SECURITIES AND EXCHANGE COMMISSION

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

                                   FORM 10-KSB


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


                            For the fiscal year ended
                                December 31, 2001

                             Commission file number
                             ----------------------
                                     0-26694

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


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

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

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

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

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

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

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

         The issuer's revenue for its most recent fiscal year was $520,074

         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 15, 2002
was approximately $24,352,000.

<PAGE>

                 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.

                       TABLE OF CONTENTS TO ANNUAL REPORT
                                 ON FORM 10-KSB
                          YEAR ENDED DECEMBER 31, 2001




                                     PART I

Item 1.  Description of Business.............................................3
Item 2.  Description of Property............................................13
Item 3.  Legal Proceedings..................................................13
Item 4.  Submission of Matters to a Vote of Security Holders................13


                                  PART II

Item 5.  Market for Common Equity and Related Stockholder Matters...........15
Item 6.  Management's Discussion and Analysis or Plan of Operation..........17
Item 7.  Financial Statements...............................................27
Item 8.  Changes in and Disagreements With Accountants on Accounting
           and Financial Disclosures........................................27


                                 PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
           Compliance With Section 16(a) of the Exchange Act................28
Item 10. Executive Compensation.............................................30
Item 11. Security Ownership of Certain Beneficial Owners and Management.....34
Item 12. Certain Relationships and Related Transactions.....................36
Item 13. Exhibits and Reports on Form 8-K...................................36

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                           Forward-Looking Statements

         When used in this Form 10-KSB, in our filings with the Securities and
Exchange Commission ("SEC"), in our press releases or other public or
stockholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "would be," "will allow,"
"intends to," "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements
specifically include, but are not limited to, launch dates for licensed
products; dates upon which we will receive royalty payments, the generation of
royalty revenues from our licensees; acceptance of safety products by health
care professionals; plans to rely on our joint venture partners to pursue
commercialization of licensed products; expectations regarding the ability of
our products to compete with the products of our competitors; acceptance of our
products by the marketplace as cost effective; factors affecting the ability of
licensees to sell licensed products; sufficiency and timing of available
resources to fund operations; plans regarding the raising of capital; the size
of the market for safety products; plans regarding sales and marketing;
strategic business initiatives; intentions regarding dividends and the launch
dates of our licensed products.

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

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

PART I

Item 1. Description of Business

Overview

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

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

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Systems, Inc. ("Bard"). Additional discussions are ongoing with potential
partners for several other product applications of our proprietary technologies.

         We recently restructured our management team and board of directors
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 new leadership team is highly experienced
in both the health care and medical safety product sectors. See Item 9
"Directors, Executive Officers, Promoters and Control Persons." We believe this
leadership team has the entrepreneurial leadership, strategic guidance and
industry experience necessary to efficiently realize our market potential.

         Our primary objective is to be the leader and innovator in disposable
medical safety sharps products, with an initial focus on safety medical needles.
We will seek to commercialize products providing the following features and
benefits:

         o        Excellent functionality for the intended medical use;

         o        Similar or enhanced clinical technique versus conventional
                  product offerings;

         o        Comparable, improved or additional ancillary patient benefits
                  (e.g., comfort, convenience, etc.);

         o        Efficient/low cost manufacturability to provide attractive
                  margins at a reasonable price to the end user; and

         o        Superior safety technology to prevent accidental exposure to
                  blood-borne pathogens.

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

         While foreign safety needle legislation lags that of the U.S., certain
countries, such as France, have already demonstrated an interest in increasing
efforts to protect their healthcare workers in a similar manner. As these
efforts continue, we expect foreign demand for medical safety needle products to
continue to expand.

Our Products

         General

         We own 19 U.S. patents and have over 90 U.S. patents and international
patent applications pending which protect our 20 highly differentiated, patented
safety needle technologies. These patents provide the basis for a wide range of
safety needle products. Under our new leadership, we expect to initially focus
on the following products that are currently under development.

         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

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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 needle eliminates
the need to perform dangerous recapping techniques with a built-in safety device
that covers the needle after use. Our safety syringe needle conforms to current
user technique and is low-cost, intuitive, and easy-to-use. This product line
will compete in the $260 million U.S. safety needle and syringe market.

         Our first safety syringe needle products are currently being developed
for market with 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 and will receive an additional $1,000,000
thirty months from the effective date of the contract or upon the sale of
commercial quantities of products, whichever occurs first, 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 30 months from the effective date
of the contract or upon the sale of commercial quantities of products, whichever
occurs first.

         Kendall has received 510(k) clearance from the FDA and anticipates
launching the safety syringe needle in 2002.

         Safety Huber Needle Devices

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

         Our LiftLoc(TM) Safety Infusion Set conforms to user technique and
reduces this risk by locking the needle into a protective sheath, thus
preventing the rebound effect from occurring and reducing the risk of accidental
needlestick injury. The product is packaged with a unique patient comfort pad
accessory product. This product line will compete in the $46 million U.S. Huber
needle market.

         Our new LiftLoc(TM) safety Huber needle product will be distributed in
the hospital market by Bard Access Systems, Inc., a division of C. R. Bard,
Inc., the leading multinational developer, manufacturer and marketer of
healthcare products in the field of implanted ports that are accessed using
Huber needles. They are also a market leader in the fields of vascular,
oncology, urology and surgical specialty products. We have entered into a
Distribution Agreement (the "Bard Agreement") with Bard whereby Bard acquired
the non-exclusive right to promote, market, distribute and sell our LiftLoc(TM)
Safety Infusion Set, which we manufacture, to hospitals and group purchasing
organizations. The Bard Agreement excludes alternate sites 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 will sell finished product to
Bard, and Bard is subject to minimum purchase requirements. The Bard Agreement
is for a two year period which automatically renews for successive one-year
terms unless terminated by Bard in writing not less than 180 days prior to the
expiration of the initial term or any renewal term.

         We received 510(k) clearance from the FDA for this unique device in the
fourth quarter of 2001. Our LiftLoc(TM) Safety Winged Infusion Set is now in
final evaluation studies prior to launch.

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         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, bed, table or otherwise set aside. Afterward,
the needle is usually unscrewed from the barrel and discarded into a sharps
container, while the barrel is often used again with another patient (which
increases the risk of cross contamination).

     We are currently developing a family of safety phlebotomy device products.
Our safety phlebotomy device has a unique, one-piece injection molded barrel
with an integral safety needlestick prevention feature. 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. The FDA has already granted 510(k) clearance for marketing this device,
which will compete in the $130 million U.S. phlebotomy needle market. We are
currently engaged in active licensing discussions on this product line.

         Safety Prefillable Syringe Devices

         Prefillable syringes are a significant drug delivery modality. In
addition, they offer a method for delivering many of today's new drugs, which
cannot be formulated into a solid form or even a stable liquid for injection.
Typically, the prefillable syringe is made of glass to ensure appropriate shelf
life and inertness to the drug, which is stored in the syringe. Prefillable
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 prefill syringe.

         We believe that this area represents a major new market opportunity for
us, and we are currently developing a device that is adaptable to a wide variety
of prefillable syringes. This product provides intuitive one-handed activation.
Additionally, the product is designed for easy integration into pharmaceutical
manufacturing. The product can be applied to the prefilled syringe after filling
and before final packaging. This minimizes capital investment and speeds
integration. We anticipate filing a 510(k) application with the FDA for this
device in 2002. We are currently engaged in active discussions for our first
agreement on this product line.

         Safety Long Specialty Needle Devices

         We have a significant program for developing safety solutions for long
specialty needles which are used across a wide range of medical disciplines,
such as: anesthesiology, oncology, radiology, and cardiology. These needles
include epidural, spinal, Seldinger, Chiba, biopsy, and others. Since these
needles are typically long, they present unique challenges for developing an
effective safety system that does not interfere with clinical technique. We are
developing long needle safety technologies that we believe effectively address
these problems. These products will compete in the $165 million U.S. long
specialty needle market.

         We have entered into a License Agreement (the "Merit Agreement") with
Merit relating to the production of safety needle devices for angiographic
guidewire introducers. Merit is a worldwide leader in interventional cardiology
and radiology needles. 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. The Merit Agreement provides that we will
receive ongoing royalties, including minimum royalty payments beginning in 2002.
Other long needle applications are in development.

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         Safety Steel Needles

         Generally, safety steel needle products are used for small needle
access for fluid infusion and blood collection. Safety steel needle products are
often referred to as winged infusion sets. Most safety steel needle products
that are currently commercially available require two hands to encase a needle
after use. We are developing two products for market, a blood collection device
and a fluid infusion device, that permit single-handed needle retraction and do
not interfere with clinical technique. This product line will compete in the $80
million U.S. safety steel needle set market for blood collection and infusion.

         Safety Catheter Introducers

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

Industry

         Market

         Healthcare is one of the largest industries in the world and grows
larger each year. Healthcare worker and patient safety continue to be high
priority, high profile issues. 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. Accidental needlesticks are the cause of
nearly 80% of all occupationally acquired diseases, including HBV, HCV,
HIV/AIDS, 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.

         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 price
competitive 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 while paying close attention to manufacturing cost. 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 that
result from accidental needlesticks and of the need for safer needle devices to
reduce the number of accidental needlesticks that occur.

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         It is estimated that at least 1,000 healthcare workers annually
contract serious infections from accidental needlestick and sharps injuries in
the U.S. Estimates also suggest that safety needle devices may prevent more than
80% of all needlestick injuries. Testing and treatment of needlestick injuries
costs the U.S. healthcare system between $750 million and $1 billion each year.
The average cost of treating a needlestick injury not resulting in the
transmission of a disease is between $450 and $800 per incident, which only
considers the direct costs associated with HBV, HCV and HIV screens and employee
health time. According to the American Hospital Association, a single case of
serious blood-borne pathogen infection can cost more than $1 million in expenses
for follow-up testing, lost work time and disability payments. Even if no
infection occurs as a result of the injury, the average cost of treating a
high-risk exposure is 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. There are presently about 54 documented cases of healthcare
workers who have acquired HIV as a result of their occupation, with an estimated
35 new cases reported each year.

         While we expect recent government regulations to dramatically increase
conversions to safety products in the future, the greatest obstacle to
conversion may be adequate supply and availability of 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. Seventeen U.S.
states have passed safety legislation requiring the use of safety needle
products. OSHA also issued a national directive in November 1999 requiring use
of safety medical devices, then revised the order in November of 2000 to comply
with the Needlestick Safety and Prevention Act. This order requires healthcare
employers to review new safety products and mandates their use by employees.
Various government agencies now monitor hospitals and clinics for compliance. We
believe these developments will positively affect our ability to commercialize
our products.

Our Strategy

         Our primary objective is to be the leader and innovator in disposable
medical safety sharps products, with an initial focus on safety medical needles.
We are seeking to accomplish this objective by capturing significant market
share of targeted product segments, broadening existing product lines,
developing new products and seeking additional market opportunities.

         Our business model is to enter into licensing, OEM supply, or
distribution agreements for our products, rather than engage in direct sales or
marketing of products to end-users on our own. OEM arrangements are our
preferred business relationship for low volume/high margin products.
Out-licensing opportunities will be pursued for high volume/low margin products
where efficient/low cost manufacturing would be unfeasible at a contract
manufacturer, or when a large capital investment is required to scale-up
manufacturing. In certain circumstances, where we are providing a component, but
not finished goods, or an exclusive arrangement is provided, we will pursue a
combination of an OEM manufacturing relationship and licensing-based royalty
arrangements.

Marketing and Sales

         Because we focus on the design, development, manufacture, and license
of cost-effective, innovative safety healthcare products, we are not engaged in

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the marketing and sale of our products directly to health care professionals.
Our current marketing efforts primarily focus upon identifying market leaders in
the pharmaceutical and medical device industries who may sell and distribute our
products after manufacture, license our products for sale, distribute or
incorporate our safety applications in their existing products or some
combination of the foregoing. As our partners bring products to market, we
intend to expand our marketing capabilities and activities to support their
efforts in gaining widespread trial and acceptance of our product offerings.

Manufacturing and Facilities

         Products being developed under OEM supply or distribution agreements
will be manufactured under our authority and supervision by a qualified contract
manufacturer. In the first quarter of 2002, we began producing our LiftLoc(TM)
Safety Infusion Set and Patient Comfort Pad at an ISO 9002 qualified contract
manufacturer. Products subject to licensing agreements will be manufactured by
our corporate partners. The materials used to produce our products are generally
widely available. We do not anticipate difficulty in obtaining such materials.

         Our facilities include 17,273 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. We also
have a dedicated machine shop to support our product development activities.

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 own 19 U.S. patents relating to our safety medical needle
technologies. We have over 90 U.S. and international patents and patent
applications pending. The patents referred to above first begin to expire in
2013.

         Our future success may depend upon the strength of our intellectual
property. We believe that the scope of our patents/patent applications is
sufficiently broad to prevent competitors from introducing devices of similar
novelty and design to compete with our current products in development and that
such patents and patent applications are or will be valid and enforceable. There
is no assurance, however, that if such patents are challenged this belief will
prove correct. In addition, patent applications filed in foreign countries and
patents granted in such countries are subject to laws, rules and procedures
which differ from those in the 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 plan to file international patents in all countries in which
we are seeking market share.

         We are not aware of any patent infringement claims against us.
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 109 patents and
patent applications worldwide and the creation of 20 highly differentiated,
patented safety needle technologies. These technologies apply to almost all
medical needles used today including: syringe, prefilled syringe, IV catheter,

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Seldinger, PICC introducer needles, winged needle sets, blood collection,
epidural, spinal, plasma apheresis sets, dialysis sets, Huber, biopsy,
laparoscopy, lancets and other specialty needles. We spent $1,815,082 in 2001
and $1,463,564 in 2000 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 $202,615 in 2001 and $452,529 in
2000. We plan to continue research and development on our current products under
development and new products. There is no assurance that our ongoing research
and development activities will prove effective.

Government Regulation

         Product Approvals

         We are regulated by the FDA, pursuant to various statutes, including
the (Federal Food, Drug and Cosmetic Act) ("FD&C") Act, as amended and
supplemented by the Medical Device Amendments of 1976 (the "1976 Amendments")
and the Safe Medical Devices Act of 1990. Although our focus in the past has
been on the design and development of devices, we anticipate that as we engage
in more OEM manufacturing, we will become increasingly active in pursuing
regulatory approvals. We have submitted and received clearance for our
LiftLoc(TM) safety Huber needle product. In addition, our strategic partners
have received clearances for both our Safety Phlebotomy and the Safety Syringe.
We plan to submit an additional 510(k) application for prefilled syringes during
2002.

         Pursuant to the 1976 Amendments, the FDA classifies medical devices
intended for use with humans into three classes, Class I, Class II and Class
III. The controls applied to the different classifications are those the FDA
believes are necessary to provide reasonable assurance that a device is safe and
effective. Many Class I devices have been exempted from pre-market notification
requirements by the FDA. These products can be adequately regulated by the same
types of controls the FDA has used on devices since the passage of the FD&C Act
in 1938. These "general controls" include provisions related to labeling,
producer registration, defect notification, records and reports and good
manufacturing practices. The good manufacturing practice regulation has been
recently replaced by a more comprehensive Quality System Regulation ("QSR").
QSRs include implementation of quality assurance programs, 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 II or Class III device, respectively. If
a company states the device is unclassified, it must explain the basis for that
determination.

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

                                       10
<PAGE>

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 which they
distribute commercially. The FD&C Act also requires that all manufacturers of
medical devices comply with labeling requirements and manufacture devices in
accordance with QSRs. QSRs require that companies manufacture their products and
maintain their documents in a prescribed manner with respect to manufacturing,
testing, and quality control. The FDA's Medical Device Reporting regulation
requires that companies provide information to the FDA on death or serious
injuries alleged to have been associated with the use of their products, as well
as product malfunctions that would likely cause or contribute to death or
serious injury if the malfunction were to recur. The FDA further requires that
certain medical devices not cleared with the FDA for marketing in the U.S. meet
specific requirements before they are exported. We are registered as a
manufacturer with the FDA. To date, no incidents have occurred with our products
that have necessitated submission of a Medical Device Report to the FDA.

         The FDA inspects medical device manufacturers and distributors, and has
broad authority to order recalls of medical devices, to seize 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 Specialized Health Products International, Inc. ("SHPI").

         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
bloodborne 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.

          Seventeen 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.

                                       11
<PAGE>

         Foreign Regulation

         Distribution and sales of our products in countries other than the U.S.
is subject to regulations in those countries. There can be no assurance that we
will be able to obtain the approvals necessary to market our products outside
the U.S.

Competition

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

         The leading suppliers of syringe needles and syringes with needles are
Becton Dickinson and Company ("Becton Dickinson") and Kendall . Terumo Medical
Corporation ("Terumo") holds a minor U.S. market share. B. Braun Medical is a
leader in Europe and Asia, while Terumo is a leader in Japan and the Pacific
Rim. In addition to us, other developers of safety syringe needles include
Med-Design Corporation, Bio-Plexus, Inc., New Medical Technologies, Retractable
Technologies, Inc., Medi-Hut Co., Inc., Medisys Technologies, Inc., and SIMS
Portex, Inc.

         Now Medical is the only supplier of a safety Huber needle product on
the market with a built-in safety feature or mechanism. Our LiftLoc(TM)
technology also incorporates a built-in safety mechanism and we believe provides
significant advantages versus the Now product. Our safety Huber needle product
is currently being used on patients in product evaluations at healthcare
facilities in multiple U.S. states.

         The leading suppliers in the blood collection needle market (phlebotomy
needles) are Becton Dickinson, Kendall and Terumo.

         The specialty needle market includes a wide variety of needles
including Huber, spinal, epidural, Seldinger, biopsy, dental, dialysis, plasma
apheresis, blood donor collection sets, introducer, PICC introducer, Veress and
opthalmic needles. Numerous companies compete within the various markets
associated with each of these needles. These companies include Arrow, Bard, B.
Braun Medical, Kendall, Cook Inc., Becton Dickinson, Horizon Medical Products,
Boston Scientific, Guidant, Bio-Plexus, Merit, Medtronic, Mannan, Hart, Baxter
International, Inc., Johnson & Johnson, Medamicus, Needle Tech, Mallinckrodt,
Inc., Terumo, Daum, U.S. Biopsy, Ballard and Abbott Laboratories.

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

         Conventional needle products have competed primarily on the basis of
price. In direct contrast, 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. Our technologies are
well suited for these markets and have led to discussions with some of the
companies identified above. We believe our products will perform well based on
product design features and provide attractive margins for us and our partners
at a reasonable cost to the end user.

Our 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." 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.

                                       12
<PAGE>

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 15, 2002, we employed 18 people, with all but four actively
engaged in our research and product development efforts. We expect to add
additional employees in the next 12 months. 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
June 30, 2003, subject to our right to extend the lease term for an additional
three years. The offices and laboratories comprise 17,273 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 manufacturing facilities in the future depending upon the volume of
products sold and the manufacturing arrangements we develop.

Item 3.  Legal Proceedings

         None

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

         We held our annual meeting of stockholders on November 6, 2001, at
which meeting several matters were submitted for approval by the stockholders.

         At the annual meeting, Guy J. Jordan, Ph.D., was nominated for election
to the class of directors whose term expires at the 2004 annual meeting of
stockholders. The stockholders elected Dr. Jordan by a vote of 10,904,776 for
and 0 withheld authority. The board is divided into three classes. One class of
directors is elected at each annual meeting of stockholders for a three-year
term. Each year a different class of directors are elected on a rotating basis.
The terms of the directors expire as follows: David W. Jahns and Robert R.
Walker in 2002; Stuart A. Randle and Donald D. Solomon, Ph.D. in 2003; and Guy
J. Jordan, Ph.D., Jeffrey M. Soinski and Stephen I. Shapiro in 2004.

         Stockholders also considered a proposal to approve a Series A Preferred
Stock Purchase Agreement, dated as of October 5, 2001, and the sale of up to
21,834,060 shares of Series A Preferred Stock to certain investors, including
Galen Partners. The stockholders approved the agreement by a vote of 10,885,576
in favor, 14,000 against and 5,200 abstained from voting.

         Stockholders then considered a proposal to approve an amendment to our
Certificate of Incorporation to increase the number of authorized shares from
55,000,000, comprised of 50,000,000 shares of common stock with a par value of
$.02 per share and 5,000,000 shares of preferred stock with a par value of $.001
per share, to 100,000,000 authorized shares, comprised of 70,000,000 shares of
common stock with a par value of $.02 per share and 30,000,000 shares of
preferred stock with a par value of $.001 per share. The stockholders approved
the amendment by a vote of 10,896,506 in favor, 3,070 against and 5,200
abstained from voting.

                                       13
<PAGE>

         Stockholders next considered a proposal to approve the Specialized
Health Products International, Inc. 2001 Stock Option Plan. The stockholders
approved the amendment by a vote of 10,797,006 in favor, 101,570 against and
6,200 abstained from voting.


                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


                                       14
<PAGE>

                                     PART II


Item 5.  Market for Common Equity and Related Stockholder Matters


Dividend Policy

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

         To date, we have not paid dividends on our common stock. The payment of
dividends on the common stock, if any, is at the discretion of the board and
will depend upon our earnings, if any, our capital requirements and financial
condition, and other relevant factors. See Item 6. "Management's Discussion and
Analysis or Plan of Operation." Moreover, we are prohibited from paying a
dividend on our common stock unless a dividend is also concurrently declared and
paid on the Series A Preferred Stock. In addition, no dividend paid on the
common stock may exceed the dividend paid on the Series A Preferred Stock. We do
not intend to declare any dividends in the foreseeable future, but instead
intend to retain all earnings, if any, for use in our operations.

Share Price History

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

         Quarter Ended                                 High          Low
         -------------                                 ----          ---
         2000
         ----
         March 31..............................         $1.06        $0.68
         June 30...............................         $1.31        $0.75
         September 30..........................         $1.68        $0.87
         December 31...........................         $1.50        $0.87

         2001
         ----
         March 31..............................         $1.25        $0.81
         June 30...............................         $0.95        $0.46
         September 30..........................         $0.83        $0.60
         December 31...........................         $1.90        $0.70


Holders of Record

         At March 15, 2002, there were approximately 314 holders of record of
our common stock. The number of holders of record was calculated by reference to
our stock transfer agent's books.

                                       15
<PAGE>

Issuance of Securities

         On November 6, 2001, our stockholders approved the issuance to Galen
Partners and other accredited and sophisticated investors of a total of
10,917,030 shares of Series A Preferred Stock for an aggregate purchase price of
$5 million, or $.458 per share. Galen Partners purchased its shares for
$3,500,000 and the other investors purchased their shares by canceling
$1,500,000 in debt we owed to them. The Series A Preferred Stock is immediately
convertible into the same number of shares of common stock and the conversion
rate is subject to adjustment if we issue additional shares of common stock for
an amount less than the then current conversion price and upon the happening of
certain other events.

         On the date of stockholder approval, our common stock was trading at
$1.48 per share. Because the Series A Preferred Stock is convertible immediately
into common stock on a one-for-one basis, a beneficial conversion feature
existed to the extent of the net proceeds received, which totaled $4,872,580.
This amount has been treated as a preferred stock dividend in the 2001 financial
statements.

         The Series A Preferred Stock Purchase Agreement also provides that the
investors have the right, but not the obligation to acquire an additional
10,917,030 shares of Series A Preferred Stock at $.458 per share ($5,000,000
total) during the 12 months following the initial closing date of November 7,
2001. If these shares are purchased, we would record an additional beneficial
conversion charge, limited to the net proceeds we receive. .

         As a condition precedent to the sale of the Series A Preferred Stock,
all of our outstanding Series G Warrants and the outstanding rights to acquire
Series H Warrants and common stock were terminated. In consideration for the
termination of these securities, we issued to holders of the Series G Warrants
784,638 shares of common stock (immediately prior to cancellation there were
outstanding Series G Warrants exercisable for 3,923,204 shares of common stock).
No additional consideration was given in connection with the cancellation of the
right to acquire the Series H Warrants and common stock.

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

         On November 7, 2001, we issued stock options exercisable for 50,000
shares of common stock in exchange for consulting services and extended the
expiration date of stock options exercisable for 250,000 shares of common stock
for our former president and CEO. These options are exercisable at $2.00 per
share and are exercisable through November 7, 2004.

         On November 14, 2001, we issued stock options exercisable for 4,584,690
shares of common stock to our employees and directors. Of these options, our new
president and CEO received options exercisable for 2,500,000 shares of common
stock, other executive officers received options exercisable for 1,055,000
shares of common stock, non-executive directors received stock options
exercisable for 700,000 shares of common stock and other employees received
stock options exercisable for 329,690 shares of common stock. These options are
exercisable at $1.19 per share and are exercisable for a 10 year term.

         On December 27, 2001, we issued stock options exercisable for 100,000
shares of common stock to a non-executive director. These options are
exercisable at $1.51 per share and are exercisable for a 10 year term. The
issuance of the options described above was exempt from registration pursuant to
Sections 4(2) and 4(6) of the Securities Act of 1933 and pursuant to Regulation
D as promulgated under the Securities Act of 1933.

         We did not use an underwriter in connection with these transactions.

                                       16
<PAGE>

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

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

Overview

         Our principal business is the design, development, manufacture, and
license of cost-effective, innovative safety healthcare products that minimize
the risk of accidental needle sticks, which are a leading cause of the spread of
blood-borne diseases such as HIV/AIDS, HBV and HCV. We have 20 highly
differentiated, patented safety needle technologies. These technologies apply to
almost all medical needles used today including: syringe, prefilled syringe, IV
catheter, Seldinger, PICC introducer needles, winged needle sets, blood
collection, epidural, spinal, plasma apheresis sets, dialysis sets, Huber,
biopsy, laparoscopy, lancets and other specialty needles.

Financial Position

         We had $3,371,407 in cash as of December 31, 2001. This is an increase
of $3,360,812 from December 31, 2000. Working capital (deficit) as of December
31, 2001 was $2,317,175 as compared to ($1,240,617) at December 31, 2000. These
increases were largely due to the $5 million investment by Galen Partners and
other investors.

Product Agreements

         In November 1999, we entered into a Development and License Agreement
(the "Kendall Agreement") with Kendall relating to the production of a line of
safety medical needle products, including six syringe products and five other
safety needle products. The Kendall Agreement became effective at the end of
March 2000. In April 2000, we received $1,464,956 under the Kendall Agreement
and will receive an additional $1,000,000 thirty months from the effective date
of the contract or upon the sale of commercial quantities of products, whichever
occurs first, in exchange for our assigning to Kendall the FlexLoc(R) and
ReLoc(TM) trademarks and two related patents 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 30 months from the
effective date of the contract or upon the sale of commercial quantities of
products, whichever occurs first. Kendall has received 510(k) clearance from the
FDA and anticipates launching the safety syringe needle in 2002.

         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 our LiftLoc(TM) Safety Infusion Set, which we
manufacture, to hospitals and group purchasing organizations. The Bard Agreement
excludes alternate sites 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 will sell finished product to Bard, and Bard is subject to minimum
purchase requirements. The Bard Agreement is for a two year period which
automatically renews for successive one-year terms unless terminated by Bard in
writing not less than 180 days prior to the expiration of the initial term or
any renewal term.

         In August 2001, we entered into an oral agreement with a pharmaceutical
company whereby it would provide development services on a specialized
application of one of its safety needle technologies. While a formalized
agreement has not yet been finalized related to this development project, we
billed and received payment for $169,677 in development fees. Expenses related
to this development project were expensed as incurred during 2001. As of

                                       17
<PAGE>

December 31, 2001, we have reflected deferred revenue of $169,677 related to
this development project.

         In January 2001, we entered into a License Agreement (the "Merit
Agreement") with Merit relating to the production 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 by us over the
estimated five year life of the Merit Agreement. The Merit Agreement provides
that we will receive ongoing royalties, including minimum royalty payments
beginning in 2002. Other long needle applications are in development.

         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 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 and product
licensing relationships.

Critical Accounting Policies

         Revenue Recognition

         Pursuant to Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements," we recognize license revenue when the
following criteria have been met: (1) persuasive evidence of an arrangement
exists, (2) delivery has occurred or services have been rendered, (3) the price
is fixed or determinable and (4) collectibility is reasonably assured.

         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 account for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS No. 121 requires that long-lived assets are reviewed for impairment when
events or changes in circumstances indicate that the book value of an asset may
not be recoverable. We evaluate, at each balance sheet date, whether events and
circumstances have occurred that indicate possible impairment. In accordance
with SFAS No. 121, we use an estimate of future undiscounted net cash flows of
the related asset or group of assets over the remaining life in measuring
whether the assets are recoverable. As of December 31, 2001, management did not
consider any of our long-lived assets to be impaired. During 2000, we adjusted
the estimated useful lives of certain computer equipment and software in order
to properly reflect the realizable value of the equipment and software as of
December 31, 2000, and recognized an additional $54,365 of depreciation expense.
See "Recent Accounting Pronouncements."

Years Ended December 31, 2001 and 2000

         During the year ended December 31, 2001, we had total operating revenue
of $520,074, compared with total operating revenue of $674,532 for the year
ended December 31, 2000. During 2001, we recognized $202,615 in development fee
revenue and $317,459 in technology fee revenue under the Kendall and JJM
Agreements. Costs incurred to generate the development fees were $206,974.
During 2000, we recognized $452,529 in development fee revenue and $222,003 in
technology fee revenue from the Kendall and JJM agreements. Costs incurred to
generate the development fees were $316,295. We will look to our product

                                       18
<PAGE>

agreements and additional development and strategic arrangements for future
revenue.

         Research and development expenses ("R&D") in 2001 were $1,815,082
compared to $1,463,564 in 2000. The increase was primarily due to costs incurred
in bringing the LiftLoc(TM) safety Huber needle product to market and R&D
personnel spending less time on billable development fee projects.

         General and administrative expenses were $2,109,226 in 2001 compared to
$2,099,960. The 2001 expenses include $316,974 in severance expenses related to
contractual obligations to the former CEO. Absent these severance expenses,
general and administrative expenses would have totaled $1,792,252 for 2001, a
decrease of $307,708 from 2000. It is anticipated that 2002 expenses will
approximate the adjusted 2001 expense level.

         Other income (expense) was ($64,714) in 2001 compared to $29,698 in
2000. The decrease was primarily due to $80,169 in interest expenses and finance
charges paid in 2001 compared to $0 in 2000.

         The net loss in 2001 (not including preferred stock dividends) was
$3,675,922, compared to $3,181,720 in 2000. The primary reason for the increased
loss was a reduction in revenue and an increase in R&D expense.

         On November 6, 2001, our stockholders approved the issuance to Galen
Partners and other accredited and sophisticated investors of a total of
10,917,030 shares of Series A Preferred Stock for an aggregate purchase price of
$5 million, or $.458 per share. Galen Partners purchased its shares for
$3,500,000 and the other investors purchased their shares by canceling
$1,500,000 in debt we owed to them. The Series A Preferred Stock is immediately
convertible into the same number of shares of common stock and the conversion
rate is subject to adjustment if we issue additional shares of common stock for
an amount less than the then current conversion price and upon the happening of
certain other events.

         On the date of stockholder approval, our common stock was trading at
$1.48 per share. Because the Series A Preferred Stock is convertible immediately
into common stock on a one-for-one basis, a beneficial conversion feature
existed to the extent of the net proceeds received, which totaled $4,872,580.
This amount has been treated as a preferred stock dividend in the 2001 financial
statements.

         The holders of Series A Preferred Stock are entitled to receive
dividends at the rate of eight percent per share per annum, payable
semi-annually, when, if and as declared by the board of directors out of any
assets legally available therefore. The right to dividends on the Series A
Preferred Stock is not cumulative, and the holders of Series A Preferred Stock
have no right to any accrued or future dividend payment by reason of the fact
that dividends on such shares are not declared or paid in any prior year. As of
December 31, 2001, no dividends had been declared or paid.

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

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

         Each share of Series A Preferred Stock shall be convertible at the
option of the holder thereof, at any time after the date of issuance of such

                                       19
<PAGE>

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

         The Series A Preferred Stock Purchase Agreement also provides that the
investors have the right, but not the obligation to acquire an additional
10,917,030 shares of Series A Preferred Stock at $.458 per share ($5,000,000
total) during the 12 months following the initial closing date of November 7,
2001. If these shares are purchased, we would record an additional beneficial
conversion charge, limited to the net proceeds we receive.

Liquidity and Capital Resources

         To date, we have financed our operations principally through private
placements of equity securities, the sale of technology and patents, advanced
royalties, development fees, technology and license fees and proceeds from the
exercise of common stock options. We generated $23,110,876 in net proceeds
through financing activities from inception through December 31, 2001. We used
net cash for operating activities of $2,889,601 during 2001. As of December 31,
2001, our working capital was $2,317,175 and our current liabilities were
$1,205,908.

         Our working capital requirements for the foreseeable future will vary
based upon a number of factors, including the costs to complete development
work, the cost of bringing safety medical needle technologies and other products
to commercial viability, the timing of the market launches of new safety needle
products and the level of sales. As of December 31, 2001, we had accounts
payable and accrued liabilities totaling $653,227 and the current portion of
deferred revenue of $552,681. As of March 15, 2002, we had not committed any
funds for capital expenditures. We estimate that we will need to raise at least
$1,000,000 in additional funds for 2002 to execute our business plan. If
investors under the Series A Preferred Stock Purchase Agreement acquire at least
$1,000,000 in Series A Preferred Stock then we do not expect a requirement for
additional funding during 2002. There can be no assurance that we will receive
any additional amounts under the Series A Preferred Stock Purchase Agreement,
that additional funding will be available to us or that if funding is available
that it will be under favorable terms. If we are unsuccessful in raising
additional funds we may be required to substantially reduce or eliminate certain
areas of our product development activities, limit our operations significantly
or cease operations entirely.

         As of March 15, 2002, we had granted stock options that were
exercisable for 6,057,500 shares of common stock at exercise prices ranging from
$1.00 to $2.625 per share and issued warrants that are exercisable for 1,050,000
shares of common stock at exercise prices of $1.25 and $2.00 per share. The
exercise of all such stock options and warrants would result in an equity
infusion of $9,676,419. A substantial number of these stock options and warrants
are out of the money and there can be no assurance that any of the stock options
or warrants will be exercised.

Recent Accounting Pronouncements

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

                                       20
<PAGE>

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

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

Contractual Obligations

         Our contractual obligations as of December 31, 2001 were as follows:

                                           Payments Due by Year
                                   --------------------------------------
  Obligation               Total        2002         2003      Thereafter
------------------------ --------- ----------- ------------ -------------
Operating leases         $451,220    $318,130     $133,090     $     -

         We lease office space under a noncancellable operating lease.

Recent Financing Activities

         On November 6, 2001, our stockholders approved the issuance to Galen
Partners and other accredited and sophisticated investors of a total of
10,917,030 shares of Series A Preferred Stock for an aggregate purchase price of
$5 million, or $.458 per share. Galen Partners purchased its shares for
$3,500,000 and the other investors purchased their shares by canceling
$1,500,000 in debt we owed to them. The Series A Preferred Stock is immediately
convertible into the same number of shares of common stock and the conversion
rate is subject to adjustment if we issue additional shares of common stock for
an amount less than the then current conversion price and upon the happening of
certain other events.

         On the date of stockholder approval, our common stock was trading at
$1.48 per share. Because the Series A Preferred Stock is convertible immediately
into common stock on a one-for-one basis, a beneficial conversion feature
existed to the extent of the net proceeds received, which totaled $4,872,580.
This amount has been treated as a preferred stock dividend in the 2001 financial
statements.

         The Series A Preferred Stock Purchase Agreement also provides that the
investors have the right, but not the obligation to acquire an additional
10,917,030 shares of Series A Preferred Stock at $.458 per share ($5,000,000
total) during the 12 months following the initial closing date of November 7,
2001. If these shares are purchased, we would record an additional beneficial
conversion charge, limited to the net proceeds we receive. There can be no
assurance that any additional shares of Series A Preferred Stock will be
purchased.

         As a condition precedent to the sale of the Series A Preferred Stock,
all of our outstanding Series G Warrants and the outstanding rights to acquire
Series H Warrants and common stock were terminated. In consideration for the
termination of these securities, we issued to holders of the Series G Warrants
784,638 shares of common stock (immediately prior to cancellation there were
outstanding Series G Warrants exercisable for 3,923,204 shares of common stock).
No additional consideration was given in connection with the cancellation of the
right to acquire the Series H Warrants or common stock.

                                       21
<PAGE>

Inflation

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

Risk Factors

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

         We have a history of losses and may never become profitable.

         We are a development stage company and have incurred total net losses
of $22,893,256 and have preferred stock dividends of $4,900,749 primarily
related to beneficial conversion features on preferred stock since inception,
November 1993. With the exception of the second quarter of 1999, all quarters
have had operating losses. Among other things, our ability to achieve
profitability is dependent on:

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

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

         o        Our ability to develop additional safety medical technologies.

There can be no assurance that we will become profitable.

         We do not have sufficient funding to execute our business plan.

         We estimate that we will need to raise at least $1,000,000 in
additional funding to fully execute our business plan. This funding is needed to
bring our safety medical needle technologies and other products to commercial
viability. We may be unsuccessful in obtaining additional funding or funding may
not be available on favorable terms. If we are unsuccessful in raising
additional funds it may result in the discontinuance of our business due to lack
of funding.

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

         We have entered into distribution and licensing arrangements with
Kendall, Bard and Merit. 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 and 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 products 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;

                                       22
<PAGE>

         o        We have limited sales and marketing capabilities, and do not
                  intend to build a sales and marketing infrastructure for
                  commercial sales of products;

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

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

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

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

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

         If our distribution and licensing partners are not successful in their
efforts to develop, market and sell our products it may result in the
discontinuance of our business due to lack of revenue.

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

         Under our licensing arrangements, we are primarily relying on licensees
to arrange for the commercial manufacture of products. These licensees generally
anticipate manufacturing our products at their own facilities, although it is
possible that in connection with future licenses or joint venture or similar
arrangements, we may rely on third-party manufacturers other than licensees or
manufacture selected products ourself. 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, 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.

         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 and safety Huber needle
products, 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.

                                       23
<PAGE>

         Even if we obtain the necessary approvals or clearances, later problems
with the product could cause the FDA to suspend or revoke the approvals or
clearances. Also, if the FDA authorizes marketing of products, our distribution
partners or licensees will be 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, Agency 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 may require us to seek separate clearance
or approval by the FDA of products manufactured in our facilities and to comply
with ongoing FDA requirements for submission of safety and other post market
information. If we engage in commercial manufacturing, we will be required to
adhere to requirements pertaining to the FDA's current QSR. The current QSR
requirements govern the methods, facilities and controls used for the
manufacture, testing, design, packaging, labeling and storage of medical
devices.

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

         There are negative pricing pressures on safety products.

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

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

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

         Our products may not be accepted by the market.

         The use of safety medical products, including our products, is
relatively new. Our products may not be accepted by the market and 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. Our products may not achieve market
acceptance and major medical products companies 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 applications for all of our products. 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 technology
through a combination of patents and other intellectual property arrangements.

                                       24
<PAGE>

The protection provided by our patents and patent applications, if issued, may
not be broad enough to prevent competitors from introducing similar products or
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 effect our ability to prosecute these patents. We also attempt to
protect our proprietary information through the use of confidentiality
agreements and by limiting access to our facilities. There can be no assurance
that our program of patents, confidentiality agreements and restricted access to
our facilities will be sufficient to protect our proprietary technology.

         We may not have adequate resources to manage anticipated growth.

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

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

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

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

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

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

         We are engaged in a highly competitive business and will compete
directly with companies that have longer operating histories, more experience,
substantially greater financial resources, greater size, more substantial
research and development and marketing organizations, and established
distribution channels that are better situated in the market than us. Our
competitors and potential competitors include Baxter International, B. Braun,
Becton Dickinson, Bio-Plexus, Inc., Boehringer Mannheim, Inc., Johnson & Johnson
Medical, Kendall, Maxon, Inc., Med-Design Corporation, Medi-Hut, Medisys PLC,
Miles, Inc., NMT Group PLC, Retractable Technologies, Inc., Surgicutt, Inc.,
Terumo and Univec, Inc. 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.

                                       25
<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 $5 million. In some
cases we have indemnification arrangements in place with strategic partners who
may be selling our products under our partner's label. There is no assurance
that we will maintain product liability insurance in the future, that such
insurance will be available or that we will not be subject to product liability
claims in excess of our insurance coverage.

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

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

         Limitations on director liability.

         Our Certificate of Incorporation provides, as permitted by Delaware
law, that our directors are not personally liable to the company or its
stockholders for monetary damages for any action or failure to take any action,
with specified exceptions. These provisions may discourage stockholders from
bringing suit against a director for breach of duty and may reduce the
likelihood of derivative litigation brought by stockholders on behalf of the
company against a director. In addition, we have agreed and our Certificate of
Incorporation and Bylaws provide for mandatory indemnification of directors and
officers to the fullest extent permitted by Delaware law and we have entered
into contracts with our directors and officers providing for such
indemnification.

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

         Our Certificate of Incorporation provides for the division of the board
of directors into three classes substantially equal in number. At each annual
meeting of stockholders one class of directors is to be elected for a three-year
term. Amendments to this provision must be approved by a two-thirds vote of all
the outstanding stock entitled to vote; the number of directors may be changed
by a majority of the entire board of directors or by a two-thirds vote of the
outstanding stock entitled to vote. Meetings of stockholders may be called only
by the board of directors, our CEO or our president, and stockholder action may
not be taken by written consent. These provisions could have the effect of (i)
discouraging attempts at non-negotiated takeovers which 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 upon conversion of the
Series A Preferred Stock), or the perception that such sales may occur, could
adversely affect the trading price of our common stock.

                                       26
<PAGE>

         We do not anticipate paying dividends in the foreseeable future.

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

         Our common stock is subject to dilution.

         As of December 31, 2001, there were 17,921,479 shares of our common
stock issued and outstanding. On this date we also had outstanding 10,917,030
shares of Series A Preferred Stock which is convertible into the same number of
shares of common stock . The conversion rate of the Series A Preferred Stock can
be adjusted upon the happening of certain triggering events. In addition, an
aggregate of 7,107,500 additional shares of our common stock are issuable
pursuant to stock options granted under our stock option plans and warrant
agreements.

         Additionally, as of December 31, 2001 there are 10,917,030 shares of
Series A Preferred Stock outstanding, which are convertible into common stock on
a one-for-one basis. Should the Series A Preferred stockholders opt to acquire
additional shares in accordance with the terms of the Series A Preferred Stock
Purchase Agreement, an additional beneficial conversion charge, limited to the
net proceeds received, would be treated as a preferred stock dividend and impact
the calculation of net loss per common share.

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

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

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

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

Item 7.  Financial Statements

         See index to consolidated financial statements and consolidated
financial statement schedules included herein as Item 13.

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

         None.

                                       27
<PAGE>

                                    PART III

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

         Set forth below is certain information concerning each of our directors
and executive officers as of March 15, 2002.
<TABLE>
<CAPTION>
                                                                                                    With the
               Name                    Age                        Position                       Company Since
               ----                    ---                        --------                       -------------
      <S>                              <C>    <C>                                                     <C>
      Jeffrey M. Soinski (1)           40     President, Chief Executive Officer and Director         2001

      Guy J. Jordan, Ph.D. (2)(3)      53     Chairman of the Board                                   2001

      Donald D. Solomon, Ph.D. (1)     51     Vice President, Chief Operating Officer, Chief          2000
                                                Technical Officer and Director

      Paul S. Evans (1)                39     Vice President, General Counsel and Secretary           2000

      Keith L. Merrell                 56     Controller, Acting Chief Financial Officer and          2000
                                              Treasurer

      David W. Jahns (2)(3)            36     Director                                                2001

      Stuart A. Randle                 42     Director                                                2001

      Stephen I. Shapiro (3)           57     Director                                                2001

      Robert R. Walker (2)             71     Director                                                1994
---------------
</TABLE>
(1)      Member of Executive Committee.
(2)      Member of Audit Committee.
(3)      Member of Compensation Committee.

         Jeffrey M. Soinski. Mr. Soinski is our President, Chief Executive
Officer and a director. Mr. Soinski brings 19 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, using the skin and
mucosa as the primary route of administration. 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. He also served on the board of BigStar
Entertainment Inc., and has since resigned. Mr. Soinski has a BA degree from
Dartmouth College.

         Guy J. Jordan, Ph.D. Dr. Jordan is our Chairman of the board. Dr.
Jordan brings over 20 years of senior management healthcare experience to us,
with a strong focus in the areas of vascular disease and oncology. Dr. Jordan is
currently 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. Dr. Jordan has been with C.R. Bard
since 1986. Prior to joining C.R. Bard, 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.

         Donald D. Solomon, Ph.D. Dr. Solomon is Chief Operating Officer, Chief
Technology Officer, a Vice President and a director. He joined us in October
2000 and has served as a director since March 2001. Dr. Solomon brings 23 years

                                       28
<PAGE>

of medical product experience in research, product development, engineering and
manufacturing to us. Dr. Solomon was the Vice President of Research and
Development at Johnson & Johnson Medical - Vascular Access from 1997 to 2000.
Prior to Johnson & Johnson Medical, Dr. Solomon spent 14 years at Becton
Dickinson ("BD"), including 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 General Counsel, a Vice-President and
corporate Secretary. Mr. Evans joined us in June 2000. He manages our
intellectual property portfolio and corporate legal matters, and is extensively
involved in business development efforts. Mr. Evans brings a wide range of
intellectual property and corporate legal experience to us, having previously
served as Vice-President, General Counsel for two R&D companies (1994 to 2000),
and as a patent attorney with the law firm of Snow, Christensen & Martineau.
Prior to earning his law degree, Mr. Evans worked as a Project/Design Engineer
for Morton International (now Autoliv). Mr. Evans holds BS and JD 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 28 years
of accounting experience to manage all of our accounting functions and to
interface with our independent public accountants. He spent two years in the
field of public accounting, and served as Chief Financial Officer or Controller
of four companies prior to his joining us. His business career also includes
extensive experience in management, sales and marketing, and consulting. He
served as Vice President - Western Operations for Michelex, an injection molding
company with corporate headquarters in New York, from 1998 to 2000. From 1991 to
1998 he served as Director of Finance for The Duplication Group, planning,
implementing and bringing online the first CD manufacturing facility in the
intermountain area. He graduated from Arizona State University with a BS degree
in Accounting.

         David W. Jahns. Mr. Jahns serves as one of our directors. 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 successful 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. Mr. Randle
is a highly experienced healthcare executive with over 20 years of operating
successes. He is the past President and CEO of ACT Medical, Inc., a leading
company providing outsourcing services to the medical device, biotech and
diagnostic industries. He joined ACT Medical, Inc. in 1998. Mr. Randle 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. Mr.
Shapiro brings over 30 years of relevant medical device and equipment industry
experience us, 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 of the premier healthcare venture capital firms,

                                       29
<PAGE>

including Galen Partners. He currently serves on the board of Noveste
Corporation. Mr. Shapiro has a BS degree from the Massachusetts Institute of
Technology and an MS degree in biomedical engineering from the University of
California, Berkley.

         Robert R. Walker. Mr. Walker serves as one of our directors. 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, from which he retired as
President of IHC Affiliated Services. He is also a former Chairman of the board
of AmeriNet, Inc., which is a national group purchasing organization for
hospitals, clinics, detox/drug centers, emergency, nursing homes, private
laboratories, psychiatric centers, rehabilitation facilities, surgical centers
and institutions such as schools and prisons. Mr. Walker is a member of the
American Hospital Association and the Hospital Financial Management Association.
He holds a Bachelor of Science degree in Business Administration from the
University of Utah.

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

Section 16(a) Beneficial Ownership Reporting Compliance

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

         Based solely on our review of forms furnished to us and representations
from reporting persons, we believe that all filing requirements applicable to
our executive officers, directors and more than 10% stockholders were complied
with during 2001.

Item 10. Executive Compensation

         The tables below set forth certain information concerning compensation
paid by us to our Chief Executive Officer and all other executive officers with
annual compensation in excess of $100,000 (determined for the year ended
December 31, 2001) (the "Named Executive Officers"). The tables include
information related to stock options granted to the Named Executive Officers.

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

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

Donald D. Solomon, Ph.D.     2000    31,942      ---          1,375            ---       100,000       ---            ---
(3),
VP, CTO, COO & director      2001   165,000      ---          8,250            ---       600,000       ---           273(4)

Paul S. Evans (3), VP        2000    86,798      ---          2,406           28,125     100,000       ---           268(4)
General Counsel &            2001   165,000      ---          7,219            ---       400,000       ---           460(4)
secretary

Keith L. Merrell (3)         2000    41,250      ---          2,062            ---        50,000       ---           179(4)
Controller & Treasurer       2001    90,000      ---          4,500            ---        55,000       ---           410(4)

                                       30
<PAGE>
<CAPTION>
                                             Annual Compensation                    Awards           Payouts
                                             -------------------                    ------           -------
                                                                            Restricted  Stock                     All Other
        Name and                                           Other Annual     Stock       Options/    LTIP        Compensation
    Principal Position       Year  Salary ($)  Bonus($)  Compensation($)(1) Awards ($)    SAR(#)    Payouts($)       ($)
----------------------       ----  ----------  ------    ------------------ ----------    ------    ----------  -------------
<S>                          <C>    <C>          <C>         <C>            <C>       <C>             <C>        <C>
David A. Robinson,           1999   225,416      ---         10,000            ---         ---         ---        68,508(5)
Former President, CEO,       2000   190,000      ---          9,500            ---       300,000(6)    ---        12,180(4)
Chairman & director          2001   190,000      ---          7,916            ---        50,000(6)    ---        39,306(5)
---------------
</TABLE>

(1)  These amounts represent payments by us into our 401(k) retirement plan for
     the benefit of the Named Executive Officer.
(2)  Mr. Soinski joined SHPI in November 2001. Salary represents partial year
     from the date of his employment.
(3)  Dr. Solomon and Messrs. Evans and Merrell joined SHPI in 2000. Salaries for
     2000 represent partial year from the date of their employment.
(4)  Represents amounts paid by us for life insurance on the lives of Mr.
     Robinson, Dr. Solomon, Mr. Evans and Mr. Merrell with insurance proceeds
     payable to the beneficiary designated by them.
(5)  This represents payment of accrued vacation, $67,400 in 1999 which was used
     to pay off a subscription receivable in a non-cash transaction, and $28,880
     in 2001 that was paid at the time Mr. Robinson left the employment of the
     Company. The balance of the amount shown represent amounts paid by us for
     life insurance on the life of Mr. Robinson with insurance proceeds payable
     to the beneficiary designated by him.
(6)  On September 2, 2000, the board granted Mr. Robinson options to acquire
     300,000 shares with a three-year term. We then authorized Mr. Robinson to
     transfer options to purchase 50,000 of these shares to a third party. In
     November 2001, the board modified the term of the remaining options to
     purchase 250,000 shares by extending the expiration date to November 2004
     and granted Mr. Robinson options to acquire an additional 50,000 shares for
     a similar term.

         Option Grants in Fiscal Year 2001. The following table sets forth
certain information with respect to stock options grants during the year ended
December 31, 2001 to Named Executive Officers.
<TABLE>
<CAPTION>
                                         OPTION/SAR GRANTS IN LAST FISCAL YEAR
                                                  (Individual Grants)

                                 Number of        Percent of Total
                                Securities           Options/SAR
                                Underlying           Granted to
                                Options/SAR         Employees in       Exercise or Base
            Name              Granted (#) (1)        Fiscal Year        Price ($/Share)    Expiration Date
            ----              ---------------        -----------        ---------------    ---------------
   <S>                          <C>                     <C>                 <C>               <C>
   Jeffrey M.  Soinski           2,500,000               50%                 $1.19             11/14/11
   Donald D. Solomon, Ph.D.        600,000               12%                 $1.19             11/14/11
   Paul S. Evans                   400,000                8%                 $1.19             11/14/11
   Keith L. Merrell                 55,000                1%                 $1.19             11/14/11
   David A. Robinson                50,000 (2)            1%                 $2.00             11/07/04
</TABLE>

(1)      These options were granted pursuant to our 2001 Stock Option Plan with
         the exception of the options granted to Mr. Robinson, which were
         granted under the 2000 Stock Option Plan.
(2)      On September 2, 2000, the board granted Mr. Robinson options to acquire
         300,000 shares with a three-year term and subsequently authorized Mr.
         Robinson to transfer options to purchase 50,000 of these shares to a
         third party. In November 2001, the board modified the term of the
         remaining options to purchase 250,000 shares by extending the
         expiration date to November 2004 and granted Mr. Robinson options to
         acquire an additional 50,000 shares for a similar term.

                                       31
<PAGE>

Compensation of Directors

         No cash fees or other consideration were paid to our employee directors
for service on the board during 2001. During 2001, Mr. Walker received cash
payments of $7,500 and stock options to acquire 112,000 shares for service on
the board. Dr. Jordan received stock options exercisable for 400,000 shares for
service on the board. Messrs. Jahns and Shapiro each received stock options
exercisable for 100,000 shares for service on the board. We do not plan on
providing cash compensation in 2002. We have made no other agreements regarding
compensation of non-employee directors. All directors are entitled to
reimbursement for reasonable expenses incurred in the performance of their
duties as board members.

Employment and Indemnity Agreements

         We have entered into an employment agreement with Mr. Soinski. The
employment agreement with provides that (i) Mr. Soinski receive a salary of
$240,000 per year in addition to performance based bonuses; (ii) Mr. Soinski
receive stock options to acquire 2.5 million shares of our common stock at
market value on the date of grant which stock options vest over a four-year
period; (iii) Mr. Soinski be reimbursed for relocation expenses in an amount not
to exceed $75,000; (iv) Mr. Soinski is entitled to vacation pay, health
insurance and life insurance; (v) Mr. Soinski's employment contract may be
terminated at any time by us; (vi) if the employment of Mr. Soinski is
terminated by reason of disability, death or for cause, his salary and benefits
(except as otherwise required by law) will terminate as of the date of
termination; (vii) if Mr. Soinski is terminated for reasons other than
disability, death or for cause, then Mr. Soinski's salary and medical benefits
will continue for a period of 18 months from the date of termination and his
other benefits will cease as of the date of termination.

         We have entered into an employment agreement with Donald D. Solomon,
Ph.D. Dr. Solomon's employment agreement, as amended, provides that (i) Dr.
Solomon receive a salary of $190,000 per year; (ii) Dr. Solomon's current
employment agreement expires on October 23, 2004; (iii) Dr. Solomon is entitled
to vacation pay, health insurance and life insurance; (iv) Dr. Solomon's
employment contract may be terminated at any time by us; (v) if the employment
of Dr. Solomon is terminated by reason of disability, death or for cause, his
salary and benefits (except as otherwise required by law) will terminate as of
the date of termination; (vi) if Dr. Solomon is terminated for reasons other
than disability, death or for cause, then Dr. Solomon's salary and medical
benefits will continue for a period of 12 months from the date of termination
and his other benefits will cease as of the date of termination.

         We have entered into an employment agreement with Mr. Paul S. Evans.
Mr. Evans' employment agreement, as amended, provides that (i) Mr. Evans receive
a salary of $175,000 per year; (ii) Mr. Evans' current employment agreement
expires on June 12, 2003; (iii) Mr. Evans is entitled to vacation pay, health
insurance and life insurance; (iv) Mr. Evans' employment contract may be
terminated at any time by us; (v) if the employment of Mr. Evans is terminated
by reason of disability, death or for cause, his salary and benefits (except as
otherwise required by law) will terminate as of the date of termination; (vi) if
Mr. Evans is terminated for reasons other than disability, death or for cause,
then Mr. Evans' salary and medical benefits will continue for a period of 12
months from the date of termination and his other benefits will cease as of the
date of termination.

         We have entered into an employment agreement with Mr. Keith L. Merrell.
Mr. Merrell's employment agreement, as amended, provides that (i) Mr. Merrell
receive a salary of $102,000 per year; (ii) Mr. Merrell's current employment
agreement expires December 31, 2002; (iii) Mr. Merrell is entitled to vacation
pay, health insurance and life insurance; (iv) Mr. Merrell's employment contract
may be terminated at any time by us; (v) if the employment of Mr. Merrell is
terminated by reason of disability, death or for cause, his salary and benefits
(except as otherwise required by law) will terminate as of the date of
termination; (vi) if Mr. Merrell is terminated for reasons other than
disability, death or for cause, then Mr. Merrell's salary and medical benefits
will continue for a period of three months from the date of termination and his
other benefits will cease as of the date of termination.

                                       32
<PAGE>

         In February 2002, we approved a 2002 Executive Officer Bonus Plan.
Under the plan executive officers eligible for bonuses during 2002 include the
CEO, COO and General Counsel. Plan participants will earn 20% of their annual
salary based upon 100% achievement of the overall revenue goal outlined in our
approved budget plan. Also, plan participants will be eligible to receive
incremental bonus payments for performing beyond the budget plan. The amount of
incremental payments, if earned, will be based upon the recommendation of the
Compensation Committee and approved by the board of directors. The maximum base
bonus that could be paid under this plan is $121,000. In connection with this
plan, we also adopted an Employee Bonus Plan for employees other than the Named
Executive Officers to reward specific individual or team achievements during
2002.

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

401(k) Retirement Plan

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

Accrued Vacation Pay

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

Indemnification for Securities Act Liabilities

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

Stock Options and Warrants

         In November 2001, our stockholders approved the adoption of the
Specialized Health Products International, Inc. 2001 Stock Option Plan (the
"2001 Option Plan"). The 2001 Option Plan permits us to grant "non-qualified
stock options" and "incentive stock options" to acquire our common stock. The
total number of shares authorized for the Option Plan may be allocated by the
board between the non-qualified stock options and the incentive stock options
from time to time, subject to certain requirements of the Internal Revenue Code
of 1986, as amended. The option exercise price per share under the Option Plan
may not be less than the fair market value of a share of common stock on the
date on which the option is granted. A total of 5,000,000 shares are allocated
to the Option Plan. As of March 15, 2002, options to acquire an aggregate of
4,684,690 shares of common stock at exercise prices ranging from $1.19 to $1.51
were outstanding under the Option Plan.

                                       33
<PAGE>

         Prior to the adoption of the 2001 Option Plan, we had been issuing
stock options under stock options plans that preceded the 2001 Option Plan
("Prior Plans"). We do not intend to issue any additional options under the
Prior Plans. As of March 15, 2002, options to acquire an aggregate of 1,372,810
shares of common stock at exercise prices ranging from $1.00 to $2.625 were
outstanding under Prior Plans.

Compensation Committee Interlocks and Insider Participation

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

Item 11. Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of March 15, 2002, for: (i) each
person who is known by us to beneficially own more than five percent of our
common stock, (ii) each of our directors, (iii) each of our Named Executive
Officers, and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
                                      Shares
       Name and Address            Beneficially          Percentage of
    of Beneficial Owner(1)           Owned(2)              Total(2)                 Position
    ----------------------           --------              --------                 --------
<S>                                <C>                     <C>                 <C>
Jeffrey M. Soinski (3)                      --                    *            President, CEO and director

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

Donald D. Solomon, Ph.D. (5)           157,774                    *            Vice President, COO, CTO and
                                                                                Director

Paul S. Evans (6)                      177,402                    *            Vice President, General
                                                                                Counsel, Secretary and
                                                                                Director

Keith L. Merrell (7)                    95,566                    *            Controller, Acting CFO and
                                                                                Treasurer

David W. Jahns (8)                          --                    *            Director

Stuart A. Randle (9)                        --                    *            Director

Stephen I. Shapiro (9)                      --                    *            Director

Robert R. Walker (10)                  155,000                    *            Director

Executive Officers and                 490,176                 1.7%
 Directors as a Group
 (9 persons)

Galen Partners III, L.P. and        15,283,844                42.0%
 affiliates (11)

* 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)  The amounts reported in these columns were calculated assuming the
     conversion as of March 15, 2002 of all 10,917,030 outstanding shares of our
     Series A Preferred Stock into the same number of shares of common stock,

                                       34
<PAGE>

     for an assumed total of 28,838,509 shares of common stock outstanding. The
     Series A Preferred Stock in convertible on a one-for-one basis, subject to
     adjustment if we issue additional shares of common stock for an amount less
     than the then current conversion price and upon the happening of certain
     other events. In addition, 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)  Does not include options to acquire 2,500,000 shares of common stock. The
     options exercisable for 625,000 shares vest on November 14, 2002 and the
     remaining options vest, in cumulative fashion, in equal monthly
     installments beginning on the one year anniversary of the date of grant and
     ending on the four year anniversary of the date of grant.
(4)  Does not include options to acquire 400,000 shares of common stock. The
     options exercisable for 133,333 shares vest on November 14, 2002 and the
     remaining options vest, in cumulative fashion, in equal monthly
     installments beginning on the one year anniversary of the date of grant and
     ending on the four year anniversary of the date of grant.
(5)  Includes 10,000 shares of common stock, 32,751 shares of Series A Preferred
     Stock that is immediately convertible into the same number of shares of
     common stock, 15,023 shares of common stock purchased through our 401(k)
     plan and options to acquire 100,000 shares of common stock that are
     immediately exercisable. Does not include unvested options to acquire
     600,000 shares of common stock. Unvested options exercisable for 150,000
     shares vest on November 14, 2002 and the remaining options vest, in
     cumulative fashion, in equal monthly installments beginning on the one year
     anniversary of the date of grant and ending on the four year anniversary of
     the date of grant.
(6)  Includes 61,000 shares of common stock, 16,402 shares of common stock
     purchased through our 401(k) plan and options to acquire 100,000 shares of
     common stock that are immediately exercisable. Does not include unvested
     options to acquire 400,000 shares of common stock. Unvested options
     exercisable for 100,000 shares vest on November 14, 2002 and the remaining
     options vest, in cumulative fashion, in equal monthly installments
     beginning on the one year anniversary of the date of grant and ending on
     the four year anniversary of the date of grant.
(7)  Includes 36,000 shares of common stock, 9,566 shares of common stock
     purchased through our 401(k) plan and options to acquire 50,000 shares of
     common stock that are immediately exercisable. Does not include unvested
     options to acquire 55,000 shares of common stock. Unvested options
     exercisable for 37,500 shares vest on November 14, 2002 and the remaining
     options vest, in cumulative fashion, in equal monthly installments
     beginning on the one year anniversary of the date of grant and ending on
     the four year anniversary of the date of grant.
(8)  Does not include options to acquire 100,000 shares of common stock. The
     options exercisable for 33,333 shares vest on November 14, 2002 and the
     remaining options vest, in cumulative fashion, in equal monthly
     installments beginning on the one year anniversary of the date of grant and
     ending on the four year anniversary of the date of grant. Does not include
     shares held by Galen Partners III, L.P. David Jahns is a member of
     Claudius, L.L.C., a Delaware limited liability company, and a general
     partner of Galen Partners III, L.P. and Galen Partners International III,
     L.P. See note (10) below.
(9)  Does not include options to acquire 100,000 shares of common stock. The
     options exercisable for 33,333 shares vest on November 14, 2002 and the
     remaining options vest, in cumulative fashion, in equal monthly
     installments beginning on the one year anniversary of the date of grant and
     ending on the four year anniversary of the date of grant.
(10) Includes stock options to purchase 74,000 shares of common stock that are
     immediately exercisable and 63,000 shares of common stock that Mr. Walker
     is deemed to beneficially own through a trust. Does not include unvested
     options to acquire 100,000 shares of common stock. Unvested options
     exercisable for 33,333 shares vest on November 14, 2002 and the remaining
     options vest, in cumulative fashion, in equal monthly installments
     beginning on the one year anniversary of the date of grant and ending on
     the four year anniversary of the date of grant.
(11) Information regarding Galen Partners III, L.P. and its affiliates is
     derived from the Schedule 13D filed by Galen Partners III, L.P. with the
     Securities and Exchange Commission on November 16, 2001. Shares owned

                                       35
<PAGE>

     represent 6,981,397 shares of Series A Preferred Stock held of record by
     Galen Partners III, L.P. and the option of Galen Partners III, L.P. to
     acquire an additional 6,981,397 shares of Series A Preferred Stock on or
     before November 7, 2002, 631,937 shares of Series A Preferred Stock held of
     record by Galen Partners International III, L.P. and the option of Galen
     Partners International III, L.P. to acquire an additional 631,937 shares of
     Series A Preferred Stock on or before November 7, 2002, and 28,588 shares
     of Series A Preferred Stock held of record by Galen Employee Fund III, L.P.
     and the option of Galen Employee Fund III, L.P. to acquire an additional
     631,937 shares of Series A Preferred Stock on or before November 7, 2002.
     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.

Item 12. Certain Relationships and Related Transactions

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

         On November 7, 2001, our stockholders approved the issuance to Galen
Partners and other accredited and sophisticated investors of a total of
10,917,030 shares of Series A Preferred Stock for an aggregate purchase price of
$5 million, or $.458 per share. Galen Partners purchased their shares for
$3,500,000 and the other investors purchased their shares in exchange for the
cancellation of $1,500,000 of debt. The Series A Preferred Stock is immediately
convertible into the same number of shares of our common stock and the
conversion rate is subject to adjustment if we issue additional shares of common
stock for an amount less than the then current conversion price and upon the
happening of certain other events.

         The Series A Preferred Stock Purchase Agreement also provides that the
investors that are a party to the agreement have the right to acquire an
additional 10,917,030 shares of Series A Preferred Stock at $.458 per share ($5
million total) during the 12 months following the initial closing date of
November 7, 2001. There can be no assurance that any additional shares of Series
A Preferred Stock will be purchased.

         As a condition precedent to the sale of the Series A Preferred Stock,
all of our outstanding Series G Warrants and the outstanding rights to acquire
Series H Warrants and common stock were terminated. In consideration for the
termination of these securities, we issued to holders of the Series G Warrants
784,638 shares of common stock (immediately prior to cancellation there were
outstanding Series G Warrants exercisable for 3,923,204 shares of common stock).
No additional consideration was given in connection with the cancellation of the
right to acquire the Series H Warrants.

Item 13. Exhibits and Reports on Form 8-K

Exhibits

         Listed on page 38 hereof.

Reports on Form 8-K

         A report on Current Report on Form 8-K, filed November 8, 2001,
reporting a change in control and receipt of funding under the Series A
Preferred Stock Purchase Agreement.

                                       36
<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 15, 2002                           By  /s/ Jeffrey M. Soinski
                                                  -----------------------
                                                  Jeffrey M. Soinski
                                                  President, Chief Executive
                                                  Officer and Director


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

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

 /s/ Jeffrey M. Soinski         President, Chief Executive       March 15, 2002
-----------------------------   Officer and Director (Principal
Jeffrey M. Soinski              Executive Officer)


 /s/ Keith L. Merrell           Controller, Acting Chief         March 15, 2002
-----------------------------   Financial Officer and
 Keith L. Merrell               Treasurer (Principal Financial
                                and Accounting Officer)


 /s/ Guy J. Jordan, Ph.D.       Chairman of the Board            March 15, 2002
-----------------------------
 Guy J. Jordan, Ph.D.


 /s/ Donald D. Solomon, Ph.D.   Director, Vice President,        March 15, 2002
-----------------------------   COO and CTO
Donald D. Solomon, Ph.D.


 /s/ David W. Jahns             Director                         March 15, 2002
-----------------------------
David W. Jahns


 /s/ Stuart A. Randle           Director                         March 15, 2002
-----------------------------
Stuart A. Randle


 /s/ Stephen I. Shapiro         Director                         March 15, 2002
-----------------------------
Steve I. Shapiro


 /s/ Robert R. Walker           Director                         March 15, 2002
-----------------------------
Robert R. Walker

                                       37
<PAGE>

                                  EXHIBIT INDEX

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

3(i).1         Restated Certificate of Incorporation of the Company.
               (Incorporated by reference to Exhibit 3(i).1 of the Company's
               Form 10-QSB, dated September 30, 2001).

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

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

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

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

3(ii).2        Bylaws of SHP (Incorporated by reference to Exhibit 3(ii).2 of
               the Company's 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.

10.3           Employment Agreement with Mr. Paul S. Evans

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

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

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

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

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

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

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

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

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

                                       38
<PAGE>


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

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

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

99.1           Letter from the Company to the Securities and Exchange Commission

                                       39
<PAGE>

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

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




                                                                     Page


Report of Independent Public Accountants                             F - 2

Consolidated Balance Sheet as of December 31, 2001                   F - 3

Consolidated Statements of Operations for the Years Ended
  December 31, 2001 and 2000 and for the Period
  from Inception to December 31, 2001                                F - 5

Consolidated Statements of Stockholders' Equity (Deficit)
  for the Years Ended December 31, 2001 and 2000 and
  for the Period from Inception to December 31, 2001                 F - 6

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2001 and 2000 and for the Period
  from Inception to December 31, 2001                                F - 11

Notes to Consolidated Financial Statements                           F - 13

                                      F-1
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Specialized Health Products International, Inc.:

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

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits and the reports of the other
auditors provide a reasonable basis for our opinion.

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

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


ARTHUR ANDERSEN LLP

Salt Lake City, Utah
March 8, 2002

                                      F-2
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)

CONSOLIDATED BALANCE SHEET

                                                                                      December 31,
                                                                                          2001
                                                                                 ----------------------
<S>                                                                                 <C>
Assets
Current assets:
   Cash                                                                             $     3,371,407
   Accounts receivable                                                                      100,550
   Notes receivable, net                                                                      2,132
   Prepaid expenses and other                                                                48,994
                                                                                 ----------------------
       Total current assets                                                               3,523,083
                                                                                 ----------------------
Property and equipment, net:
   Research and development machinery and equipment                                         294,061
   Office furniture and fixtures                                                            171,063
   Computer equipment and software                                                          164,180
   Leasehold improvements                                                                   134,869
   Manufacturing equipment                                                                   44,135
   Construction-in-progress                                                                  71,300
                                                                                 ----------------------
                                                                                            879,608
   Less accumulated depreciation and amortization                                          (662,238)
                                                                                 ----------------------
       Total property and equipment, net                                                    217,370
                                                                                 ----------------------
Other assets                                                                                 27,000
                                                                                 ----------------------
                                                                                    $     3,767,453
                                                                                 ======================

          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)

CONSOLIDATED BALANCE SHEET (Continued)
                                                                                      December 31,
                                                                                          2001
                                                                                 ----------------------
<S>                                                                                 <C>
Liabilities and stockholders' equity
Current liabilities:
   Accounts payable                                                                 $        92,541
   Accrued liabilities                                                                      560,686
   Deferred revenue                                                                         552,681
                                                                                 ---------------------
       Total current liabilities                                                          1,205,908
Deferred revenue, net of current portion                                                    745,985
Unamortized rent                                                                             32,102
                                                                                 ---------------------
       Total liabilities                                                                  1,983,995
                                                                                 ---------------------
Commitments and contingencies (Notes 1, 4, and 6)

Stockholders' equity:
   Series A preferred stock, $.001 par value; 30,000,000 shares authorized,
     10,917,030 shares issued and outstanding (liquidation preference of
     $5,066,667)                                                                             10,917
   Common stock, $.02 par value; 70,000,000 shares authorized, 17,921,479
     shares outstanding                                                                     358,430
   Additional paid-in capital (common and preferred)                                     29,227,189
   Deferred compensation expense                                                            (19,073)
   Deficit accumulated during the development stage                                     (27,794,005)
                                                                                 ---------------------
       Total stockholders' equity                                                         1,783,458
                                                                                 ---------------------
       Total liabilities and stockholders' equity                                   $     3,767,453
                                                                                 =====================
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)

CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                                   Period from
                                                             Years Ended December 31,              Inception to
                                                     ------------------------------------------    December 31,
                                                             2001                 2000                 2001
                                                     ----------------------------------------------------------------
<S>                                                    <C>                  <C>                 <C>
Revenue:
   Technology fees and licensing revenue               $       317,459      $        222,003    $        4,289,462
   Development fees and related services                       202,615               452,529             3,035,025
   Net product sales                                               -                     -                 748,228
                                                     ----------------------------------------------------------------
       Total revenue                                           520,074               674,532             8,072,715
                                                     ----------------------------------------------------------------
Cost of revenue:
   Cost of development fees and related services               206,974               316,295             2,236,637
   Cost of product sales                                           -                     -                 536,002
                                                     ----------------------------------------------------------------
       Total cost of revenue                                   206,974               316,295             2,772,639
                                                     ----------------------------------------------------------------
       Gross profit                                            313,100               358,237             5,300,076
                                                     ----------------------------------------------------------------
Operating expenses:
   Selling, general and administrative                       2,109,226             2,099,960            18,668,088
   Research and development                                  1,815,082             1,463,564             8,753,389
   Loss on disposal of operating assets, net                   -                       6,131             1,286,688
                                                     ----------------------------------------------------------------
       Total operating expenses                              3,924,308             3,569,655            28,708,165
                                                     ----------------------------------------------------------------
Loss from operations                                        (3,611,208)           (3,211,418)          (23,408,089)
                                                     ----------------------------------------------------------------
Other income (expense):
   Interest income                                              15,185                22,697               558,032
   Interest expense                                            (79,040)                  -                (102,698)
   Other income (expense), net                                    (859)                7,001                59,499
                                                     ----------------------------------------------------------------
       Other income (expense), net                             (64,714)               29,698               514,833
                                                     ----------------------------------------------------------------
Net loss                                                    (3,675,922)           (3,181,720)          (22,893,256)
Less preferred stock dividends                              (4,872,580)                  -              (4,900,749)
                                                     ----------------------------------------------------------------

Net loss applicable to common shares                   $    (8,548,502)     $     (3,181,720)   $      (27,794,005)
                                                     ================================================================

Basic and diluted net loss per common share            $          (.56)     $           (.26)
                                                     ==========================================
Basic and diluted weighted average number of common
   shares outstanding                                       15,190,026            12,393,024
                                                     ==========================================
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                                                                                                                            Deficit
                                                                                                                            Accumu-
                                                                                   Series C  Series D                        lated
                                                               Common              Warrants  Warrants                        During
                        Series A                               Stock                 to         to                Deferred    the
                     Preferred Stock          Common Stock    Subscrip- Additional Purchase  Purchase             Compen-   Develop-
                   -----------------------------------------    tions    Paid-in   Common     Common  Advance to  sation     ment
                     Shares     Amount    Shares     Amount   Receivable  Capital    Stock     Stock   Stockholder Expense    Stage
                   -----------------------------------------------------------------------------------------------------------------
<S>                <C>        <C>       <C>        <C>       <C>        <C>        <C>       <C>        <C>       <C>     <C>
Issuance of common
 stock for cash at
 inception                 -  $      -  1,170,000  $  1,300  $       -  $      -   $     -   $      -   $      -  $    -  $       -

Net loss                   -         -          -         -          -         -         -          -          -       -     (3,450)
                   -----------------------------------------------------------------------------------------------------------------
BALANCE as of
 December 31, 1993         -         -  1,170,000     1,300          -         -         -          -          -       -     (3,450)

Issuance of
 preferred stock
 for cash          1,440,000   560,000          -         -          -         -         -          -          -       -          -

Issuance of common
 stock for services
 and stock
 subscriptions
 receivable                -         -    193,500   208,500   (198,500)        -         -          -          -       -          -

Unpaid dividends
 on preferred
 stock                     -         -          -         -          -         -         -          -          -       -    (16,780)

Net loss                   -         -          -         -          -         -         -          -          -       -   (906,948)
                   -----------------------------------------------------------------------------------------------------------------
BALANCE as of
 December 31, 1994 1,440,000   560,000  1,363,500   209,800   (198,500)        -         -          -          -       -   (927,178)

Issuance of
 preferred stock
 for cash            362,403   604,001          -         -          -         -         -          -          -       -          -

Issuance of common
 stock for stock
 subscriptions
 receivable                -         -     70,000     1,400   (140,000)  138,600         -          -          -       -          -

Cash received and
 services provided
 for stock
 subscriptions
 receivable                -         -          -         -    288,500         -         -          -          -       -          -

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

          See accompanying notes to consolidated financial statements.

                                       F-6
<PAGE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)

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

                                                                                                                            Deficit
                                                                                                                            Accumu-
                                                                                   Series C  Series D                        lated
                                                               Common              Warrants  Warrants                        During
                        Series A                               Stock                 to         to                Deferred    the
                     Preferred Stock          Common Stock    Subscrip- Additional Purchase  Purchase             Compen-   Develop-
                   -----------------------------------------    tions    Paid-in   Common     Common  Advance to  sation     ment
                     Shares     Amount    Shares     Amount   Receivable  Capital    Stock     Stock   Stockholder Expense    Stage
                   -----------------------------------------------------------------------------------------------------------------
<S>                <C>        <C>       <C>        <C>       <C>        <C>        <C>       <C>        <C>       <C>     <C>
Exchange of debt
 for common stock          -  $      -    396,500  $386,000  $       -  $ 99,000   $     -   $      -   $      -  $    -  $       -

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

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

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

Exercise of stock
 options for
 common stock
 subscriptions
 receivable                -         -    288,000     5,760   (209,500)  203,740         -          -          -       -          -

Net loss                   -         -          -         -          -         -         -          -          -       - (2,919,489)
                   -----------------------------------------------------------------------------------------------------------------
BALANCE as of
 December 31, 1995         -         -  8,566,653   171,333   (259,500)9,316,028         -          -          -       - (3,858,056)

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

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

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

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

Net loss                   -         -          -         -          -         -         -          -          -       - (4,093,388)
                   -----------------------------------------------------------------------------------------------------------------
BALANCE as of
 December 31, 1996         -  $      -  8,656,653  $173,133  $(209,200)$9,540,928  $     -    $     -    $    -$(40,200)$(7,951,444)
                   -----------------------------------------------------------------------------------------------------------------

          See accompanying notes to consolidated financial statements.

                                      F-7
<PAGE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)

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

                                                                                                                            Deficit
                                                                                                                            Accumu-
                                                                                   Series C  Series D                        lated
                                                               Common              Warrants  Warrants                        During
                        Series A                               Stock                 to         to                Deferred    the
                     Preferred Stock          Common Stock    Subscrip- Additional Purchase  Purchase             Compen-   Develop-
                   -----------------------------------------    tions    Paid-in   Common     Common  Advance to  sation     ment
                     Shares     Amount    Shares     Amount   Receivable  Capital    Stock     Stock   Stockholder Expense   Stage
                   -----------------------------------------------------------------------------------------------------------------
<S>                <C>        <C>       <C>        <C>       <C>        <C>        <C>       <C>        <C>       <C>     <C>
Exercise of common
 stock options             -  $      -    110,000  $  2,200  $       -  $181,575   $     -   $      -   $      -  $    -  $       -

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

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

Net loss                   -         -          -         -          -         -         -          -          -       - (4,274,003)
                   -----------------------------------------------------------------------------------------------------------------
BALANCE as of
 December 31, 1997         -         - 10,129,842   202,597   (209,200)12,113,346  310,994    388,158          -(40,200)(12,225,447)

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

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

Issuance of common
 stock and common
 stock warrants for
 cash, net of
 expenses                  -         -  1,860,000    37,200          - 2,518,159         -  1,078,800          -       -          -

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

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

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

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

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

          See accompanying notes to consolidated financial statements.

                                      F-8
<PAGE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)

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

                                                                                                                            Deficit
                                                                                                                            Accumu-
                                                                                   Series C  Series D                        lated
                                                               Common              Warrants  Warrants                        During
                        Series A                               Stock                 to         to                Deferred    the
                     Preferred Stock          Common Stock    Subscrip- Additional Purchase  Purchase             Compen-   Develop-
                   -----------------------------------------    tions    Paid-in   Common     Common  Advance to  sation     ment
                     Shares     Amount    Shares     Amount   Receivable  Capital    Stock     Stock   Stockholder Expense    Stage
                   -----------------------------------------------------------------------------------------------------------------
<S>                <C>        <C>       <C>        <C>       <C>        <C>        <C>       <C>        <C>       <C>     <C>
Cash received for
 stock subscriptions
 receivable                -  $      -          -  $      -  $ 200,200  $      -   $     -   $      -  $       -  $    -  $       -

Modification of
 options previously
 granted to
 employees                 -         -          -         -          -    97,126         -          -          -       -          -

Stock options
 granted in
 exchange for
 services
 rendered                  -         -          -         -          -   (20,100)        -          -          -  20,100          -

Stock options
 forfeited                 -         -          -         -          -         -         -          -          -  20,100          -

Net income                 -         -          -         -          -         -         -          -          -       -    359,231
                   -----------------------------------------------------------------------------------------------------------------
BALANCE as of
 December 31, 1999         -         - 12,356,440   247,129          -14,865,399         -  1,954,452          -       -(16,063,783)

Exercise of common
 stock options             -         -     18,000       360          -     6,660         -          -          -       -          -

Issuance of common
 stock for
 consulting
 services                  -         -     75,000     1,500          -    86,000         -          -          -       -          -

Issuance of common
 stock options for
 consulting services       -         -          -         -          -   273,154         -          -          - (18,340)         -

Modification of
 terms on Series D
 warrants                  -         -          -         -          -   132,848         -          -          -(122,113)         -

Advance to
 stockholder               -         -          -         -          -         -         -          -     (2,801)      -          -

Net loss                   -         -          -         -          -         -         -          -          -       - (3,181,720)
                   -----------------------------------------------------------------------------------------------------------------
BALANCE as of
 December 31, 2000         -   $     - 12,449,440  $248,989   $     -$15,364,061  $      - $1,954,452$(2,801)$(140,453)$(19,245,503)
                   -----------------------------------------------------------------------------------------------------------------

          See accompanying notes to consolidated financial statements.

                                      F-9
<PAGE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)

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

                                                                                                                            Deficit
                                                                                                                            Accumu-
                                                                                   Series C  Series D                        lated
                                                               Common              Warrants  Warrants                        During
                        Series A                               Stock                 to         to                Deferred    the
                     Preferred Stock          Common Stock    Subscrip- Additional Purchase  Purchase             Compen-   Develop-
                   -----------------------------------------    tions    Paid-in   Common     Common  Advance to  sation     ment
                     Shares     Amount    Shares     Amount   Receivable  Capital    Stock     Stock   Stockholder Expense    Stage
                   -----------------------------------------------------------------------------------------------------------------
<S>                <C>        <C>       <C>        <C>       <C>        <C>        <C>       <C>        <C>       <C>     <C>
Issuance of
 preferred stock
 for cash, net
 of expenses      10,917,030 $  10,917          -  $      -  $       -$4,872,580   $     -   $      -   $      -  $    -  $       -

Repayment from
 stockholder               -         -          -         -          -         -         -          -      2,801       -          -

Exercise of series
 D warrants for cash       -         -    153,388     3,067          -    41,670         -     31,957          -       -          -

Expiration of series
 D warrants                -         -          -         -          - 2,054,168         - (2,054,168)         -       -          -

Issuance of common
 stock for cash in
 February Private
 Placement Memorandum      -         -    341,066     6,822          -    95,952         -     67,759          -       -          -

Issuance of common
 stock for cash in
 April Private
 Placement
 Memorandum, net of
 expenses                  -         -  2,840,000    56,800          - 1,224,200         -          -          -       -          -

Value of warrants
 issued in April
 Private Placement
 Memorandum                -         -          -         -          -  (798,657)  798,657          -          -       -          -

Conversion of note
 payable and debt
 to equity                 -         -    394,947     7,899          -   213,165     4,784          -          -       -          -

Amortization of
 deferred
 compensation
 expense                   -         -          -         -          -         -         -          -          - 131,763          -

Issuance of common
 stock to Rubicon
 for consulting
 services and
 finders fees              -         -    478,000     9,560          -   285,440         -          -          -       -          -

Issuance of common
 stock for cash in
 September Private
 Placement
 Memorandums, net
 of expenses               -         -    120,000     2,400          -    47,600         -          -          -       -          -

Issuance of common
 stock for cash in
 November Private
 Placement
 Memorandum, net of
 expenses                  -         -    360,000     7,200          -   142,800         -          -          -       -          -

Issuance of common
 stock upon exercise
 of G warrants             -         -    784,638    15,693          -   787,748  (803,441)         -          -       -          -

Issuance of common
 stock options for
 consulting services       -         -          -         -          -    23,882         -          -          - (10,383)         -

Preferred stock
 dividend related to
 beneficial
 conversion feature        -         -          -         -          - 4,872,580         -          -          -       - (4,872,580)

Net loss                   -         -          -         -          -         -         -          -          -       - (3,675,922)
                   -----------------------------------------------------------------------------------------------------------------
Balance as of
December 31, 2001 10,917,030  $ 10,917 17,921,479  $358,430   $     -$29,227,189  $      -   $      -  $     -$(19,073)$(27,794,005)
                   =================================================================================================================
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-10
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)

CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) In Cash

                                                                                                      Period from
                                                                   Years Ended December 31,           Inception to
                                                              ------------------------------------    December 31,
                                                                     2001              2000               2001
                                                              ---------------------------------------------------------
<S>                                                            <C>               <C>                <C>
Cash flows from operating activities:
    Net loss                                                   $   (3,675,922)   $   (3,181,720)    $   (22,893,256)
    Adjustments to reconcile net loss to net cash used in
      operating activities:
        Depreciation and amortization                                 252,246           350,908           1,949,323
        Allowance for doubtful accounts receivable                        -                 -               125,800
        Common stock issued for consulting services                   156,000            69,160             442,661
        Amortization of deferred compensation                         131,763               -               145,262
        Common stock options issued for consulting services
                                                                       13,499           273,154             668,379
        Compensation expense for cancellation of warrants               6,735            60,665              67,400
        Compensation expense for modification of term on
           Series D warrants                                              -              10,735              10,735
        Loss on disposition of assets, net                                -               6,131           1,287,979
        Changes in operating assets and liabilities:
           Accounts receivable                                         (6,005)           40,829            (100,550)
           Notes receivable, net                                       (2,132)              -                (2,132)
           Prepaid expenses and other                                 (34,793)           24,788             (48,994)
           Amounts due from related parties                               -              (1,822)                -
           Other assets                                                   -                 -               (27,000)
           Accounts payable                                           (38,066)          132,022              92,541
           Accrued liabilities                                        296,451           140,342             560,686
           Other liabilities                                          (10,046)           47,398              32,102
           Deferred revenue                                            20,669         1,277,997           1,298,666
                                                              ---------------------------------------------------------
              Net cash used in operating activities                (2,889,601)         (749,413)        (16,390,398)
                                                              ---------------------------------------------------------
Cash flows from investing activities:
    Purchase of property and equipment                                (53,112)          (27,483)         (2,999,442)
    Purchase of patents and technology                                    -                 -              (356,146)
    Proceeds from the disposition of assets                               -                 -                 6,517
                                                              ---------------------------------------------------------
              Net cash used in investing activities                   (53,112)          (27,483)         (3,349,071)
                                                              ---------------------------------------------------------

          See accompanying notes to consolidated financial statements.

                                      F-11
<PAGE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Increase (Decrease) In Cash

                                                                                                      Period from
                                                                   Years Ended December 31,           Inception to
                                                              ------------------------------------    December 31,
                                                                     2001              2000               2001
                                                              ---------------------------------------------------------
<S>                                                            <C>               <C>                <C>
Cash flows from financing activities:
   Proceeds (payments) related to notes payable                 $    (450,000)   $      600,000     $           -
   Proceeds from issuance of common stock                           1,867,227             7,020          14,512,179
   Proceeds from issuance of common stock warrants                        -                 -             1,777,952
   Proceeds from stock subscriptions                                      -                 -               413,700
   Net proceeds from issuance of preferred stock                    4,883,497               -             6,047,498
   Proceeds from issuance of redeemable preferred stock                   -                 -               240,000
   Payments on redeemable preference stock and dividends                  -                 -              (268,300)
   Net repayments on stockholder loans                                  2,801                46             387,847
                                                              --------------------------------------------------------
              Net cash provided by financing activities             6,303,525           607,066          23,110,876
                                                              --------------------------------------------------------
Net increase (decrease) in cash                                     3,360,812          (169,830)          3,371,407
Cash at beginning of the period                                        10,595           180,425                 -
                                                              --------------------------------------------------------
Cash at end of the period                                       $   3,371,407    $       10,595     $     3,371,407
                                                              ========================================================


 Supplemental disclosure of cash flow information:
   Cash paid for interest                                       $      79,040    $          -       $        79,040
</TABLE>

 Supplemental disclosures of non-cash investing and financing activities:
     For the period from inception to December 31, 2001, the Company recorded
     non-cash dividends on preferred stock of $4,900,749.

  Forthe period from inception to December 31, 2001, the Company converted
     certain stockholder loans and amounts due to stockholders to common stock
     totaling $485,000.

   For the period from inception to December 31, 2001, the Company wrote off
     fully depreciated fixed assets totaling $746,208.

  For the period from inception to December 31, 2001, the Company cancelled
     warrants totaling $2,054,168.


          See accompanying notes to consolidated financial statements.

                                      F-12
<PAGE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)      NATURE OF OPERATIONS

History and Nature of Operations

Specialized Health Products ("SHP"), a Utah corporation, was incorporated in
November 1993. On July 28, 1995, SHP became a wholly owned subsidiary of
Specialized Health Products International, Inc. ("SHPI"), (a Delaware
corporation organized in February 1986 and known as Russco, Inc. prior to
changing its name to SHPI) through a merger with a subsidiary of SHPI (the
"Acquisition"). On that date, the Company changed its name to "Specialized
Health Products International, Inc." The persons serving as officers and
directors of SHP immediately prior to the consummation of the Acquisition were
elected to the same offices with SHPI and retained their positions as directors
and officers of SHP. In addition, the outstanding securities of SHP became
outstanding securities of SHPI. Prior to the Acquisition, neither SHP nor any
affiliate of SHP had an ownership interest in Russco, Inc.

SHPI through its wholly and majority owned subsidiaries, SHP, Specialized
Cooperative Corporation ("SCC"), and Safety Syringe Corporation ("SSC")
(collectively, the "Company") is a development stage company which is engaged
principally in the development of cost-effective, disposable, proprietary
healthcare products designed to reduce the incidence of accidental injury in the
healthcare industry, and thus reduce the spread of disease. The Company has
created a portfolio of proprietary healthcare products that are in various
stages of pre-production, development and research. At present the Company is
focusing its resources and activities principally on completing development of
products under current licensing and development arrangements, developing new
safety needle medical devices and identifying marketing partners for the
Company's safety medical needle products and concepts. The Company's products
are designed to reduce the risk of acquiring human immunodeficiency virus and
autoimmunodeficiency syndrome or HIV/AIDS, hepatitis B virus, hepatitis C virus
and other blood-borne diseases through accidental needlesticks.

Development Stage Presentation

The Company is in the development stage and has incurred significant cumulative
net losses since inception. The Company incurred negative cash flows from
operating activities of $2,889,601 and $749,413 during the years ended December
31, 2001 and 2000, respectively. Sales of products based on the Company's
proprietary technologies have been minimal. As of December 31, 2001, the Company
had an accumulated deficit of $27,794,005. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The Company's
continued existence is dependent upon several factors including the Company's
success in (1) bringing its products to commercialization, (2) entering into
favorable contracts with third-party manufacturers, distributors and strategic
partners, (3) raising sufficient additional funding and (4) minimizing costs.

Although there can be no assurance, the Company believes existing cash, expected
cash flows from existing and potential distribution and license agreements (see
Note 3) and expected future equity funding will be sufficient to support the
Company's operations at least through December 31, 2001. Management has
negotiated agreements with third parties to assist in the development,
financing, manufacturing and distribution of its products under development or
near commercialization. The Company has entered into an agreement with existing
investors that sets forth terms for future equity capital infusions (see Note
6), however, the decision to make the funds available resides solely with the
investors. The Company's inability to obtain the necessary additional funding
would severely impair its business operations and there can be no assurance that
the Company's operating plan will be successful.

                                      F-13
<PAGE>

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

a)       There is no assurance that the Company's products will be commercially
         viable and no assurance can be given that the Company will have
         sufficient sales or a sufficient customer base to become profitable.
         The business prospects of the Company will be affected by expenses,
         operational issues and uncertainties frequently encountered in the
         development of a business enterprise in a competitive environment.

b)       The Company's need for capital during the next year or more will be
         significant and will vary based upon a number of factors, including the
         rate at which demand for its products expands and the level of effort
         needed to develop and commercialize other products utilizing the
         Company's medical needle and other technologies. The Company has no
         contractual arrangements that guarantee that the Company will have
         adequate funding during 2002 and there can be no assurance that
         additional funding, if needed, will be available on commercially
         reasonable terms or at all. Any inability to obtain additional funding
         when needed will have a material adverse effect on the Company.

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

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

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

f)       The Company operates in a highly competitive market and will compete
         directly with firms that have longer operating histories, more
         experience, substantially greater financial resources, greater size,
         more substantial research and development, and marketing and
         distribution organizations and established distribution channels that
         are better suited in the market than the Company. Such competitors may
         use their economic strength to influence the market to continue to buy
         their existing products. These competitors, such as Becton Dickinson
         and Company ("Becton Dickinson"), The Kendall Company ("Kendall"),
         Johnson & Johnson Medical ("JJM") and Merit Medical Systems, Inc.
         ("Merit"), may also be potential strategic partners with respect to
         various products. The Company does not have an established customer
         base and is likely to encounter a high degree of competition in
         developing a customer base. One or more of these competitors could use
         their resources to improve their current products or develop new
         products that may compete more effectively with the Company's products.
         New competitors may emerge and may develop products which compete with
         the Company's products. No assurance can be given that the Company will
         be successful in competing in this industry.

g)       The Company's future success depends in part on its ability to protect
         its intellectual property and maintain the proprietary nature of its
         technology through a combination of patents and other intellectual
         property arrangements. There can be no assurance that the protection
         provided by patents, if issued, will be broad enough to prevent

                                      F-14
<PAGE>

         competitors from introducing similar products or that such patents, if
         challenged, will be upheld by the courts of any jurisdiction. Patent
         infringement litigation, either to enforce the Company's patents or
         defend the Company from infringement suits, would be expensive and, if
         it occurs, could divert Company resources from other planned uses. Any
         adverse outcome in such litigation could have a material adverse effect
         on the Company. Patents and patent applications filed in foreign
         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 the
         Company. Certain portions of the Company's international patent
         prosecution efforts are funded by third parties. The failure of the
         funding parties to pay for the international patent prosecution costs
         would materially effect the Company's ability to prosecute these
         patents. The Company also attempts to protect its proprietary
         information through the use of confidentiality agreements and by
         limiting access to its facilities. There can be no assurance that the
         Company's program of patents, confidentiality agreements and restricted
         access to its facilities will be sufficient to protect the Company's
         proprietary technology.

h)       The sale of medical devices entails an inherent risk of liability in
         the event of product failure or claim of harm caused by product
         operation. There can be no assurance that the Company will not be
         subject to such claims, that any claim will be successfully defended
         or, if the Company is found liable, that the claim will not exceed the
         limits of the Company's insurance. The Company's current insurance
         coverage is in the amount of $1 million per occurrence and $2 million
         in aggregate. The Company also has an umbrella policy in the amount of
         $3 million. In certain cases, the Company has indemnification
         arrangements in place with its strategic partners who will be selling
         Company developed products under the partner's label. There is no
         assurance that the Company will maintain product liability insurance on
         acceptable terms in the future or that such insurance will be
         available. Product liability claims could have a material adverse
         effect on the Company.

(2)      SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Use of Estimates

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

Property and Equipment

Property and equipment are stated at cost and consist primarily of manufacturing
and equipment, office furniture and fixtures, computer equipment and software,
research and development machinery and equipment, and construction-in-progress.
Manufacturing equipment is depreciated using the straight-line method over seven
years or the units-of-production method, whichever is greater. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful life of the asset. Costs incurred in
connection with the fabrication and construction of manufacturing equipment are
capitalized as construction-in-progress. No depreciation is recognized on these
assets until they are placed in service. All other property and equipment are
depreciated using the straight-line method based on the estimated useful lives
of the related assets of which are five years, except for computer equipment and
software, with which has a useful lives life of three years.

Maintenance and repairs are charged to expense as incurred and costs of
improvements and betterments are capitalized. Upon disposal or sale, the related
asset costs and accumulated depreciation are removed from the accounts and
resulting gains or losses are reflected in current operations.

                                      F-15
<PAGE>

Other Assets

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

Long-Lived Assets

Long-lived assets are reviewed for impairment when events or changes in
circumstances indicate that the book value of an asset may not be recoverable.
The Company evaluates, at each balance sheet date, whether events and
circumstances have occurred that indicate possible impairment. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting
for the Impairment of Assets and for Long-Lived Assets to be Disposed Of," the
Company uses an estimate of future undiscounted net cash flows of the related
asset or group of assets over the remaining life in measuring whether the assets
are recoverable. As of December 31, 2001, management did not consider any of the
Company's long-lived assets to be impaired (see "Recent Accounting
Pronouncements"). During 2000, the Company adjusted the estimated useful lives
of certain computer equipment and software in order to properly reflect the
realizable realized value of such assets as of December 31, 2000, . As a result
of the adjustment, an and recognized an additional $54,365 of depreciation
expense was recognized during 2000.

Revenue Recognition

Pursuant to Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements", the Company recognizes license revenue when the following
criteria has been met: (a) persuasive evidence of an arrangement exists, (b)
delivery has occurred or services have been rendered, (c) the price is fixed or
determinable and (d) collectibility is reasonably assured.

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

Research and Development Costs

Research and development costs are expensed as incurred.

Income Taxes

The Company recognizes a liability or asset for the deferred tax consequences of
temporary differences between the tax bases basis of assets and liabilities and
their reported amounts in the consolidated financial statements that will result
in taxable or deductible amounts in future years when the reported amounts of
the assets and liabilities are recovered or settled.

Fair Value of Financial Instruments

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

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives not be amortized, but rather tested for impairment at

                                      F-16
<PAGE>

least annually. The Company anticipates the adoption of SFAS No. 141 and 142 on
January 1, 2002, will not have a material impact on its financial position or
results of operation.

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

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

Basic and Diluted Net Loss Per Common Share

As a result of the Company incurring net losses for the years ended December 31,
2001 and 2000, both basic and diluted net loss per common share for the years
are based on the weighted average number of common shares outstanding. Stock
options and warrants prior to conversion are not included in the calculation of
diluted net loss per common share for the year because their inclusion would be
antidilutive, thereby reducing the net loss per common share. Options and
warrants to purchase 7,107,500 and 6,298,787 shares of common stock at exercise
prices ranging from $1.00 to $2.625 per share were outstanding at December 31,
2001 and 2000, respectively, but were not included in the computation of diluted
earnings per share for the respective years then ended because the exercise
price was greater than the average market price of the common shares and as
such, their inclusion would be antidilutive.

Additionally, as of December 31, 2001, there are 10,917,030 shares of Series A
Preferred Stock outstanding, which are convertible into common stock on a
one-for-one basis. Should the Series A Preferred stockholders opt to acquire
additional shares in accordance with the terms of the Series A Preferred Stock
Purchase Agreement, an additional beneficial conversion charge, limited to the
net proceeds received, would be treated as a preferred stock dividend and impact
the calculation of net loss per common share.

Reclassifications

Certain reclassifications have been made in the 2000 consolidated financial
statements to conform to the 2001 presentation.

(3)      DISTRIBUTION AND LICENSE AGREEMENTS

Bard Access Systems

On September 17, 2001, the Company entered into a distribution agreement with
Bard Access Systems ("Bard") for the sale and distribution of the Company's
LiftLocTM Safety Winged Infusion Set. Under the terms of the agreement a payment
of $67,000 was received by the Company on September 27, 2001. The agreement
specifies that this payment is to be applied against the initial product orders
from Bard. As of December 31, 2001, no product had been shipped and the Company
has reflected deferred revenue in the accompanying consolidated balance sheet of
$67,000 related to this distribution agreement. The agreement is for a two-year
period which automatically renews for successive one-year terms unless
terminated by Bard in writing not less than 180 days prior to the expiration of
the initial term or any renewal term.

                                      F-17
<PAGE>

Pharmaceutical Company

In August 2001, the Company entered into an oral agreement with an undisclosed
pharmaceutical company whereby it would provide development services on a
specialized application of one of its safety needle technologies. While a
formalized agreement has not yet been finalized related to this development
project, the Company billed and received payment for $169,677 in development
fees. Expenses related to this development project were expensed as incurred
during 2001. As of December 31, 2001, the Company has reflected deferred revenue
of $169,677 related to this development project.

Merit Medical

On January 4, 2001, the Company entered in a license agreement (the "Merit
Agreement") with Merit related to the production of safety needle devices for
angiographic guidewire introducers. The Company received a payment of $100,000
which is being recognized over the estimated five-year period of the Merit
Agreement at a rate of $1,667 per month. As of December 31, 2001, the Company
has reflected deferred revenue of $79,996 related to this license agreement.

Kendall

In November 1999, the Company and Kendall, a division of Tyco Healthcare Group
LP, entered into a Development and License Agreement (the "Kendall Agreement")
relating to one application of the Company's needle technology in the production
of a line of safety medical needle products, including six syringe products and
five other safety needle products. The Kendall Agreement became effective in
March 2000. In April 2000, the Company received $1,500,000, less $35,044
representing the Company's share of certain patent filing costs, under the
Kendall Agreement and will receive an additional $1,000,000 thirty months from
the effective date of the contract or upon the sale of commercial quantities of
products, whichever comes first, in exchange for the Company assigning to
Kendall the FlexLoc(R) and ReLoc(TM) trademarks and two related U.S. patents 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 SHPI to receive
development fees and ongoing royalties, including a $500,000 advance royalty
payment 30 months from the effective date of the contract or upon the sale of
commercial quantities of products, whichever comes first. It is anticipated that
Kendall will manufacture all products that are subject to the Kendall Agreement.
The Company is recognizing revenue from the agreement over a period of five
years at a rate of $24,667 per month. As of December 31, 2001, the Company has
reflected deferred revenue of $981,993 related to this license agreement.

Johnson & Johnson Medical

In December 1997, the Company entered into an agreement with JJM to
commercialize two applications of the Company's safety needle technologies in
one restricted field-of-application of the technology. The agreement provided
for monthly development payments by JJM, sharing of field related patent costs,
payments for initial periods of low volume manufacturing, an ongoing royalty
stream and a JJM investment in molds, assembly equipment and other capital costs
related to commercialization of each product. However, on April 3, 2001, the
Company received notice from JJM that the Development and License Agreement
between JJM and the Company was terminated.

(4)      COMMITMENTS AND CONTINGENCIES

Lease Obligations

The Company leases office space under a noncancelable operating lease. The
following summarizes future minimum lease payments under the operating lease at
December 31, 2001:

                                      F-18
<PAGE>

                                                             Minimum
                         Year Ending December 31,        Lease Payments
                                                       ------------------
                                  2002                    $     318,130
                                  2003                          133,090
                                                       ------------------
                                                          $     451,220
                                                       ==================

Rental expense for the years ended December 31, 2001 and 2000 totaled
approximately $280,000 and $269,000, respectively. Beginning March 1, 2000, the
Company subleased approximately 3,300 square feet of its office space which
generated sublease payments of $16,500 and $54,000 during 2001 and 2000
respectively. The sublease agreement was terminated effective January 31, 2002.

Employment and Indemnity Agreements

On December 31, 2001, the Company entered into an employment agreement with
Donald D. Solomon, Ph.D. Dr. Solomon's employment agreement, as amended,
provides that (i) Dr. Solomon receive a salary of $190,000 per year; (ii) Dr.
Solomon's current employment agreement expires on October 23, 2004; (iii) Dr.
Solomon is entitled to vacation pay, health insurance and life insurance; (iv)
Dr. Solomon's employment contract may be terminated at any time by us; (v) if
the employment of Dr. Solomon is terminated by reason of disability, death or
for cause, his salary and benefits (except as otherwise required by law) will
terminate as of the date of termination; (vi) if Dr. Solomon is terminated for
reasons other than disability, death or for cause, then Dr. Solomon's salary and
medical benefits will continue for a period of 12 months from the date of
termination and his other benefits will cease as of the date of termination.

On December 31, 2001, the Company entered into an employee agreement with Mr.
Paul S. Evans. Mr. Evans' employment agreement, as amended, provides that (i)
Mr. Evans receive a salary of $175,000 per year; (ii) Mr. Evans' current
employment agreement expires on June 12, 2003; (iii) Mr. Evans is entitled to
vacation pay, health insurance and life insurance; (iv) Mr. Evans' employment
contract may be terminated at any time by us; (v) if the employment of Mr. Evans
is terminated by reason of disability, death or for cause, his salary and
benefits (except as otherwise required by law) will terminate as of the date of
termination; (vi) if Mr. Evans is terminated for reasons other than disability,
death or for cause, then Mr. Evans' salary and medical benefits will continue
for a period of 12 months from the date of termination and his other benefits
will cease as of the date of termination.

On December 31, 2001, the Company entered into an employee agreement with Mr.
Keith L. Merrell. Mr. Merrell's employment agreement, as amended, provides that
(i) Mr. Merrell receives a salary of $102,000 per year; (ii) Mr. Merrell's
current employment agreement expires December 31, 2002; (iii) Mr. Merrell is
entitled to vacation pay, health insurance and life insurance; (iv) Mr.
Merrell's employment contract may be terminated at any time by us; (v) if the
employment of Mr. Merrell is terminated by reason of disability, death or for
cause, his salary and benefits (except as otherwise required by law) will
terminate as of the date of termination; (vi) if Mr. Merrell is terminated for
reasons other than disability, death or for cause, then Mr. Merrell's salary and
medical benefits will continue for a period of three months from the date of
termination and his other benefits will cease as of the date of termination.

On November 9, 2001, the Company entered into a three-month consulting agreement
with Mr. David A. Robinson, the Company's former CEO. The consulting agreement
provides that Mr. Robinson receive stock options to acquire 50,000 shares of our
common stock at $2.00 per share which stock options vest immediately. This
resulted in compensation expense of $23,882 of which $10,383 has been deferred
as of December 31, 2001 and will be recognized over the remaining service
period.

On November 8, 2001, the Company entered into an employment agreement with Mr.
Jeffrey M. Soinski. The employment agreement provides that (i) Mr. Soinski
receive a salary of $240,000 per year in addition to performance based bonuses;

                                      F-19
<PAGE>

(ii) Mr. Soinski receive stock options to acquire 2.5 million shares of our
common stock at market value on the date of grant which stock options vest over
a four-year period; (iii) Mr. Soinski be reimbursed for relocation expenses in
an amount not to exceed $75,000; (iv) Mr. Soinski is entitled to vacation pay,
health insurance and life insurance; (v) Mr. Soinski's employment contract may
be terminated at any time by us; (vi) if the employment of Mr. Soinski is
terminated by reason of disability, death or for cause, his salary and benefits
(except as otherwise required by law) will terminate as of the date of
termination; (vii) if Mr. Soinski is terminated for reasons other than
disability, death or for cause, then Mr. Soinski's salary and medical benefits
will continue for a period of 18 months from the date of termination and his
other benefits will cease as of the date of termination.

In February 2002, we approved a 2002 Executive Officer Bonus Plan. Under the
plan executive officers eligible for bonuses during 2002 include the CEO, COO
and General Counsel. Plan participants will earn 20% of their annual salary
based upon 100% achievement of the overall revenue goal outlined in our approved
budget plan. Also, plan participants will be eligible to receive incremental
bonus payments for performing beyond the budget plan. The amount of incremental
payments, if earned, will be based upon the recommendation of the compensation
Committee and approved by the Board of Directors. The maximum base bonus that
could be paid under this plan is $121,000. In connection with this plan, we also
adopted an Employee Bonus Plan for employees other than the Named Executive
Officers to reward specific individual or team achievements during 2002.

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

In December 1998 and again in November 1999, a previously existing employment
agreement was amended to allow for cash payments totaling $115,000 in exchange
for the surrender of outstanding common stock warrants held by the employee. The
exchange could be elected by the employee if the fair market value of the
Company's common stock did not reach specified amounts by January 31, 2001.
Additionally, the January 31, 2001 exchange could be accelerated, at the
employee's option, should the Company's cash position fall below a specified
level. Upon election of the accelerated exchange, the cash compensation would be
reduced by $625 for each month between the date the exchange occurs and January
31, 2001. In January 1999, the Company paid $50,000 to the employee upon
exercise of the first option. In December 2000, the employee exercised the
second option and the Company agreed to make the cash payment of $60,665 on
January 31, 2001. The Company made that payment in June 2001, including interest
of $3,072 calculated from the date the payment was due until the date the
payment was made.

Litigation

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

(5)      STOCK OPTIONS

Effective November 2001, the Company's Board of Directors and stockholders
approved the adoption of the Specialized Health Products International, Inc.
2001 Stock Option plan. The plan permits the Company to grant non-qualified
stock options and incentive stock options to acquire common stock. The total
number of shares authorized for the plan may be allocated by the board between
the non-qualified stock options and the incentive stock options from time to
time, subject to certain requirements of the Internal Revenue Code of 1986, as
amended. The option exercise price per share under the plan may not be less than
the fair market value of a share of common stock on the date on which the option
is granted. A total of 5,000,000 shares are available for issuance under the

                                      F-20
<PAGE>


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, 2001, options to acquire an aggregate of 4,684,690 shares of common
stock at exercise prices ranging from $1.19 to $1.51 were outstanding.

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

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, 2001, options to acquire an aggregate of 1,372,810 shares of
common stock at exercise prices ranging from $1.00 to $2.625 were outstanding
under the 2000 and 1998 stock option plans.

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

During 1994, the Board of Directors of SHP approved a nonqualified stock option
plan for its officers, directors and employees, and authorized 396,000 shares of
common stock for issuance. During 1994, options to acquire 396,000 common shares
were granted at prices ranging from $0.39 to $1.11 per share. The exercise
prices of the options were equivalent to the estimated fair market value of the
underlying stock as determined by SHP's Board of Directors at the dates of
grant. No options were exercised or forfeited during 1994. In connection with
the business combination, discussed in Note 1, all of the options issued under
the plan became outstanding obligations of the Company. On September 1, 1995,
options to acquire 288,000 shares were exercised, primarily by directors and
officers of the Company, from which the Company received $209,500 in
non-interest bearing common stock subscriptions receivable, which were paid in
full as of December 31, 1999. During 1996, options to acquire 45,000 shares were
exercised at $0.39 per share and 22,500 options were forfeited. Of the remaining
40,500 options, 22,500 were exercised in 1997 at $0.39 per share. During August
2000 the remaining 18,000 options were exercised at $0.39 per share.

As permitted by SFAS No. 123, "Accounting for Stock-based Compensation", the
Company applies Accounting Principles Board ("APB") Opinion No. 25 and related
interpretations in accounting for certain aspects of its stock-based
compensation plans. Accordingly, no compensation cost is recognized for stock
options granted to officers, directors and other key employees if options are
granted at the intrinsic fair market value or higher. The Company recognized
$156,000 and $273,154 of consulting expense during 2001 and 2000, respectively,
related to certain options and warrants granted to non-employee consultants in
accordance with SFAS No. 123.

                                      F-21
<PAGE>

Had compensation cost been determined based on the fair value at the grant date
for awards under its plans consistent with the method prescribed by SFAS No.
123, the Company's net loss and basic and diluted net loss per common share
would have been increased to the pro forma amounts presented below for the years
ended December 31:

                                                   2001             2000
                                              ---------------- -----------------
Net loss applicable to          As reported    $  (8,548,502)    $ (3,181,720)
  common stockholders:          Pro forma         (9,055,534)      (4,207,484)

Basic and diluted net loss      As reported            (.56)             (.26)
  per common share:             Pro forma              (.60)             (.34)


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

A summary of the status of the Company's option plans as of December 31, 2001
and 2000, and changes during the years then ended is presented below:

<PAGE>
<TABLE>
<CAPTION>
                                                    2001                             2000
                                       -------------------------------- -------------------------------
                                                          Wtd. Avg.                       Wtd. Avg.
                                                          Exercise                        Exercise
                                           Shares          Prices          Shares          Prices
                                       --------------- ---------------- --------------- ---------------
       <S>                                <C>          <C>                <C>              <C>
       Outstanding at beginning
          of year                          1,939,000   $        1.70        1,653,500      $     2.08
       Granted                             5,004,690            1.21        1,445,810            1.50
       Exercised                                 -               -            (18,000)            .39
       Forfeited                            (886,190)           1.88       (1,142,310)           2.78
                                       ---------------                  ---------------
       Outstanding at end
          of year                          6,057,500            1.27        1,939,000            1.70
                                       ===============                  ===============
       Exercisable at end
          of year                          1,033,310            1.66        1,205,000            1.78
                                       ===============                  ===============
       Weighted average fair value
          of options granted               $    0.85                        $    0.99
                                       ---------------                  ---------------

The following table summarizes information about the stock options outstanding
at December 31, 2001:
<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, 2001            Life             Price           31, 2001             Price
   ------------------------ ------------------ ----------------- -------------- ------------------- ------------------
    <S>                         <C>               <C>             <C>               <C>              <C>
    $     1.0000                     78,000         8.93 years                            78,000
          1.1250                    118,000         8.50                                 118,000
          1.1900                  4,584,690         9.92                                     -
          1.2500                    407,810         6.15                                 151,810
          1.4375                      8,000         8.92                                   8,000
          1.5100                    100,000         9.92                                     -
          1.5625                    100,000         8.75                                 100,000
          1.6250                     55,000         7.95                                  55,000

                                      F-22
<PAGE>

          1.7500                      5,000         1.50                                   5,000
          2.0000                    591,000         2.50                                 507,500
          2.6250                     10,000         0.67                                  10,000
                            ------------------                   -------------- ------------------- ------------------
    $1.00 to 2.6250               6,057,500                          $  1.27           1,033,310      $     1.66
                            ==================                   ============== =================== ==================
</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 2001 and 2000: average risk-free interest rate of
approximately 3.5 percent and 6.0 percent, respectively; expected lives of 10
years and 4 years, respectively; expected dividend yields of zero percent in
both years; expected volatility of 63 and 92 percent, respectively.

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

(6)      CAPITAL TRANSACTIONS

The board of directors approved a proposal to amend the Company's Certificate of
Incorporation to increase the number of authorized shares from 55,000,000
comprised of 50,000,000 shares of common stock with a par value of $.02 per
share and 5,000,000 shares of preferred stock with a par value of $.001 per
share to 100,000,000 authorized shares comprised of 70,000,000 shares of common
stock with a par value of $.02 per share and 30,000,000 shares of preferred
stock with a par value of $.001 per share.

On December 27, 2001, the Company issued stock options to acquire 100,000 shares
of common stock to a non-executive director. These options are exercisable at
$1.51 per share for a ten-year term.

On November 14, 2001, the Company issued stock options to acquire 4,584,690
shares of common stock to employees and directors. Of these options, the
Company's new president and CEO received options for 2.5 million shares of
common stock, other executive officers received options for 1,055,000 shares of
common stock, non-executive directors received options for 700,000 shares of
common stock and other employees received options for 329,690 shares of common
stock. These options are exercisable at $1.19 per share for a ten-year term.

On November 6, 2001, our stockholders approved the issuance to Galen Partners
and other accredited and sophisticated investors of a total of 10,917,030 shares
of Series A Preferred Stock for an aggregate purchase price of $5 million, or
$.458 per share. Galen Partners purchased its shares for $3,500,000 and the
other investors purchased their shares by canceling $1,500,000 in debt owed them
by the Company. The Series A Preferred Stock is immediately convertible into the
same number of shares of common stock and the conversion rate is subject to
adjustment if the Company issues additional shares of common stock for an amount
less than the then current conversion price and upon the happening of certain
other events.

On the date of stockholder approval, the Company's common stock was trading at
$1.48 per share. Because the Series A Preferred Stock is convertible immediately
into common stock on a one-for-one basis, a beneficial conversion feature
existed to the extent of the net proceeds received, which totaled $4,872,580.
This amount has been treated as a preferred stock dividend in the 2001 financial
statements.

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

                                      F-23
<PAGE>

shares are not declared or paid in any prior year. As of December 31, 2001, no
dividends had been declared or paid.

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

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

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

The Series A Preferred Stock Purchase Agreement also provides that the investors
have the right, but not the obligation to acquire an additional 10,917,030
shares of Series A Preferred Stock at $.458 per share ($5,000,000 total) during
the 12 months following the initial closing date of November 7, 2001. If these
shares are purchased, the Company would record an additional beneficial
conversion charge, limited to the net proceeds received by the Company.

As a condition precedent to the sale of the Series A Preferred Stock, all of the
outstanding Series G Warrants and the outstanding rights to acquire Series H
Warrants and common stock were terminated. In consideration for the termination
of these securities, the Company issued 784,638 shares of common stock to
holders of the Series G Warrants. Immediately prior to cancellation, there were
outstanding Series G Warrants exercisable for 3,923,204 shares of common stock.
No additional consideration was given in connection with the cancellation of the
right to acquire the Series H Warrants and common stock.

On November 9, 2001, the Company issued stock options for 50,000 shares of
common stock in consideration for consulting services and extended the
expiration date of stock options for 250,000 shares of common stock held by the
former president and CEO. These options are exercisable at $2.00 per share
through November 7, 2004.

In September 2001, the board of directors authorized the private sale of up to
480,000 shares of the Company's common stock to certain investors. Through this
private sale the Company raised $200,000 at $.417 per share.

In July 2001, the Company entered into loan agreements (the "Loans") with
certain investors (the "Bridge Investors") to provide bridge financing. Under
the terms of the Loans, the Bridge Investors agreed to lend the Company an
aggregate of $1,500,000. The Loans were convertible, at each Bridge Investor's
option, on the closing date of the Series A Preferred Stock financing, into
Series A Preferred Stock. Upon such conversion, the participating Bridge
Investors received the same number and type of securities the Bridge Investor
would have received had the Bridge Investor first invested in the Series A
Preferred Stock at an amount equal to the outstanding loan amounts on the
conversion date. The principal amount owing on the Loans was converted as part
of the Series A Preferred Stock financing, all accrued interest was paid, and
the related security interests were terminated.

                                      F-24
<PAGE>

In February 2001, the Company raised $170,000 through the private sale of common
stock and Series F warrants (the "February Offering"). The February Offering
closed in April 2001. In the February Offering the Company sold units at $20,000
per unit. Each unit was comprised of 20,000 shares of the Company's common stock
and Series F warrants to purchase an additional 20,000 shares of the Company's
common stock at an exercise price of $1.50 per share. The Series F warrants were
exercisable through February 28, 2002. The February Offering was also given
certain antidilutive rights.

In April 2001, the Company raised $1,420,000 through the private sale of common
stock and Series G warrants (the "April Offering") to accredited and
sophisticated investors. The April Offering closed on May 4, 2001. In the April
Offering the Company sold units at $20,000 per unit. Each unit was comprised of
40,000 shares of the Company's common stock and Series G warrants to purchase an
additional 40,000 shares of the Company's common stock at an exercise price of
$0.75 per share. The Series G warrants were to expire with respect to one-fifth
of the shares initially issuable upon exercise of the Series G warrants on each
of the following dates: April 30, 2002, April 30, 2003, April 30, 2004, April
30, 2005 and April 30, 2006. The Company also granted an option exercisable for
278,000 shares of the Company's common stock and 278,000 Series G warrants at an
exercise price of $139,000. This option was exercised in exchange for a common
stock subscription receivable September 2001.

In the April Offering, subscribers were allowed to pay the subscription price in
cash or through the cancellation of amounts owed on certain outstanding
promissory notes and short-term loan obligations. In addition, investors who
subscribed to acquire Company securities in the February Offering had the right
pursuant to its terms to exchange the securities received in the February
Offering for the securities in the April Offering. As an additional condition of
certain investors who invested in the April Offering, the Company agreed to give
investors who acquired common stock in 2001 upon the exercise of Series D
warrants the option to submit the shares and related Series D warrants to the
Company (such shares and warrants are sometimes hereinafter referred to as the
"Series D Securities") in exchange for terms offered in the April Offering.

As a result, (i) holders of the outstanding notes in the principal amount of
$600,000 were given the option to pay part or all of the purchase price of
securities in the April Offering in exchange for the cancellation of all or part
of the amounts owing under notes in the principal amount of $600,000, (ii) the
holder of a $75,000 demand loan was given the option to pay part or all of the
purchase price of securities in the April Offering in exchange for the
cancellation amounts owing under the demand loan, (iii) the Series D Securities
holders had the opportunity to roll the amounts invested into the April Offering
by tendering the Series D Securities they previously acquired to the Company in
exchange for terms offered in the April Offering, and (iv) February Offering
investors who invested $170,533 had the option to roll the amounts invested into
the April Offering pursuant to rights granted.

Two investors holding promissory notes totaling $150,000, investors holding
$76,694 in Series D Securities and investors holding $170,533 of investment in
the February Offering elected to participate in the terms of the April Offering
as described above. This resulted in the Company issuing 402,602 additional
shares of common stock and an equivalent number of Series G warrants. The
Company used a portion of the proceeds from the April Offering to pay off the
remaining outstanding promissory notes in the principal amount of $450,000 and
related interest and the $75,000 demand loan obligation and related interest.

In addition to the foregoing, certain investors in the April Offering were
granted rights to provide future funding to the Company through the purchase and
sale of common stock and Series H warrants (the "Subsequent Units").

In December 2000, the Company filed a registration statement related to the
Series D warrants, which became effective on January 12, 2001. The Series D
warrants are exercisable for a period of two years from the effective date of a
registration statement, which period shall be extended day-for-day for any time
that a prospectus meeting the requirements of the Securities Act of 1933 is not
available. The Company offered the Series D warrant holders a reduced exercise

                                      F-25
<PAGE>

price, allowing their exercise at $1.00 per share rather than $2.00 per share,
to encourage warrant holders to exercise their Series D warrants during the
period of the reduced price offer, which ended January 13, 2001. Those warrant
holders who exercised some of their warrants, but not all of them, were allowed
to extend the exercise period of an equal number, up to the total warrants held,
until June 30, 2001. Of the 3,609,787 Series D warrants outstanding, 76,694 were
exercised. The exercise dates of 6,921 warrants were extended until June 30,
2001. The remaining 3,526,172 Series D warrants have expired. Other SHPI
warrants totaling 750,000 remain outstanding with expiration dates beginning in
2002. As a result of the modification of terms on the Series D warrants a total
of $122,113 and $132,848 was recorded as compensation expense in 2001 and 2000,
respectively.

In August 2000, common stock options to acquire 18,000 shares of the Company's
common stock at $0.39 per share were exercised by a former employee and director
of the Company.

In August 2000, the Company issued 50,000 shares of restricted common stock in
full settlement of a claim from an individual related to certain expenses
incurred by that individual in connection with the Company's acquisition of
certain intellectual property and related assets.

In June 2000, the Company granted to an employee 25,000 shares of common stock
as part of a new employment arrangement.

The following summarizes all warrant activity for the Company for the years
ended December 31, 2001 and 2000.

<TABLE>
<CAPTION>
                                           2001                             2000
                              -------------------------------- -------------------------------
                                                 Wtd. Avg.                       Wtd. Avg.
                                                  Exercise                        Exercise
                                  Shares           Prices          Shares          Prices
                              ---------------- --------------- --------------- ---------------
<S>                               <C>               <C>            <C>           <C>
Outstanding at beginning of
  the year                         4,359,787        $ 2.00         4,384,787     $     2.00
Granted                              300,000          1.25               -              -
Exercised                            (76,694)         1.00               -              -
Forfeited                         (3,533,093)         2.00           (25,000)          2.00
                              ----------------                 ---------------
Outstanding at end of the
  year                             1,050,000        $ 1.85         4,359,787     $    2.00
                              ================                 ===============
                                   1,050,000                       4,359,787
Exercisable at end of the
  year
                              ================                 ===============
</TABLE>

                                      F-26
<PAGE>

(7)      INCOME TAXES

The Company recognized no income tax expense in 2001 and 2000 due to net
operating losses. The Company did not record any income tax benefit related to
the net operating losses and other deferred tax assets as management established
a valuation allowance against the entire amount of those assets. Significant
components of the Company's deferred income tax assets and deferred income tax
liabilities as of December 31, 2001 and 2000 are as follows:
<TABLE>
<CAPTION>
                                                                       2001                 2000
                                                               ------------------------------------------
<S>                                                               <C>                  <C>
Deferred income tax assets:
   Net operating loss carryforwards                               $    7,298,503       $    5,928,214
   Non cash compensation expense                                         260,704              206,521
   Accrued compensation                                                  103,195               36,156
   Patent costs                                                          143,146              157,499
   Financial reporting accruals and reserves                              30,624               79,214
   Deferred revenue                                                      396,122              476,693
                                                               ------------------------------------------
       Total gross deferred income tax assets                          8,232,294            6,884,297
   Less valuation allowance                                           (8,165,182)          (6,799,275)
                                                               ------------------------------------------

       Net deferred income tax assets                                     67,112               85,022
Deferred income tax liability -Property and equipment                    (67,112)             (85,022)
                                                               ------------------------------------------
       Net deferred income taxes                                  $           -        $           -
                                                               ==========================================
</TABLE>

The net change in the total valuation allowance for the year ended December 31,
2001 was an increase of $1,365,907.

At December 31, 2001, the Company had total tax net operating losses of
approximately $19,567,000 that can be carried forward to reduce federal income
taxes, if any. If not utilized, the tax net operating loss carryforwards begin
to expire in 2009. As defined in Section 382 of the Internal Revenue Code, the
Company has undergone a greater than 50 percent ownership change. Consequently,
a certain amount of the Company's tax net operating loss carryforwards available
to offset future taxable income in any one year are limited. The maximum amount
of carryforwards available in a given year is limited to the product of the
Company's value on the date of ownership change and the federal long-term
tax-exempt rate, plus any limited carryforwards not utilized in prior years.

                                      F-27
<PAGE>

(8)      EMPLOYEE BENEFIT PLAN

Employees who are 21 years of age are eligible for participation in the
Specialized Health Products International, Inc. 401(k) Plan and may elect to
make contributions to the plan. The Company matches 100 percent of such
contributions up to five percent of the individual participant's compensation.
The Company's contribution to the plan was approximately $61,500 and $62,300 for
the years ended December 31, 2001 and 2000, respectively.

(9)      RELATED-PARTY TRANSACTIONS

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

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

                                      F-28