614,391)          (3,675,922)
Less preferred stock deemed dividend related to
  beneficial conversion feature                                                    (3,281,564)          (4,872,580)
                                                                          -------------------    -----------------

Net loss applicable to common shares                                      $        (5,895,955)   $      (8,548,502)
                                                                          ===================    =================

Basic and diluted net loss per common share                               $              (.33)   $            (.56)
                                                                          ===================    =================
Basic and diluted weighted average number of common
  shares outstanding                                                               17,921,479           15,190,026
                                                                          ===================    =================

                          See accompanying notes to consolidated financial statements.

                                                         F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
                                   CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)




                                        Series A
                                     Preferred Stock           Common Stock       Additional                Deferred
                                -----------------------  -----------------------   Paid-in    Advance to  Compensation  Accumulated
                                  Shares        Amount     Shares        Amount    Capital    Stockholder   Expense      Deficit
                                ----------    ---------  ----------    ---------  ----------- ----------- ------------  -----------
<S>                             <C>           <C>        <C>           <C>        <C>           <C>        <C>        <C>
BALANCE as of
  December 31, 2000                      -    $       -  12,449,440    $ 248,989  $17,318,513   $ (2,801)  $(140,453) $ (19,245,503)

Issuance of preferred stock     10,917,030       10,917           -            -    4,872,580          -           -
  for cash, net of expenses                                                                                                       -
Repayment from stockholder               -            -           -            -            -      2,801           -              -
Exercise of series D warrants
  for cash                               -            -     153,388        3,067       73,627          -           -              -
Issuance of common stock for
  cash in February Private
  Placement                              -            -     341,066        6,822      163,711          -           -              -
Issuance of common stock for
  cash in April Private
  Placement,  net of expenses            -            -   2,840,000       56,800    1,224,200          -           -              -
Conversion of note payable
   and debt to common stock
   and warrants                          -            -     394,947        7,899      217,949          -           -              -
Amortization of deferred
   compensation expense                  -            -           -            -            -          -     131,763              -
Issuance of common stock to
   Rubicon for consulting
   service and finders fees              -            -     478,000        9,560      285,440          -           -              -
Issuance of common stock for
   cash in September Private
   Placement,  net of expenses           -            -     120,000        2,400       47,600          -           -              -
Issuance of common stock for
   cash in November Private
   Placement, net of expenses            -            -     360,000        7,200      142,800          -           -              -
Issuance of common stock upon
   exercise of series G
   warrants                              -            -     784,638       15,693      (15,693)         -           -              -
Issuance of common stock
   options for consulting
   services                              -            -           -            -       23,882          -     (10,383)             -
Preferred stock deemed
   dividend related to
   beneficial conversion
   feature                               -            -           -            -    4,872,580          -           -     (4,872,580)
Net loss                                 -            -           -            -            -          -           -     (3,675,922)
                                ----------    ---------  ----------    ---------  -----------   --------  ----------  -------------
BALANCE as of
   December 31, 2001            10,917,030       10,917  17,921,479      358,430   29,227,189          -     (19,073)   (27,794,005)
                                ----------    ---------  ----------    ---------  -----------   --------  ----------  -------------
Issuance of preferred stock
   for cash, net of expenses    10,944,339       10,944           -            -    4,992,013          -           -              -
Amortization of deferred
   compensation expense                  -            -           -            -            -          -      19,073              -
Preferred stock dividend
   related to beneficial
   conversion feature                    -            -           -            -    3,281,564          -           -     (3,281,564)
Net loss                                 -            -           -            -            -          -           -     (2,614,391)
                                ----------    ---------  ----------    ---------  -----------   --------  ----------  -------------
BALANCE as of
  December 31, 2002             21,861,369    $  21,861  17,921,479    $ 358,430  $37,500,766   $      -  $        -  $ (33,689,960)
                                ==========    =========  ==========    =========  ===========   ========  ==========  =============


                                  See accompanying notes to consolidated financial statements.

                                                              F-7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                        SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
                                      CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                            Years Ended December 31,
                                                                             2002              2001
                                                                        --------------    --------------
<S>                                                                     <C>               <C>
Cash flows from operating activities:
    Net loss                                                            $   (2,614,391)   $   (3,675,922)
    Adjustments to reconcile net loss to net cash used in operating
      activities:
        Depreciation and amortization                                           54,886           252,246
        Common stock issued for consulting services                                  -           156,000
        Amortization of deferred compensation                                   19,073           131,763
        Common stock options issued for consulting services                          -            13,499
        Compensation expense for cancellation of warrants                            -             6,735
        Changes in operating assets and liabilities:
           Accounts receivable                                                (142,385)           (6,005)
           Notes receivable, net                                                 2,132            (2,132)
           Inventory                                                          (393,888)                -
           Prepaid expenses and other                                         (244,023)          (34,793)
           Accounts payable                                                    108,134           (38,066)
           Accrued liabilities                                                (245,389)          296,451
           Deferred revenue                                                    887,325            20,669
           Deferred rent                                                       (18,306)          (10,046)
                                                                        --------------    --------------
              Net cash used in operating activities                         (2,586,832)       (2,889,601)
                                                                        --------------    --------------
Cash flows from investing activities:
    Purchase of property and equipment                                        (158,218)              -
    Purchase of property and equipment                                        (121,734)          (53,112)
                                                                        --------------    --------------
              Net cash used in investing activities                           (279,952)          (53,112)
                                                                        --------------    --------------
Cash flows from financing activities:
   Payments on notes payable                                                         -          (450,000)
   Net proceeds from issuance of common stock                                        -         1,867,227
   Net proceeds from issuance of preferred stock                             5,002,957         4,883,497
   Net repayments on stockholder loans                                               -             2,801
                                                                        --------------    --------------
              Net cash provided by financing activities                      5,002,957         6,303,525
                                                                        --------------    --------------
Net increase in cash                                                         2,136,173         3,360,812
Cash and cash equivalents at beginning of the period                         3,371,407            10,595
                                                                        --------------    --------------
Cash and cash equivalents at end of the period                          $    5,507,580    $    3,371,407
                                                                        ==============    ==============

 Supplemental disclosure of cash flow information:
   Cash paid for interest                                               $        4,897    $       79,040



                          See accompanying notes to consolidated financial statements.

                                                      F-8
</TABLE>
<PAGE>

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



(1)      NATURE OF OPERATIONS

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")." 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 20 highly
differentiated, patented safety needle technologies. These technologies apply to
the following: syringe, pre-filled syringe, IV catheter, guidewire introducer,
PICC introducer, winged needle sets, blood collection, epidural, spinal, plasma
aphaeresis sets, dialysis sets, Huber, biopsy, and other specialty needles. The
Company emerged from the development stage in 2002 and 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")
and Merit Medical Systems, Inc. ("Merit"). SHPI has distribution agreements in
place with Cardinal Health, Medline Industries, Inc. ("Medline"), and Physician
Sales and Service, Inc. ("PSS") 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 our current products. As of December 31,
2002, the Company had accounts payable and accrued liabilities totaling
$515,972. We also had current deferred revenue of $1,202,338, which will not
require the use of cash. At December 31, 2002, the Company had cash of
$2,007,580, with an additional $3,500,000 invested in certificates of deposit.
This cash, along with cash generated from the sale of products, development fees
and royalties, is expected to provide sufficient cash for the Company to execute
it's business plan in 2003. If the Company is not able to reduce its operating
losses, its liquidity will be adversely affected and the Company may be required
to seek additional sources of financing to fund operations. The Company may not
be able to obtain adequate financing when needed or obtain it on terms which are
satisfactory. Failure to raise capital when needed could prevent the Company
from achieving its business objectives.


(2)      SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

                                      F-9
<PAGE>

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

Concentrations of Credit Risk

The Company's distribution and license agreements are primarily with partners
operating in the United States. At December 31, 2002, one partner accounted for
approximately 77% of the accounts receivable balance. For the years ended
December 31, 2002 and 2001, two partners and one partner accounted for
approximately 82% and 86% of total revenues, respectively.

The Company is currently utilizing a single contract manufacturer to produce its
LiftLoc(R) Safety Infusion Set.

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 and at times may exceed insured depository
limits.

Inventory

Inventory is valued at the lower of cost or market. Cost is determined using the
FIFO method. At December 31, 2002, inventory is comprised of the following:

         Raw materials                      $  217,060
         Work in process                        48,258
         Finished goods                        128,570
                                            ----------
         Total                              $  393,888
                                            ==========

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.

Long-Lived Assets

Long-lived assets are reviewed for impairment when events or changes in
circumstances indicate that the book value of an asset may not be recoverable.
The Company evaluates, at each balance sheet date, whether events and
circumstances have occurred that indicate possible impairment. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting
for the Impairment of Assets and for Long-Lived Assets to be Disposed Of," the
Company uses an estimate of future undiscounted net cash flows of the related
asset or group of assets over the remaining life in measuring whether the assets
are recoverable. As of December 31, 2002, management did not consider any of the
Company's long-lived assets to be impaired.

                                      F-10
<PAGE>

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 which have been
capitalized and are being amortized over 17 years. Accumulated amortization at
December 31, 2002 was $5,958.

Stock Options

The Company accounts for stock options granted using Accounting Principles Board
APB Opinion 25. Accordingly, no compensation cost has been recognized for its
fixed stock option plans. 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 SFAS No. 123, the
Company's net loss and net loss per common share would have changed to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
                                                                  2002              2001
                                                               ------------      ------------
<S>                                                            <C>               <C>
Net loss applicable to common                                  $ (5,895,955)     $ (8,548,502)
  stockholders, as reported
Total compensation cost determined
  under fair value based method for
  all awards                                                     (1,384,435)        (507,032)
                                                               ------------      ------------

Pro forma net loss applicable to
  common stockholders                                          $ (7,280,390)     $ (9,055,534)
                                                               ============      ============

Basic and diluted net loss per      As reported                $       (.33)     $       (.56)
   common share:                    Pro forma                          (.41)             (.60)
</TABLE>

Revenue Recognition

Pursuant to Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements", 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 upfront fees totaling $2,500,000 from Tyco Healthcare and
$100,000 from Merit. 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 revenues are recognized as revenues 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, in accordance
with the terms of the agreements, as the services are performed.

Research and Development Costs

Research and development costs are expensed as incurred.

                                      F-11
<PAGE>

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 June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business combinations initiated after June 30, 2001 be accounted for under
the purchase method and addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination. SFAS
No. 142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 provides
that intangible assets with finite useful lives be amortized and that goodwill
and intangible assets with indefinite lives will not be amortized, but rather
will be tested at least annually for impairment. The adoption of SFAS No. 141
and No. 142 on January 1, 2002, did not have a material impact on our financial
position or results of operations.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." Under SFAS No. 143, the fair value of a liability for an asset
retirement obligation must be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material
impact on our financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lives Assets and for Long-Lived Assets to
be Disposed of", and addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The statement is effective for
fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 on
January 1, 2002, did not have a material impact on our financial position or
results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44, and
64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 145, which is
effective for fiscal years beginning after May 15, 2002, among other things,
eliminates the requirement that gains and losses from the extinguishments of
debt be classified as extraordinary items. The Company does believe the adoption
of SFAS No. 145 will have a significant effect on its financial position or
results of operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for exit or disposal
activities that are initiated after December 31, 2002. SFAS No. 146 addresses
significant issues related to the recognition, measurement, and reporting of
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The Company does not believe that the
adoption of SFAS No. 146 will have a significant effect on its financial
position or results of operations.

                                      F-12
<PAGE>

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 is effective for years ending after December 15, 2002,
provides alternative methods for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and requires
prominent disclosure about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The adoption
of SFAS No. 148 is not expected to have a significant effect on the Company's
financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation Number 45, or FIN 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (an interpretation of SFAS No. 5,
57, and 107 and rescission of FIN 34." FIN 45 clarifies the requirements of SFAS
No. 5, "Accounting for Contingencies," relating to a guarantor's accounting for,
and disclosure of, the issuance of certain types of guarantees. The adoption of
FIN 45 is not expected to have a significant effect on the Company's financial
position or results of operations.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities, and Interpretation of ARB 51." The primary objectives of FIN 46 are to
provide guidance on the identification of entities for which control is achieved
through means other than through voting rights ("variable interest entities" or
"VIE's") and how to determine when and which business enterprise should
consolidate the VIE (the "primary beneficiary"). This new model for
consolidation applies to an entity in which either (1) the equity investors (if
any) do not have a controlling financial interest or (2) the equity investment
at risk is insufficient to finance that entity's activities without receiving
additional subordinated financial support from other parties. In addition, FIN
46 requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE make additional disclosures. The Company
does not believe that the adoption of FIN 46 will have a significant effect on
its financial position or 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,
2002 and 2001, the basic and diluted net loss per common share for the years are
based on the weighted average number of common shares outstanding. Stock options
and warrants prior to conversion are not included in the calculation of diluted
net loss per common share for the year because their inclusion would be
antidilutive, thereby reducing the net loss per common share. Options and
warrants to purchase 7,347,500 and 7,107,500 shares of common stock at exercise
prices ranging from $1.00 to $2.00 per share were outstanding at December 31,
2002 and 2001, respectively.

Additionally, as of December 31, 2002 and 2001, respectively, there were
21,861,369 and 10,917,030 shares of Series A Preferred Stock outstanding, which
are convertible into common stock on a one-for-one basis. Such shares were also
not included in the computation of diluted earnings per share for the respective
years then ended because their inclusion would be antidilutive.

Reclassifications

Certain reclassifications have been made in the 2001 consolidated financial
statements to conform to the 2002 presentation.

(3)      DISTRIBUTION AND LICENSE AGREEMENTS

Kendall

In November 1999, SHPI entered into a Development and License Agreement (the
"Kendall Agreement") with The Kendall Company ("Kendall"), a division of Tyco
Healthcare Group LP, ("Tyco Healthcare") 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

                                      F-13
<PAGE>

April 2000, the Company received $1,464,956 under the Kendall Agreement. SHPI
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 life of the Kendall Agreement. The assignment of the patent
rights to Kendall provides for the Company's retention of an exclusive,
royalty-free worldwide 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 also received in
November 2002.

In April 2002, the Company 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, SHPI will 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.

Under the Development and License Agreement executed between Kendall and the
Company related to the Monoject Magellan(TM) safety products, Kendall 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.

Bard Access Systems

In September 2001, the Company entered into a Distribution Agreement (the "Bard
Agreement") with Bard whereby Bard acquired the non-exclusive right to promote,
market, distribute and sell LiftLoc(R) Safety Infusion Set, which SHPI
manufactures, to hospitals and group purchasing organizations. The Bard
Agreement excludes alternate site locations. Under the terms of the agreement,
SHPI sells finished product to Bard for marketing under Bard's private label.
Bard is subject to minimum purchase requirements. 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 Bard in writing not
less than 180 days prior to the expiration of the initial term or any renewal
term.

TAP Pharmaceutical Products

In July 2002, SHPI 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 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, SHPI has 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 the Company's proprietary
safety needle device. The TAP Agreement is for a minimum period of three years.

Merit Medical Systems

In January 2001, the Company 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. SHPI
received an upfront license fee payment of $100,000 in January 2001, which is
being recognized ratably by the Company over the estimated five-year life of the
Merit Agreement. Under the terms of the Merit Agreement, SHPI will receive
ongoing royalties on net product sales and began receiving minimum royalty
payments in 2002

                                      F-14
<PAGE>

Physician Sales & Service

In July 2002, the Company entered into a Distribution Agreement (the "PSS
Agreement") with Physician Sales and Service, Inc. ("PSS") 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 the
Company 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 (the "Medline
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 the
Company 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.

Allegiance Healthcare

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

(4)      COMMITMENTS AND CONTINGENCIES

Lease Obligations

The Company leases office space under a non-cancelable operating lease. The
following summarizes future minimum lease payments under the operating lease at
December 31, 2002:

                                                          Minimum
                    Year Ending December 31            Lease Payments
                                                       -------------
                            2003                       $     244,823
                            2004                             253,908
                            2005                             260,397
                            2006                             107,499
                                                       -------------
                                                       $     866,627
                                                       =============

Rental expense for the years ended December 31, 2002, and 2001 totaled
approximately $268,500 and $280,000, respectively. In July 2002, the Company
amended the lease to extend it from May 31, 2003 through May 31, 2006. In
conjunction with the extension, rent payable during the remaining term of the
original lease and the term of the extended lease was reduced to a more
favorable rate, the total space rented was reduced by 1,699 square feet, and
certain leasehold improvements were funded by the landlord. Beginning March 1,
2000, the Company subleased approximately 3,300 square feet of its office space,
generating sublease payments of $16,500 during 2001. The sublease agreement was
terminated effective January 31, 2002.

                                      F-15
<PAGE>

Employment and Indemnity Agreements

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

In January 2003, the Company approved a 2003 Executive Officer Bonus Plan. Under
the plan executive officers eligible for bonuses during 2003 include the CEO,
COO, VP of Sales and Marketing and VP of Business Development. Plan participants
will earn 20% of their annual salary based upon 100% achievement of the overall
revenue goal outlined in the approved budget plan. Also, plan participants will
be eligible to receive incremental bonus payments for performing beyond the
budget plan. The amount of incremental payments, if earned, will be based upon
the recommendation of the Compensation Committee and approved by the board of
directors. The maximum base bonus that could be paid under this plan is
$160,200. In connection with this plan, the Company also adopted an Employee
Bonus Plan for employees other than the Named Executive Officers to reward
specific individual or team achievements during 2003.

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

The Company is not involved in any litigation matters and is unaware of any
pending litigation.

(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
the non-qualified stock options and the incentive stock options from time to
time, subject to certain requirements of the Internal Revenue Code of 1986, as
amended. The option exercise price per share under the plan may not be less than
the fair market value of a share of common stock on the date on which the option
is granted. 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, 2002, options to acquire an aggregate of 4,984,690 shares of common
stock at exercise prices ranging from $1.00 to $2.00 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 ten 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.

                                      F-16
<PAGE>

Effective August 1998, adoption of the Specialized Health Products
International, Inc. 1998 Stock Option Plan was approved by the Company's Board
of Directors. The plan is 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, 2002, options to acquire an aggregate of 1,562,810 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, 2002
and 2001, and changes during the years then ended is presented below:

                                      2002                     2001
                           -------------------------- --------------------------
                              Wtd. Avg.      Wtd. Avg.   Exercise      Exercise
                                Shares        Prices      Shares        Prices
                            ------------ ------------ ------------ -------------
Outstanding at beginning
  of year                     6,057,500    $   1.27       1,939,000    $  1.70
Granted                         500,000        1.00       5,004,690       1.21
Exercised                             -         -                 -
Forfeited                       (10,000)       2.62        (886,190)      1.88
                            ------------              -------------
Outstanding at end
  of year                      6,547,500       1.26       6,057,500       1.27
                            ============              =============
Exercisable at end
  of year                      2,595,768       1.40       1,033,310       1.66
                            ============              =============
Weighted average fair
  value of options
  granted                   $       0.55              $        0.85
                            ------------              -------------

The following table summarizes information about the stock options outstanding
at December 31, 2002:
<TABLE>
<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, 2002             Life            Price           31, 2002           Price
   -------------------- ------------------ ------------------ ------------- -------------------- -------------
    <S>                     <C>             <C>                <C>               <C>             <C>
    $     1.0000                578,000         7.91 years                            78,000
          1.1250                118,000         7.45                                 118,000
          1.1900              4,584,690         8.87                               1,327,625
          1.2500                407,810         5.07                                 279,810
          1.4375                  8,000         7.88                                   8,000
          1.5100                100,000         8.99                                  33,333
          1.5625                100,000         7.74                                 100,000
          1.6250                 55,000         6.90                                  55,000
          1.7500                  5,000         0.45                                   5,000
          2.0000                594,000         1.46                                 591,000
                        ------------------                    ------------- -------------------- -------------
    $1.00 to 2.0000           6,547,500                          $  1.26           2,595,768       $     1.40
                        ==================                    ============= ==================== =============
</TABLE>
                                      F-17
<PAGE>

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 2002 and 2001: average risk-free interest rate of
approximately 2.5 and 3.5 percent, respectively; expected lives of 10 years and
5 years, respectively; expected dividend yields of zero percent in each year;
expected volatility of 81, 63 and 92 percent, respectively.

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

The following summarizes all warrant activity for the Company for the years
ended December 31, 2002, and 2001.

                                      2002                     2001
                           -------------------------- --------------------------
                              Wtd. Avg.      Wtd. Avg.   Exercise      Exercise
                                Shares        Prices      Shares        Prices
                            ------------ ------------ ------------ -------------
Outstanding at beg-
  inning of the year          1,050,000       $ 1.85    4,359,787      $  2.00
Granted                               -            -      300,000         1.25
Exercised                             -            -      (76,694)        1.00
Forfeited                      (250,000)        2.00   (3,533,093)        2.00
                          -------------               -----------
Outstanding at end of
  the year                      800,000       $ 1.72    1,050,000      $  1.85
                          =============               ===========

Exercisable at end of
  the year                      800,000                 1,050,000
                          =============               ===========


(6)      CAPITAL TRANSACTIONS

The Series A Preferred Stock Purchase Agreement entered into in November 2001
provided that the investors had the right, but not the obligation, to acquire
additional shares of Series A Preferred Stock at $.458 per share ($5,000,000
total) during the 12 months following the initial closing date of November 7,
2001. In September 2001, Galen Partners exercised their option to purchase the
additional shares to which they held rights. Under terms of the agreement, the
options to purchase held by the remaining qualified investors would expire in
thirty days if not exercised. All of those holding options to purchase exercised
some or all of their rights, purchasing an additional 10,944,339 shares of
Series A Preferred stock. The Company realized net proceeds of $5,002,957 from
the transaction. A non-cash beneficial conversion charge of $3,281,564 was
recognized related to this transaction, as the conversion price was less than
the market price of the Company's common stock on the date of exercise. This
amount has been treated as a deemed preferred stock dividend in the 2002
financial statements.

The holders of Series A Preferred Stock are entitled to receive dividends at the
rate of eight percent per share per annum, payable semi-annually, when, if and
as declared by the board of directors out of any assets legally available
therefore. The right to dividends on the Series A Preferred Stock is not
cumulative, and the holders of Series A Preferred Stock have no right to any
accrued or future dividend payment by reason of the fact that dividends on such
shares are not declared or paid in any prior year. As of December 31, 2002, no
dividends had been declared or paid.

                                      F-18
<PAGE>

Upon liquidation, dissolution or winding up of the Company, either voluntary or
involuntary, the holders of Series A Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets of the
Company to the holders of common stock, an amount equal to at least $.458 per
outstanding share of Series A Preferred Stock, plus an amount equal to eight
percent annual compounded return on $.458 per outstanding share of Series A
Preferred Stock from the date of the initial purchase of such shares less any
dividends previously paid on such shares ($10,621,915 at December 31, 2002).

The holder of each share of Series A Preferred Stock has the right to one vote
for each share of common stock into which the Series A Preferred Stock could
then be converted (with fractional shares being rounded to the nearest whole
share). The preferred stockholders have full voting rights and powers equal to
the voting rights and powers of the common stockholders.

Each share of Series A Preferred Stock shall be convertible at the option of the
holder thereof, at any time after the date of issuance of such share, into the
equivalent number of common shares. In addition, each share of Series A
Preferred Stock shall automatically be converted into the equivalent number of
shares of common stock at any time 66 2/3% of the Series A Preferred Stock has
been converted by the holders into common stock. Each share of Series A
Preferred Stock shall automatically be converted into the equivalent number of
shares of common stock if, after the second anniversary of the original issue
date, the Company's average closing share price per common stock for at least 20
consecutive trading days exceeds three times the conversion price.

(7)      INCOME TAXES

The Company recognized no income tax benefit in 2002 and 2001 from its net
operating losses. Significant components of the Company's deferred income tax
asset and deferred income tax liability as of December 31, 2002 is as follows:

                                                                        2002
                                                                  --------------
         Deferred income tax assets:
            Net operating loss carryforwards                      $   8,085,064
            Non cash compensation expense                               211,556
            Accrued compensation                                         12,585
            Patent costs                                                128,446
            Financial reporting accruals and reserves                    27,051
            Research and experimentation tax credits                    395,678
            Deferred revenue                                            634,301
                                                                  --------------
                Total gross deferred income tax asset                 9,494,682
            Less valuation allowance                                 (9,460,376)
                                                                  --------------
                Net deferred income tax asset                            34,306
         Deferred income tax liability -property and equipment          (34,306)
                                                                  --------------
                Net deferred income taxes                         $           -
                                                                  ==============

The net change in the total valuation allowance for the years ended December 31,
2002 and 2001was an increase of $1,295,194 and $1,365,907, respectively.

At December 31, 2002, the Company had total tax net operating losses ("NOLs") of
$21,675,776 and Research and Experimentation tax credits of $395,678 that can be
carried forward to reduce federal income taxes, if any. Approximately $17,000 of
NOLs expired in 2002. 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 2002. Consequently, a certain
amount of the Company's tax net operating loss carryforwards available to offset
future taxable income in any one year are limited. The maximum amount of
carryforwards available in a given year is limited to the product of the
Company's value on the date of ownership change and the federal long-term
tax-exempt rate, plus any limited carryforwards not utilized in prior years.

                                      F-19
<PAGE>

(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 contribution to the plan was approximately $67,700 and $61,500 in
2002 and 2001, respectively.

(9)      RELATED-PARTY TRANSACTIONS

In February 2000, the Company entered into a letter agreement with Rubicon
International Limited ("Rubicon") to receive certain financial advisory
services. Certain principals of Rubicon and the persons expected to perform
service on behalf of Rubicon under the letter agreement are stockholders.
Subject to certain limitations, in the event that the Company entered into
certain financing transactions Rubicon would have been entitled to a fee. In
September 2001, the Company entered into an agreement with Rubicon whereby
Rubicon was issued 200,000 shares of the Company's common stock valued at
$156,000 using the quoted market price on that date in exchange for the
cancellation of the Rubicon agreement and a mutual release of any and all claims
pertaining to the Rubicon agreement.

In December 2000, an employee of the Company exercised his option to return to
the Company 23,333 warrants in exchange for a cash payment of $60,665, due in
January 2001. The employee subsequently notified the Company that he would
accept common stock in lieu of a cash payment. The Company completed that
transaction in June 2001, issuing stock at a market price equivalent to the
principal and accrued interest from the date the payment was originally due.


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                                      F-20