UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                   FORM 10-KSB


(Mark One)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005.

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

                         Commission File Number: 0-26694


                 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
                 -----------------------------------------------
                 (Name of small business issuer in its charter)


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

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

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

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

                                      None.

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

                     Common Stock, par value $.02 per share
                     --------------------------------------
                                (Title of Class)

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

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

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

<PAGE>

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [X] No [ ].

State issuer's revenues for its most recent fiscal year: $6,981,544

The aggregate market value of the common stock held by non-affiliates (i.e.,
does not include directors, executive officers or ten percent stockholders
identified in Item 11 hereof) of the issuer as of March 7, 2006 was
approximately $12,118,675.

As of March 7, 2006, the issuer had 44,629,445 shares of common stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in the issuer's definitive Proxy Statement for the
2006 annual meeting of stockholders, to be filed not later than 120 days after
the end of the fiscal year covered by this report, is incorporated by reference
into Part III hereof.]

Transitional Small Business Disclosure Format:  Yes [ ]; No [X].

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<PAGE>

                 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.

                       TABLE OF CONTENTS TO ANNUAL REPORT
                                 ON FORM 10-KSB
                          YEAR ENDED DECEMBER 31, 2005




                                     PART I

Item 1.     Description of Business............................................4
Item 2.     Description of Property...........................................18
Item 3.     Legal Proceedings.................................................18
Item 4.     Submission of Matters to a Vote of Security Holders...............19


                                     PART II

Item 5.     Market for Common Equity and Related Stockholder Matters..........20
Item 6.     Management's Discussion and Analysis or Plan of Operation.........20
Item 7.     Financial Statements..............................................37
Item 8.     Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosures.......................................37
Item 8A.    Controls and Procedures...........................................37
Item 8B.    Other Information.................................................37

                                    PART III

Item 9.     Directors, Executive Officers, Promoters and Control Persons;
              Compliance With Section 16(a) of the Exchange Act...............39
Item 10.    Executive Compensation............................................43
Item 11.    Security Ownership of Certain Beneficial Owners and Management
              and Related Stockholder Matters.................................43
Item 12.    Certain Relationships and Related Transactions....................45
Item 13.    Exhibits..........................................................46
Item 14.    Principal Accountant Fees and Services............................46

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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
our licensees to sell licensed products; sufficiency and timing of available
resources to fund operations; plans regarding the raising of capital; the size
of the market for safety products; plans regarding sales and marketing;
strategic business initiatives; intentions regarding dividends and the launch
dates of our licensed products.

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

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

                                     PART I

Item 1. Description of Business

Overview

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

         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

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entered into product agreements relating to specific technologies and product
lines with The Kendall Company ("Kendall"), a division of Tyco Healthcare Group
LP ("Tyco Healthcare"), Bard Access Systems, Inc. ("Bard"), Becton, Dickinson
and Company ("BD"), TAP Pharmaceutical Products Inc. ("TAP"), Merit Medical
Systems, Inc. ("Merit"), and Exelint International Co. ("Exel"). We have
distribution agreements in place with Cardinal Health ("Cardinal"), Medline
Industries, Inc. ("Medline"), Physician Sales and Service, Inc. ("PSS"), and
several other specialty distributors for products marketed under our own SHPI
("SHPI" is used for Specialized Health Products International, Inc.) label.
Additional discussions are ongoing with potential partners for other product
applications of our proprietary technologies.

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

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

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

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

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

         We have product agreements in place pertaining to four additional
product lines based upon our SecureLoc(TM) platform technology. In 2003, we
signed a worldwide development and license agreement for safety-engineered
spinal and epidural needles with BD, the worldwide leader in spinal needles.
Products subject to this agreement will compete in the estimated $200 million
U.S. spinal and epidural needle market. In June 2004, we completed a development
and OEM supply agreement for safety and conventional bone marrow biopsy needles
with Tyco Healthcare, one of the leading U.S. marketers of bone marrow biopsy
needles. We believe that the safety spinal needles we are developing for BD and
the safety bone marrow biopsy needles we are developing for Tyco Healthcare have
the potential to be the first safety products available in their respective
categories. In December 2005, we signed a non-exclusive worldwide license
agreement for a passive safety IV catheter with an undisclosed multinational
medical products company. Products subject to this agreement will compete in the
estimated $255 million U.S. IV catheter market.

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         We see a significant and growing market opportunity for our medical
safety needle products. The U.S. market for disposable medical needles is in
excess of $1.4 billion. Most of this market is directly impacted by broad
reaching state and federal safety legislation, culminating in the U.S.
Needlestick Safety and Prevention Act, which was signed into federal law in
November 2000, and became effective in April 2001. This law requires healthcare
employers to review new safety needle products and mandates their usage by
employees. As various government agencies increase their efforts to monitor
compliance and better designed safety products become available at reasonable
pricing, we anticipate that conversion to safety products will continue to
accelerate.

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

Our Products

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

         Safety Syringe Needles

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

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

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

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

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Monoject Magellan(TM) product line includes a wide variety of needle lengths and
gauges, and primarily competes in the $260 million U.S. safety needle and
syringe market. Kendall launched the MonoJect Magellan(TM) product into key
international markets in the fourth quarter of 2004.

         Safety Huber Needle Devices

         LiftLoc(R) Safety Infusion Set

         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 periods extending from six
months to a year. A major cause of accidental needlestick injuries to healthcare
workers from Huber needles is due to the "rebound effect" which occurs during
needle withdrawal from the implanted port. This needle presents a high risk for
transmission of blood-borne pathogens, since it is hollow-bore and potentially
blood-contaminated at the time of removal.

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

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

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

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

         We received 510(k) clearance from the FDA for LiftLoc(R) Safety
infusion Set in 2001, and initiated the U.S. market launch of the product line
under our SHPI label in September 2002. Bard initiated its U.S market launch of
LiftLoc(R) Safety Infusion Set under the Bard label in December 2002. The
LiftLoc(R) Safety Infusion Set product line includes a wide variety of needle
lengths and gauges. It competes in the $60 million U.S. Huber needle market.

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         MiniLoc(TM) Safety Infusion Set

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

         We supply MiniLoc(TM) Safety Infusion Set on an OEM private label basis
to Bard and Exel. We distribute MiniLoc(TM) under the SHPI label through
non-exclusive distribution agreements with Cardinal Health, Medline, PSS,
Medical Specialties, and Henry Schein. In addition, we have entered into an
agreement with Angus Medical for the distribution of our MiniLoc(TM) product in
Canada.

         We received 510(k) clearance from the FDA for MiniLoc(TM) Safety
Infusion Set in May 2005, and initiated the U.S. market launch of the product
line under our SHPI label in September 2005. Bard initiated its U.S. market
launch of MiniLoc(TM) Safety Infusion Set under the Bard label in the fourth
quarter of 2005. The comprehensive MiniLoc(TM) Safety Infusion Set product line
includes a wide variety of needle lengths and gauges.

         Pre-filled Syringe Safety Needle Devices

         Pre-filled syringes are a significant drug delivery modality, with a
strong need for an effective, cost-efficient safety needle solution. A wide
range of drugs, from high volume vaccines to many of today's newer drugs, are
delivered via pre-filled syringes. Typically, the pre-filled syringe is made of
glass to ensure appropriate shelf life and inertness to the drug. Pre-filled
syringes are used to deliver drugs in a variety of forms, including liquids,
gels, lyophilized (freeze-dried) drugs, or a combination of liquid and dry 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 (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. The TAP Agreement automatically renews for
additional one year terms unless TAP provides written notice of termination at
least ninety days prior to the expiration of the then current term.

         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

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its Center for Devices and Radiological Health ("CDRH"). Pharmaceutical products
sold in pre-filled syringes represent a multi-billion dollar worldwide market.
The total U.S. market for pre-filled syringes is estimated to be in excess of
$100 million annually.

         Safety Blood Collection (Phlebotomy) Devices

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

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

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

         Kendall initiated its U.S. market launch of the Monoject Magellan(TM)
safety blood collection product line in January 2004. This product line competes
in the estimated $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 relating to the manufacture and marketing of safety needle devices for
angiographic guidewire introducers. Merit is a leading manufacturer and marketer
of proprietary disposable products used in cardiology and radiology procedures.
We received an upfront license fee payment of $100,000 in January 2001, which is
being recognized ratably by us over the estimated five-year life of the Merit
Agreement. Under the terms of the Merit Agreement, we will receive ongoing
royalties on net product sales and began receiving minimum royalty payments in
2002.

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

         Safety Introducer Needles

         Introducer needles are an important component in sterile procedure kits
and trays used in the fields of interventional cardiology, interventional
radiology, and for general vascular access. Introducer needles are estimated to

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represent a $29 million U.S. market. SecureLoc(TM) Safety Introducer Needle is
our safety entry into this growing market. We believe that the SecureLoc(TM)
Safety Introducer Needle offers several compelling features and benefits to the
end user, including:

         o        an integral safety mechanism to reduce the risk of accidental
                  needlesticks,
         o        the ability to activate the safety device over a guidewire,
         o        specially lubricated needles to minimize needle penetration
                  forces,
         o        a funneled hub for smooth guidewire introduction, and
         o        an ergonomic handle to facilitate grip, stability and needle
                  control during procedure.

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

         In October 2005, we entered into a non-exclusive Distribution Agreement
(the "2nd Merit Agreement") with Merit relating to the OEM supply of
SecureLoc(TM) Safety Introducer Needle. We continue to be engaged in discussions
with multiple other large potential OEM customers for the supply and
distribution of the SecureLoc(TM) Safety Introducer Needle.

         Safety Long Specialty Needles

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

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

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

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

         In June 2004, we entered into a worldwide Development and OEM
Supply/Distribution agreement with Tyco Healthcare for the marketing and sale of
safety bone marrow biopsy needles. Under the terms of the agreement, Tyco
Healthcare will purchase safety and conventional bone marrow biopsy needles from

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us, as well as reimburse us for certain research and development expenses
related to product commercialization. Tyco Healthcare is one of the leading U.S.
marketers of bone marrow biopsy needles. We believe that the safety bone marrow
biopsy needles we are developing for Tyco Healthcare have the potential to be
the first safety products available in the field.

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

Industry

         Market

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

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

         Accidental Needlestick Injuries

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

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

                                       11
<PAGE>

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

         Legislative Response

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

Our Strategy

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

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

Marketing and Sales

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

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

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<PAGE>

Manufacturing and Facilities

         Products being developed under OEM supply or distribution agreements
are manufactured under our authority and supervision by a qualified contract
manufacturer headquartered in Vista, California, with FDA and ISO compliant
assembly facilities in Tijuana, Mexico. In 2002, we began producing our
LiftLoc(R) Safety Infusion Set and Patient Comfort Pad(TM) at an ISO 9002
qualified contract manufacturer. We began producing our MiniLoc(TM) Safety
Infusion Set and SecureLoc(TM) Safety Introducer Needle product lines at this
same facility in the second half of 2005. Products subject to licensing
agreements are manufactured by our corporate partners. The materials used to
produce our products are generally widely available. We do not anticipate
difficulty in obtaining such materials.

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

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

Patents and Proprietary Rights

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

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

         Our future success may depend upon the strength of our intellectual
property. We believe that our patents and patent applications are or will be
valid and enforceable. There is no assurance, however, that if such patents are
challenged this belief will prove correct. In addition, patent applications
filed in foreign countries and patents granted in such countries are subject to
laws, rules and procedures, which differ from those in the U.S. Patent
protection in such countries may be different from patent protection provided by
U.S. laws and may not be as favorable to us.

         We are not aware of any patent infringement claims against us directly.
In December 2002, BD filed a lawsuit against Tyco Healthcare Group LP ("Tyco
Healthcare"), asserting that the Monoject Magellan(TM) safety products infringe
upon a BD patent. See Item 3. "Legal Proceedings." On October 26, 2004, a jury
found in favor of BD that Tyco Healthcare's Monoject Magellan(TM) safety
products willfully infringed the `544 Patent and awarded damages of $4.4
million. On November 1, 2004, the court entered the judgment in favor of BD.
Tyco Healthcare is challenging the jury finding in post-trial motions, and, if
necessary, in an appeal. Tyco Healthcare developed the Monoject Magellan(TM)
safety products in association with us. We are not a party to the patent
infringement lawsuit.

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

                                       13
<PAGE>

due us on unit sales of products alleged to infringe, an amount which is the
lesser of all royalties and/or other monies paid by Tyco Healthcare to BD, or
fifty percent (50%) of all royalty payments otherwise payable to us. Based on
information obtained during the fourth quarter of 2003 related to costs incurred
by Tyco Healthcare, we recorded a liability of approximately $1,300,000 at
December 31, 2003, which amount was our estimate of the portion of costs
associated with BD's lawsuit against Tyco Healthcare that Tyco Healthcare would
withhold against the royalties due SHPI through 2005. During the twelve month
contract periods ended September 30, 2004 and 2005, Tyco Healthcare withheld
fifty percent of royalty payments due us, which amounts totaling $1,000,000 have
been offset against the accrual. Based on information obtained during the fourth
quarter of 2005, we now anticipate the litigation will continue at least through
2007. Accordingly, we recorded an additional liability of $1,095,200 at December
31, 2005, which amount was our estimate of the portion of costs associated with
BD's suit against Tyco Healthcare that Tyco Healthcare will withhold against the
royalties due us during 2006 and 2007. In the event litigation continues beyond
2007, or if Tyco Healthcare ultimately loses the case on appeal, additional
liabilities may accrue. If Tyco Healthcare is unsuccessful in post-trial motions
and on appeal, Tyco Healthcare may be prohibited from selling the Monoject
Magellan(TM) safety products in their current form. Additional litigation to
enforce patents, to protect proprietary information, or to defend us against
alleged infringement of the rights of others may occur. Such litigation would be
costly, could divert our resources from other planned activities, and could have
a material adverse effect on our results of operations and financial condition.

Research and Development

         We have devoted a substantial portion of our efforts to designing and
developing healthcare products. To date, research and development expenditures
have resulted in our ownership of, or right to, in excess of 120 patents and
patent applications worldwide. We spent $2,942,687 in 2005 (excluding $435,329
of amortization of deferred compensation) and $2,437,880 in 2004 (excluding
$82,772 of amortization of deferred compensation) on research and development
activities. Customer sponsored research activities relating to the development
of new products, services or techniques or the improvement of existing products,
services or techniques for which we earned revenues were $1,111,906 in 2005 and
$508,602 in 2004. We plan to continue research and development on our current
products under development and new products. There is no assurance that our
ongoing research and development activities will prove effective.

Government Regulation

         Product Approvals

         We are regulated by the FDA, pursuant to various statutes, including
the Federal Food, Drug and Cosmetic ("FD&C") Act, as amended and supplemented by
the Medical Device Amendments of 1976 (the "1976 Amendments") and other related
medical device legislatively enacted statutes. Although our focus in the past
has been on the design and development of devices, we anticipate that as we
engage in more OEM manufacturing, we will become increasingly active in pursuing
regulatory approvals. We have submitted and received FDA clearance for our
LiftLoc(R) Safety Infusion Set and MiniLoc(TM) Safety Infusion Set. In addition,
our strategic partners have received FDA clearances for Monoject Magellan(TM)
Safety Syringe Needle, Monoject Magellan(TM) Safety Blood Collection Device,
LuproLoc(TM) Pre-filled Syringe Safety Needle, and Majestik(TM) Shielded
Angiographic Needle. We submitted a 510(k) application for our SecureLoc(TM)
Safety Introducer Needle in January 2005 and received marketing clearance in
February 2005. We plan to submit additional 510(k) applications for safety
needle devices based upon our SecureLoc(TM) technology during 2006.

         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

                                       14
<PAGE>

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)
Notification"] must state the class in which the device is classified and the
actions taken to comply with performance standards or pre-market approval which
may be needed if the device is a Class III device. If a company states the
device is unclassified, it must explain the basis for that determination.

         In some cases obtaining pre-market approval for Class III devices can
take several years. Product clearance pursuant to a 510(k) Notification can be
obtained in much less time. The average time for 510(k) clearance for safety
devices is currently 90 days. In general, clearance of a 510(k) Notification for
a Class II device may be obtained if an applicant can establish that the new
device is "substantially equivalent" to another device of that Class already on
the market. This requires the new device to have the same intended use as a
legally marketed predicate device and have 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,

                                       15
<PAGE>

testing, and quality control. The FDA's Medical Device Reporting regulation
requires that companies provide information to the FDA on death or serious
injuries alleged to have been associated with the use of their products, as well
as product malfunctions that would likely cause or contribute to death or
serious injury if the malfunction were to recur. The FDA further requires that
certain medical devices not cleared with the FDA for marketing in the U.S. meet
specific requirements before they are exported. We are registered as a
manufacturer with the FDA.

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

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

         Safety Product Mandates

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

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

         Foreign Regulation

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

Competition

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

         The leading suppliers of syringe needles and syringes with needles are
BD and Kendall. Terumo Medical Corporation ("Terumo") holds a minor U.S. market
share. B. Braun Medical ("B. Braun") is a leader in Europe and Asia, while
Terumo is a leader in Japan and the Pacific Rim. In addition to the major
companies mentioned above, other developers of safety medical needles include
The Med-Design Corporation (being acquired by us pursuant to the merger
agreement dated November 21, 2005), ICU Medical, Inc., Now Medical Technologies,
Retractable Technologies, Inc., Medisys Technologies, Inc., and Smiths Medical.

         Competitive suppliers of safety Huber needle products with an integral
safety feature or mechanism include Now Medical, Smiths Medical, Rita Medical,

                                       16
<PAGE>

B. Braun, and Churchill Medical Ltd. We believe our LiftLoc(R) and MiniLoc(TM)
Safety Infusion Sets provide significant advantages versus competitive safety
Huber needle products on the market.

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

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

         Many of our competitors are substantially larger than we are, have
established channels of distribution and may be more effective at competing than
we are. We depend upon our indirect channels of distribution and our licensees,
some of whom are our competitors for other products, in marketing and
distributing our products.

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

Company Background

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

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

Seasonality of Business

         Sales of our products are not subject to seasonal variations.

Backlog

         There is no backlog of unfilled orders of our products.

Employees

         As of March 7, 2006, we employed 31 people, 17 of whom are engineers.
All but four of our employees are actively engaged in our research, product
development, or sales and marketing efforts.

                                       17
<PAGE>

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

Item 2. Description of Property

         Our principal offices are located at 585 West 500 South, Bountiful,
Utah, under the terms of a lease with an unaffiliated lessor, which expires on
December 31, 2007, at which time the lease shall continue in full force and
effect indefinitely subject to our right to terminate on the last day of the
first month that occurs six months after the date of our providing notice of
termination. The offices and laboratories comprise 15,574 square feet of space.
We believe that our current office space will be adequate to meet the needs of
current and expected growth for the foreseeable future. We may, however, require
additional warehousing or manufacturing facilities in the future depending upon
the volume of products sold and the manufacturing arrangements we develop.

Item 3. Legal Proceedings

         In December 2002, Becton Dickinson ("BD") filed a lawsuit against Tyco
Healthcare in the United States Court of the District of Delaware, asserting
that Tyco Healthcare's Monoject Magellan(TM) safety products infringe upon BD's
U.S. Patent No. 5,348,544 (`544 Patent), titled "Single-Handedly Actuable Safety
Shield for Needles."

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

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

         Based on information obtained during the fourth quarter of 2003 related
to costs incurred by Tyco Healthcare, the Company recorded a liability of
approximately $1,300,000 at December 31, 2003, which amount was the Company's
estimate of the portion of costs associated with BD's suit against Tyco
Healthcare that Tyco Healthcare will withhold against the royalties due SHPI
through 2005. During the twelve months periods ended September 30, 2004 and
2005, Tyco Healthcare withheld fifty percent of royalty payments due, which
amounts totaling $1,000,000 have been offset against the accrual. Based on
information obtained during the fourth quarter of 2005, we now anticipate the
litigation will continue at least through 2007. Accordingly, we recorded an
additional liability of $1,095,200, which amount was our estimate of the portion
of costs associated with BD's suit against Tyco Healthcare that Tyco Healthcare
will withhold against the royalties due SHPI during 2006 and 2007. In the event
litigation continues beyond 2007, or if Tyco Healthcare ultimately loses the
case on appeal, additional liabilities may accrue. Moreover, if Tyco Healthcare
is unsuccessful in post-trial motions and on appeal, Tyco Healthcare may be
prohibited from selling the Monoject Magellan(TM) safety products in their
current form. Additional litigation to enforce patents, to protect proprietary
information, or to defend us against alleged infringement of the rights of
others may occur. Such litigation would be costly, could divert our resources
from other planned activities, and could have a material adverse effect on our
results of operations and financial condition.

                                       18
<PAGE>

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

         We held our annual meeting of stockholders on May 25, 2005, at which
meeting two director nominees were submitted for approval by the stockholders.
At the annual meeting, Guy J. Jordan, Ph.D., Stephen I. Shapiro and Jeffrey M.
Soinski, were nominated for election to the class of directors whose term
expires at the 2008 annual meeting of stockholders. The stockholders elected Dr.
Jordan by a vote of 34,583,393 for and 24,800 withheld authority, Mr. Shapiro by
a vote of 34,589,393 for and 18,800 withheld authority, and Mr. Soinski by a
vote of 34,587,393 for and 20,800 withheld authority. The board is divided into
three classes. One class of directors is elected at each annual meeting of
stockholders for a three-year term. Each year a different class of directors is
elected on a rotating basis. The terms of the directors expire as follows: David
W. Jahns and Robert R. Walker in 2006; and Stuart A. Randle and Donald D.
Solomon, Ph.D., in 2007, and Guy J. Jordan Ph.D., Jeffrey M. Soinski and Stephen
I Shapiro in 2008.


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                                     PART II


Item 5. Market for Common Equity and Related Stockholder Matters

Dividend Policy

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

Share Price History

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

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

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

                  2005
                  March 31.....................      $1.12            $0.60
                  June 30......................      $0.77            $0.55
                  September 30.................      $0.70            $0.55
                  December 31..................      $0.65            $0.42

Holders of Record

         At March 7, 2006, there were approximately 313 holders of record of our
common stock. The number of holders of record was calculated by reference to our
stock transfer agent's books.

Issuance of Securities

         None.

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

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

                                       20
<PAGE>

Overview

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

Years Ended December 31, 2005 and 2004

         During the year ended December 31, 2005, we had total revenues of
$6,981,544, compared with total revenues of $5,765,278 for the year ended
December 31, 2004, an increase of $1,216,266 or 21%. During 2005, we recognized
$5,563,700 in product sales and royalties, $305,938 in technology fees and
licensing revenues, and $1,111,906 in development fees and related services
revenue. During 2004, we recognized $4,361,052 in product sales and royalties,
$895,624 in technology fees and licensing revenues and $508,602 in development
fees and related services revenue. The growth in product sales and royalties in
2005 reflects increased marketplace acceptance of our safety products and the
launch of two new manufactured product lines in the fourth quarter of 2005. The
increase in development fees and related services in 2005 as compared to 2004
reflects work performed under existing development agreements and the securing
of additional work under new agreements in 2005. Upfront licensing fees from
Tyco were fully amortized in May 2005, resulting in significantly lower
technology and license fee revenue in 2005 than were recognized in 2004. We will
look to our existing product agreements, sales of our own branded products
through distributors, expanded OEM product sales to corporate customers,
introduction of new products, and additional development and strategic
arrangements for future revenue growth.

         Cost of revenues in 2005 was $2,080,659. Our gross profit in 2005 was
$4,900,885, representing a 70% gross profit margin. Cost of revenues in 2004 was
$1,082,131. Our gross profit in 2004 was $4,683,147, representing an 81% gross
profit margin. The reduction in gross margin in 2005 relates to a shift in
revenue mix, with development revenue representing a significantly larger share
of total revenue in 2005, and license revenue related to the amortization of
upfront payments from our earlier license agreements becoming fully amortized in
mid-2005. Development revenue carries much lower margins than product sales and
royalties revenue. The upfront license fee from Tyco, which became fully
amortized in mid-2005, carried a 100% gross margin. Product sales and royalty
revenue, which represented 80% of our total revenue in 2005, provided a blended
gross margin of 76% compared to a blended gross margin of 82% in 2004.

         Research and development ("R&D") expenses in 2005 were $2,942,687
(excluding $435,329 of amortization of deferred compensation) compared to
$2,437,880 (excluding $82,772 of amortization of deferred compensation) in 2004,
representing an increase of $504,807 or 21%. This increase was primarily due to
the hiring of additional personnel to commercialize our late-stage development
products and to advance the development of our pipeline products.

         Sales and marketing ("S&M") expenses in 2005 were $985,155 (excluding
$19,081 of amortization of deferred compensation), compared to $1,007,338
(excluding $11,895 of amortization of deferred compensation) in 2004, a decrease
of $22,183 or 2%. Expenses remained flat as the result of the mid-2004
reorganization and streamlining of our sales and marketing department to achieve
greater efficiencies.

         General and administrative ("G&A") expenses in 2005 were $1,291,743
(excluding $842,026 of amortization of deferred compensation) compared to
$1,334,639 (excluding $161,788 of amortization of deferred compensation) in

                                       21
<PAGE>

2004, a decrease of $42,896. Reduced consulting services, offset by higher
insurance costs, enabled us to maintain 2005 expenses at virtually the same
level as 2004.

         On September 15, 2004, the 2004 Stock Incentive Plan ("Stock Plan") was
approved by the Board of Directors and became effective on that date, subject to
the Stock Plan being approved by the stockholders within six months after that
date. The Stock Plan provides that 6,000,000 shares of our authorized but
unissued common stock be reserved pursuant to the terms and conditions of the
plan. On October 19, 2004, a special meeting of stockholders was held, at which
time the stockholders approved the Stock Plan. The Stock Plan will allow the
Company, under the direction of the Compensation Committee, to make broad-based
grants of restricted stock and stock units, any of which may or may not require
the satisfaction of performance objectives, to employees and non-employee
directors. The purpose of these stock awards is to attract and retain talented
employees and further align employee and stockholder interests. The Board
approved and recommended the Stock Plan after consultation with a nationally
recognized compensation consulting firm that was retained by the Company. The
Stock Plan provides an essential component of the total compensation package
offered to employees, reflecting the importance that we place on motivating and
rewarding superior results with long-term, performance-based incentives. Under
the Stock Plan, current directors and employees holding stock option grants were
given the election of retaining those stock option grants or surrendering them
for grants of common stock. This resulted in the surrender of 5,738,190 stock
options in exchange for the issuance of 3,375,397 shares of common stock. The
stock issuance resulted in a non-cash charge of $3,825,521, which is being
expensed ratably over the three-year vesting period of the stock grants. In
February 2005, the Board of Directors approved the grant of 147,500 shares of
restricted common stock to certain employees, resulting in a non-cash charge of
$94,400. The charges to expense for the years ended December 31, 2005 and 2004
relating to these transactions were $1,296,436 and $256,455, respectively.

         During the fourth quarter of 2005, we recorded a liability of
$1,095,200, which amount is our estimate of the portion of costs associated with
BD's suit against Tyco Healthcare that Tyco Healthcare will withhold against the
royalties due SHPI for 2006 and 2007. See Item 3, "Legal Proceedings."

         Other expense was $48,386 in 2005 compared to other income of $9,526 in
2004. This change was due to $36,388 in amortization of deferred finance costs
and $18,781 in interest expense related to the borrowings from Galen Partners
coupled with lower interest earnings due to lower cash balances during 2005.

         We did not recognize any income tax benefit from our losses for the
years ended December 31, 2005 and 2004. At December 31, 2005, we had total net
operating losses ("NOL's") of $27,337,736 and research and experimentation tax
credits of $884,017 that can be carried forward to future years. Our ability to
realize the benefit of these NOL's and tax credits will depend on the generation
of future taxable income through profitable operations.

         Our net loss in 2005 was $2,758,721 compared to a net loss of $343,639
in 2004, an increase of $2,415,082 or 703%. This increase is the result of the
items noted above. Our basic and diluted net loss per share for the year ended
December 31, 2005 was ($0.07) per share. This compares to a net loss per share
of ($0.01) for the year ended December 31, 2004.

Liquidity and Capital Resources

         To date, we have financed our operations principally through private
placements of equity securities, the sale of products, technology and patents,
advanced royalties, development fees, technology and license fees and proceeds
from the sale of common stock. We used net cash for operating activities of
$411,385 during 2005, compared to net cash used of $1,683,723 during 2004,
representing a decrease of $1,272,338, or 76%. The decrease was primarily
attributable to the increase in amortization of deferred compensation and net
cash provided by working capital items. During 2005, $541,918 was used for the
purchase of intangible assets and property and equipment, compared to $232,572

                                       22
<PAGE>

during 2004. Property, plant and equipment purchases in 2005 and 2004 related
primarily to molds and assembly equipment for our marketed products. During
2005, we capitalized $430,997 related to the planned merger with Med-Design. See
Note 9 in the Consolidated Financial Statements.

         During 2005, net cash of $519,596 was provided from proceeds from the
Galen note and by the sale of stock through The SHPI 401(k) Plan. During 2004,
net cash of $1,082,595 was provided from a private placement of 1,250,000 shares
of restricted common stock to certain accredited and sophisticated investors and
the purchase of 139,720 shares of common stock through The SHPI 401(k) plan.

         Our working capital requirements for the foreseeable future will vary
based upon a number of factors, including the costs to complete development
work, the cost of bringing safety medical needle technologies and other products
to commercial viability, the timing of the market launches of new products and
the level of sales of our current products. As of December 31, 2005, we had
accounts payable and accrued liabilities totaling $1,424,864. We also had a
current portion of accrued patent litigation expense of $541,363 and current
deferred revenue of $196,668, neither of which will require the use of cash. At
December 31, 2005, we had cash and cash equivalents of $707,222. On March 6,
2006, we notified Galen Partners that we would draw the remaining $500,000
against the note agreement. On March 6, 2006, we also obtained a $1,500,000
revolving line of credit with Silicon Valley Bank under which borrowings will be
collateralized by substantially all of the assets of the Company. Available
borrowings are based primarily on outstanding accounts receivable and initially
amounted to approximately $800,000. We believe that existing cash and cash
equivalents, along with cash generated from the collection of accounts
receivable, the sale of products, development fees and royalties, the $500,000
in funding to be provided under the Galen note agreement, and available
borrowings under our credit line will be sufficient to meet our cash
requirements during the next twelve months. However, there can be no assurance
that we will not encounter unforeseen difficulties that may deplete our
resources more rapidly than anticipated. Any efforts to seek additional funding
could be done through equity, debt or other external financing; however there is
no assurance that additional funding will be available on favorable terms, if at
all. If we fail to obtain additional funding when needed, our business and
financial condition may be adversely affected.

         As of March 7, 2006, we have outstanding stock options that are
exercisable for 74,250 shares of common stock at exercise prices ranging from
$1.00 to $1.25 per share and issued warrants that are exercisable for 120,000
shares of common stock at an exercise price of $0.02 per share. The exercise of
all such stock options and warrants would result in an equity infusion of
$190,958. All of the stock options are out of the money, certain options are not
yet exercisable, and there can be no assurance that any of the stock options or
warrants will be exercised.

Financial Position

         We had $707,222 in cash and cash equivalents as of December 31, 2005, a
decrease of $864,704 from December 31, 2004. Working capital as of December 31,
2005 was $798,722 as compared to $1,430,590 at December 31, 2004. These
decreases were primarily due to the net cash used to fund capital equipment,
capitalized merger costs and operations during 2005.

Product Agreements

License Agreements

         Kendall

         In November 1999, we entered into a Development and License Agreement
with The Kendall Company, a division of Tyco Healthcare Group LP, relating to
the production of a line of safety medical needle products, including six
syringe products and five other safety needle products. The Kendall Agreement
became effective in March 2000. In April 2000, we received $1,464,956 under the
Kendall Agreement. We received an additional $1,000,000 in November 2002 in
exchange for assigning to Kendall the FlexLoc(R) and ReLoc(TM) trademarks and
two related U.S. patents and their progeny for a technology. Both of these

                                       23
<PAGE>

payments are being recognized ratably over the estimated five-year life of the
Kendall Agreement. The assignment of the patent rights to Kendall provides for
the Company's retention of an exclusive, royalty-free license in a number of
strategic product areas. The Kendall Agreement also provides for us to receive
development fees and ongoing royalties, including a $500,000 advance royalty
payment that was also received in November 2002.

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

         Merit Medical

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

         TAP Pharmaceutical Products

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

         Becton, Dickinson and Company

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

         Medical Device Company

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

Distribution Agreements

         Bard Access Systems

         In September 2001, we entered into a Distribution Agreement with Bard
Access Systems, Inc. whereby Bard acquired the non-exclusive right to promote,
market, distribute and sell LiftLoc(R) Safety Infusion Set, which we
manufacture, to hospitals and group purchasing organizations. The Bard Agreement

                                       24
<PAGE>

excludes alternate site locations. Under the terms of the agreement, we sell
finished product to Bard for marketing under Bard's private label. The Bard
Agreement is for a two-year period from the initial date of product launch, and
automatically renews for successive one-year terms unless terminated by either
party in writing not less than 180 days prior to the expiration of the initial
term or any renewal term. In September 2005, the Bard Agreement was amended to
add the MiniLoc(TM) Safety Infusion Set to the products supplied to Bard.

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

         Physician Sales & Service

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

         Medline Industries

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

         Cardinal Health

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

         ExelInt International

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

                                       25
<PAGE>

         Henry Schein

         In September 2003, we entered into a Distribution Agreement with Henry
Schein, Inc., whereby Henry Schein acquired the non-exclusive right to
distribute and sell LiftLoc(R) Safety Infusion Set. Under the terms of the
agreement, Henry Schein purchases SHPI branded product from us for resale to
Henry Schein's end-user customers. The Henry Schein Agreement continues until 45
days after written notice of termination is received by either party. In
September 2005, the Henry Schein Agreement was amended to add the MiniLoc(TM)
Safety Infusion Set to the products supplied to Henry Schein.

         Other LiftLoc(R) and MiniLoc(TM) Distribution Agreements

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

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

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

         Tyco Healthcare

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

         Merit Medical

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

         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

                                       26
<PAGE>

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.

Merger Agreement

         On November 21, 2005, SHPI and The Med-Design Corporation signed an
Agreement and Plan of Merger and Reorganization ("Merger Agreement") under which
our wholly-owned subsidiary will merge with and into Med-Design in a transaction
to be accounted for as an acquisition by SHPI. The assets and liabilities of
Med-Design will be recorded as of the acquisition date at their estimated fair
values. The transaction is expected to qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code. Under the terms of the
merger agreement, each share of Med-Design common stock outstanding at the
closing of the merger will be exchanged for approximately 1.24 shares of SHPI
common stock as set forth in the merger agreement exchange formula, resulting in
the issuance of 21,175,631 shares of SHPI common stock to the Med-Design
stockholders. Based on 16,874,486 Med-Design shares outstanding at December 31,
2005, and adding 223,509 shares to be issued in exchange for Med-Design options,
the shares of SHPI to be issued to Med-Design stockholders will represent
approximately 32.2% of the combined organization. The exchange ratio and
ownership percentage may be increased if Med-Design eliminates or reduces
certain liabilities related to its real property lease and pending litigation
prior to the closing of the transaction. Assuming Med-Design is successful in
eliminating those liabilities, the exchange ratio would increase to
approximately 1.35, resulting in the issuance of 23,097,984 shares of SHPI
common stock to the Med-Design stockholders, which would represent approximately
34.1% of the combined organization. On March 6, 2006, we executed an amendment
to the Merger Agreement with Med-Design which extended the "End Date," as
defined in the Merger Agreement, for the merger from March 31, 2006 to June 30,
2006 and increased the cumulative burn rate of Med-Design from December 1, 2005
until the closing date to $1,000,000. We filed a prospectus/proxy statement
concerning our proposed combination with Med-Design with the Securities and
Exchange Commission, or SEC. Investors and security holders are advised to read
the prospectus/proxy statement related to the proposed transaction, because it
contains important information related to the transaction.

         There are currently outstanding 2,309,532 Med-Design warrants at strike
prices ranging from $6.03 to $14.1375. These warrants will be exchanged for
warrants to purchase our common stock at the same final exchange ratio received
by the Med-Design stockholders. The aggregate Black-Scholes value of our
warrants to be issued in this exchange, which is approximately $14,000, will be
included as a component of the purchase price.

         We will assume approximately $1,026,000 of Med-Design liabilities, plus
an estimated lease settlement obligation of $470,000, and estimated legal
obligations of $200,000, and will incur approximately $570,000 in costs related
to the transaction. The fair value of our stock to be issued in this
transaction, the assumption of Med-Design liabilities and the costs incurred in
the transaction combine for an estimated purchase price of $14,995,000.

         At December 31, 2005, we had incurred costs totaling $430,997 relating
to this proposed transaction which are included in other assets in the
consolidated balance sheet. The transaction is subject to regulatory and
shareholder approval. If the transaction is not completed, the total costs will
be expensed. Should the Med-Design stockholders fail to approve the merger, a
$500,000 break-up fee will be paid to us by Med-Design. Such payment will be
offset against the merger costs to be expensed.

                                       27
<PAGE>

Critical Accounting Policies

         Revenue Recognition

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

         We received a $500,000 upfront payment in December 2005 from a
multinational medical products company relating to a license agreement for the
manufacture and marketing of safety peripheral IV catheter devices which will be
recognized ratably over the three year life of the underlying agreement. No
upfront fees were received in 2004.

         Product revenues are recognized when persuasive evidence of an
arrangement exists, risk of loss and title has transferred to our customers, the
fee is fixed or determinable and collection is probable. Rights of return for
manufactured product are dependent upon the agreement. No right of return is
provided for product manufactured under private label, as such product is custom
manufactured to order for those distributors. Product manufactured and
distributed under our own label does provide rights of return in the case of
shipping errors or product received in damaged condition. In addition,
distributors have the right, on a quarterly basis, to request the return of
excess or slow moving inventory. An accrual for product returns, calculated
using historical data, is made at the end of each quarter.

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

         Long-Lived Assets

         We regularly evaluate whether events or circumstances have occurred
that indicate the carrying value of our long-lived assets may not be
recoverable. When factors indicate the asset may not be recoverable, we compare
the related undiscounted future net cash flows to the carrying value of the
asset to determine if impairment exists. If the expected future net cash flows
are less than the carrying value, an impairment charge is recognized based on
the fair value of the asset. No such impairments were recorded during the years
ended December 31, 2005 and 2004.

         Stock Based Compensation

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

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

         In November 2004, the Financial Accounting Standards Board ("FASB")
issued Financial Accounting Standard No. 151, "Inventory Costs - an amendment of
ARB No. 43, Chapter 4." This statement requires that items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs be recognized

                                       28
<PAGE>

as current-period charges regardless of whether they meet the criterion of "so
abnormal," as set forth in ARB No. 43. In addition, this statement requires that
the allocation of fixed production overhead to the costs of production be based
on the normal capacity of the production facilities. The adoption of this
statement, which is effective January 1, 2006, is not expected to have a
material effect on the Company's financial condition, results of operations, or
cash flows.

         In December 2004, the FASB issued SFAS 123R, "Share-Based Payments"
("SFAS No. 123R"), a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which requires companies to measure all employee
stock-based compensation awards using a fair value method and record such
expense in their financial statements. We have adopted this standard effective
January 1, 2006 and elected the modified-prospective transition method. Under
the modified-prospective transition method, awards that are granted, modified,
repurchased or cancelled after the date of adoption should be measured and
accounted for in accordance with SFAS No. 123R. Stock-based awards that are
granted prior to the effective date should continue to be accounted for in
accordance with SFAS No. 123, except that stock option expense for unvested
options must be recognized in the statement of operations. Because we had only
74,250 options outstanding as of December 31, 2005, the adoption of SFAS 123R is
not expected to have a material effect on our consolidated financial position,
results of operations or cash flows.

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

Contractual Obligations

         Our contractual obligations as of December 31, 2005 were as follows:
<TABLE>
<CAPTION>
                                                                 Payments Due by Year
                                                   -------------------------------------------------
Obligation                             Total            2006            2007          Thereafter
---------------------------------- --------------- --------------- --------------- -----------------
<S>                                    <C>               <C>             <C>               <C>
Operating leases                       $  523,832        $260,397        $263,435          $      -
Purchase order commitments                576,553         576,553               -
Convertible note                          500,000               -               -           500,000
Interest on convertible note              161,219          60,000          60,000            41,219
                                   --------------- --------------- --------------- -----------------
Total                                  $1,761,604        $896,950        $323,435          $541,219
                                   =============== =============== =============== =================
</TABLE>

         We lease office space under an operating lease that is non-cancellable
prior to December 31, 2007.

         Due to the long lead time of specialty needles and proprietary molded
parts, which are critical components for the Liftloc(R) and MiniLoc(TM) Safety
Infusion Set product lines and the SecureLoc(R) Safety Introducer Needle, as of
December 31, 2005, we had issued $576,553 in long-term purchase orders relating
to these products.

         On September 17, 2005, we elected to draw $500,000 against our
promissory note held by Galen Partners. The note has a maturity date of
September 27, 2008, and bears interest at the rate of 12% per annum, with
accrued interest payable on each January 1 and July 1 for as long as the note
remains outstanding. On March 6, 2006, we notified Galen Partners that we were
exercising our option to draw down the remaining $500,000 against the note
agreement. The note will have a maturity date of March 6, 2009, at which time
any outstanding principal and accrued interest must be paid in full.

Inflation

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

                                       29
<PAGE>

Risk Factors

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

         We have a history of losses.

         We have accumulated deficits totaling $39,911,433 since inception in
November 1993. With the exception of the second quarter of 1999 and the third
quarter of 2004, all quarters have had operating losses. Among other things, our
ability to achieve sustainable profitability is dependent on:

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

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

         o        Our ability to develop additional safety medical products.

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

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

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

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

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

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

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

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

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

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

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

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

                                       30
<PAGE>

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

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

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

         In 2005, over fifty percent of our revenues were generated under
         agreements with two of our corporate partners.

         The significant amount of revenues we received in 2005 under these
arrangements presents additional risks to our commercial success. If
arrangements with either of these partners were terminated or if there is a
decline in revenues under either of these arrangements, it could have a material
adverse effect on us and our revenues and could require us to significantly
curtail or even cease operations. In assessing the value of these arrangements,
you should consider the fact that one of these arrangements may be terminated on
fifteen days notice and the other arrangement is subject to annual renewal. In
addition, these arrangements are subject to the marketing ability, marketing
plans and credit-worthiness of these business partners and the other factors
identified in the prior risk factor. There can be no assurance that one or both
of these arrangements will not be terminated or that our business partners will
be successful in their marketing and sale of the products that are subject to
these arrangements.

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

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

         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.

         Potential Inability to Obtain Additional Financing.

         At December 31, 2005, we had cash and cash equivalents of $707,222.
This cash, along with anticipated cash generated from the sale of products,
development fees and royalties and $500,000 of funding which will be drawn in
March 2006, from the convertible note held by Galen Partners, should provide

                                       31
<PAGE>

sufficient cash for us to execute our business plan in 2006. In addition,
subsequent to year end, we obtained a $1,500,000 revolving line of credit with
Silicon Valley Bank under which borrowings would be collateralized by
substantially all of the assets of the Company. Available borrowings are based
primarily on outstanding accounts receivable and initially amounted to
approximately $800,000. If we are not able to reduce our operating losses, our
liquidity will be adversely affected and we may be required to seek additional
sources of financing to fund operations. If we are not able to reduce our
operating losses, we may be required to seek additional sources of financing to
fund operations. We may not be able to obtain adequate financing when needed or
upon satisfactory terms. Failure to raise capital when needed could prevent us
from achieving our business objectives and may require us to significantly
curtail or even cease operations.

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

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

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

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

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

         Our proposed merger with Med-Design may not close, or it may close but
be an unsuccessful combination.

         The proposed merger with Med-Design may fail to occur for any number of
reasons, including failure to obtain stockholder approval of either SHPI or
Med-Design. Whether or not the merger is consummated, SHPI and Med-Design will
incur substantial expenses related thereto. SHPI and Med-Design estimate that
they will incur aggregate costs of approximately $1.6 million associated with
the combination, of which approximately $617,000 has been paid as of December
31, 2005, as well as severance costs relating to employees of Med-Design of
approximately $1.1 million. These transaction costs consist of investment
banking fees, estimated legal fees, estimated printing costs, estimated proxy
solicitation fees, and an amount necessary to purchase director and officer tail
insurance for Med-Design. In addition to these transaction costs, the combined
organization expects to incur certain costs in connection with the integration
of the two companies. These costs and expenses will affect results of operations
in the quarter in which the combination is completed.

         If SHPI does not successfully integrate the operations of Med-Design
and realize the expected benefits of the combination, the results of operations
of the combined organization could be adversely affected. Achieving the expected
benefits of the combination will depend in part upon the successful integration

                                       32
<PAGE>

of the operations, technology, vendors and suppliers of Med-Design into SHPI in
a timely and efficient manner. Such integration efforts may be difficult and
unpredictable. Neither SHPI nor Med-Design knows whether the combined
organization will be successful in these integration efforts and cannot give
assurances that the combined organization will realize the expected benefits of
the combination. In addition, successful integration of the operations of SHPI
and Med-Design may place a significant burden on the combined organization's
management and internal resources. The diversion of management's attention and
any difficulties encountered in the transition and integration process could
have an adverse effect on the future business, financial condition and operating
results of the combined organization.

         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.

         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

                                       33
<PAGE>

confidentiality agreements and by limiting access to our facilities. There can
be no assurance that our program of patents, confidentiality agreements and
restricted access to our facilities will be sufficient to protect our
proprietary technology.

         In December 2002, BD filed a lawsuit against Tyco Healthcare Group LP
("Tyco Healthcare"), asserting that the Monoject Magellan(TM) safety products
infringe upon a BD patent. See Item 3. "Legal Proceedings." On October 26, 2004,
a jury found in favor of BD that Tyco Healthcare's Monoject Magellan(TM) safety
products willfully infringed the `544 Patent and awarded damages of $4.4
million. On November 1, 2004, the court entered the judgment in favor of BD.
Tyco Healthcare is challenging the jury finding in post-trial motions, and, if
necessary, in an appeal. Tyco Healthcare developed the Monoject Magellan(TM)
safety products in association with us. We are not a party to the patent
infringement lawsuit. Under the Kendall Agreement, Tyco Healthcare has the right
to withhold up to fifty percent (50%) of royalties due as an offset against
litigation expenses related to charges of infringement by a third part for the
manufacture, use or sale of licensed product. This right continues during the
period in which such litigation is pending. If, as a result of a judgment in the
litigation or settlement with BD, Tyco Healthcare is required to pay royalty
and/or other monies to BD, Tyco Healthcare may thereafter deduct from the amount
of royalties due us on unit sales of products alleged to infringe, an amount
which is the lesser of all royalties and/or other monies paid by Tyco Healthcare
to BD, or fifty percent (50%) of all royalty payments otherwise payable to us.
Based on information obtained during the fourth quarter of 2003 related to costs
incurred by Tyco Healthcare, we recorded a liability of approximately $1,300,000
at December 31, 2003, which amount was our estimate of the portion of costs
associated with BD's lawsuit against Tyco Healthcare that Tyco Healthcare would
withhold against the royalties due SHPI through 2005. During the twelve month
contract periods ended September 30, 2004 and 2005, Tyco Healthcare withheld
fifty percent of royalty payments due us, which amounts totaling $1,000,000 have
been offset against the accrual. Based on information obtained during the fourth
quarter of 2005, we now anticipate the litigation will continue at least through
2007. Accordingly, we recorded an additional liability of $1,095,200, which
amount was our estimate of the portion of costs associated with BD's suit
against Tyco Healthcare that Tyco Healthcare will withhold against the royalties
due us during 2006 and 2007. In the event litigation continues beyond 2007, or
if Tyco Healthcare ultimately loses the case on appeal, additional liabilities
may accrue. If Tyco Healthcare is unsuccessful in post-trial motions and on
appeal, Tyco Healthcare may be prohibited from selling the Monoject Magellan(TM)
safety products in their current form. Additional litigation to enforce patents,
to protect proprietary information, or to defend us against alleged infringement
of the rights of others may occur. Such litigation would be costly, could divert
our resources from other planned activities, and could have a material adverse
effect on our results of operations and financial condition;

         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 operating and financial
                  management information systems and related 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

                                       34
<PAGE>

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

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

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

<PAGE>

         Potential product liability relating to failure of our safety products.

         The sale of safety medical devices entails an inherent risk of
liability in the event of product failure or claim of harm caused by product
operation. There can be no assurance that we will not be subject to such claims,
that any claim will be successfully defended or, if we are found liable, that
the claim will not exceed the limits of our insurance. Our current insurance
coverage is in the amount of $1 million per occurrence and $2 million in
aggregate. We also have an umbrella policy in the amount of $8 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.

         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

                                       35
<PAGE>

be taken by written consent. These provisions could have the effect of (i)
discouraging attempts at non-negotiated takeovers that may provide for
stockholders to receive a premium price for their stock, or (ii) delaying or
preventing a change of control, which some stockholders may believe is in their
interest.

         Our common stock price may continue to be volatile.

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

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

         In October 2001, we entered into an Investor Rights Agreement with the
purchasers of our Series A Preferred Stock. These shares were automatically
converted into 21,861,369 shares of our common stock in 2004. Holders of these
shares have been granted demand and piggyback registration rights with respect
to these shares. In addition, on March 22, 2004, we entered into an agreement
whereby Galen Partners agreed to make up to $1,000,000 in funding available to
us under the terms of a convertible note. As partial consideration for this
commitment, we issued to these stockholders warrants to acquire 80,000 shares of
our common stock. On March 7, 2005, Galen Partners agreed to a six-month
extension of the promissory note agreement in exchange for the issuance of
warrants to purchase an additional 40,000 shares of our common stock. At our
sole option, we may extend the agreement for an additional six-month period
through March 31, 2006, for the issuance of a second warrant to purchase an
additional 40,000 shares of our common stock at an exercise price of $0.02 per
share. All other terms and conditions of the original agreement remain unchanged
in the subsequent agreement. Valuing the warrants utilizing the Black-Scholes
valuation model, the issuance of the 40,000 warrants resulted in deferred
financing costs of $35,351 that will be amortized ratably over the three and
one-half year term of the agreement. On September 17, 2005, the Company elected
to draw $500,000 against the note agreement, with the option to draw down the
remaining $500,000 prior to March 31, 2006. Galen Partners agreed to extend the
note agreement for an additional six-month period without further consideration.
The note has a maturity date of September 17, 2008, at which time any
outstanding principal and accrued interest must be paid in full. On March 6,
2006, we notified Galen Partners that we were exercising our option to draw down
the remaining $500,000 against the note agreement. The note will have a maturity
date of March 6, 2009, at which time any outstanding principal and accrued
interest must be paid in full.

         We have also granted demand and piggyback registration rights with
respect to the common stock underlying these warrants and the common stock into
which the $1,000,000 convertible promissory note, if issued, may be convertible.
Sales of this common stock in the public market could materially and adversely
affect the market price of the common stock.

         We do not anticipate paying dividends in the foreseeable future.

         We have never paid dividends on our common stock. The payment of
dividends, if any, on the common stock in the future is at the discretion of the
board of directors and will depend upon our earnings, if any, capital
requirements, financial condition and other relevant factors. Based on the
financial condition of the Company at December 31, 2005, the board of directors
does not intend to declare any dividends on our common stock.

         Our common stock is subject to dilution.

         As of December 31, 2005, there were 44,629,445 shares of our common
stock issued and outstanding. In addition there are an additional 74,250 shares

                                       36
<PAGE>

of our common stock that are issuable pursuant to stock options granted under
our stock option plans and 120,000 shares issuable under warrant agreements.

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

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

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

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

Item 7. Financial Statements

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

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

         During the year ended December 31, 2005, we have not disagreed with our
independent registered public accounting firm on any items of accounting
treatment or financial disclosure.

Item 8A. Controls and Procedures

         We have evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of the design and
operation of our disclosure controls and procedures as of December 31, 2005,
pursuant to Exchange Act Rule 13a-15(b) under the Securities Exchange Act. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2005, our disclosure controls and procedures
are effective.

         There have been no significant changes in our internal control over
financial reporting that occurred during our most recently completed fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting, or other factors that
could significantly affect internal controls subsequent to the date of our most
recent evaluation.

Item 8B. Other Information

         On March 6, 2006, the Company executed a Loan and Security Agreement
with Silicon Valley Bank which provides a revolving line of credit in an
aggregate amount of up to $1,500,000. Borrowings under this credit facility will
be collateralized by substantially all of the assets of the Company. The line
has a maturity date of February 10, 2008, and carries an interest rate equal to
1.00 percentage point above the Prime Rate.

                                       37
<PAGE>

         On March 6, 2006, we requested that Galen Partners purchase a Note in
the principal sum of $500,000, which is the remaining balance of funding
available under the note agreement. Under the agreement, Galen has 20 days from
such notice to purchase and fund the Note. The note will have a maturity date of
March 6, 2009, at which time any outstanding principal and accrued interest must
be paid in full.

         On March 6, 2006, we executed an amendment to the Agreement and Plan of
Merger and Reorganization with the Med-Design Corporation which extended the End
Date for the merger from March 31, 2006 to June 30, 2006 and increased the
cumulative burn rate of Med-Design from December 1, 2005 until the closing date
to $1,000,000.


                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       38
<PAGE>

                                    PART III

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

         Set forth below is certain information concerning each of our directors
and executive officers as of March 7, 2006.

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

Jeffrey M. Soinski          44   President, Chief Executive Officer     2001
                                 and Director

Guy J. Jordan, Ph.D.        57   Chairman of the Board                  2001
(1)(2)(3)

Donald D. Solomon, Ph.D.    55   Vice President, Chief Operating        2000
                                 Officer, Chief Technical Officer
                                 and Director

Paul S. Evans               43   Vice President, Business               2000
                                 Development, General Counsel
                                 and Secretary

Keith L. Merrell            60   Controller, Acting Chief Financial     2000
                                 Officer and Treasurer

David W. Jahns (2)          40   Director, Chairman of Compensation     2001
                                 Committee

Stuart A. Randle (1) (3)    46   Director, Chairman of Nominating       2001
                                 Committee

Stephen I. Shapiro (2)      61   Director                               2001

Robert R. Walker (1) (3)    76   Director, Chairman of Audit            1994
                                 Committee
---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Nominating Committee.

         Jeffrey M. Soinski. Mr. Soinski is our President, Chief Executive
Officer and a director. His term as a director expires at the 2008 annual
meeting of stockholders. Mr. Soinski brings 23 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 2008 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.

                                       39
<PAGE>

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

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

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

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

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

         Stephen I. Shapiro. Mr. Shapiro serves as one of our directors. His
term as a director expires at the 2008 annual meeting of stockholders. Mr.
Shapiro has over 30 years of relevant medical device and equipment industry

                                       40
<PAGE>

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

         Robert R. Walker. Mr. Walker serves as one of our directors. His term
as a director expires at the 2006 annual meeting of stockholders. Since 1992,
Mr. Walker has been principally self-employed as a consultant in the healthcare
industry primarily in the area of start-up medical device companies. From 1976
to 1992, Mr. Walker was employed by IHC Affiliated Services Division of
Intermountain Healthcare, a regional hospital company. He retired as President
of IHC Affiliated Services in 1992. He is also a former Chairman of the board of
AmeriNet, Inc., a national group purchasing organization for hospitals, clinics,
detox/drug centers, emergency, nursing homes, private laboratories, psychiatric
centers, rehabilitation facilities, surgical centers and other institutions. Mr.
Walker is a member of the American Hospital Association and the Hospital
Financial Management Association. He has a BS degree in Business Administration
from the University of Utah.

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

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

Board Committees

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

         The Audit Committee

         The Company's Audit Committee held five meetings during 2005. The
function of the Audit Committee as detailed in the Audit Committee Charter (as
amended November 2004) is to provide assistance to the Board in fulfilling their
responsibility to the stockholders, potential stockholders, and investment
community relating to corporate accounting, reporting practices of the Company
and the quality and integrity of the financial reports of the Company. In so
doing, it is the responsibility of the Audit Committee to maintain free and open
means of communication between the directors, the independent auditors and
Company management. The Company believes that the members of the Audit Committee
are independent as defined by Rule 4200(a) of NASD's listing standards. The
members of the Audit Committee are Guy J. Jordan, Stuart A. Randle and Robert R.
Walker. Mr. Walker, Chairman of our Audit Committee, serves as our financial
expert on that committee.

         The Compensation Committee

         The Company's Compensation Committee held one meeting during 2005. The
Compensation Committee administers the Company's stock option and stock grant
plans, establishes a general compensation policy for the Company and, except as
prohibited by applicable law, may take any and all actions that the Board could
take relating to the compensation of employees, directors and other parties. The

                                       41
<PAGE>

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

         The Nominating Committee

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

         The Nominating Committee held two meetings during 2005, during which it
recommended the nomination of Messrs. Jordan, Shapiro and Soinski for reelection
to the Board. The function of the Nominating Committee, as detailed in the
Nominating Committee's Charter, is to recommend to the Board the slate of
director nominees for election to the Board and to identify and recommend
candidates to fill vacancies occurring between annual stockholder meetings. It
is the policy of the Nominating Committee to consider candidates recommended by
security holders, directors, officers and other sources, including, but not
limited to, third-party search firms. Security holders of the Company may submit
recommendations for candidates for the Board. All recommendations shall be
submitted to Paul Evans at SHPI, Inc, 585 West 500 South, Bountiful, Utah 84010
(telephone: 801-298-3360, email: pevans@shpi.com). Such submissions should
include the name, contact information, a brief description of the candidate's
business experience and such other information as the person submitting the
recommendation believes is relevant to the evaluation of the candidate. Paul
Evans will then pass all such recommendations on to the Nominating Committee for
consideration. For candidates to be considered for election at the next annual
meeting stockholders, the recommendation must be received by the Company no
later than 120 calendar days prior to the date that the Company's proxy
statement is released to security holders in connection with such meeting.

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

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

Section 16(a) Beneficial Ownership Reporting Compliance

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

         Based solely on our review of forms furnished to us and representations
from reporting persons, we believe that all filing requirements applicable to
our executive officers, directors and more than 10% stockholders were complied
with during 2005.

                                       42
<PAGE>

Item 10. Executive Compensation

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

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

         The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of March 7, 2006, for: (i) each
person who is known by us to beneficially own more than five percent of our
common stock, (ii) each of our directors, (iii) each of our Named Executive
Officers, and (iv) all directors and executive officers as a group. On March 7,
2006 the Company had 44,629,445 shares of Common Stock outstanding.
<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)         1,507,744       3.4       President, CEO and Director

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


Donald D. Solomon, Ph.D. (5)     569,308       1.3       Vice President, COO, CTO and
                                                          Director

Paul S. Evans (6)                420,486        *        Vice President, Business
                                                          Development, General
                                                          Counsel, and Secretary

Keith L. Merrell (7)             228,455        *        Controller, Acting CFO and
                                                          Treasurer

David W. Jahns (8)            15,435,236      34.6       Director

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

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

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

Executive Officers and
  Directors as a Group
  (9 persons)                 18,845,025      42.2

* Less than 1%.
--------------
</TABLE>
(1) Except where otherwise indicated, the address of the beneficial owner is
    deemed to be the same address as the company.
(2) Beneficial ownership is determined in accordance with SEC rules and
    generally includes holding voting and investment power with respect to the
    securities. Shares of common stock subject to options or warrants currently
    exercisable, or exercisable within 60 days, are deemed outstanding for
    computing the percentage of the total number of shares beneficially owned by
    the designated person, but are not deemed outstanding for computing the
    percentage for any other person.
(3) Includes 37,156 shares of common stock purchased through our 401(k) plan and
    1,470,588 shares of common stock that are currently unvested and
    non-transferable.
(4) Includes 235,294 shares of common stock that are currently unvested and
    non-transferable.

                                       43
<PAGE>

(5) Includes 75,666 shares of common stock, 81,878 shares of common stock
    purchased through our 401(k) plan and 411,764 shares of common stock that
    are currently unvested and non-transferable.
(6) Includes 61,000 shares of common stock, 65,369 shares of common stock
    purchased through our 401(k) plan and 294,117 shares of common stock that
    are currently unvested and non-transferable.
(7) Includes 36,000 shares of common stock, 51,573 shares of common stock
    purchased through our 401(k) plan and 140,882 shares of common stock that
    are currently unvested and non-transferable.
(8) Includes 58,823 shares of common stock that are currently unvested and
    non-transferable. Also includes 13,937,735 shares of common stock held of
    record by Galen Partners III, L.P., 1,261,605 shares of common stock held of
    record by Galen Partners International III, L.P., and 57,073 shares of
    common stock held of record by Galen Employee Fund III, L.P. Information
    regarding Galen Partners III, L.P. and its affiliates is derived from the
    Form 4 filed by Galen Partners III, L.P. with the Securities and Exchange
    Commission Also includes warrants to purchase 120,000 shares of common
    stock. William R. Grant, Bruce F. Wesson, L. John Wilkerson, David W. Jahns,
    Srini Conjeevaram, and Zubeen Shroff are all natural persons and are the
    members of Claudius, L.L.C., a Delaware limited liability company, the
    general partner of Galen Partners III, L.P. and Galen Partners International
    III, L.P. Bruce F. Wesson is the President of Wesson Enterprises, Inc., a
    Delaware corporation, which is the general partner of Galen Employee Fund
    III, L.P. David Jahns is a member of Claudius, L.L.C., a Delaware limited
    liability company, and a general partner of Galen Partners III, L.P. and
    Galen Partners International III, L.P.
(9) Includes 117,647 shares of common stock that are currently unvested and
    non-transferable.
(10) Includes 65,503 shares of common stock and 58,823 shares of common stock
     that are currently unvested and non-transferable.
(11) Includes 143,529 shares of common stock that are currently unvested and
     non-transferable and 63,000 shares of common stock that Mr. Walker is
     deemed to beneficially own through a trust.

Merger Agreement

         On November 21, 2005, the Company and The Med-Design Corporation or
Med-Design, signed an Agreement and Plan of Merger and Reorganization, or merger
agreement, under which our wholly-owned subsidiary will merge with and into
Med-Design in a transaction to be accounted for as an acquisition by the
Company. Under the terms of the merger agreement, each share of Med-Design
common stock outstanding at the closing of the merger will be exchanged for
approximately 1.24 shares of the Company's common stock as set forth in the
merger agreement exchange formula, resulting in the issuance of 21,175,631
shares of the Company's common stock to the Med-Design stockholders, which
represents approximately 32.2% of the combined organization. This exchange ratio
and ownership percentage may be increased if Med-Design eliminates or reduces
certain liabilities related to its real property lease and pending litigation
prior to the closing of the transaction. Assuming Med-Design is successful in
eliminating those liabilities, the exchange ratio would increase to
approximately 1.35, resulting in the issuance of 23,097,984 shares of the
Company's common stock to the Med-Design stockholders, which would represent
approximately 34.1% of the combined organization. The Company has filed a
prospectus/proxy statement concerning its proposed combination with Med-Design
with the Securities and Exchange Commission, or SEC. Investors and security
holders are advised to read the prospectus/proxy statement related to the
proposed transaction, because it contains important information related to the
transaction. Investors and security holders are advised to read the
prospectus/proxy statement related to the proposed transaction, because it
contains important information related to the transaction.

         There are currently outstanding 2,309,532 Med-Design warrants at strike
prices ranging from $6.03 to $14.1375. These warrants will be exchanged for
warrants to purchase our common stock at the same final exchange ratio received
by the Med-Design stockholders. The aggregate Black-Scholes value of our
warrants to be issued in this exchange, which is approximately $14,000, will be
included as a component of the purchase price.

         We will assume approximately $1,026,000 of Med-Design liabilities, plus
an estimated lease settlement obligation of $470,000, and estimated legal
obligations of $200,000, and will incur approximately $570,000 in costs related
to the transaction. The fair value of our stock to be issued in this

                                       44
<PAGE>

transaction, the assumption of Med-Design liabilities and the costs incurred in
the transaction combine for an estimated purchase price of $14,995,000.

         At December 31, 2005, we had incurred costs totaling $430,997 relating
to this proposed transaction which are included in other assets in the
consolidated balance sheet. The transaction is subject to regulatory and
shareholder approval. If the transaction is not completed, the total costs will
be expensed. Should the Med-Design stockholders fail to approve the merger, a
$500,000 break-up fee will be paid to us by Med-Design. Such payment will be
offset against the merger costs to be expensed.

Securities Issued through Private Placement

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

Securities Authorized for Issuance Under Equity Compensation Plans

         The following table sets forth certain information with respect to
equity securities of the Company that are authorized for issuance as of the year
ended December 31, 2005.
<TABLE>
<CAPTION>
                      Equity Compensation Plan Information

                              Number of securities to       Weighted average
                              be issued upon exercise       exercise price of        Number of securities
                              of outstanding options,     outstanding options,      remaining available for
                              warrants and rights (1)    warrants and rights (1)      future issuance (1)
                              -----------------------    -----------------------      -------------------
<S>                                   <C>                         <C>                      <C>
Equity compensation plans
   approved by security
   holders                            74,250                      $1.19                    7,228,250
Equity compensation plans
   not approved by
   security holders                   120,000                     0.02                         0
                             -------------------------- -------------------------- --------------------------
Total                                 194,250                     $0.47                    7,228,250
</TABLE>

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

Item 12. Certain Relationships and Related Transactions

         On March 22, 2004, we entered into an agreement with Galen Partners
III, L.P., Galen Partners International III, L.P., and Galen Employee Fund III,
L.P. (collectively, "Galen Partners") whereby Galen Partners agreed to purchase
a convertible promissory note ("Note") in the aggregate principal amount of
$1,000,000 upon our request made at any time between March 31, 2004 and March
31, 2005. As consideration for entering into this purchase agreement, Galen
Partners received a warrant that provides them the right, but not the
obligation, to purchase 80,000 shares of our common stock at an exercise price
of $0.02 per share. The warrant shall expire and be no longer exercisable after
5:00 p.m., Eastern Time, on March 22, 2007. Further, we paid $9,991 in legal

                                       45
<PAGE>

fees related to this transaction. The Note has a term of three years and bears
interest at the rate of 12% per annum, with accrued interest to be paid July 1
and January 1 of each year the Note remains outstanding. The entire outstanding
principal amount due on the Note may, at Galen Partner's option, be converted
into fully paid and nonassessable shares of our common stock. The conversion
price will be 110% of the average closing share price for our common stock as
reported on NASDAQ or the OTC Bulletin Board for the twenty (20) consecutive
trading days prior to the date of the issuance of the Note.

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

         On September 1, 2005, the parties amended the March 7, 2005 Purchase
Agreement to extend the option period from September 30, 2005 to March 31, 2006
without the consideration of additional warrants for shares of common stock and
to allow the Company to exercise the option in principal amounts of less than
$1,000,000, provided that the total aggregate principal amount of the
outstanding obligations cannot exceed $1,000,000.

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

         On March 6, 2006, the Company elected to draw the remaining $500,000
against the note agreement with Galen Partners. Under the terms of the
agreement, Galen has 20 days from such notice to purchase and fund the Note. The
note will have a maturity date of March 6, 2009, at which time any outstanding
principal and accrued interest must be paid in full.

Item 13. Exhibits and Reports on Form 8-K

Exhibits

         Listed on page 45 hereof.

Item 14. Principal Accountant Fees and Services

Audit Fees

         The aggregate fees billed for professional services rendered by our
principal accountant for the audit of our financial statements, review of
financial statements included in our quarterly reports and other fees that are
normally provided by the accountant in connection with statutory and regulatory
filings or engagements for the fiscal years ended December 31, 2005 and 2004
were $135,500 and $101,725 respectively.

Audit Related Fees

         The aggregate fees billed for assurance and related services by our
principal accountant that are reasonably related to the performance of the audit
or review of our financial statements, other than those previously reported in
this Item 14, for the fiscal years ended December 31, 2005 and 2004 were $0 and
$0, respectively.

                                       46
<PAGE>

Tax Fees

         The aggregate fees billed for professional services rendered by our
principal accountant for tax compliance, tax advice and tax planning for the
fiscal years ended December 31, 2005 and 2004 were $10,000 and $10,000,
respectively.

All Other Fees

         The aggregate fees billed for products and services provided by the
principal accountant, other than those previously reported in this Item 14, for
the fiscal years ended December 31, 2005 and 2004 were $6,486 and $9,260,
respectively.

Audit Committee

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


                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       47
<PAGE>

                                   SIGNATURES

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

                                           SPECIALIZED HEALTH PRODUCTS
                                           INTERNATIONAL, INC.
                                           (Registrant)


Date: March 7, 2006                        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 Officer   March 7, 2006
----------------------------- and Director (Principal Executive
Jeffrey M. Soinski            Officer)



 /s/ Keith L. Merrell         Controller, Acting Chief Financial   March 7, 2006
----------------------------- Officer and Treasurer (Principal
Keith L. Merrell              Financial and Accounting Officer)


 /s/ Guy J. Jordan, Ph.D.     Chairman of the Board                March 7, 2006
-----------------------------
 Guy J. Jordan, Ph.D.


 /s/ Donald D. Solomon, Ph.D. Director, Vice President, COO        March 7, 2006
----------------------------- and CTO
Donald D. Solomon, Ph.D.


 /s/ David W. Jahns           Director                             March 7, 2006
-----------------------------
David W. Jahns


 /s/ Stuart A. Randle         Director                             March 7, 2006
-----------------------------
Stuart A. Randle


 /s/ Stephen I. Shapiro       Director                             March 7, 2006
-----------------------------
Stephen I. Shapiro


 /s/ Robert R. Walker         Director                             March 7, 2006
-----------------------------
Robert R. Walker

                                       48
<PAGE>

                                  EXHIBIT INDEX

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

2.1               Agreement and Plan of Merger And Reorganization, dated
                  November 21, 2005, by and between Specialized Health Products
                  International, Inc. and The Med-Design Corporation
                  (Incorporated by reference to Exhibit 99.1 of the Company's
                  Current Report on Form 8-K, dated November 21, 2005).

                  In accordance with Item 601(b)(2) of Regulation S-B, certain
                  schedules to the Merger Agreement are omitted. We agree to
                  furnish supplementally a copy of any omitted schedules to the
                  Commission upon request.

2.2               First Amendment to the Agreement and Plan of Merger and
                  Reorganization, dated March 6, 2006, by and between
                  Specialized Health Products International, Inc. and The
                  Med-Design Corporation.

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           Third Amended and Restated Bylaws of the Company (Incorporated
                  by reference to Exhibit 99.3 of the Company's Current Report
                  on Form 8-K, dated November 21, 2005).

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              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).

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

10.7              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).

                                       49
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

10.18             Purchase Agreement, dated March 7, 2005, by and between
                  Specialized Health Products International, Inc. and Galen
                  Partners III, L.P., Galen Partners International III, L.P. and
                  Galen Employee Fund III, L.P. (Incorporated by reference to
                  Exhibit 10.20 of the Company's Annual Report on Form 10-KSB,
                  dated December 31, 2004).

10.19             Amendment to Purchase Agreement, dated September 1, 2005, by
                  and between Specialized Health Products International, Inc.
                  and Galen Partners III, L.P., Galen Partners International
                  III, L.P. and Galen Employee Fund III, L.P. (Incorporated by
                  reference to Exhibit 10.1 of the Company's Form 8-K, dated
                  September 8, 2005).

10.20             Promissory Note, dated September 1, 2005, by and between
                  Specialized Health Products International, Inc. and Galen
                  Partners III, L.P., Galen Partners International III, L.P. and
                  Galen Employee Fund III, L.P. (Incorporated by reference to
                  Exhibit 10.2 of the Company's Form 8-K, dated September 8,
                  2005).

                                       50
<PAGE>

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

10.21             Development, Distribution and Supply Agreement, dated
                  September 22, 2005, by and between Specialized Health Products
                  International, Inc. and Bard Access Systems, Inc.
                  (Incorporated by reference to Exhibit 10.1 of the Company's
                  Form 8-K, dated September 26, 2005).

10.22             Voting Agreement (Incorporated by reference to Exhibit 99.2 of
                  the Company's Current Report on Form 8-K, dated November 21,
                  2005).

10.23             License Agreement, dated December 5, 2005, by and between
                  Specialized Health Products International, Inc. and an
                  undisclosed third party (Incorporated by reference to Exhibit
                  10.1 of the Company's Current Report on Form 8-K, dated
                  December 5, 2005).

10.24             Loan and Security Agreement, dated February 22, 2006 and
                  mutually executed on March 6, 2006, by and between Specialized
                  Health Products International, Inc. and Silicon Valley Bank,

10.25             First Amendment to Loan and Security Agreement, dated March 6,
                  2006, by and between Specialized Health Products
                  International, Inc. and Silicon Valley Bank,

21.1              Schedule of subsidiaries.

23.1              Consent of Independent Registered Public Accounting Firm

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

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

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

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

                                       51
<PAGE>

SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




                                                                         Page


Report of Independent Registered Public Accounting Firm                  F - 2

Consolidated Balance Sheet as of December 31, 2005                       F - 3

Consolidated Statements of Operations for the Years Ended
  December 31, 2005 and 2004                                             F - 5

Consolidated Statement of Stockholders' Equity
  for the Years Ended December 31, 2005 and 2004                         F - 6

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2005 and 2004                                             F - 7

Notes to Consolidated Financial Statements                               F - 8


                                      F-1
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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


In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Specialized
Health Products International, Inc. and its subsidiaries at December 31, 2005,
and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Salt Lake City, Utah
March 8, 2006

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

CONSOLIDATED BALANCE SHEET


                                                                                           December 31,
                                                                                               2005
                                                                                      ----------------------
<S>                                                                                      <C>
      Assets
      Current assets:
         Cash and cash equivalents                                                       $       707,222
         Accounts receivable                                                                   1,577,715
         Inventory, net                                                                          618,490
         Prepaid expenses and other                                                               58,190
                                                                                      ----------------------
             Total current assets                                                              2,961,617
                                                                                      ----------------------
      Property and equipment, net:
         Research and development machinery and equipment                                        376,412
         Office furniture and fixtures                                                           153,749
         Computer equipment and software                                                         216,592
         Leasehold improvements                                                                  139,350
         Molds                                                                                   512,200
         Manufacturing equipment                                                                 370,999
         Construction-in-process                                                                 102,599
                                                                                      ----------------------
                                                                                               1,871,901
         Less accumulated depreciation and amortization                                         (985,760)
                                                                                      ----------------------
             Total property and equipment, net                                                   886,141
                                                                                      ----------------------
      Intangible assets, net                                                                     241,115
      Other assets                                                                               549,742
                                                                                      ----------------------
                                                                                         $     4,638,615
                                                                                      ======================


                  See accompanying notes to consolidated financial statements.

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


CONSOLIDATED BALANCE SHEET (Continued)


                                                                                           December 31,
                                                                                               2005
                                                                                      ----------------------
<S>                                                                                      <C>
      Liabilities and Stockholders' Equity
      Current liabilities:
         Accounts payable                                                                $       822,453
         Accrued liabilities                                                                     602,411
         Accrual for patent litigation expenses                                                  541,363
         Deferred revenue                                                                        196,668
                                                                                      ---------------------
             Total current liabilities                                                         2,162,895
                                                                                                 368,735
      Deferred revenue, net of current portion
      Deferred rent                                                                                3,176
      Accrual for patent litigation expenses, net of current portion                             845,200
      Note payable - long term                                                                   500,000
                                                                                      ---------------------
             Total liabilities                                                                 3,880,006
                                                                                      ---------------------
      Commitments and contingencies (Note 4)

      Stockholders' equity:
         Series A preferred stock, $.001 par value; 30,000,000 shares authorized, no
           shares issued and outstanding at December 31, 2005                                          -
         Common stock, $.02 par value; 70,000,000 shares authorized, 44,629,445
           shares issued and outstanding at December 31, 2005                                    892,589
         Additional paid-in capital                                                           42,153,783
         Deferred compensation                                                                (2,376,330)
         Accumulated deficit                                                                 (39,911,433)
                                                                                      ---------------------
             Total stockholders' equity                                                          758,609
                                                                                      ---------------------
             Total liabilities and stockholders' equity                                  $     4,638,615
                                                                                      =====================


                          See accompanying notes to consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                   Years ended December 31,
                                                                                      2005                2004
                                                                            ----------------------------------------
<S>                                                                         <C>                  <C>
Revenues:
    Product sales and royalties                                             $       5,563,700    $       4,361,052
    Technology fees and licensing                                                     305,938              895,624
    revenues
    Development fees and related services                                           1,111,906              508,602
                                                                          ------------------------------------------
                                                                                    6,981,544            5,765,278
 Cost of revenues                                                                   2,080,659            1,082,131
                                                                          ------------------------------------------

       Gross profit                                                                 4,900,885            4,683,147
                                                                          ------------------------------------------

Operating expenses:
   Research and development (2005 and 2004 totals
     exclude amortization of deferred compensation
     of  $435,329 and $82,772, respectively)                                        2,942,687            2,437,880
   Sales and marketing (2005 and 2004 totals
     exclude amortization of deferred compensation
     of $19,081 and $11,895, respectively)                                            985,155            1,007,338
   General and administrative (2005 and 2004 totals
     exclude amortization of deferred compensation
     of $842,026 and $161,788, respectively)                                        1,291,743            1,334,639
   Amortization of deferred compensation                                            1,296,435              256,455
   Patent litigation expense                                                        1,095,200                    -
                                                                          ------------------------------------------
       Total operating expenses                                                     7,611,220            5,036,312
                                                                          ------------------------------------------
Loss from operations                                                               (2,710,335)            (353,165)
                                                                          ------------------------------------------
Other income (expense):
   Interest income                                                                      6,959               30,040
   Interest expense                                                                   (18,781)                 -
   Amortization of deferred finance cost                                              (36,388)             (20,919)
   Other income (expense)                                                                (176)                 405
                                                                          ------------------------------------------
       Other income (expense)                                                         (48,386)               9,526
                                                                          ------------------------------------------

Net loss                                                                    $      (2,758,721)   $        (343,639)
                                                                          ==========================================
Basic and diluted net loss per common share                                 $            (.07)   $            (.01)
                                                                          ==========================================

Basic and diluted weighted average number of common
  shares outstanding                                                               41,200,119           36,970,882
                                                                          ==========================================


                             See accompanying notes to consolidated financial statements.

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY




                                      Series A
                                   Preferred Stock            Common Stock         Additional
                               ---------------------------------------------------  Paid-in     Deferred     Accumulated
                                 Shares       Amount       Shares       Amount      Capital   Compensation     Deficit
                               --------------------------------------------------------------------------------------------
<S>                            <C>            <C>        <C>           <C>         <C>          <C>           <C>
BALANCE as of
  December 31, 2003            21,861,369     $ 21,861   17,831,479    $ 356,630   $37,502,557  $         -   $(36,809,073)

Conversion of Series A
   Preferred stock to common
   stock                      (21,861,369)     (21,861)  21,861,369      437,227      (415,366)           -              -
Compensation expense for
   extension of 46,250 stock
   options                              -            -            -            -         9,300       (9,300)             -
Deferred finance cost for
   issuance of 80,000 warrants          -            -            -            -        98,561            -              -
Common stock issued through
   private placement, net of
   offering costs                       -            -    1,250,000       25,000       918,090            -              -
Common stock issued in
   exchange for stock options           -            -    3,375,397       67,508     3,758,014   (3,825,521)             -
Common stock purchased by
   SHPI 401(k) Plan                     -            -      139,750        2,795       136,710            -              -
Amortization of deferred
   compensation                         -            -            -           -              -      256,455              -
Net loss                                -            -            -           -              -            -       (343,639)
                               --------------------------------------------------------------------------------------------
BALANCE as of
   December 31, 2004                    -            -   44,457,995      889,160    42,007,866   (3,578,366)   (37,152,712)
Common stock purchased by
   SHPI 401(k) Plan                     -            -       23,950          480        19,116            -              -
Deferred finance cost for
   issuance of 40,000 warrants          -            -            -            -        35,351            -              -
Common stock granted under
   SHPI 2004 Stock Incentive
   Plan                                 -            -      147,500        2,949        91,450      (94,399)             -
Amortization of deferred
   compensation                         -            -            -            -             -    1,296,435              -
Net loss                                -            -            -            -             -            -     (2,758,721)
                               --------------------------------------------------------------------------------------------
BALANCE as of
  December 31, 2005                     -     $      -   44,629,445    $ 892,589   $42,153,783  $(2,376,330)  $(39,911,433)
                               ============================================================================================



                                    See accompanying notes to consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                              Years Ended December 31,
                                                                       ------------------------------------
                                                                              2005              2004
                                                                       ------------------------------------
<S>                                                                       <C>              <C>

Cash flows from operating activities:
    Net loss                                                              $ (2,758,721)    $    (343,639)
    Adjustments to reconcile net loss to net cash used in operating
      activities:
        Depreciation and amortization                                          123,684            86,714
        Amortization of deferred compensation                                1,296,435           256,455
        Amortization of deferred finance cost                                   31,239            10,928
        Changes in operating assets and liabilities:
           Accounts receivable                                                (349,068)         (501,032)
           Inventory, net                                                     (331,913)          (87,533)
           Prepaid expenses and other                                           88,734            20,803
           Accounts payable                                                    526,855            66,476
           Accrued liabilities                                                 (70,271)          103,861
           Accrual for patent litigation expenses                              845,200          (500,000)
           Deferred revenue                                                    194,062          (795,624)
           Deferred rent                                                        (7,621)           (1,132)
                                                                       ------------------------------------
              Net cash used in operating activities                           (411,385)       (1,683,723)
                                                                       ------------------------------------
Cash flows from investing activities:
    Purchase of intangible assets                                                    -           (44,819)
    Purchase of property and equipment                                        (541,918)         (187,753)
    Capitalized merger costs                                                  (430,997)                -
                                                                       ------------------------------------
              Net cash used in investing activities                           (972,915)         (232,572)
                                                                       ------------------------------------
Cash flows from financing activities:
   Proceeds from note payable                                                  500,000                 -
   Proceeds from issuance of common stock, net of offering costs                19,596         1,082,595
                                                                       ------------------------------------
              Net cash provided by financing activities                        519,596         1,082,595
                                                                       ------------------------------------
Net decrease in cash and cash equivalents                                     (864,704)         (833,700)
Cash and cash equivalents at beginning of year                               1,571,926         2,405,626
                                                                       ------------------------------------
Cash and cash equivalents at end of year                                 $     707,222     $   1,571,926
                                                                       ====================================


                      See accompanying notes to consolidated financial statements.

                                                    F-7
</TABLE>
<PAGE>

SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)      HISTORY AND NATURE OF OPERATIONS

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

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

The Company's business model is to enter into licensing, original equipment
manufacturing ("OEM") supply, or distribution agreements for its products,
rather than engage in direct sales of products to end-users on its own. SHPI has
entered into product agreements relating to specific technologies and product
lines with The Kendall Company ("Kendall"), a division of Tyco Healthcare Group
LP, Bard Access Systems, Inc. ("Bard"), TAP Pharmaceutical Products Inc.
("TAP"), Merit Medical Systems, Inc. ("Merit") and Exelint International Co.
("Exel"). SHPI has distribution agreements in place with Cardinal Health,
Medline Industries, Inc. ("Medline"), Physician Sales and Service, Inc. ("PSS"),
Medical Specialties Distributors, Inc., Omni Medical Supply, Inc., Briggs
Corporation, Henry Schein, Inc., Wolf Medical Supply, Inc., Biometrix Ltd. and
Angus Medical Ltd. for products marketed under the SHPI label. In 2005, over 50%
of the Company's revenues were generated under agreements with two of their
corporate partners. The significant amount of revenues the Company receives
under these arrangements presents a risk to their commercial success, as
termination of either of these agreements could have a material adverse effect
on the Company and their revenues.

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 products and
the level of sales of our current products. As of December 31, 2005, the Company
had accounts payable and accrued liabilities totaling $1,424,864. The Company
also had a current portion of accrued patent litigation expense of $541,363 and
current deferred revenue of $196,668, neither of which will require the use of
cash. At December 31, 2005, the Company had cash and cash equivalents of
$707,222.

On March 6, 2006, the Company notified Galen partners that they would draw the
remaining $500,000 against the note agreement. On March 6, 2006, the Company
also obtained a $1,500,000 revolving line of credit with Silicon Valley Bank,
under which borrowings will be collateralized by substantially all of the assets
of the Company. Available borrowings are based primarily on outstanding accounts
receivable and initially amounted to approximately $800,000. Management believes
that existing cash and cash equivalents, along with cash generated from the
collection of accounts receivable, the sale of products, development fees and
royalties, the $500,000 in funding to be provided under the Galen note
agreement, and available borrowings under the Company's credit line ,will be
sufficient to meet the Company's cash requirements during the next twelve
months. However, there can be no assurance that the Company will not encounter
unforeseen difficulties that may deplete its resources more rapidly than
anticipated. Any efforts to seed additional funding could be done through
equity, debt or other external financing; however there is no assurance that
additional funding will be available on favorable terms, if at all. If the
Company fails to obtain additional funding when needed, the Company's business
and financial condition may be adversely affected.

                                      F-8
<PAGE>

(2)      SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Use of Estimates

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

Concentrations of Risk

The Company's distribution and license agreements are primarily with partners
operating in the United States. At December 31, 2005, one partner accounted for
approximately 55% of the accounts receivable balance. For the years ended
December 31, 2005 and 2004, two partners accounted for approximately 52% and 55%
of total revenues, respectively.

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

Cash and Cash Equivalents

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

Inventory

Inventory is valued at the lower of cost or market. Cost is determined using the
first-in first-out ("FIFO") basis. At December 31, 2005, inventory is comprised
of the following:

         Raw materials                               $  468,022
          Finished goods                                169,218
         Less: Allowance for obsolescence and
                  shrinkage                             (18,750)
                                                     ----------
         Total                                       $  618,490
                                                     ==========

Property and Equipment

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

                                      F-9
<PAGE>

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

The Company regularly evaluates whether events or circumstances have occurred
that indicate the carrying value of its long-lived assets may not be
recoverable. When factors indicate the asset may not be recoverable, the Company
compares the related undiscounted future net cash flows to the carrying value of
the asset to determine if impairment exists. If the expected future net cash
flows are less than the carrying value, an impairment charge is recognized based
on the fair value of the asset. No such impairments were recorded during the
years ended December 31, 2005 and 2004.

Other Assets

Other assets consist of a $27,000 building security lease deposit for the
Company's headquarters building, $91,745 of deferred finance costs, and $430,997
of capitalized merger costs. (See Note 9) Deferred finance costs are amortized
using the effective interest method over the term of the related note agreement.

Intangible Assets

Intangible assets consist of outside legal patent costs that have been
capitalized and are being amortized using the straight-line method over 17
years. Accumulated amortization at December 31, 2005 was $57,787. The following
summarizes estimated amortization expense that will be recorded over the next
five years:

                  Year Ending December 31            Amortization Expense
                  -----------------------            --------------------
                           2006                            $   20,000
                           2007                                20,000
                           2008                                20,000
                           2009                                20,000
                           2010                                20,000
                                                           ----------
                                                           $  100,000
                                                           ==========

Stock-Based Compensation

The Company recorded compensation expense of $1,296,346 during 2005 and $256,455
during 2004. The total 2005 charge relates to charges for restricted stock. Of
the 2004 charge, $247,155 relates to charges for restricted stock and $9,300 is
the charge resulting from the extension of certain option agreements. As of
December 31, 2005, approximately $2,376,000 remains to be amortized over the
remaining vesting periods of the restricted stock. The Company accounts for
stock options granted using Accounting Principles Board APB Opinion No. 25.
Accordingly, no compensation cost has been recognized for its fixed stock option
plans. Had compensation cost for the Company's stock-based compensation plans
(See Note 5) been determined based on the fair value at the grant dates for
awards under those plans consistent with Statement of Financial Accounting
Standards ("SFAS") No. 123, as amended by SFAS No. 148, the Company's net loss
and net loss per common share would have changed to the pro forma amounts
indicated below:

                                      F-10
<PAGE>
<TABLE>
<CAPTION>
                                                           Years Ended December 31,
                                                            2005               2004
                                                        ------------      ------------
<S>                                                     <C>               <C>
     Net loss, as reported                              $ (2,758,721)     $   (343,639)
     Add: Stock compensation expense
       included in reported net loss                       1,296,435           256,455
     Less: Stock compensation cost
       determined under fair value based
       method for all awards                              (1,034,259)       (1,034,259)
                                                        ------------      ------------
     Pro forma net loss                                 $ (2,496,545)     $ (1,121,443)
                                                        ============      ============

     Basic and diluted net loss per      As reported    $       (.07)     $       (.01)
        common share:                    Pro forma              (.06)             (.03)
</TABLE>

Revenue Recognition

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

The Company received a $500,000 upfront payment in December 2005 from an
undisclosed multinational medical products company relating to a license
agreement for the manufacture and marketing of safety peripheral IV catheter
devices, which will be recognized ratably over the three year life of the
underlying agreement. No upfront fees were received in 2004.

Product revenues are recognized when persuasive evidence of an arrangement
exists, risk of loss and title has transferred to our customers, the fee is
fixed or determinable and collection is probable. Rights of return for
manufactured product are dependent upon the agreement. No right of return is
provided for product manufactured under private label, as such product is custom
manufactured to order for those distributors. Product manufactured and
distributed under our own label does provide rights of return in the case of
shipping errors or product received in damaged condition. In addition,
distributors have the right, on a quarterly basis, to request the return of
excess or slow-moving inventory. An accrual for product returns, calculated
using historical data, is made at the end of each quarter.

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

Research and Development Costs

Research and development costs are expensed as incurred.

Income Taxes

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

                                      F-11
<PAGE>

Fair Value of Financial Instruments

The book values of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and note payable, approximate
their fair values. The estimated fair values have been determined using
appropriate market information and valuation methodologies.

Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard No. 151, "Inventory Costs - an amendment of ARB
No. 43, Chapter 4." This statement requires that items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal," as set forth in ARB No. 43. In addition, this statement requires that
the allocation of fixed production overhead to the costs of production be based
on the normal capacity of the production facilities. The adoption of this
statement, which is effective January 1, 2006, is not expected to have a
material effect on the Company's financial condition, results of operations, or
cash flows.

In December 2004, the FASB issued SFAS 123R, "Share-Based Payments" ("SFAS No.
123R"), a revision of SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"), which requires companies to measure all employee stock-based
compensation awards using a fair value method and record such expense in their
financial statements. The Company has adopted this standard effective January 1,
2006 and elected the modified-prospective transition method. Under the
modified-prospective transition method, awards that are granted, modified,
repurchased or cancelled after the date of adoption should be measured and
accounted for in accordance with SFAS No. 123R. Stock-based awards that are
granted prior to the effective date should continue to be accounted for in
accordance with SFAS No. 123, except that stock option expense for unvested
options must be recognized in the statement of operations. Because the Company
had only 74,250 options outstanding as of December 31, 2005, the adoption of
SFAS 123R is not expected to have a material effect on its consolidated
financial position, results of operations or cash flows.

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

Basic and Diluted Net Loss Per Common Share

As a result of the Company incurring net losses for the years ended December 31,
2005 and 2004, the basic and diluted net loss per common share for these years
are based on the weighted average number of common shares outstanding, excluding
unvested restricted stock. Outstanding stock options, warrants and unvested
restricted stock are not included in the calculation of diluted earnings per
share for 2005 and 2004 because their inclusion would be antidilutive, thereby
reducing the net loss per common share. At December 31, 2005 and 2004, options
and warrants to purchase 194,250 and 204,250 shares of common stock at exercise
prices ranging from $0.02 to $2.00 per share were outstanding, respectively. At
December 31, 2005 and 2004, there were 3,522,897 and 3,375,397 unvested
restricted common shares outstanding, respectively.

(3)      DISTRIBUTION AND LICENSE AGREEMENTS

License Agreements

         Kendall

         In November 1999, the Company entered into a Development and License
Agreement with The Kendall Company, a division of Tyco Healthcare Group LP,
relating to the production of a line of safety medical needle products,
including six syringe products and five other safety needle products. The

                                      F-12
<PAGE>

Kendall Agreement became effective in March 2000. In April 2000, the Company
received $1,464,956 under the Kendall Agreement. The Company received an
additional $1,000,000 in November 2002 in exchange for assigning to Kendall the
FlexLoc(R) and ReLoc(TM) trademarks and two related U.S. patents and their
progeny for a technology. Both of these payments are being recognized ratably
over the estimated five-year life of the Kendall Agreement. The assignment of
the patent rights to Kendall provides for the Company's retention of an
exclusive, royalty-free license in a number of strategic product areas. The
Kendall Agreement also provides for the Company to receive development fees and
ongoing royalties, including a $500,000 advance royalty payment that was also
received in November 2002.

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

         Merit Medical

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

         TAP Pharmaceutical Products

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

         Becton, Dickinson and Company

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

         Medical Device Company

         In December 2005, the Company entered into a License Agreement with a
multinational medical products company relating to the manufacture and marketing
of safety peripheral IV catheter devices. Under the terms of the agreement, the
Company received a $500,000 upfront license fee at signing and receives payments
related to the achievement of certain patent and commercialization milestones,
and on-going royalty payments on all product sales. The agreement is for the
life of the patents.

                                      F-13
<PAGE>

Distribution Agreements

         Bard Access Systems

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

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

         Physician Sales & Service

         In July 2002, the Company entered into a Distribution Agreement with
Physician Sales and Service, Inc. whereby PSS acquired the non-exclusive right
to distribute and sell LiftLoc(R) Safety Infusion Set. Under the terms of the
agreement, PSS purchases SHPI branded product 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. In September 2005, the PSS Agreement was amended to
add the MiniLoc(TM) Safety Infusion Set to the products supplied to PSS.

         Medline Industries

         In August 2002, the Company entered into a Distribution Agreement with
Medline Industries, Inc. whereby Medline acquired the non-exclusive right to
distribute and sell LiftLoc(R) Safety Infusion Set. Under the terms of the
agreement, Medline purchases SHPI branded product 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. In September 2005, the Medline Agreement was
amended to add the MiniLoc(TM) Safety Infusion Set to the products supplied to
Medline.

         Cardinal Health

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

         ExelInt International

         In May 2003, the Company entered into a Distribution Agreement with
ExelInt International, Company whereby Exel acquired the non-exclusive right to
promote, market, distribute and sell LiftLoc(R) Safety Infusion Set. Under the

                                      F-14
<PAGE>

terms of the agreement, the Company sells finished product to Exel for marketing
under Exel's SecureTouch(R) private label. Exel is subject to minimum purchase
requirements. In October 2005, the Exel Agreement was amended to add the
MiniLoc(TM) Safety Infusion Set to the products supplied to Exel. The Exel
Agreement is for a six-year period and automatically renews for successive
five-year terms unless terminated by either party in writing not less than 180
days prior to the expiration of the initial term or any renewal term.

         Henry Schein

         In September 2003, the Company entered into a Distribution Agreement
with Henry Schein, Inc., whereby Henry Schein acquired the non-exclusive right
to distribute and sell LiftLoc(R) Safety Infusion Set. Under the terms of the
agreement, Henry Schein purchases SHPI branded produce from the Company for
resale to Henry Schein's end-user customers. The Henry Schein Agreement
continues until 45 days after written notice of termination is received by
either party. In September 2005, the Henry Schein Agreement was amended to add
the MiniLoc(TM) Safety Infusion Set to the products supplied to Henry Schein.

         Other LiftLoc(R) and MiniLoc(TM) Distribution Agreements

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

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

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

         Tyco Healthcare

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

         Merit Medical

         In October 2005, the Company entered into a Purchase Agreement with
Merit Medical for the marketing and sale of its SecureLoc(TM) Safety Introducer
Needle. Under the terms of the agreement, Merit Medical will purchase safety
introducer needles from the Company. The agreement is for an initial term of

                                      F-15
<PAGE>

five years. After the initial five-year term it automatically renews for
additional five-year terms unless terminated in writing by either party upon 90
days notice.

         In connection with these product agreements, all product introductions
are scheduled and controlled by the Company's 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 the Company
will realize future revenues in excess of any minimum purchase/royalty
commitment from these agreements.

(4)      COMMITMENTS AND CONTINGENCIES

Lease Obligations

         The Company leases office space under a non-cancelable operating lease,
which is effective through December 31, 2007. The following summarizes future
minimum lease payments under the operating lease at December 31, 2005:

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

                         2006                    $          260,397
                         2007                               263,435
                                                 ------------------
                                                 $          523,832
                                                 ==================

         Rental expense for the years ended December 31, 2005, and 2004 totaled
approximately $254,345 and $253,908, respectively.

Employment and Indemnity Agreements

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

         In February 2004, the Compensation Committee approved a 2004 Executive
Officer Bonus Plan. In February 2005, the Compensation Committee approved a 2005
Executive Officer Bonus Plan. Under the 2004 plan, executive officers eligible
for bonuses included the Company's President and CEO, Chief Operating Officer,
and Vice President, General Counsel and Business Development. Plan participants
were eligible to earn 20% of their annual salary based upon 100% achievement of
certain financial goals outlined in the approved budget plan. The maximum base
bonus that could be paid under the 2004 plan was $126,750. In February 2005, the
board of directors approved total payments of $120,015 under the 2004 Plan.
Under the 2005 plan, executive officers eligible for bonuses included the
Company's President and CEO, Chief Operating Officer, Vice President, General
Counsel and Business Development, and Management Directors. Plan participants
were eligible to earn from 17.5% to 37.5% of their annual salary based upon 100%
achievement of certain financial goals outlined in the approved budget plan. The
maximum base bonus that could be paid under the 2005 plan was $292,500. In March
2006, the board of directors approved total payments of $189,697 under the 2005
plan. In connection with these plans, the Company also adopted an Employee Bonus
Plan for employees other than the Named Executive Officers to reward specific
individual or team achievements. The total approved for this plan was $75,000 in
both 2005 and 2004. During 2004 and in February 2005, payments of $75,000 were
made against the 2004 Plan. During 2005 and in January 2006, payments of $55,000
were made against the 2005 Plan.

         The Company has entered into indemnity agreements (the "Indemnity
Agreements") with each of its executive officers and directors pursuant to which
the Company has agreed to indemnify the officers and directors to the fullest
extent permitted by law for any event or occurrence related to the service of

                                      F-16
<PAGE>

the indemnitee for the Company as an officer or director that takes place prior
to or after the execution of the Indemnity Agreement. The Indemnity Agreements
obligate the Company to reimburse or advance expenses relating to any proceeding
arising out of an indemnifiable event. Under the Indemnity Agreements, the
Company's officers and directors are presumed to have met the relevant standards
of conduct required by Delaware law for indemnification. Should the Indemnity
Agreements be held to be unenforceable, indemnification of these officers and
directors may be provided by the Company in certain cases at the Company's
discretion.

Litigation

         In December 2002, Becton Dickinson ("BD") filed a lawsuit against Tyco
Healthcare in the United States Court of the District of Delaware, asserting
that Tyco Healthcare's Monoject Magellan(TM) safety products infringe upon BD's
U.S. Patent No. 5,348,544 (`544 Patent), titled "Single-Handedly Actuable Safety
Shield for Needles."

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

         Under the Kendall Agreement, Tyco Healthcare has the right to withhold
up to fifty percent (50%) of royalties due the Company as an offset against
litigation expenses related to charges of infringement by a third party for the
manufacture, use or sale of licensed product. This right continues 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 us.

         Based on information obtained during the fourth quarter of 2003 related
to costs incurred by Tyco Healthcare, the Company recorded a liability of
approximately $1,300,000 at December 31, 2003, which amount was the Company's
estimate of the portion of costs associated with BD's suit against Tyco
Healthcare that Tyco Healthcare will withhold against the royalties due SHPI
through 2005. During the twelve months periods ended September 30, 2004 and
2005, Tyco Healthcare withheld fifty percent of royalty payments due, which
amounts totaling $1,000,000 have been offset against the accrual. Based on
information obtained during the fourth quarter of 2005, we now anticipate the
litigation will continue at least through 2007. Accordingly, we recorded an
additional liability of $1,095,200, which amount was our estimate of the portion
of costs associated with BD's suit against Tyco Healthcare that Tyco Healthcare
will withhold against the royalties due SHPI during 2006 and 2007. In the event
litigation continues beyond 2007, or if Tyco Healthcare ultimately loses the
case on appeal, additional liabilities may accrue. Moreover, if Tyco Healthcare
is unsuccessful in post-trial motions and on appeal, Tyco Healthcare may be
prohibited from selling the Monoject Magellan(TM) safety products in their
current form. Additional litigation to enforce patents, to protect proprietary
information, or to defend us against alleged infringement of the rights of
others may occur. Such litigation would be costly, could divert our resources
from other planned activities, and could have a material adverse effect on our
results of operations or financial condition.

(5)      STOCK OPTIONS

         Effective November 2001, the Company's Board of Directors and
stockholders approved the adoption of the Specialized Health Products
International, Inc. 2001 Stock Option plan. The plan permits the Company to
grant non-qualified stock options and incentive stock options to acquire common
stock. The total number of shares authorized for the plan may be allocated by
the board between non-qualified stock options and incentive stock options from
time to time, subject to certain requirements of the Internal Revenue Code of

                                      F-17
<PAGE>

1986, as amended. The option exercise price per share under the plan may not be
less than the fair market value (or 110% of such fair market value when the
optionee is a 10 percent stockholder) on the date on which the option is
granted. A total of 5,000,000 shares are available for issuance under the plan.
The options are exercisable for a period not to exceed 10 years (or five years
when the optionee is a 10 percent stockholder) from the date of grant. At
December 31, 2005, options to acquire an aggregate of 13,000 shares of common
stock at exercise prices of $1.19 were outstanding under the 2001 Stock Option
plan.

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

         Effective August 1998, adoption of the Specialized Health Products
International, Inc. 1998 Stock Option Plan was approved by the Company's Board
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, 2005, options to acquire an aggregate of 61,250
shares of common stock at exercise prices ranging from $1.00 to $1.25 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, 2005 and 2004, and changes during the years then ended is presented below:

<PAGE>
<TABLE>
<CAPTION>
                                                  2005                       2004
                                       ------------------------   ----------------------------
                                                      Wtd. Avg.                      Wtd. Avg.
                                                       Exercise                      Exercise
                                           Shares       Prices        Shares          Prices
                                       -----------    ---------   -------------   ------------
<S>                                        <C>        <C>            <C>            <C>
Outstanding at beginning of year           124,250    $   1.52       6,685,690      $    1.24

Granted                                          -           -         100,000           1.35
Surrendered in exchange for
  restricted shares                              -           -      (5,738,190)          1.21
Forfeited                                  (50,000)       2.00        (923,250)          1.38
                                      -------------              ---------------
Outstanding at end
  of year                                   74,250        1.19         124,250           1.52
                                      =============              ===============
Exercisable at end
  of year                                   72,892        1.19         121,644           1.53
                                      =============              ===============
Weighted average fair value of
  options granted                                -                   $    1.07

                                      F-18
<PAGE>

The following table summarizes information about stock options outstanding at
December 31, 2005:
<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, 2005             Life            Price           31, 2005           Price
   -------------------- ------------------ ------------------ ------------- -------------------- -------------
<S>                           <C>              <C>               <C>              <C>            <C>
    $     1.00                    5,000         7.08 years       $   1.00           3,642        $      1.00
          1.12                   10,000         4.47                 1.12          10,000               1.12
          1.19                   29,250         2.66                 1.19          29,250               1.19
          1.25                   30,000         0.08                 1.25          30,000               1.25
                        ------------------                                 --------------------
    $1.00 to 2.00                74,250                          $   1.19          72,892        $     1.19
                        ==================                                  ====================
</TABLE>

The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2004: average risk-free interest rate ranging
from 3.25% to 3.75%; expected lives of 10 years; expected dividend yield of zero
percent; expected volatility of 73 percent.

The following summarizes all warrant activity for the Company for the years
ended December 31, 2005, and 2004.
<TABLE>
<CAPTION>
                                                  2005                       2004
                                       ------------------------   ----------------------------
                                                      Wtd. Avg.                      Wtd. Avg.
                                                       Exercise                      Exercise
                                           Shares       Prices        Shares          Prices
                                       -----------    ---------   -------------   ------------
<S>                                       <C>           <C>           <C>            <C>
         Outstanding at beg-
           inning of the year              80,000        $.02          500,000        $ 2.00
         Granted                           40,000         .02           80,000           .02
         Forfeited                              -           -         (500,000)         2.00
                                       -----------                 --------------
         Outstanding at end of
           the year                       120,000        $.02           80,000        $  .02
                                       ===========                 ==============

         Exercisable at end of
           the year                       120,000                       80,000
                                       ===========                 ==============
</TABLE>

         The fair value of each warrant 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 2005 and 2004: average risk-free
interest rate ranging from 3.25% to 3.75%; expected lives of 3 years; expected
dividend yield of zero percent; expected volatility of 81 percent and 73
percent, respectively.

         On September 15, 2004, The 2004 Stock Incentive Plan ("Stock Plan") was
approved by the Board of Directors and became effective on that date, subject to
the Stock Plan being approved by the stockholders within six months after that
date. The Stock Plan provides that 6,000,000 shares of the Company's authorized
but unissued common stock be reserve pursuant to the terms and conditions of the
plan. On October 19, 2004, a special meeting of stockholders was held, at which
time the stockholders approved the Stock Plan. The Stock Plan allows the
Company, under the direction of the Compensation Committee, to make broad-based
grants of restricted stock and stock units, any of which may or may not require
the satisfaction of performance objectives, to employees and non-employee
directors. Under the Stock Plan, current directors and employees holding stock
option grants were given the election of retaining those stock option grants or
surrendering them for grants of common stock. This resulted in the surrender of
5,738,190 stock options in exchange for the issuance of 3,375,397 shares of
restricted common stock which cliff vest at the end of three years. The stock

                                      F-19
<PAGE>

issuance resulted in a non-cash charge of $3,825,521, which is being expensed
ratably over the three year vesting period of the stock grants. In February
2005, the Board of Directors approved the grant of 147,500 shares of restricted
stock to certain employees, resulting in a non-cash charge of $94,399.

(6)      CAPITAL TRANSACTIONS

         Preferred Stock

         At December 31, 2005 and 2004, no shares of Series A Preferred Stock
were outstanding, a reduction of 21,861,369 shares as compared to the number of
shares of Series A Preferred Stock outstanding at December 31, 2003. The Series
A Preferred Stock Purchase Agreement contained an automatic conversion feature
whereby the Series A Preferred Stock automatically converted into common stock
when the average closing price of the Company's common stock, as reported on the
OTC Bulletin Board, exceeded $1.374 for at least twenty consecutive trading
days. Between January 26 and February 23, 2004, the common stock closed each
trading day at $1.39 per share or more. On February 23, 2004, the closing price
was $1.48 per share. As a result, all of the Series A Preferred Stock was
automatically converted into common stock on a one-for-one basis.

         Common Stock

         During the year-ended December 31, 2005, purchases of stock by
employees through the Company's 401(k) Plan resulted in the issuance of 23,950
shares of common stock and 147,500 shares of restricted stock were granted to
certain employees under the 2004 Stock Incentive Plan. During the year ended
December 31, 2004, 1,250,000 shares of restricted common stock were issued
through a private placement to certain accredited and sophisticated investors,
139,750 shares of common stock were purchased under the Employee Stock Purchase
Plan, and 3,375,397 shares of common stock were issued in exchange for the
surrender of 5,738,190 stock options.

         Stock Options and Warrants.

         On March 22, 2004, the Company entered into an agreement with Galen
Partners III, L.P., Galen Partners International III, L.P., and Galen Employee
Fund III, L.P. (collectively, "Galen Partners") whereby Galen Partners agreed to
purchase a convertible promissory note ("Note") in the aggregate principal
amount of $1,000,000 upon the Company's request made at any time between March
31, 2004 and March 31, 2005. As of December 31, 2005, Galen Partners owned
approximately 34.2% of the Company's common stock. As consideration for entering
into this purchase agreement, Galen Partners received a warrant that provides
them the right, but not the obligation, to purchase 80,000 shares of common
stock at an exercise price of $0.02 per share. Valuing the warrants utilizing
the Black-Scholes valuation model, the issuance of the 80,000 warrants resulted
in deferred financing costs of $108,552 that will be amortized ratably over the
three and one-half year term of the agreement. The warrant shall expire and be
no longer exercisable after 5:00 p.m., Eastern Time, on March 22, 2007. Further,
the Company paid $9,991 in legal fees related to this transaction. The Note has
a term of three years and bears interest at the rate of 12% per annum, with
accrued interest to be paid July 1 and January 1 of each year the Note remains
outstanding. The Note also provides that the Company may prepay all or any
portion of the outstanding principal amount at any time without penalty upon not
less than five business days' notice to Galen Partners. The entire outstanding
principal amount due on the Note may, at Galen Partner's option, be converted
into fully paid and nonassessable shares of the Company's common stock. The
conversion price will be 110% of the average closing share price for the
Company's common stock as reported on NASDAQ or the OTC Bulletin Board for the
twenty (20) consecutive trading days prior to the date of the issuance of the
Note.

         On March 7, 2005, Galen Partners agreed to a six-month extension of its
$1,000,000 promissory note agreement through September 30, 2005 in exchange for
the issuance of warrants to purchase 40,000 shares of the Company's common stock
at an exercise price of $0.02 per share. The Company had the right, at its sole
option, to extend the agreement for an additional six-month period through March

                                      F-20
<PAGE>

31, 2006 for the issuance of warrants to purchase an additional 40,000 shares of
the Company's common stock at an exercise price of $0.02 per share. All other
terms and conditions of the original agreement remain unchanged in the
subsequent agreement. Valuing the warrants utilizing the Black-Scholes valuation
model, the issuance of the 40,000 warrants resulted in deferred financing costs
of $35,351 that will be amortized ratably over the three and one-half year term
of the agreement.

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

         On March 6, 2006, the Company elected to draw the remaining $500,000
against the note agreement with Galen Partners. Under the terms of the
agreement, Galen has 20 days from such notice to purchase and fund the Note. The
note will have a maturity date of March 6, 2009, at which time any outstanding
principal and accrued interest must be paid in full.

(7)      INCOME TAXES

         The Company recognized no income tax benefit from its net operating
losses for the years ended December 31, 2005 and 2004. Significant components of
the Company's net deferred income tax assets as of December 31, 2005 are as
follows:

         Deferred income tax assets:
            Net operating loss carryforwards              $     9,686,424
            Non cash compensation expense                         597,135
            Accrued compensation                                    3,469
            Intangible assets                                      74,692
            Financial reporting  accruals and reserves            649,687
            Research and experimentation tax
              credits/carryforwards                               884,017
            Deferred revenue                                      210,895
                                                       ---------------------
                Total gross deferred income tax asset          12,106,319
            Less valuation allowance                          (12,106,319)
                                                       ---------------------
                Net deferred income taxes                 $             -
                                                       =====================

         The net change in the valuation allowance for the years ended December
31, 2005 and 2004 was an increase of $1,307,559 and $2,733, respectively.

         SFAS 109 requires that a valuation allowance be provided if it is more
likely than not that some portion or all of a deferred tax asset will not be
realized. Because the Company has a history of operating losses, the Company's
ability to realize the benefit of its deferred tax asset will depend on the
generation of future taxable income. The Company has recorded a full valuation
allowance as of December 31, 2005.

         At December 31, 2005, the Company had total tax net operating losses
("NOL's") of $25,968,966 which will expire in the years 2006 through 2026, and
research and experimentation tax credits of $735,672 which will expire in the
years 2009 through 2026, that can be carried forward to reduce federal income
taxes, if any. Approximately $23,000 of NOL's expired in 2005. 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, there are limitations on the amount of the
Company's NOL's which may be utilized to offset future taxable income in any one
year. The maximum amount of carryforwards available in a given year is limited
to the product of the Company's value on the date of ownership change and the
federal long-term tax-exempt rate, plus any limited carryforwards not utilized
in prior years.

                                      F-21
<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 contributions to the plan were approximately $110,000 and $104,400
for the years ended December 31, 2005 and 2004, respectively.

(9)      MERGER AGREEMENT

         On November 21, 2005, the Company and The Med-Design Corporation signed
an Agreement and Plan of Merger and Reorganization under which Med-Design and
its subsidiaries will merge with and into the Company in a transaction to be
accounted for as an acquisition by the Company. The assets and liabilities of
Med-Design will be recorded as of the acquisition date at their estimated fair
values. The transaction is expected to qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code. Under the terms of the
merger agreement, each share of Med-Design common stock outstanding at the
closing of the merger will be exchanged for approximately 1.24 shares of the
Company's common stock as set forth in the merger agreement exchange formula,
resulting in the issuance of 21,175,631 shares of the Company's common stock to
the Med-Design stockholders. Based on 16,874,486 Med-Design shares outstanding
at December 31, 2005, and adding 223,509 shares to be issued in exchange for
Med-Design options, this will represent approximately 32.2% of the combined
organization. The exchange ratio and ownership percentage may be increased if
Med-Design eliminates or reduces certain liabilities related to its real
property lease and pending litigation prior to the closing of the transaction.
Assuming Med-Design is successful in eliminating those liabilities, the exchange
ratio would increase to approximately 1.35, resulting in the issuance of
23,097,984 shares of the Company's common stock to the Med-Design stockholders,
which would represent approximately 34.1% of the combined organization. On March
6, 2006, we executed an amendment to the Merger Agreement with the Med-Design
Corporation which extended the End Date for the merger from March 31, 2006 to
June 30, 2006 and increased the cumulative burn rate of Med-Design from December
1, 2005 until the closing date to $1,000,000. The Company has filed a
prospectus/proxy statement concerning its proposed combination with Med-Design
with the Securities and Exchange Commission, or SEC.

         There are currently outstanding 2,309,532 Med-Design warrants at strike
prices ranging from $6.03 to $14.1375. These warrants will be exchanged for
warrants to purchase the Company's common stock at the same final exchange ratio
received by the Med-Design stockholders. The aggregate Black-Scholes value of
the Company's warrants to be issued in this exchange, which is approximately
$14,000, will be included as a component of the purchase price.

         The Company will also assume approximately $1,026,000 of Med-Design
liabilities, plus an estimated lease settlement obligation of $470,000, and
estimated legal obligations of $200,000, and will incur approximately $570,000
in costs relating to the transaction. The fair value of the Company's stock to
be issued in this transaction, the assumption of Med-Design liabilities and the
costs incurred in the transaction combine for an estimated purchase price of
$14,995,000.

         At December 31, 2005, the Company had incurred costs totaling $430,997
relating to this proposed transaction which are included in other assets in the
consolidated balance sheet. The transaction is subject to regulatory and
shareholder approval. If the transaction is not completed the total costs will
be expensed. Should the Med-Design stockholders fail to approve the merger, a
$500,000 break-up fee will be paid to the Company by Med-Design. Such payment
will be offset against the merger costs to be expensed.

                                      F-22
<PAGE>

(10)     SUBSEQUENT EVENTS

         On March 6, 2006, the Company executed a Loan and Security Agreement
with Silicon Valley Bank which provides a revolving line of credit in an
aggregate amount of up to $1,500,000. Borrowings under this credit facility will
be collateralized by substantially all of the assets of the Company. The line
has a maturity date of February 10, 2008, and carries an interest rate equal to
1.00 percentage point above the Prime Rate.




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                                      F-23