SECURITIES AND EXCHANGE COMMISSION

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

                                    FORM 10-K

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


                            For the fiscal year ended
                                December 31, 1996

                             Commission file number
                                     0-26694

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


           Delaware                               87-0431035  
(State or other jurisdiction  of            (IRS employer identification no.)
      incorporation) 

 655 East Medical Drive, Bountiful, Utah 84010              (801) 578-3580
  (Address of principal executive offices)       (Registrant's telephone number,
                                                       including area code)

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

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

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

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

         The aggregate  market value of voting stock held by  non-affiliates  of
the  registrant at March 31, 1997,  was  $26,396,127.  On that date,  there were
9,257,343 outstanding shares of the registrant's common stock.



<PAGE>


SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.


                       TABLE OF CONTENTS TO ANNUAL REPORT
                                  ON FORM 10-K
                          YEAR ENDED DECEMBER 31, 1996


                                     PART I

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

                                     PART II

Item 5.    Market for Registrant's Common Equity and Related
             Stockholder Matters .........................................17
Item 6.    Selected Financial Data .......................................18
Item 7.    Management's Discussion and Analysis of Financial 
             Condition and Results of Operations .........................19
Item 8.    Financial Statements and Supplementary Data ...................24
Item 9.    Changes in and Disagreements with Accountants on 
             Accounting and Financial Disclosure .........................24

                                    PART III

Item 10.   Directors and Executive Officers of Registrant ................24
Item 11.   Executive Compensation ........................................26
Item 12.   Security Ownership of Certain Beneficial Owners 
             and Management ..............................................30
Item 13.   Certain Relationships and Related Transactions ................31

                                     PART IV

Item 14.   Exhibits, Financial Statement Schedules, and 
             Reports on Form 8-K .........................................32


<PAGE>





                                     PART I

Item 1. Business.

General

         The   Company   is   engaged   principally   in  the   development   of
cost-effective,   disposable,  proprietary  health  care  products  and  systems
designed to reduce the spread of disease and the incidence of accidental  injury
in the health care industry.  The Company has created a portfolio of proprietary
health care products that are in various stages of  production,  pre-production,
development and research.  At present, the Company is focusing its resources and
activities  principally on design and  development  of new products  designed to
minimize the risk of the spread of HIV/AIDS,  hepatitis B and other  blood-borne
diseases  through  accidental  needlesticks,  the  development  of other medical
products  and the  marketing  of its current  products  used for the disposal of
contaminated  "sharps"  (i.e.,  needles,  syringes,  blood  collection  systems,
intravenous catheters, surgical blades, lancets, etc.).

         The Company's  products  include those being currently  commercialized,
those utilizing the ExtreSafe(TM) medical needle withdrawal technology and those
relating to filmless digitized imaging technology. In December 1994, the Company
introduced the first in its line of containers for the disposal of  contaminated
sharps.  Additional sizes and versions of its Safety Cradle(R) sharps containers
were  released in the third and fourth  quarters  of 1995.  The Company has also
developed a safety lancet (the "ExtreSafe(TM)  Lancet Strip"), a small hand-held
device  for  penetrating  the skin to  obtain  blood  for  analysis.  Commercial
production of the  ExtreSafe(TM)  Lancet Strip commenced in the first quarter of
1997.

         The  Company  is  developing  a line of  products  using the  Company's
ExtreSafe(TM)   medical  needle   withdrawal   technology  (the   "ExtreSafe(TM)
Products"),  which  incorporates a system to allow a  contaminated  needle to be
automatically  retracted and immediately  encapsulated  without  exposure to the
health  care  worker.   Products  under   development   that   incorporate   the
ExtreSafe(TM)   medical  needle  withdrawal   technology  include  ExtreSafe(TM)
phlebotomy devices,  ExtreSafe(TM) catheters and several different ExtreSafe(TM)
syringe applications. The Company expects to introduce additional products using
this   technology.   Prototypes   of  the   Extresafe(TM)   phlebotomy   device,
Extresafe(TM)  catheters and  Extresafe(TM)  syringes have been  completed.  The
Company has filed two 510(k) applications with the FDA relating to the Company's
ExtreSafe(TM)  medical  needle  withdrawal  technology.   The  Company's  safety
intravenous flow gauge and blood collection devices are in the research stage.

         The Company has entered into a joint venture  to design and  produce an
improved filmless  digitized imaging  technology to be used in the medical field
(the  "Imaging  Products")  which is in the  research  stage.  A model  has been
produced to demonstrate the technology.

Company Background

         The Company was incorporated in 1986 as Santian Ventures,  Inc., a Utah
corporation.  Santian Ventures,  Inc. was organized to engage in the business of
acquiring  assets and properties of any kind without regard to any specific type
of business or industry.  In 1989,  the Company  changed its name to Ware/Hadley
Ventures, Inc. Subsequently, the Company's corporate domicile was changed to the
State of Delaware,  and its name was changed to Russco, Inc., effective December
20, 1990, by merger into a then newly created Delaware corporation.  The Company
had no  operations  until  July 28,  1995.  On that  date the  Company  acquired
Specialized Health Products,  Inc., a Utah corporation ("SHP"), through a merger
with a subsidiary of the Company (the  "Acquisition").  The Company  changed its
name to  "Specialized  Health  Products  International,  Inc."  ("SHPI") and SHP
became a wholly owned  subsidiary of SHPI.  The persons  serving as officers and
directors of SHP immediately  prior to the  consummation of the Acquisition were
elected to the same offices with SHPI and retained their  positions as directors
and  officers of SHP. In  addition,  the  outstanding  securities  of SHP became
outstanding  securities of SHPI. Prior to the  Acquisition,  neither SHP nor any
affiliate of SHP had an interest in Russco, Inc.

<PAGE>

Products

         Sharps Containers

         In January 1994, SHP acquired the Sharp-Trap(R) name and all technology
developed by Sharp-Trap,  Inc., a Michigan  corporation,  relating to a patented
container  entry  system  that was  designed  to reduce  the risk of  accidental
needlesticks and exposure to contaminated instruments when disposing of them. At
the time of SHP's purchase of the Sharp-Trap(R) technology, Sharp-Trap, Inc. was
already manufacturing two sharps container product  configurations,  a 0.5 quart
and a 1.5 quart (the "Sharp-Trap(R)" containers).

         Following  additional  research and  discussions  with medical  product
distributors  and end users,  SHP designed an improved line of Safety  Cradle(R)
sharps  containers (the "Safety  Cradle(R)")  which retained the basic container
closure  technology and  incorporated  improvements  to make them safer,  higher
quality,  easier to use and less costly to  manufacture  than the  Sharp-Trap(R)
containers.  The self-closing Safety Cradle(R)  containers allow for disposal of
sharps in a container that incorporates a self-closing  sharps  containment flap
and incorporates both a temporary and a permanent locking mechanism.  Especially
adapted for alternate site use, SHP's line of Safety Cradle(R) sharps containers
provides  convenience  and  safety  for  home  health  care and  other  portable
applications.  In addition,  each of SHP's sharps  containers  is designed to be
used as a  self-contained  shipping  container,  used in the transport of unused
medical  products,  which readily converts at the user's site into as a safe and
efficacious  sharps container.  The Safety Cradle(R) sharps  container's  novel,
single-molded-part  lid fits three sizes of containers  filling a broad spectrum
of sharps containment applications, especially alternate site use which includes
emergency  vehicle,  in-home and  insurance  testing.  As each Safety  Cradle(R)
sharps container is formed from only two molded parts, unit  manufacturing  cost
places SHP's sharps  containers  in a  competitive  position,  while the special
design for  transportability  permits the Safety  Cradle(R)  container to fill a
unique market niche. These containers are made of polypropylene material.

         Becton  Dickinson and Company ("BD") began  distribution  of the Safety
Cradle(R)  sharps  containers  in the  first  quarter  of 1997,  as part of BD's
exclusive  international  marketing and distribution agreement with the Company.
See  "Marketing and Sales" for a description  of the BD  distribution  agreement
relating to the Company's Safety Cradle(R) sharps containers.

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

         Safety  Cradle(R)  Sharps  Container  - all three sizes will be used as
Safety  Cradle(R)  sharps  containers  to contain  and  dispose of  contaminated
sharps.

         Transporter - all three sizes are designed to house new medical devices
for  shipping to the  customer.  Upon  arrival at a customer  site,  each Safety
Cradle(R) sharps container can be utilized as a sharps disposal container.

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

         The ExtreSafe(TM) Lancet Strip

         Lancets are small devices used to penetrate the skin, usually a finger,
to obtain a few drops of blood for  analysis.  Lancets  are used by health  care
workers and can be self-administered  by individuals,  especially insulin users.
The same safety  concerns  exist with the  handling of lancets as with  needles,
because lancets become contaminated after they come into contact with blood.

         There are a number of lancets on the market  today,  the most common of
which is a small "nail" type instrument which is pressed against the finger, and
the "nail" penetrates the skin by hand pressure. Some lancets penetrate the skin
with a blade,  which generally  produces better blood flow. The nail type lancet
is often inserted into a spring loaded  activation  device,  about the size of a

<PAGE>

large pen. The device is pressed against the skin of the patient's  finger which
is penetrated  when the spring is triggered.  After  triggering,  the activation
device must be emptied and then reloaded with another lancet for use on the next
patient.   Existing   activation  devices  may  become   contaminated  by  blood
splattering  when  the  finger  is  pierced.  To  help  prevent   contamination,
activation  devices should be sterilized or disposed of after each use. However,
while these  activation  devices are  intended to be used on multiple  patients,
they are not designed or intended to be sterilized  thus  increasing the risk of
cross contamination.

         Company management  believes its ExtreSafe(TM)  Lancet Strip is easy to
use and  cannot  be used more  than  once.  The  ExtreSafe(TM)  Lancet  Strip is
provided in cartridge  strips of six lancets per strip, a configuration  that is
patent protected. Lancets are used one at a time, by breaking off and discarding
lancets  immediately  after use.  A lancet  strip is loaded  into a  convenient,
low-cost,  activation  device  which  also  provides  a  means  for  safely  and
conveniently  triggering  each lancet.  After  penetrating  the skin,  the blade
automatically  returns inside its housing and cannot be reused.  The used blade,
encased  by its  protective  housing,  is then  broken  off from the  strip  and
appropriately discarded. Reloading the handle with another cartridge is a simple
process. In the opinion of Company management,  use of the ExtreSafe(TM)  Lancet
Strip  will be  easier  and  faster  than use of  existing  lancets.  This is an
assumption  by   management,   as  no  testing  has  been  performed  to  verify
management's belief. The blade of the Company's ExtreSafe(TM) Lancet Strip has a
revolutionary  design and its rotary spring motion drives the blade both outward
to lance and inward for retraction.  In the opinion of Company  management,  the
ExtreSafe(TM)  Lancet  Strip's  design  makes it less  painful  than  nail  type
lancets,  although no formal comparison  testing has been conducted.  It is also
noteworthy  that part of the lancet in contact with the patient's  skin prior to
lancing is sterile  until  contaminated  by use.  Commercial  production  of the
ExtreSafe(TM)  Lancet  Strip  commenced in the first  quarter of 1997,  although
automated equipment is not yet completed.

Products Under Development

         ExtreSafe(TM) Phlebotomy Devices

         For certain  blood tests it is necessary to draw blood from the patient
for analysis.  The present  method for drawing blood involves the insertion of a
needle,  which is attached to a barrel,  into a blood vessel and obtaining blood
by  way  of  vacuum  pressure,  most  often  into a  small  evacuated  tube-like
container,  which is inserted into the barrel, commonly known as a Vacutainer(R)
(the Vacutainer(R) is not a trademark of the Company). After blood is drawn, the
needle is manually  removed from the patient and, while  continuing to attend to
the patient,  the  Vacutainer(R),  barrel and needle are often placed on a tray,
bed, table or otherwise set aside.  Afterward,  the needle is usually  unscrewed
from the barrel and discarded into a sharps container, while the barrel is often
used again with another patient which increases the risk of cross contamination.
The Company's  ExtreSafe(TM)  phlebotomy  devices  provide a safer  method.  The
device   retracts  the  inserted   needle  into  a  safe  housing   quickly  and
automatically,  minimizing the chance of an inadvertent  stick by a contaminated
needle.  Retraction  is  initiated  by  a  simple  depression  of  a  designated
distortable  portion of the housing  assuring  that there is no action  directed
toward  or away  from the  patient  which  might  affect  the  depth  of  needle
penetration.  The  Company's  ExtreSafe(TM)  technology  has a  number  of other
applications,  including  ExtreSafe(TM)  catheters  and  ExtreSafe(TM)  syringes
described hereafter. Prototypes of the ExtreSafe(TM) phlebotomy device have been
completed.

         ExtreSafe(TM) Catheters

         Catheters  are devices  that are  inserted  into veins or other  bodily
passages to remove blood or other fluids. Contemporary catheter use has problems
similar  to those  faced in  drawing  blood.  Inserting  a  catheter  involves a
percutaneous 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 a  discharge  of blood
which could contaminate the health care worker. Second,  needlesticks occur when
the needle is withdrawn from the catheter because, in most instances, the needle
is temporarily left exposed while the patient is being attended to by the health
care  worker.   Like  the  ExtreSafe(TM)   phlebotomy  device  ,  the  Company's

<PAGE>

ExtreSafe(TM) catheters retract a contaminated needle from a patient and enclose
the needle in a safe  housing  when a health care worker  depresses a portion of
the  housing  at the time the needle is to be  extracted  from the  patient  and
catheter.  Further,  in one version of the  ExtreSafe(TM)  catheter,  a manually
closeable  portion of the catheter stem permits the catheter  channel to be held
closed until a connection  is made to a medical line thereby  restricting  blood
loss. Prototypes of ExtreSafe(TM) catheters have been completed.

         ExtreSafe(TM) Syringes

         Another  area where there is  significant  risk of  needlesticks  is in
syringe use.  There are many  different  aspects of syringe use which range from
integrated  units which  combine a filled  syringe and attached  needle for unit
dose  applications to syringe needles which are attached to separate syringes by
leur-lock  connectors.  Generally,  access to the needle for a medical procedure
involves  removing a needle cap just prior to performing the  procedure.  In the
past, medical personnel  attempted needle protection by replacing the needle cap
after  performing  the  procedure,  but the  volume of  accidental  needlesticks
related  to needle  replacement  resulted  in the  banning  of such  needle  cap
replacement.  Medical  personnel then began disposing of needles by carrying the
exposed needles to sharps containers  (normally found in the patient's room) and
by providing needle/syringe apparatus having a shroud which can be extended over
the exposed  needle after the procedure.  The ExtreSafe(TM) syringe  provides an
extendible  needle which is retracted into a safe housing in a manner similar to
the  retraction of the  ExtreSafe(TM)  phlebotomy  devices and catheter  systems
described above. Prototypes of the ExtreSafeTM syringes have been completed.

         Filmless Digitized Imaging Technology

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

         In October 1995, the Company  entered into a joint venture with Zerbec,
Inc.,  a Texas  corporation,  to  develop,  manufacture,  distribute  and market
products  and  technologies  using a patented  solid  state  filmless  digitized
imaging  technology through Quantum, a Utah corporation formed at that time. The
filmless digitized imaging technology involves a method of directly producing an
electrical  signal  from an image  recorded  on an x-ray  plate.  The  signal is
instantly  digitized  and stored on a CD-ROM  and the same  x-ray  plate is then
available  for a later  procedure.  The filmless  digitized  imaging  technology
eliminates film as the x-ray image  recording  medium and enables x-ray films to
be  translated  to a CD-ROM  format to simplify  their  storage,  retrieval  and
handling.  The Company believes the filmless  digitized  imaging  technology can
revolutionize  the way in which  x-ray  images  are  obtained,  interpreted  and
stored, while also providing clearer images having high resolution that are more
easily interpreted than x-ray films. Furthermore, the technology could represent
a breakthrough in the use of x-ray facilities in mobile medical  emergency units
which has not been achieved to date because of the necessity for local  chemical
handling equipment associated with film processing.

         Under the terms of the joint venture  agreement,  Zerbec,  Inc. and SHP
formed Quantum Imaging Corporation,  a Utah corporation  ("Quantum"),  to finish
the development and commercialize the filmless digitized imaging  technology.  A
prototype has been produced to demonstrate  picture  resolution  compatible with
breast cancer diagnosis.

         At present, SHP and Zerbec, Inc. are equal owners of Quantum.  Pursuant
to the terms of the joint venture  agreement,  Zerbec,  Inc.  assigned  patented
filmless  digitized  imaging  technology  to Quantum,  and will provide  ongoing
support in the  development  and  commercialization  of the  technology.  SHP is

<PAGE>

obligated to contribute $15,000 to Quantum's research and development efforts in
April and $10,000 in May. In  addition,  SHP is  obligated  to pay Quantum up to
$15,000 per month for general and administrative expenses through June 1, 1997.

         For  Quantum to be  successful,  the  Company  estimates  that  between
$3,000,000 and  $6,000,000  will have to be raised.  It is  anticipated  that at
least  one  third of the  outstanding  shares  of  Quantum  will be sold to fund
development  of related  filmless  digitized  imaging  systems  through  initial
production. In addition, if at least $3,000,000 in funding is not raised by June
1, 1997, then Zerbec, Inc. has the right to acquire two-thirds of SHP's interest
in the Quantum for one dollar (the "Zerbec Option").  SHP is trying to negotiate
an agreement with Zerbec, Inc. whereby SHP can acquire Zerbec Inc.'s interest in
Quantum  (the  "Zerbec  Acquisition")  or an  extension of the date at which the
Zerbec Option can be exercised.  There can be no assurance that SHP will be able
to negotiate, on terms acceptable and/or favorable to SHP, an agreement relating
to the Zerbec Acquisition or an extension of the date on which the Zerbec Option
can be exercised.  As a result, the Company's ownership interest may decrease as
a result of the Company's  inability to negotiate an agreement with Zerbec, Inc.
and/or from dilution resulting from new financing.

Company Strategy

         The  Company's  primary  objective is to establish  itself as a leading
developer of safety medical products.  The manufacture of these products will be
subcontracted  to  reputable  manufacturers.  To  achieve  this  objective,  the
Company's growth strategy is focused on the following four principal elements.

     o    Capturing significant market share of the sharps container, lancet, 
     phlebotomy device, IV catheter and syringe markets.

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

     o    Seeking additional market opportunities based on the Company's 
     proprietary technology.

     o    Developing marketing and distribution agreements with large medical
     product organizations.

         Sharps Containers

         Consistent with the Company's objective of selling its products through
third  party  distributors,  on August 26,  1996,  the Company  entered  into an
exclusive distribution agreement (the "Distribution Agreement") with BD relating
to the Company's Safety Cradle(R)  sharps container  products.  The Distribution
Agreement  grants BD an exclusive  world-wide right to market and distribute the
Company's  Safety  Cradle(R)  sharps  container  products for an initial term of
three years,  which term may be extended by BD annually  thereafter.  During the
term of the Distribution Agreement,  marketing of the Company's Safety Cradle(R)
sharps container  products will be done  exclusively  through BD. See "Marketing
and Sales" for a more detailed  discussion of the  distribution of the Company's
Safety Cradle(R) sharps container products through BD.

         Extresafe(TM) Lancets

         The Company  intends to distribute its  Extresafe(TM)  Lancets  through
third party distributors.  The Company has entered into a distribution agreement
National Clinical Supply for the distribution of Extresafe(TM)  Lancets to blood
banks and plasma collection centers in the United States and to the Canadian Red
Cross.  The Company intends to seek out additional  third party  distributors to
market and sell Extresafe(TM) Lancets.

<PAGE>


         Products in Development

         The   Company's   ExtreSafe(TM)   phlebotomy   devices,   ExtreSafe(TM)
catheters,  ExtreSafe(TM)  syringes,  intravenous  flow gauge,  blood collection
device,  other ExtreSafe(TM)  medical needle withdrawal  technology products and
the filmless  digitized  imaging  technology  are in various  stages of research
and/or development.  The Company plans to continue  development of each of these
products/systems.  The necessary production equipment and testing, however, must
be completed before such products are brought to market.

         Future Market Opportunities

         The Company will seek to enter  additional  markets in situations where
it believes  that it can gain  significant  market  share  based on  proprietary
technology or by capitalizing on its sales channels for complementary  products.
There are a number of possible future applications for the Company's technology,
but there can be no assurance that the Company will commence  development of any
such products.

Marketing and Sales

         The  Company  currently  plans to employ a limited  number of sales and
marketing  personnel;  however,  the number will vary depending on the extent to
which the Company contracts with third parties or forms strategic alliances with
other  parties  to market and sell its  products.  The  Company  will seek third
parties to market and  distribute its products in the United States and selected
foreign countries.  The Company may enter into contracts,  licensing  agreements
and joint  ventures with such third parties  whereby the Company would receive a
licensing fee and/or  royalty  payment  based on the  licensee's  revenues.  The
Company  would  likely  enter  into such  licensing  arrangements  with  several
companies based on geographical regions and/or product types, but may enter into
an exclusive  arrangement  with a single company having a major presence in most
markets the  Company  seeks to  penetrate.  There can be no  assurance  that the
Company  will be able to  enter  into  contracts,  license  agreements  or joint
ventures with third parties on terms acceptable to the Company.

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

         Sharps Containers

         On August 26, 1996,  the Company and BD entered  into the  Distribution
Agreement. The Distribution Agreement grants BD an exclusive world-wide right to
market and distribute the Company's Safety  Cradle(R) sharps container  products
for an initial  term of three  years,  which term may be extended by BD annually
thereafter upon pricing terms to be negotiated in good faith.  The  Distribution
Agreement  provides that products may be sold, at BD's option,  either under the
Company's  name or under BD's label.  The products will,  however,  be imprinted
with the Company's name. The first sales pursuant to the Distribution  Agreement
occurred in the first quarter of 1997,  after the Company made  modifications to
the Safety Cradle(R)  sharps container  products as required by the Distribution
Agreement and completed other items as required by the Distribution Agreement.

         The Distribution Agreement presents certain risks to the Company. These
include, among other things (i) reliance on BD for the sale of the products, and
therefore reliance on BD's marketing ability, marketing plans,  creditworthiness
and selling efforts;  (ii) to the extent products are marketed under BD's label,
goodwill associated with the products may inure to the benefit of BD rather than
the  Company;  (iii) the Company has only  limited  protection  from  changes in
manufacturing  costs (other than raw materials costs) during the initial term of
the Distribution Agreement;  and (iv) if the Company is reliant on BD for all or
substantially  all of its sales, the Company may be restricted in its ability to
effectively  negotiate with BD concerning  pricing or other terms upon extension
of the initial three-year term of the Distribution Agreement by BD.

<PAGE>


         Extresafe(TM) Lancets

         The Company has entered into a  distribution  agreement  with  National
Clinical  Supply for the  distribution  of  Extresafe(TM)  Lancets  Strips.  The
distribution arrangement is limited to blood banks and plasma collection centers
in the United  States and to the  Canadian  Red  Cross.  The  Company is seeking
additional  parties to market and  distribute its  Extresafe(TM)  Lancets Strips
upon terms that are favorable to the Company. Until the Company is able to enter
into such  distribution  arrangement,  the Company is  currently  attempting  to
market and sell the  Extresafe(TM)  Lancets  Strips with its own  limited  sales
force.

         Other Products

         The Company currently intends to market and sell its follow on products
in the  United  States  and  selected  foreign  countries  through  third  party
manufacturers  and  distributors.  The Company's plan for the  distribution  and
sales of its products is to target major segments of the respective  markets for
those  products,  including,  major  hospital and  institutional  buying groups,
pharmaceutical  companies,  distributors  and  wholesalers,  and  government and
military  agencies.  The Company  intends to market and  distribute its products
through one or more companies that have a major presence in these markets.

         On March 27, 1997, the Company  entered into a letter of intent with BD
which contemplates a license agreement related to the development,  manufacture,
distribution  and   commercialization  of  a  product  utilizing  the  Company's
ExtreSafe(TM)  technology.  If a license  agreement is consummated,  the Company
anticipates that BD will distribute at least one, and possibly  several,  of the
Company's products utilizing the ExtreSafe(TM) technology on an exclusive basis.
Under the terms of the letter of intent,  BD would pay the Company $4 million in
prepaid  royalties and  development  fees in two equal  payments  which payments
relate  to the  first  product  utilizing  the  ExtreSafe(TM)  technology  to be
licensed to BD. The financial terms relating to additional  products licensed to
BD would be subject  to  negotiation.  The first  payment  would be made  within
thirty days of execution of a license  agreement and the second payment no later
than March 1998.  The proposal is subject to the  satisfactory  completion  of a
legal and  business  investigation  and due  diligence  review of the  Company's
intellectual  property  portfolio  by BD  and  the  approval  of the  boards  of
directors of the Company and BD.

         The Company will not sell its  ExtreSafe(TM)  medical needle withdrawal
technology for commercial use in the United States until regulatory  approval is
obtained.  The Company  must also comply  with the laws and  regulations  of the
various  foreign  countries  in which the  Company  plans to sell its  products.
Certain foreign countries may only require the Company to submit evidence of the
FDA's  pre-market  clearance of the relevant  products  prior to selling in such
countries.  However,  some foreign countries may require  additional testing and
approval. See "Government Regulation."

Industry

         Market

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

<PAGE>


         Accidental Needlesticks

         Needles  for  hypodermic  syringes,  phlebotomy  sets  and  intravenous
catheters  are used for  introducing  drugs and other  fluids  into the body and
drawing blood and other fluids from the body. Among the applications for needles
are  the  injection  of  drugs  (hypodermic  needles),   the  drawing  of  blood
(phlebotomy sets) and the infusion of drugs and nutrients (catheters).  There is
an increasing  awareness of the potential  danger of infections and illness that
result from accidental  needlesticks and of the need for safer needle devices to
reduce the number of accidental needlesticks that occur.

         Infections  contracted  as a result of  accidental  needlesticks  are a
major concern to health care institutions,  health care workers,  sanitation and
environmental  services  workers and  certain  regulatory  agencies.  Accidental
needlesticks  may result in the spread of infectious  diseases such as hepatitis
B, HIV (which may lead to AIDS), diphtheria, gonorrhea, typhus, herpes, malaria,
rocky  mountain  spotted  fever,  syphilis  and  tuberculosis.  According to the
American  Hospital  Association's  (the "AHA")  report dated  December  1992, an
estimated  800,000  occupational  needlesticks  occur  nationwide each year. The
number of reported  needlesticks,  however,  is believed to be only a portion of
the actual number of occurrences. The AHA report estimates that the direct costs
(excluding  costs  such  as  time  lost  from  work  and  other   administrative
activities)  for  medical  evaluation  and  follow-up  treatment  after a single
needlestick injury range from $200 to $1,200.  While it is difficult to estimate
the total costs associated with treating  accidental  needlestick  injuries with
any degree of confidence,  Theta  Corporation,  in its Report No. 346 on Medical
Needles  and  Syringes  dated  January  1994 (the "Theta  Corporation  Report"),
estimates that the total cost associated with treating  accidental  needlesticks
in the  United  States  averages  $3  billion  each  year.  The  AHA  and  other
authorities have also stated that the benefits  resulting from the prevention of
accidental  needlesticks (and of the resulting incidence of infection,  illness,
time lost from work and death) cannot be measured solely by savings in the costs
of medical treatment.

         The  possibility  of  health  care  workers   becoming   infected  from
contaminated  needles has caused and  continues to cause a great deal of concern
in the health care field and the agencies regulating that area. OSHA has adopted
regulations  requiring employers to institute  universal  precautions to prevent
contact  with  blood  and  other  potentially   infectious   materials.   OSHA's
regulations  also require  employers to establish  engineering  controls  (e.g.,
sharps disposal  containers and self-sheathing  needles) and safe work practices
to insure  compliance  with these universal  precautions.  OSHA does not mandate
specific  technologies;  rather,  employers  are  permitted  to choose  the most
appropriate  and  effective  safety  control  devices  to  meet  their  specific
institutional needs.  According to OSHA guidelines,  while employers do not have
to institute the most sophisticated  engineering  controls, it is the employer's
responsibility  to evaluate the  effectiveness of existing controls and evaluate
the  feasibility  of  instituting  more  advanced  engineering  controls.   OSHA
specifically  prohibits  the  recapping,  bending or removal of needles,  unless
there  is  no  feasible  alternative  or if  required  for  a  specific  medical
procedure.

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

<PAGE>


         Disposal of Sharps

         There is extensive everyday use of sharps by doctors,  nurses and other
health care workers who are in danger of  accidental  exposure to  transmittable
blood-borne  diseases  such as AIDS and hepatitis B. The most  extensively  used
sharp is the  medical  needle.  The  Theta  Corporation  Report  estimated  that
approximately  five and one-half  billion  needles and syringes would be sold in
the United States in 1996.  Approximately every thirty nine seconds, about eight
hundred thousand times a year, a health care worker is accidentally injured by a
potentially contaminated needle. Based on source material from 1988 and 1989, it
is  estimated  that  every year as many as 12,000  health  care  workers  become
infected by accidental exposure to hepatitis B.

         OSHA  mandates  the  use of  special  containers  for  sharps  disposal
purposes to reduce the  incidence  of  accidental  transmission  of  blood-borne
diseases.  OSHA  requires  that the  design of sharps  containers  meet  certain
minimum standards of safety. It also makes  recommendations  with respect to the
safe  handling  of  needles.  One  of  the  most  common  causes  of  accidental
needlesticks  occurs when a worker tries to recap a needle. The most recent OSHA
regulations  require that  needles not be recapped or purposely  bent or broken.
After they are used, disposable syringes,  needles, and other sharp items should
be placed in closeable, disposable,  puncture-resistant containers that are leak
proof on the sides and bottom and labeled according to OSHA guidelines.

         Facilities now being affected by current state and federal  legislation
regarding the disposal of biohazardous  items include  hospitals,  laboratories,
clinics,  nursing  homes,  blood  banks,  physicians'  offices  and  mortuaries.
Stricter  legislation may be introduced that relates to all  environments  where
sharps can be found (e.g.,  homes, public facilities,  etc.). In addition,  some
states have passed legislation and others are considering  legislation  relating
to the disposal of sharps.

Patents and Proprietary Rights

         The  Company  owns six  United  States  patents  and has  other  patent
applications  pending in the  United  States  and in other  countries  which are
directly applicable to the Company's Safety Cradle(R) sharps container products.
The Company also owns two United States  patents  relating to its  ExtreSafe(TM)
Lancet Strip,  and six United  States  patents and allowed  patent  applications
relating to its ExtreSafe(TM) medical needle withdrawal technology.  The Company
has two additional  United States patent  applications  pending  relating to its
ExtreSafe(TM) Lancet Strip.
None of the above referenced patents expires before April 1, 2006.

         Quantum, an affiliate of the Company,  owns three United States patents
and has three  Canadian  patents  relating  to the  filmless  digitized  imaging
technology. These patents expire in May 2001, September 2002 and September 2005.
The Company expects that additional  patents will be applied for relating to the
technology owned by Quantum.

         The future  success of the Company may depend upon the  strength of its
intellectual property. The Company believes that the scope of its patents/patent
applications  is  sufficiently  broad to prevent  competitors  from  introducing
devices of similar  novelty and design to compete with its current  products and
that such patents and patent  applications are or will be valid and enforceable.
This belief,  however, may prove to be incorrect if such patents are challenged.
In addition,  patent applications filed in foreign countries and patents granted
in such countries are subject to laws,  rules and  procedures  which differ from
those in the United States. Patent protection in such countries may be different
from patent protection  provided by U.S. laws and may not be as favorable to the
Company. The Company plans to timely file international patents in all countries
in which the Company is seeking market share.

         The Company is not aware of any patent  infringement claims against the
Company.  Litigation  to  enforce  patents  issued to the  Company,  to  protect
proprietary  information owned by the Company,  or to defend the Company against
claimed  infringement of the rights of others,  may occur. Such litigation would

<PAGE>

be costly and could  divert the  resources  of the  Company  from other  planned
activities.  There can be no assurance  that the Company  would be successful in
any such litigation.

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

Manufacturing

         The Company has designed and paid for the construction of various molds
and machinery used to manufacture its Safety  Cradle(R) sharps  containers.  The
Company  owns  all  molds  used  to  manufacture  its  Safety  Cradle(R)  sharps
containers.  The Company  contracts for the manufacture of its Safety  Cradle(R)
sharps  containers  from  outside  sources.  Presently a single  corporation  is
manufacturing the Company's Safety Cradle(R) sharps container  products.  In the
past,  polypropylene  resin,  the major  plastic  material used in the Company's
Safety Cradle(R) sharps containers, has been in short supply for limited periods
of  time.  While  alternative  manufacturers  exist,  changes  in the  Company's
manufacturer  or an  unforeseen  shortage in the supply of  polypropylene  could
disrupt  production  schedules and could  materially  and  adversely  affect the
Company.

         Final   arrangements   have  been  made  for  the  manufacture  of  the
ExtreSafe(TM)  Lancet  Strip.  The  Company  has  not  contracted  yet  for  the
manufacture of the ExtreSafe(TM)  phlebotomy devices,  ExtreSafe(TM)  catheters,
ExtreSafe(TM)  syringes,  intravenous flow gauge, blood collection device, other
ExtreSafe(TM)   medical  needle  withdrawal   technology  products  or  filmless
digitized  imaging  technology.  The materials  that the Company plans to use to
produce these  products are  generally  widely  available.  The Company does not
anticipate  difficulty  in obtaining  such  materials.  At present,  there are a
number of manufacturers that could produce lancet and needle retraction products
and a number of suppliers could supply necessary parts.

Competition

         The leading  manufacturers  in the sharps  container  market are Baxter
International,  Inc., Becton Dickinson and Company,  Devon Industries,  Inc. and
Sage Products, Inc. There are also numerous smaller manufacturers.  A variety of
sharps  disposal  products have been introduced  into the  marketplace.  Some of
these disposal  containers  accommodate only the needle while others accommodate
the needle, syringe and limited surgical instruments. The majority of the sharps
containers on the market,  however,  allow contaminated  instruments to fall out
when  inverted.  Many of the  products  are  unstable if not  supported  by wall
supports or other apparatus.  The Company believes its products are more stable,
safer and more effective than  competitively  priced products on the market.  In
addition,  there are no sharps disposable  transporters or  recycler/transporter
type products on the market today.

         The leading manufacturers in the lancet market are Becton Dickinson and
Company,  Surgicutt,  Inc.,  Miles,  Inc.,  Diagnostic  Corporation,  Boehringer
Mannheim,  Inc.,  and Sherwood  Medical  Company,  a subsidiary of American Home
Products Corporation. There are also numerous smaller manufacturers. To the best
of the Company's knowledge, there are no safety lancets on the market today that
operate in a manner similar to the Company's ExtreSafe(TM) Lancet Strip.

         The leading  manufacturers of standard needles are Becton Dickinson and
Company, Sherwood Medical Company, Inc. and Terumo Medical Corporation of Japan.
The Company is aware of no products on the market today that are  comparable  to
the  ExtreSafe(TM)   needle  withdrawal  devices  (i.e.,  that  is  transversely
activated  to  automatically  extract  a  contaminated  needle  and  immediately
retracts the needle into a safe housing).  Applications for the Company's needle
retraction  technologies may also be found in phlebotomy  devices,  percutaneous
catheter insertion, syringes, and other medical needle devices.

<PAGE>


         While  traditional,  non-safety,  products in the market segments which
the  Company  seeks to  address  compete  primarily  on the basis of price,  the
Company  expects to compete on the basis of health care worker  safety,  ease of
use,  reduced  cost of  disposal,  patient  comfort  and  compliance  with  OSHA
regulations,  but not on the basis of  purchase  price  except  with  respect to
comparable safety products. However, the Company believes that when all indirect
costs (disposal of needles, testing, treatment and workers' compensation expense
related to needlestick  injuries) are  considered,  the Company's  products will
compete effectively both with "traditional"  products and the safety products of
the Company's competitors.

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

Acquisition of Technology/Research and Development

         The Company has devoted  substantially  all of its efforts to acquiring
its health care products and research and development relating thereto. Research
and development costs were $1,264,186, $804,639 and $290,950 for the years ended
December 31, 1996,  1995 and 1994,  respectively.  The Company  plans to acquire
additional  technologies  that it  determines  are  appropriate  to acquire.  In
addition,  the Company plans to continue research and development on its current
products.

Government Regulation

         The Company and its  products  are  regulated  by the FDA,  pursuant to
various  statutes,  including the FD&C Act, as amended and  supplemented  by the
Medical Device  Amendments of 1976 (the "1976  Amendments") and the Safe Medical
Devices Act of 1990. Pursuant to the 1976 Amendments, the FDA classifies medical
devices  intended for human use 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.  Class I devices are products not requiring  pre-market  notification
which 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  ("GMPs").
GMPs include implementation of quality assurance programs, written manufacturing
specifications and processing  procedures,  written distribution  procedures and
record keeping requirements. Class II devices are products for which the general
controls of Class I devices are deemed not  sufficient  to assure the safety and
effectiveness of the device and 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.

         Section  510(k)  of the  FD&C Act  requires  individuals  or  companies
manufacturing  medical devices  intended for human use to file a notice with the
FDA  at  least  ninety  (90)  days  before  introducing  the  product  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 the  registrant  states  the  device is
unclassified, it must explain the basis for that determination.

         In some cases  obtaining  pre-market  approval can take several  years.
Clearance  pursuant to a 510(k)  Notification can be obtained in much less time.
In  general,  clearance  of a 510(k)  Notification  for a Class II device may be
obtained if the registrant  can establish that the new device is  "substantially
equivalent" to another device of such Class that is 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

<PAGE>

device  can  still be  found to be  "substantially  equivalent"  if  information
submitted by the applicant  (including  clinical  data if requested)  supports a
finding  that the new  device is as safe and  effective  as a  legally  marketed
device and does not raise  questions of safety and efficacy  that are  different
from the predicate device.

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

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

         The Company's ExtreSafe(TM) Lancet Strip is a Tier I Class I device. No
pre-market approval or notification is required before the ExtreSafe(TM)  Lancet
Strip  is  sold.  The  Company  must  adhere  to GMP  regulations,  however,  in
connection with its manufacture of the ExtreSafe(TM) Lancet Strip.

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

         The Company  expects its other follow-on  products  (i.e.,  intravenous
flow gauge and blood collection device) to be Class II devices. The Company also
expects  that said  follow-on  products  will not  require  pre-market  approval
applications  but will be eligible for  marketing  clearance  through the 510(k)
Notifications procedure based upon their substantial equivalence to a previously
marketed device or devices.  Although the 510(k) pre-market clearance process is
ordinarily simpler and faster than the pre-market approval  application process,
there  can be no  assurance  that the  Company  will  obtain  510(k)  pre-market
clearance  to  market  its  follow-on  products,  that the  Company's  follow-on
products  will be  classified  as set forth above,  or that,  in order to obtain
510(k) clearance,  the Company will not be required to submit additional data or
meet additional FDA requirements that may  substantially  delay the 510(k) delay
sales  and add to the  Company's  expenses.  Moreover,  such  510(k)  pre-market
clearance,  if  obtained,  may be  subject to  conditions  on the  marketing  or
manufacturing  of the  corresponding  follow-on  products  that may  impede  the
Company's ability to market and/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 GMPs,  which require that companies  manufacture  their products
and  maintain   their   documents  in  a  prescribed   manner  with  respect  to
manufacturing, testing, and quality control activities. 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 for marketing in the United
States  have  FDA  approval  before  they are  exported.  The  Company  is now a
registered manufacturer with the FDA.

<PAGE>


         The FDA inspects medical device manufacturers and distributors, and has
broad  authority  to order  recalls of medical  devices,  to seize  noncomplying
medical devices, to enjoin and/or to impose civil penalties on manufacturers and
distributors   marketing   non-complying  medical  devices,  and  to  criminally
prosecute violators.

         In addition to laws and  regulations  enforced by the FDA and OSHA, the
Company is subject  to  government  regulations  applicable  to all  businesses,
including,  among others, regulations related to occupational health and safety,
workers' benefits and environmental protection.

         Distribution  of the  Company's  products in  countries  other than the
United States may be subject to regulations in those countries.  There can be no
assurance  that the Company  will be able to obtain the  approvals  necessary to
market its phlebotomy device or any other product outside the United States.

Seasonality of Business

         The Company's product sales are not subject to seasonal variations.

Backlog

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

Employees

         As of March 31, 1997, the Company  employed  sixteen people,  including
eight research and development employees,  two sales and marketing employees and
six  administrative  employees.  The  Company  expects  to add to the  number of
employees,  principally  in the areas of sales and  marketing  and  research and
development.  The planned  increase in personnel is based  primarily on expected
increases in production and sales.  The Company's  employees are not represented
by a labor union, and the Company believes its employee relations are good.

Item 2. Properties.

         The Company's offices are located at 655 East Medical Drive, Bountiful,
Utah,  under terms of a lease with an unaffiliated  lessor which expires in June
1998,  with  an  annual  rent  of  approximately   $72,000.   The  lease  covers
approximately 5,200 square feet of space.

Item 3. Legal Proceedings.

         None.

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


         The  Company  held its annual  meeting of  stockholders  on December 4,
1996, at which meeting  certain members of the Company's Board of Directors (the
"Board") were elected.  The Company's  Board is divided into three classes.  One
class of  directors  is elected at each  annual  meeting of  stockholders  for a
three-year  term.  Each year a  different  class of  directors  is  elected on a
rotating  basis.  The terms of Gale H. Thorne and Bradley C. Robinson  expire in
1997 and the terms of David A.  Robinson and J. Clark  Robinson  expire in 1998.
The terms of Gary W. Farnes and Robert R. Walker expire in 1999.

         Gary W.  Farnes  and  Robert  R.  Walker,  both of whom  are  currently
directors of the Company,  were nominated by the Board for election to the class
whose terms expire at the 1999 annual  meeting.  The  stockholders  then elected

<PAGE>

Gary W.  Farnes by a vote of  4,593,548  for and 6,782  withheld  authority  and
elected  Robert  R.  Walker  by a vote  of  4,593,548  for  and  6,782  withheld
authority.

         At the  annual  meeting  the  stockholders  also  voted to  ratify  the
retention of Arthur Andersen LLP ("AA") as the Company's  independent auditor by
a vote of 4,600,330  shares for and 2,000 shares  against.  Prior to the Board's
decision to retain AA on October 14,  1996,  KPMG Peat  Marwick LLP had acted as
the Company's independent auditor.

         Finally,  the  stockholders  voted  to  approve  an  amendment  to  the
Company's  Certificate of Incorporation that authorizes the Board to make, alter
and repeal the Bylaws of the Company,  subject to the power of the  stockholders
of the  Company  to  alter  or  repeal  any  Bylaw  whether  adopted  by them or
otherwise.  The  proposal  was  approved by a vote of  4,570,091  shares for and
16,200 shares against.

         Thereafter,  the Board made the  following  amendments to the Company's
Bylaws:  (i) Article III Section 4 was amended to provide that special  meetings
of the  stockholders may be called at any time by the Board, the Chairman of the
Board,  the Chief  Executive  Officer or the President of the Company,  but such
special meetings may not be called by any other person or persons;  (ii) Article
IV Section 1 was  amended to expand the number of  authorized  Board  members to
nine; and (iii) the Board eliminated Article IX Section 5 which provided that if
any salary,  commission,  bonus, interest, rent, travel or entertainment expense
is  disallowed  in  whole or in part as a  deductible  expense  by the  Internal
Revenue Service,  then the employee recipient shall reimburse the Company to the
full extent of the disallowance.


                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]



<PAGE>





                                     PART II


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


Dividend Policy

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

Share Price History

         The  Company's  common  stock (the  "Common  Stock") has been quoted on
Nasdaq Small-Cap Market since October 1995 under the trading symbol "SHPI." From
July  1995  through  October  1995  the  Common  Stock  was  quoted  on the NASD
Over-the-Counter market. Prior to July 1995, 294,872 shares of Common Stock were
effectively  free trading,  although no active  trading  market  existed for the
Company's  Common  Stock.  On March 31, 1997,  the reported high bid and low ask
prices of the Common Stock were $3.50 and $3.186,  respectively.  The  following
table sets forth the high and low bid  information  of the Common  Stock for the
periods  indicated.  It should be understood  that only 294,872 shares of Common
Stock were  available for trading from July 28, 1995 through July 19, 1996,  and
that such over the counter market quotations reflect inter-dealer prices without
retail markup,  markdown or  commission,  and the quotations may not reflect any
actual market transactions in the Common Stock.

   Quarter Ended                                     High              Low

   1995
   September 30..........................             $5.25            $2.50
   December 31 ..........................            $11.75            $5.25

   1996
   March 31..............................            $12.50           $7.375
   June 30...............................            $11.75            $4.25
   September 30..........................            $4.625           $2.375
   December 31...........................             $3.75            $2.50

   1997
   March 31                                          $3.688            $2.75


Holders of Record

         At March 31,  1997,  there were 353 holders of record of the  Company's
Common Stock.




<PAGE>




Item 6. Selected Financial Data.

         The following  data have been derived from the  Company's  consolidated
financial  statements.  The  information  set  forth  below  is not  necessarily
indicative of the results of future operations and should be read in conjunction
with the Financial Statements and related Notes appearing elsewhere in this Form
10-K:

<TABLE>
<CAPTION>
                                                                          Period Ended
                                            -------------------------------------------------------------------------
                                                                                                       Nov. 19, 1993
                                                 Dec. 31,           Dec. 31,           Dec. 31,       (inception) to
                                                    1996              1995               1994          Dec. 31, 1996
                                               --------------    ---------------    ---------------   ----------------
Statement of Operations Data:

<S>                                         <C>               <C>                <C>                <C>       
Net sales...................................$        74,563   $        447,844   $         33,256   $        555,663   
Cost of sales...............................         70,257            294,171             21,669            386,097
                                               --------------    ---------------    ---------------   ----------------

         Gross profit.......................          4,306            153,673             11,587            169,566
                                               --------------    ---------------    ---------------   ----------------

Operating Expenses:

    Selling, general and administrative.......    2,901,434.         2,133,021            620,022          5,657,927
     Research and development.................    1,264,186.           804,639            290,950          2,359,775
     Write off of operating assets............       72,363.           255,072              --               327,435
                                               --------------    ---------------    ---------------   ----------------

         Total operating expenses.............    4,237,983.         3,192,732            910,972          8,345,137
                                               --------------    ---------------    ---------------   ----------------

         Operating loss.......................    (4,233,677)        (3,039,059)         (899,385)         (8,175,571)

Net other income (expense)....................      140,289.           119,570             (7,563)           252,296
                                               --------------    ---------------    ---------------   ----------------

         Net loss.............................    (4,093,388)        (2,919,489)         (906,948)         (7,923,275)

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

Net loss attributable to common               
  stockholders............................... $   (4,093,388)   $    (2,930,878)   $     (923,728)   $     (7,951,444)
                                               ==============    ===============    ===============   ================

Net loss per common share (1).................$         (.48)   $          (.69)   $         (.75)
                                               ==============    ===============    ===============

Weighted average common shares
     outstanding (1)..........................     8,589,952          4,269,131          1,224,074
                                               ==============    ===============    ===============

Balance Sheet Data (at period end):

Working capital (deficit).....................$       30,754     $    4,194,568     $     (287,723)
Total assets...................................    1,848,839          5,950,728            656,865
Long-term debt, less current maturities........        --                 --               458,333
Total stockholders' equity (deficit)...........    1,513,217          5,369,805           (355,878)
</TABLE>


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

<PAGE>



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

         The  following  discussion  and  analysis  provides  information  which
management  believes is  relevant  to an  assessment  and  understanding  of the
Company's  consolidated  results of  operations  and  financial  condition.  The
discussion  should  be read  in  conjunction  with  the  consolidated  financial
statements and notes thereto.  Wherever in this discussion the term "Company" is
used, it should be understood to refer to SHPI and SHP, on a consolidated basis,
except  where  the  context  clearly  indicates  to the  contrary.  Prior to the
Acquisition, SHPI had no operations.

Overview

         From its inception, the Company has incurred losses from operations. As
of December 31, 1996, the Company had cumulative net losses totaling $7,951,444.
To date,  the  Company's  principal  focus  has been  the  design,  development,
testing, and evaluation of its Safety Cradle(R) sharps containers, ExtreSafe(TM)
Lancet Strip,  ExtreSafe(TM) medical needle withdrawal  technology,  intravenous
flow gauge,  blood  collection  device,  and other products,  and the design and
development  of its  molds  and  production  processes  relating  to its  Safety
Cradle(R) sharps containers.

Financial Position

         The Company had  $252,694 in cash and cash  equivalents  as of December
31, 1996.  This  represented  a decrease of  $3,998,890  from December 31, 1995.
Working  capital as of December 31, 1996,  also decreased to $30,754 as compared
to  $4,194,568  at December 31, 1995.  These  decreases  were largely due to the
Company's net loss of $4,093,388 and $580,468 in capital expenditures during the
year ended December 31, 1996.

Years Ended December 31, 1996, 1995 and 1994

         During the year ended  December  31,  1996,  the  Company  had sales of
$74,563,  compared  with  sales of  $447,844  and  $33,256  for the years  ended
December  31, 1995 and 1994,  respectively.  All sales  relate to the  Company's
sharps  container  products  which were the only product the Company was selling
during  said  periods.  Sales  during the year ended  December  31,  1996,  were
hampered because the Company entered into an agreement (the "Agreement") with BD
on March 11,  1996,  whereby BD was given the right to  evaluate  the  Company's
Safety  Cradle(R) sharps container for a period of three months while BD and the
Company  considered  entering  into  an  exclusive  marketing  and  distribution
agreement.  This Agreement prohibited the Company from entering into distributor
agreements  that  would  interfere  with  the  Company  executing  an  exclusive
marketing and  distribution  agreement with BD upon expiration of the Agreement.
The Agreement, therefore, limited sales of the Company's Safety Cradle(R) sharps
container products in the second and third quarters of 1996. In addition,  sales
during the first and second  quarters of 1996 were hampered due to  improvements
that were being made to the molds used to produce the Company's sharps container
products. The improvements were completed in the first quarter of 1996.

         On August 26, 1996, the Company entered into an exclusive  distribution
agreement  (the  "Distribution  Agreement")  with BD relating  to the  Company's
Safety Cradle(R) sharps container products. The Distribution Agreement grants BD
an exclusive  world-wide  right to market and  distribute  the Company's  Safety
Cradle(R)  sharps container  products for an initial term of three years,  which
term may be extended by BD annually thereafter.  The first sales pursuant to the
Distribution Agreement occurred in the first quarter of 1997. Sales were delayed
because the Distribution  Agreement required the Company to receive a new 510(k)
Notification  relating to its Safety Cradle(R) sharps container  products,  make
certain  modifications  to the containers and its  manufacturer  was required to
meet  certain BD  standards  before  sales  would begin  (collectively,  the "BD
Modifications").  The BD  Modifications  were completed  before year end. BD was
then late in getting the Safety Cradle(R) sharps container products to its sales
people and, as a result, sales of the products were delayed until March 1997.

         The Distribution  Agreement provides that products may be sold, at BD's
option,  either under the Company's name or under BD's label. The products will,
however,  be imprinted with the Company's  name. The sales price of the products

<PAGE>

to  BD  under  the   Distribution   Agreement  can  be  adjusted  under  certain
circumstances  for changes in raw material  costs during the initial term of the
Distribution  Agreement.  The Company is not required to distribute  any future,
unrelated products through BD.

         The Distribution Agreement presents certain risks to the Company. These
include,  among other  things (i)  reliance  for sale of the products on BD, and
therefore reliance on BD's marketing ability, marketing plans, credit-worthiness
and  selling  efforts;  (ii) if the  products  are  marketed  under BD's  label,
goodwill associated with the products may inure to the benefit of BD rather than
the  Company;  (iii) the Company has only  limited  protection  from  changes in
manufacturing  costs (other than raw materials costs) during the initial term of
the Distribution Agreement;  and (iv) if the Company is reliant on BD for all or
substantially  all of its sales, the Company may be restricted in its ability to
effectively  negotiate with BD concerning  pricing or other terms upon extension
of the initial three-year term of the Distribution Agreement by BD.

         Research and  development  expenses were  $1,264,186 for the year ended
December  31,  1996,  compared  with  $804,639  and $290,950 for the years ended
December  31, 1995 and 1994,  respectively.  The  Company's  efforts in the year
ended December 31, 1996,  focused on making certain  improvements  to the Safety
Cradle (R) sharps  container  products  that were  required by the Agreement and
otherwise,  finalizing  the  development  of  the  ExtreSafe(TM)  Lancet  Strip,
ExtreSafe(TM) medical needle withdrawal  technology,  intravenous flow gauge and
blood collection  device.  The Company's efforts in the years ended December 31,
1995 and 1994,  were  focused  on  refining  the design and molds for its Safety
Cradle(R) sharps container products,  and upon the design and development of its
ExtreSafe(TM) Lancet Strip,  ExtreSafe(TM) medical needle withdrawal technology,
intravenous flow gauge and blood collection device.

         Research and  development  expenses during 1996 were limited because of
funding constraints.  Funding constraints also set back the anticipated dates on
which the Company's  products under development will be brought to market. It is
anticipated that if the Company has adequate  funding during 1997,  research and
development expenses will increase over 1996 levels.

         Selling,  general and  administrative  expenses were $2,901,434 for the
year ended December 31, 1996,  compared to $2,133,021 and $620,022 for the years
ended December 31, 1995 and 1994, respectively.  The increased costs from period
to period have resulted  mainly from  increases in the  following  expenditures.
First,  selling and consulting costs increased as a result of increased  efforts
to market and sell the Safety  Cradle (R)  sharps  container  products.  Second,
salaries  and  benefits  increased  as a result  of  hiring  additional  product
development,    sales   and   marketing   personnel   to   support   sales   and
commercialization  of the Company's  products as well as pay  increases  made to
certain of the Company's employees. Third, consulting, legal and accounting fees
increased as a result of the Company's entrance into the financial markets,  the
increased  level of operational  sophistication  and of the Company's  reporting
obligations under applicable securities laws. Finally,  travel and entertainment
costs   increased   as  a  result  of  expenses   associated   with   financing,
manufacturing, selling, and marketing activities.

         Net other  income was  $140,289  for the year ended  December 31, 1996,
compared with net other income of $119,570 for the year ended  December 31, 1995
and net other expense of $(7,563) for the year ended December 31, 1994.  Most of
the other income earned during 1996 and 1995 relates to interest earned on funds
derived from the sale of the Company's equity  securities in August 1995. Unless
the Company  generates  additional cash through product sales or financing,  the
other income for 1997 will be  substantially  less than other income during 1996
and 1995.

Liquidity and Capital Resources

         The Company's  need for funds has increased from period to period as it
has increased  its research and  development  activities,  expanded  staff,  and
commenced the purchase and  construction of molds and production  equipment.  To
date the  Company  has  financed  its  operations  principally  through  private
placements of equity securities and debt. Through December 31, 1996, the Company
had  received  net  proceeds  of  approximately   $9,200,000  through  financing

<PAGE>

activities.  The bulk of the  proceeds  from the  Company's  financing  activity
resulted  from the sale of equity  securities.  As of  December  31,  1996,  the
Company's  liabilities  totaled  $335,622.  All of these liabilities are current
liabilities.  The Company had working capital as of December 31, 1996 of $30,754
and the Company used net cash in operating activities of $3,558,778 during 1996.

         At December 31, 1996,  the Company had 3,110,875  Series A Warrants and
1,290,375  Series B Warrants  outstanding  which are  exercisable  for shares of
Common  Stock of the Company at a price of $3.00 per share in the case of Series
A Warrants  and $2.00 per share in the case of Series B Warrants,  and expire on
the earlier of (a) two years from the date of  effectiveness  of a  registration
statement under the Securities Act covering the issuance of the shares of Common
Stock  underlying  such  Warrants  upon issuance by the Company or for resale of
such stock by the holder,  which  period shall be extended  day-for-day  for any
time that a prospectus  meeting the  requirements  of the  Securities Act is not
available,  or (b) the date specified in a notice of redemption from the Company
(subject to the prior right of the holder to exercise  the Warrants for at least
20 days  following  the date of such notice) in the event that the closing price
of the Common Stock for any ten  consecutive  trading days preceding such notice
exceeds $6.00 per share and subject to the availability of a current  prospectus
covering the underlying  stock.  Thus, the Company may accelerate the expiration
of the  Warrants in the event that the average  market price of the Common Stock
exceeds  $6.00 per share,  in which event the holders of the  Warrants  would be
permitted  to  exercise  the  Warrants  during a period of not less than 20 days
following notice of such an event. The exercise of all the Series A and Series B
Warrants would result in a gross cash inflow to the Company of $11,913,375.  The
Company  presently intends to accelerate the expiration of the Warrants when and
if such conditions are met. All of the Warrants are currently outstanding. There
can be no assurance, however, that any of the Warrants will be exercised.

         On September 1, 1995, the Company adopted a non-qualified  stock option
plan ("NQSOP") wherein the Company is authorized to grant options to purchase up
to 1,500,000  shares of Common Stock of the Company.  All options are granted at
exercise prices equal to the fair market value of the Company's  common stock on
the date of grant.  The Company has granted stock options to purchase  1,491,000
shares of Common Stock under the NQSOP.

         In  addition to the options  outstanding  under the NQSOP,  the Company
also has 40,500 options outstanding that were issued under the SHP non-qualified
stock option plan ("SHP NQSOP") that became  obligations of the Company pursuant
to the terms of the Acquisition.

         The Company has provided  certain officers and directors of the Company
the  opportunity  to receive up to an aggregate  of  2,000,000  shares of Common
Stock (the "Earn-Out  Shares").  Any issuance of Earn-Out  Shares would be based
upon the level of pre-tax  consolidated  net  income,  adjusted  to exclude  any
charge  arising  from the  obligation  to issue or the  issuance of the Earn-Out
Shares and any income or charge  associated with  non-recurring or extraordinary
items as determined in accordance with generally accepted accounting  principles
("Adjusted PTNI").

         The Company expects that the issuance of Earn-Out Shares will be deemed
to be  compensation to the recipients and will result in a charge to earnings in
the year or years the Earn-Out Shares are earned, in an amount equal to the fair
market  value of the  Earn-Out  Shares.  This  charge to  earnings  could have a
substantial  negative impact on the earnings of the Company in the year or years
in which the compensation expense is recognized.

         The effect of the charge to earnings  associated  with the  issuance of
Earn-Out  Shares could place the Company in a net loss position for the relevant
year,  even though the Adjusted  PTNI was at a level  requiring  the issuance of
Earn-Out Shares.  Because Earn-Out Shares are issuable based on the results of a
single year,  the Adjusted PTNI in a particular  year could require the issuance
of Earn-Out Shares even though the cumulative  Adjusted PTNI for the three years
1996,  1997 and 1998, or any  combination of those years,  could reflect a lower
amount of  Adjusted  PTNI that  would not  require  the  Company  to issue  such
Earn-Out Shares or even a loss at the Adjusted PTNI line.  There is no assurance

<PAGE>

that years  subsequent to the year or years in which Earn-Out  Shares are issued
will  produce  the  same  level  of  Adjusted  PTNI or will be  profitable.  The
management of the Company may have the discretion to accelerate or defer certain
transactions  that could shift  revenue or charges  between  years or  otherwise
affect the Adjusted PTNI in any year or years.

         The  Company  has  agreed to file a  registration  statement  under the
Securities Act with respect to the Earn-Out Shares, when issued. The issuance of
the  Earn-Out  Shares,  or the  perception  that the  issuance of such stock may
occur, could adversely affect prevailing market prices for the Common Stock.

         The Company and Zerbec,  Inc., as joint  venturers,  formed  Quantum to
develop,  make and distribute an improved  filmless  digitized  imaging  system.
Pursuant to the terms of the joint  venture  agreement,  Zerbec,  Inc.  assigned
patented  filmless  digitized  imaging  technology to Quantum,  and will provide
ongoing support in the development and commercialization of the technology.  SHP
has agreed to provide  $15,000 in funding  during  April 1997 and $10,000 in May
1997,  which  funds  shall  be  used  to  support  the  Quantum's  research  and
development  activities.  In  addition,  SHP is  obligated  to pay Quantum up to
$15,000 per month for general and administrative expenses through June 1, 1997.

         For  Quantum to be  successful,  the  Company  estimates  that  between
$3,000,000 and  $6,000,000  will have to be raised.  It is  anticipated  that at
least  one-third  of the  outstanding  shares  of  Quantum  will be sold to fund
development  through initial  production of related filmless  digitized  imaging
systems. In addition, if at least $3,000,000 in funding is not raised by June 1,
1997, then Zerbec, Inc. has the right to acquire two-thirds of SHP's interest in
the Venture for one dollar (the "Zerbec Option").  SHP is trying to negotiate an
agreement with Zerbec,  Inc.  whereby SHP can acquire Zerbec Inc.'s  interest in
Quantum  (the  "Zerbec  Acquisition")  or an  extension of the date at which the
Zerbec  Option  vests.  There  can be no  assurance  that  SHP  will  be able to
negotiate, on terms acceptable and/or favorable to SHP, an agreement relating to
the Zerbec  Acquisition  or an extension of the date on which the Zerbec  Option
vests. As a result,  the Company's  ownership  interest may decrease as a result
the Company's  inability to negotiate an agreement with Zerbec, Inc. and/or from
dilution by a financing party.

         On January 10, 1997,  David A. Robinson  exercised his stock options to
acquire 87,500 shares of the Company's common stock for $175,000.

         On March 27, 1997, the Company  entered into a letter of intent with BD
which contemplates a license agreement related to the development,  manufacture,
distribution  and   commercialization  of  a  product  utilizing  the  Company's
ExtreSafe(TM)  technology.  If a license  agreement is consummated,  the Company
anticipates that BD will distribute at least one, and possibly  several,  of the
Company's products utilizing the ExtreSafe(TM) technology on an exclusive basis.
Under the terms of the letter of intent,  BD would pay the Company $4 million in
prepaid  royalties and  development  fees in two equal  payments  which payments
relate  to the  first  product  utilizing  the  ExtreSafe(TM)  technology  to be
licensed to BD. The financial terms relating to additional  products licensed to
BD would be subject  to  negotiation.  The first  payment  would be made  within
thirty days of execution of a license  agreement and the second payment no later
than March 1998.  The proposal is subject to the  satisfactory  completion  of a
legal and  business  investigation  and due  diligence  review of the  Company's
intellectual  property  portfolio  by BD  and  the  approval  of the  boards  of
directors of the Company and BD.

         On March 31,  1997,  the  Company  completed a private  placement  (the
"Private  Placement")  wherein the Company raised $1,539,570 through offering of
Units to certain  accredited  investors for  forty-five  dollars ($45) per Unit.
Each Unit  consisted  of fifteen  (15)  shares of the  Company's  $.02 par value
common  stock and Series C Warrants to purchase  five (5) shares of Common Stock
at a price of $3.00 per share.  The Series C Warrants will be  exercisable  upon
issuance and expire two years from the date of  effectiveness  of a registration
statement  under the Securities  Act of 1933 (the "Act")  covering the resale of
the shares of Common Stock underlying the Series C Warrants by the holder, which
period shall be extended  day-for-day for any time that a prospectus meeting the
requirements  of the  Act is not  available.  The  Company  may  accelerate  the
expiration  of the Series C Warrants in the event that the average  market price
of the Company's Common Stock for 10 consecutive  trading days exceeds $6.00 per
share. In the event that the Company  accelerates the expiration of the Series C

<PAGE>

Warrants,  the holders of the Series C Warrants  would be  permitted to exercise
the Series C Warrants during a period of not less than 20 days following  notice
of such event. The Company has agreed to file a registration  statement covering
the  resale of the  Common  Stock  and  Common  Stock  underlying  the  Series C
Warrants.

         The Company's working capital and other capital requirements during the
next year or more will vary based upon a number of factors,  including  the cost
to complete  development and bring the  ExtreSafe(TM)  medical needle withdrawal
technology, intravenous flow gauge blood collection device and other products to
commercial  viability,  and the  level of sales  and  marketing  for the  Safety
Cradle(R) sharps containers and ExtreSafe(TM) Lancet Strip.

         The Company believes that the proceeds from the Private  Placement,  as
well as  sales  generated  from  the  Safety  Cradle(R)  sharps  containers  and
ExtreSafe(TM)  Lancet  Strips  will  be  sufficient  to  support  the  Company's
operations and planned  capital  expenditures  through 1997 if the Company slows
the  commercialization  of  its  products  in  development  and  sales  increase
substantially.  Management  is  planning,  however,  to raise  additional  funds
through a public or private offering of securities so  commercialization  of its
products under development is not further delayed.

         If sales do not begin to increase  sufficiently during second and third
quarters  of 1997,  the  Company  can and will cut  operating  costs and capital
expenditures by focusing only on its sharps container, lancet products and other
products  that are or will  shortly  be ready to sell.  The  Company's  failure,
however,  to produce or sell sufficient  quantities of Safety  Cradle(R)  sharps
container  products and/or  ExtreSafe(TM)  Lancets,  raise additional  funds, or
sufficiently  cut  the  cost  of  operations  and  capital   expenditures  could
materially  and adversely  affect the  Company's  cash flows.  In addition,  the
Company's business plans may change or unforeseen events may occur which require
the Company to raise additional funds. Notwithstanding the foregoing, management
may deplete cash reserves by  maintaining  or increasing  spending if management
determines that additional funding is likely.

Inflation

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

Forward-Looking Statements

         When used in this Form 10-K or other  filings by the  Company  with the
Securities  and Exchange  Commission,  in the Company's  press releases or other
public  or  shareholder  communications,  or in oral  statements  made  with the
approval of an authorized officer of the Company's executive officers, 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.

         The  Company  cautions  readers  not to  place  undue  reliance  on any
forward-looking  statements,  which speak only as of the date made,  and advises
readers that forward-looking statements involve various risks and uncertainties,
including but not limited to risk of product demand, market acceptance, economic
conditions,   competitive   products  and  pricing,   difficulties   in  product
development,  commercialization,  and technology,  and other risks. Furthermore,
manufacturing  delays may result from  additional  mold  redesigns or delays may
result from the failure to timely  obtain FDA approval to sell future  products.
In addition,  sales through BD or otherwise may not commence as anticipated  due
to delays by BD or otherwise. If and when such sales commence, the sales may not
be as substantial as anticipated.  As a result, the Company's actual results for
future periods could differ materially from those anticipated or projected.

         The  Company  does  not  undertake,   and  specifically  disclaims  any
obligation to update any  forward-looking  statements to reflect  occurrences or
unanticipated events or circumstances after the date of such statement.

<PAGE>


Item 8. Financial Statements and Supplementary Data

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

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

         None.


                                    PART III


Item 10. Directors and Executive Officers of Registrant.

         Set forth below is certain information concerning each of the directors
and executive officers of the Company as of March 31, 1997:
<TABLE>
<CAPTION>
                                                                                    
                                                                                With SHP and
          Name            Age                  Position                         Company Since
<S>                      <C>  <C>                                                       <C>  
 David A. Robinson (1)    53   President, Chief Executive Officer, Chairman of          1993
                               the Board and Director

 Bradley C. Robinson (1)  28   Vice President, Investor Relations, and Director         1993

 Dr. Gale H. Thorne       64   Vice President, Product Development and Director         1994

 J. Clark Robinson        54   Vice President, Chief Financial Officer,                 1995
                               Secretary and Director

 Gary W. Farnes (2)       55   Director                                                 1995

 Robert R. Walker(2)      66   Director                                                 1994
---------------
</TABLE>

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

         David  A. Robinson. Mr. Robinson  is  the  President,  Chief  Executive
Officer and Chairman of the Board of the Company.  He has been a Director  since
November 1993.  From November 1992 to November 1993, Mr.  Robinson was President
of EPC Products,  Inc., a packaging company based in Bountiful,  Utah. From 1981
to 1992,  Mr.  Robinson was President of Royce  Photo/Graphics  Supply,  Inc., a
distributor  of  photographic  and graphic arts  equipment and supplies based in
Glendale, California. He holds a Masters degree in Business Administration and a
Masters degree in Management Science from the University of Southern California.
Mr.  Robinson  is the  brother  of J.  Clark  Robinson,  Vice  President,  Chief
Financial  Officer,  Secretary  and a Director of the  Company,  and an uncle of
Bradley C. Robinson, Vice President,  Investor Relations,  and a Director of the
Company.

         Bradley  C.  Robinson. Mr. Robinson  is the  Vice  President,  Investor
Relations,  of the Company.  He has been a Director since  November  1993.  From
November 1992 to November 1993, Mr. Robinson was Vice President of EPC Products,
Inc., a packaging  company  based in  Bountiful,  Utah.  From 1990 to 1992,  Mr.

<PAGE>

Robinson  was  employed by Cargo  Link,  a Salt Lake City,  Utah,  import-export
broker.  Mr.  Robinson is the son of J. Clark Robinson,  Vice  President,  Chief
Financial Officer, Secretary and a Director of the Company, a nephew of David A.
Robinson, President, Chief Executive Officer, and a Director of the Company, and
a son-in-law of Gary W. Farnes, a Director of the Company.

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

         J.  Clark  Robinson.  Mr.  Robinson  became  a  Vice  President,  Chief
Financial Officer, Secretary and Director of the Company in September 1995. From
1974  to  the  present,   Mr.  Robinson  has  been  General  Manager  of  Lagoon
Corporation, which operates an amusement park in the Salt Lake City, Utah, area.
At present, Mr. Robinson spends  approximately  one-half of his time working for
the  Company  and  one-half  of his time  working  for Lagoon  Corporation.  Mr.
Robinson has also been President of the  International  Association of Amusement
Parks and Attractions, an international industry trade group. He holds a Masters
degree in Business  Administration  from the University of Utah. Mr. Robinson is
the  brother of David A.  Robinson,  President,  Chief  Executive  Officer and a
Director of the Company, and the father of Bradley C. Robinson,  Vice President,
Investor Relations, and a Director of the Company.

         Gary W. Farnes. Mr. Farnes is a Director of the Company. He has  been a
Director since 1995 and is currently the Senior Executive Vice President of Holy
Cross Health System, a multi-hospital  health care system headquartered in South
Bend,  Indiana.  From 1977 to 1995,  Mr.  Farnes was  employed by  Intermountain
Health  Care,  a regional  hospital  company.  At the time that Mr.  Farnes left
Intermountain  Health  Care,  he held the position of Vice  President,  Hospital
Division.  He holds a Bachelors  degree in Business and Psychology  from Brigham
Young  University  and a Masters degree in Business  Administration  from George
Washington  University.  Mr. Farnes is the father-in-law of Bradley C. Robinson,
Vice President, Investor Relations, of the Company.

         Robert R. Walker. Mr. Walker  is a Director of the  Company. Mr. Walker
has been a  Director  since  March  1994.  He is  currently  self-employed  as a
consultant in the health care industry primarily in the area of start-up medical
device  companies.  From 1976 to 1992, Mr. Walker was employed by IHC Affiliated
Services  Division of Intermountain  Health Care, a regional  hospital  company,
from which he retired as  President  of IHC  Affiliated  Services.  He  recently
retired as the  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.

         Executive officers of the Company are elected by the Board on an annual
basis and serve at the discretion of the Board.  The Company's  Board is divided
into three classes.  One class of directors is elected at each annual meeting of
stockholders  for a three-year  term.  Each year a different  class of directors
will be  elected on a rotating  basis.  The terms of Gale H.  Thorne and Brad C.
Robinson  will  expire in 1997,  the  terms of David A.  Robinson  and J.  Clark
Robinson  will  expire in 1998 and the  terms of Gary W.  Farnes  and  Robert R.
Walker will expire in 1999.

         The Board has an Executive  Committee and Compensation  Committee.  The
Executive  Committee has the authority to act on various matters requiring Board

<PAGE>

action. The Compensation  Committee makes decisions regarding salaries and other
compensation.  As  part  of its  responsibilities,  the  Compensation  Committee
administers the Company's "NQSOP".

Section 16(a) Beneficial Ownership Reporting Compliance

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

         Based  solely on the  Company's  review of such forms  furnished to the
Company and representations from certain reporting persons, the Company believes
that all filing  requirements  applicable to the Company's  executive  officers,
directors and more than 10%  stockholders  were complied with except that: (i) a
Form 4 filed on behalf of John T. Clarke, a former director of the Company,  was
filed with the SEC on October 31, 1996, that reported a transaction occurring in
August 1996; and (ii) a Form 4 and a Form 5 on behalf of Gale Thorne, a director
of the Company, was filed on April 7, 1997, that reported transactions occurring
in January 1997 and April 1996, respectively.

 Item 11. Executive Compensation.

         Included   below  are  tables  which  set  forth  certain   information
concerning  compensation  paid by the Company to its Chief Executive Officer and
all other  executive  officers  with annual  compensation  in excess of $100,000
(determined  as of December  31,  1996) (the "Named  Executive  Officers").  The
tables include columns related to stock options.

         Summary  Compensation  Table.  The  following  table  provides  certain
summary  information  regarding  compensation  paid by the  Company to the Named
Executive Officers. The amounts set forth were paid by SHP for services rendered
to SHP.
<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE

                                           Annual Compensation                        Long-Term Compensation Awards
                                                                          Restricted     Stock                    All Other
       Name and                   Salary      Bonus        Other Annual     Stock       Options/    LTIP        Compensation
   Principal Position     Year    ($)(1)      ($)(2)    Compensation($)(3)  Awards ($)    SAR(#)    Payouts($)     ($)(9)
---------------------    ------  --------    -------    ------------------ ----------- ----------  -----------  ------------  
<S>                       <C>    <C>         <C>             <C>           <C>         <C>           <C>        <C>
David A. Robinson,        1994   120,000       ---             ---             ---      90,000(5)      ---          ---
President, CEO, Chairman  1995   193,590      25,000           ---          666,666(4) 300,000(7)      ---         1,876
of the Board and          1996   240,000       ---            8,000            ---         ---         ---         5,906
Director

Bradley C. Robinson, VP,  1994     89,128      ---             ---             ---      90,000(5)      ---          ---
Operations and Investor   1995   148,590      25,000           ---          666,666(4) 300,000(6)      ---          625
Relations and Director    1996   160,000       ---            5,033            ---         ---         ---          980

Dr. Gale H. Throne, VP    1994     16,958      ---             ---             ---      36,000(8)      ---          ---
Product Development and   1995   128,333      25,000           ---             ---      57,000(6)      ---        2,758
Director                  1996   150,000       ---            4,640            ---      40,000(6)      ---          364
-------------------
</TABLE>

(1)  All  amounts  paid  to as  salary  were  paid  pursuant  to  the  Company's
     obligations   under   employment   contracts  with  the  above   referenced
     individuals.  Said  employment  contracts  were  amended  from time to time
     during  the  periods  set forth  above.  The annual  salaries  of the Named
     Executive  Officers for 1996, as set forth in their  employment  contracts,
     are $240,000 for Mr. David A.  Robinson,  $160,000 for Mr. Brad C. Robinson
     and $150,000 for Dr. Gale H. Thorne.

<PAGE>


(2)  The  cash  bonuses  were  awarded  by the  Company  in  recognition  of the
     recipients' contributions toward the successful Acquisition.

(3)  These amounts  represent the amounts paid by the Company into the Company's
     401(k) retirement plan for the benefit of the Named Executive Officer.

(4)  These are Earn-Out shares. David A. Robinson,  Bradley C. Robinson and John
     T. Clarke,  who are  respectively the President,  Chief Executive  Officer,
     Chairman of the Board and a Director; a Vice President and Director;  and a
     former  Director of the Company  have the  opportunity  to receive up to an
     aggregate of 2,000,000  additional  shares of common stock. Any issuance of
     Earn-Out Shares would be based upon the level of pre-tax  consolidated  net
     income,  adjusted  to  exclude  any  charge  to  income  arising  from  the
     obligation  to issue or the issuance of the Earn-Out  Shares and any income
     or  charge  associated  with   non-recurring  or  extraordinary   items  as
     determined in accordance  with  generally  accepted  accounting  principles
     ("Adjusted  PTNI").  At the date the Earn-Out Shares  agreement was adopted
     the value of the Common  Stock was $2.00 per share.  At December  31, 1996,
     the Company's common stock was trading at $3.56.

     The  Earn-Out  Shares have not  vested.  No  dividends  will be paid on the
     Earn-Out  Shares unless and until they vest. The Earn-Out  Shares will vest
     as  follows.  If  Adjusted  PTNI for 1996,  1997 or 1998  equals or exceeds
     $1,500,000, then an aggregate of 350,000 Earn-Out Share will be issued, but
     only one  issuance  of 350,000  Earn-Out  Shares  will be made based on the
     $1,500,000 level of Adjusted PTNI.

     If Adjusted PTNI for 1996,  1997 or 1998 equals or exceeds  $5,000,000 then
     there will be issued that aggregate number of Earn-Out Shares calculated by
     subtracting  the number of Earn-Out  Shares  previously  issued or issuable
     based on the attainment of a lesser Adjusted PTNI in the same year (if any)
     from 1,100,000,  provided that only one issuance of Earn-Out Shares will be
     made based on the $5,000,000 level of Adjusted PTNI.

     If Adjusted PTNI for 1996, 1997 and 1998 equals or exceeds $8,000,000, then
     there will be issued that aggregate number of Earn-Out Shares calculated by
     subtracting  the number of Earn-Out  Shares  previously  issued or issuable
     based on the attainment of a lesser Adjusted PTNI in the same year (if any)
     from  2,000,000,  provided  that in no event will an aggregate of more than
     2,000,000 Earn-Out Shares be issued.

(5)   These options were exercised on September 1, 1995 and  were  issued  under
      the SHP NQSOP

(6)   These options were issued pursuant to the NQSOP.

(7)   These options were issued pursuant to the NQSOP and 87,500 of these shares
      were exercised on January 10, 1997.

(8)  Options  to  purchase  18,000  shares of the  Company's  Common  Stock were
     exercised  on  September  1, 1995.  Said  options were issued under the SHP
     NQSOP.

(9)  These  amounts  represent  the  amounts  paid by the  Company for term life
     insurance  for the  benefit of the Named  Executive  Officer.  The  related
     insurance policies have no cash surrender values.


<PAGE>



         Option  Grants in Fiscal  Year  1996.  The  following  table sets forth
certain  information  with respect to stock option  grants during the year ended
December 31, 1996 to Named Executive Officers.
<TABLE>
<CAPTION>

                                         OPTION GRANTS IN LAST FISCAL YEAR

                                                      Individual Grants
                                 ------------------------------------------------------------
                                                                                                 Potential Realizable
                                    Number of        Percent of                                Value at Assumed Annual
                                      Shares        Total Options   Exercise                     Rate of Stock Price
                                    Underlying       Granted to     or Base                    Appreciation for Option
                                     Options        Employees in      Price      Expiration              Term
       Name                         Granted (#)      Fiscal Year      ($/Sh)        Date           5%           10%
       ----                         -----------      -----------      ------        ----      ------------- -------------
       <S>                         <C>                <C>           <C>         <C>            <C>            <C>
       David A. Robinson               ---               ---             ---           ---           ---           ---

       Bradley C. Robinson             ---               ---             ---           ---           ---           ---

       Dr. Gale H. Thorne           40,000(1)            33%          $2.625      12/10/01       $29,010       $64,104
---------------

(1)      These options were issued pursuant to the NQSOP and vest on 
         December 10, 1997.

         Option Exercises and Year-End Holdings.  The following table sets forth
certain information with respect to stock option exercises during the year ended
December 31, 1996, and the number of shares of stock covered by both exercisable
and unexercisable stock options held by each of the Named Executive Officers.

               AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
                          FISCAL YEAR END OPTION VALUES

</TABLE>
<TABLE>
<CAPTION>

                                                                  Number of Securities      Value of Unexercised
                                                                       Underlying                In-the-Money
                                                                      Unexercised         Options/SARs at Fiscal
                                                                 Options/SARs at Fiscal           Year-End($)
                                   Shares                              Year-End($)
                                Acquired On         Value             Exercisable/              Exercisable/
                Name            Exercise (#)    Realized ($)          Unexercisable            Unexercisable(4)
                ----            ------------    ------------      ------------------           ----------------

      <S>                          <C>              <C>              <C>                        <C>
       David A. Robinson            ---              ---              300,000(1)/0               $468,900/$0

       Bradley C. Robinson          ---              ---              300,000(2)/0               $468,900/$0

       Gale H. Thorne               ---              ---          75,000(2)/40,000(3)         $146,205/$37,520
---------------
</TABLE>

(1)   Options exercisable at $2.00 per share, of which options to acquire 87,500
      shares of common stock were exercised on January 10, 1997.
(2)   Options exercisable at $2.00 per share.
(3)   18,000  options currently  exercisable  at an  exercise  price of $.39 per
      share, 57,000 options currently  exercisable at $2.00 per share and 40,000
      options exercisable on December 10, 1997 at $2.625 per share.
(4)   The trading  price of  the Company's common stock on December 31, 1996 was
      $3.563 per share.

<PAGE>


Compensation of Directors

         During 1994, the non-employee  members of the Board received a total of
9,000  shares of common stock as  compensation  for serving as directors of SHP.
For 1995, the Company  granted stock options under the NQSOP to purchase  20,000
shares of Common Stock for $2.00 per share to the  non-executive  members of the
Board.  During  1996,  the  Company  granted  stock  options  under the NQSOP to
purchase 30,000 shares of Common Stock for $2.625 per share to the non-executive
members of the Board.  The Company has made no other  agreements  regarding  the
compensation of non-executive members of the Board. Directors of the Company who
are also officers of the Company  receive no additional  compensation  for their
service as directors. All directors are entitled to reimbursement for reasonable
expenses incurred in the performance of their duties as Board members.

Employment and Indemnity Agreements

         On September 1, 1995, the Company  entered into  employment  agreements
with each of Mr.  David A.  Robinson,  Mr.  Bradley C.  Robinson and Dr. Gale H.
Thorne (collectively,  the "Senior  Executives").  The terms of these employment
agreements  provide that (i) Mr. David Robinson receive a salary of $240,000 per
year,  Dr. Gale Thorne  receive a salary of  $150,000  per year and Mr.  Bradley
Robinson  receive a salary of  $160,000  per year;  (ii) the Senior  Executives'
employment  agreements  are for terms of three  years,  expiring on September 1,
1998;  (iii) the Senior  Executives  are entitled to a reasonable car allowance;
(iv) if the Senior  Executives  are  terminated  by reason of  disability or for
other than cause,  the salary of such Senior  Executives  will  continue for the
full term of the agreement;  (v) if a Senior  Executive is terminated for cause,
the salary of such Senior Executive  ceases as of the date of termination;  (vi)
the Company will provide the Senior  Executives  with up to  $1,000,000  of term
life insurance  while employed by the Company;  and (vii) the Senior  Executives
shall keep all  proprietary  information  relating to the business  confidential
both during and after the term of the agreements.

         The Company does not currently have  employment  agreements with any of
its other  executive  officers or key  employees.  The Company has entered  into
Indemnity  Agreements with each of its executive officers and directors pursuant
to which the Company  agrees to indemnify the officers and directors to the full
extent  permitted by law for any event or  occurrence  related to the service of
the  indemnitee  as an officer or director of the Company that takes place prior
to or after the execution of the agreement.  The Indemnity  Agreements  obligate
the Company to reimburse or advance expenses relating to any proceeding  arising
out  of an  indemnifiable  event.  Under  these  agreements,  the  officers  and
directors  of the Company are  presumed to have met the  relevant  standards  of
conduct  required by  Delaware  law for  indemnification.  In the absence of the
Indemnity  Agreements,  indemnification  of these  officers and directors may be
discretionary in certain cases.

Indemnification for Securities Act Liabilities

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

Stock Options and Warrants

         During 1994, the Board of Directors of SHP approved the SHP NQSOP.  The
exercise  price of the options is equivalent to the estimated  fair market value
of the stock as determined  by the Board of Directors at the date of grant.  The
number of  shares,  terms and  exercise  period are  determined  by the Board of
Directors on an option-by-option basis. As of March 31, 1997, options to acquire

<PAGE>


an  aggregate  of 40,500  shares of Common  Stock at between  $.39 and $1.11 per
share were  outstanding  under the SHP NQSOP.  The options  issued under the SHP
NQSOP expire in 1999.

         On September 1, 1995, the Company  adopted the NQSOP.  In addition,  on
the date of the Acquisition,  all of the options issued under SHP's NQSOP became
outstanding  obligations of the Company and the SHP NQSOP was terminated.  As of
March 31, 1997,  options to acquire an  aggregate of 1,491,000  shares of Common
Stock at between  $2.00 and $2.625 per share had been granted and are  presently
outstanding,  including  the options  granted to David A.  Robinson,  Bradley C.
Robinson and Gale H. Thorne.

Compensation Committee Interlocks and Insider Participation

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

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

         The following table sets forth certain  information with respect to the
beneficial  ownership  of the common  stock of the Company as of March 31, 1997,
for: (i) each person who is known by the Company to beneficially own more than 5
percent of the  Company's  common stock,  (ii) each of the Company's  directors,
(iii) each of the Company's Named Executive Officers, and (iv) all directors and
executive  officers as a group.  As of March 28, 1997, the Company had 8,744,153
shares of common stock outstanding.

<TABLE>
<CAPTION>

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

<S>                                  <C>                               <C>            <C>     
David A. Robinson(3)                    630,219                           7%             President, Chief Executive
                                                                                         Officer Chairman of the Board and
                                                                                         Director

Bradley C. Robinson(4)                  630,219                           7%             Vice President Investor Relations
                                                                                         and Director

Gale H. Thorne(5)                       133,000                           1%             Vice President, Product
                                                                                         Development and Director

J. Clark Robinson(6)                    237,000                           3%             Vice President , Chief Financial
                                                                                         Officer, Treasurer, Secretary and
                                                                                         Director

Gary W. Farnes(7)                        70,000                           1%             Director

Robert R. Walker(8)                      83,000                           1%             Director


Executive Officers and                1,734,438                          19%
Directors as a Group (6
Persons)

John T. Clarke(9)                       665,306                           7%
Thatchetts
Camp Road
Gerrards Cross
Buckinghamshire, England

Capital Growth                          938,040                          10%
International(10)
11601 Wilshire Boulevard,
Suite 500
Los Angeles, CA 90025
--------------------------

<PAGE>

(1)  Except where otherwise  indicated,  the address of the beneficial  owner is
     deemed to be the same address as the Registrant.

(2)  Beneficial  ownership is  determined  in  accordance  with the rules of the
     Securities  and  Exchange  Commission  and  generally  includes  voting and
     investment  power with  respect to the  securities.  Shares of common stock
     subject to options or warrants currently exercisable, or exercisable within
     sixty (60) days, are deemed outstanding for computing the percentage of the
     person  holding such options but are not deemed  outstanding  for computing
     the percentage of any other person.

(3)  Includes 417,719 shares and stock options to purchase 212,500. Does not include the Earn-Out Shares.

(4)  Includes 330,219 shares and stock options to purchase 300,000. Does not include the Earn-Out Shares.

(5)  Includes 18,000 shares,  stock options to purchase 75,000 shares and Series
     A Warrants to purchase 15,000 shares.  Also includes 25,000 shares that Mr.
     Thorne is deemed to  beneficially  own  through a trust.  Does not  include
     stock options to purchase  40,000 shares which options vest on December 10,
     1997.

(6)  Includes  90,000  shares,  stock options to purchase  75,000  shares.  Also
     includes 45,000 shares and Series A Warrants to purchase 27,000 shares that
     Mr. Robinson is deemed to beneficially own though a trust.

(7)  Includes  50,000  shares  and stock options to purchase 20,000 shares. Does
     not include stock options to purchase 30,000 shares  which options  vest on
     December 10, 1997.

(8)  Includes  stock options to purchase  20,000  shares.  Also includes  63,000
     shares that Mr. Walker is deemed to beneficially own through a trust.  Does
     not include stock  options to purchase  30,000 shares which options vest on
     December 10, 1997.

(9)  Includes 163,000 shares, stock option to purchase 300,000 shares and Series
     A Warrants to purchase 3,000 shares.  Also includes  18,000 shares that Mr.
     Clarke is deemed to beneficially  own as a result of their being owned by a
     controlled  entity,  123,465  shares,  18,000  Series A Warrants and 21,841
     Series B Warrants  owned by his spouse,  and 18,000 shares owned by a minor
     child,  which he is  deemed  to  beneficially  own.  Does not  include  the
     Earn-Out Shares.

(10) Includes  918,040  Series B Warrants and stock  options to purchase  20,000
     shares of Common Stock.

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

Item 13. Certain Relationships and Related Transactions.

         In September 1994, (prior to the Acquisition),  certain stockholders of
SHP made direct  loans to SHP in the amount of  approximately  $385,000  under a
bridge  loan  agreement.  Subscriptions  under  the  bridge  loan  were  offered
proportionately  to  stockholders of SHP based on the number of shares held. The
subscribers to the bridge loan were issued  warrants  permitting them to acquire

<PAGE>


up to an  aggregate  of 346,500  shares of common stock at $1.11 per share on or
before  December  31,  1995.  These  warrants  were  exercised  in July  1995 in
consideration for the conversion of this loan.

         The law firm of Blackburn & Stoll,  LC does legal work for the Company.
Eric L. Robinson,  a member of the law firm of Blackburn & Stoll, LC, is the son
of J. Clark Robinson, a director and chief financial officer of the Company, and
brother of Bradley C. Robinson, a director and vice-president of the Company.

         Stanley Hollander,  a former director of the Company, is an officer and
director of the corporate managing member of Capital Growth,  which is deemed to
beneficially own 918,040 Series B Warrants and options to purchase 20,000 shares
of the Company's  Common Stock.  Capital  Growth  received  75,000 shares of the
Company's Common Stock, 530,125 Series A Warrants,  1,290,375 Series B Warrants,
stock  options to purchase  20,000  shares of the  Company's  Common Stock and a
gross fee of $860,251, as consideration for placement agent services rendered on
behalf of the Company during 1995.

         Mr. Gale Thorne, a director of the Company, is entitled to a royalty of
two and one-half percent from the Company's gross revenue received from the sale
of  products  utilizing  the  ExtreSafe(TM)  medical  needle  withdrawal,  blood
collection  device and intravenous flow gauge  technologies  (collectively,  the
"Products").  In  addition,  the Company is required by pay Mr.  Thorne  minimum
royalties payments in an amount of not less than $435,000 over a six year period
beginning in 1998.  These  royalties  were granted in exchange for Mr.  Thorne's
assignment to the Company of intellectual  property rights he owned prior to his
involvement with the Company in 1994, which intellectual  property rights relate
to the Products.



                                        PART IV


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

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

                  (1) Financial Statements

                  Listed on page F-1 of the Financial Statements.

                  (2) Financial Statement Schedules

                  None required.

         (b)      Reports on Form 8-K

                  No reports on Form 8-K were filed by the Registrant during the
                  fourth quarter ended December 31, 1996.

         (c)      Exhibits

                  Listed on page 34 hereof.


<PAGE>



                                       SIGNATURES

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

                                     SPECIALIZED HEALTH PRODUCTS
                                     INTERNATIONAL, INC.
                                     (Registrant)


Date:    April 7, 1997                By /s/ David A. Robinson
      ----------------------            ---------------------------------
                                         David A. Robinson
                                         President, Chief Executive Officer 
                                           and Director


         Pursuant to the  requirements  of the  Securities  and  Exchange Act of
1934,  this report has been signed below by the  following  persons on behalf of
the registrant and in the capacities and on the dates indicated.

     Signature                        Title                            Date


 /s/ David A. Robinson     President, Chief Executive Officer      April 7, 1997
----------------------      and Director (Principal Executive 
David A. Robinson           Officer)


 /s/ Bradley C. Robinson   Director and Vice President             April 7, 1997
------------------------
Bradley C. Robinson


 /s/ J. Clark Robinson     Director, Vice President, Chief         April 7, 1997
------------------------    Financial Officer and Secretary
J. Clark Robinson           (Principal Financial and Accounting 
                            Officer)


 /s/ Gale H. Thorne        Director and Vice President             April 7, 1997
------------------------
Gale H. Thorne


 /s/ Robert R. Walker      Director                                April 7, 1997
------------------------
Robert R. Walker


 /s/ Gary W. Farnes        Director                                April 7, 1997
------------------------
Gary W. Farnes


<PAGE>


                                    EXHIBIT INDEX

 EXHIBIT NO.                                DESCRIPTION OF EXHIBIT


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

  3(i).2               Certificate of Amendment of Certificate of Incorporation
                       of the Company.

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

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

  3(i).5               Plan and  Articles of Merger of Russco  Resources,  Inc.,
                       into SHP  (Incorporated by reference to Exhibit 3(i).1 to
                       the Company's  current report on Form 8-K, dated July 28,
                       1995)

  3(ii).1              Amended and Restated Bylaws of the Company

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

  4.1                  Form of Series A Warrant Certificate (Incorporated by 
                       reference to Exhibit 4.1 of the Company's Annual 
                       Report on Form 10-K, dated December 31, 1995).

  4.2                  Form of Series B Warrant Certificate (Incorporated by 
                       reference to Exhibit 4.1 of the Company's Annual 
                       Report on Form 10-K, dated December 31, 1995).

  10.1                 Agreement and Plan of Reorganization dated as of 
                       June 23, 1995, among the Company, Russco Resources, 
                       Inc., Scott R. Jensen and Specialized Health 
                       Products, Inc. (Incorporated by reference to 
                       Exhibit 2.1 of the Company's Current Report on 
                       Form 8-K, dated July 28, 1995)

  10.2                 Placement  Agreement  between the  Company,  SHP and U.S.
                       Sachem Financial  Consultants,  L.P., dated June 23, 1995
                       (Incorporated   by  reference  to  Exhibit  10.2  of  the
                       Company's Form 10-K, dated December 31, 1995)

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

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

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

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

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

  21.1                 Schedule of subsidiaries (Incorporated by reference to 
                       Exhibit 21.1 of the Company's Annual Report on Form 
                       10-K, dated December 31, 1995).

  27.1                 Financial Data Schedule


<PAGE>



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





                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                          Page

Report of Independent Public Accountants - Arthur Andersen LLP.............F-2

Independent Auditors' Report - KPMG Peat Marwick LLP.......................F-3

Consolidated Balance Sheets as of December 31, 1996 and 1995...............F-4

Consolidated Statements of Operations for the Years Ended
  December 31, 1996, 1995 and 1994 and for the Period
  from Inception to December 31, 1996......................................F-5

Consolidated  Statements of  Stockholders'  Equity (Deficit) 
  for the Years Ended December 31, 1996, 1995 and 1994 and
  for the Period from Inception to December 31, 1996.......................F-6

Consolidated  Statements  of Cash Flows for the Years Ended  
  December  31, 1996, 1995 and 1994 and for the Period
  from Inception to December 31, 1996......................................F-8

Notes to Consolidated Financial Statements.................................F-10

                                       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  subsidiary  as of December  31, 1996,  and the related  consolidated
statements of operations,  stockholders' equity (deficit) and cash flows for the
year then ended and the related statements of operations,  stockholders'  equity
(deficit)  and cash flows for the period from  inception  (November 19, 1993) to
December 31, 1996.  These  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial  statements  based on our  audit.  We did not audit  the  consolidated
financial  statements of Specialized  Health  Products  International,  Inc. and
subsidiary for the period from inception to December 31, 1995.  Such  statements
are  included in the  cumulative  inception  to December  31, 1996 totals of the
statements  of  operations,  stockholders'  equity  (deficit) and cash flows and
reflect  total  net  sales  and  net  loss  of  94%  percent  and  48%  percent,
respectively, of the related cumulative totals. Those statements were audited by
other auditors whose reports have been furnished to us and our opinion,  insofar
as it relates to amounts for cumulative totals, is based solely upon the reports
of the other auditors.

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

In our  opinion,  based on our  audit and the  reports  of other  auditors,  the
financial statements referred to above present fairly, in all material respects,
the   consolidated   financial   position   of   Specialized   Health   Products
International,  Inc. and  subsidiary as of December 31, 1996, and the results of
their  operations  and their  cash  flows for the year then  ended,  and for the
period from  inception  to December  31,  1996,  in  conformity  with  generally
accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements,  the Company has experienced recurring losses
from  operations of $4,233,677,  $3,039,059 and $899,385 and negative cash flows
from  operating  activities of $3,558,778,  $2,605,616  and $778,833  during the
years ended December 31, 1996, 1995 and 1994,  respectively.  As of December 31,
1996, the Company had an accumulated  deficit of $7,951,444.  Net sales declined
to $74,563  during the year ended  December  31,  1996  compared to net sales of
$447,844  during  the  year  ended  December  31,  1995.   These  matters  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
Management's  plans in regard to these matters are also described in Note 1. The
accompanying  consolidated  financial  statements do not include any adjustments
relating to the  recoverability  and classification of asset carrying amounts or
the amount and  classification  of  liabilities  that  might  result  should the
Company be unable to continue as a going concern.



ARTHUR ANDERSEN LLP


Salt Lake City, Utah
  March 31, 1997

                                      F-2

<PAGE>



                            Independent Auditors' Report




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

We have  audited the  accompanying  consolidated  balance  sheet of  Specialized
Health Products International, Inc. and subsidiary (a company in the development
stage) as of December  31,  1995,  and the related  consolidated  statements  of
operations, stockholders' equity (deficit), and cash flows for each of the years
in the two-year period ended December 31, 1995, and for the period from November
19, 1993 (date of inception) to December 31, 1995. These consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Specialized Health
Products International, Inc. and subsidiary (a company in the development stage)
as of December  31,  1995,  and the results of their  operations  and their cash
flows for each of the years in the two-year period ended December 31, 1995,  and
for the period from  November 19, 1993 (date of inception) to December 31, 1995,
in conformity with generally accepted accounting principles.



                                                    KPMG Peat Marwick LLP

Salt Lake City, Utah
February 2, 1996

                                      F-3
<PAGE>



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

                                CONSOLIDATED BALANCE SHEETS


                                ASSETS

</TABLE>
<TABLE>
<CAPTION>                                                                                               December 31,
                                                                                         1996                1995
CURRENT ASSETS:
  <S>                                                                                 <C>               <C>
  Cash and cash equivalents                                                            $   252,694        $ 4,251,584
  Accounts receivable                                                                        1,159            350,718
  Inventories                                                                               15,710             16,322
  Prepaid expenses and other                                                                96,813             34,017
  Amounts due from related parties                                                             -              122,850
                                                                                       -----------        -----------
    Total current assets                                                                   366,376          4,775,491
                                                                                       -----------        -----------

PROPERTY AND EQUIPMENT, at cost:
  Manufacturing molds                                                                      481,553            245,753
  Office furnishings and fixtures                                                          272,220            144,992
  Assembly and manufacturing equipment                                                      33,727             33,605
  Construction-in-progress                                                                 564,502            395,895
                                                                                       -----------        -----------
                                                                                         1,352,002            820,245
  Less accumulated depreciation                                                           (165,025)            (8,196)
                                                                                       -----------        -----------
    Net property and equipment                                                           1,186,977            812,049
                                                                                       -----------        -----------

OTHER ASSETS, net                                                                          295,486            363,188
                                                                                       -----------        -----------
                                                                                       $ 1,848,839        $ 5,950,728
                                                                                       ===========        ===========

                                    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                                     $   100,686        $   134,449
  Accrued liabilities                                                                      161,784            446,474
  Amounts due to related parties                                                            73,152                -
                                                                                       -----------        ---------
    Total current liabilities                                                              335,622            580,923
                                                                                       -----------        -----------

COMMITMENTS AND CONTINGENCIES (Notes 1,3,5,7,10 and 11)

STOCKHOLDERS' EQUITY:
  Preferred stock, $.001 par value; 5,000,000 shares
    authorized, no shares outstanding                                                          -                  -
  Common stock, $.02 par value; 50,000,000 shares
    authorized, 8,656,653 and 8,566,653 shares
    outstanding, respectively                                                              173,133            171,333
  Common stock subscriptions receivable                                                   (209,200)          (259,500)
  Additional paid-in capital                                                             9,540,928          9,316,028
  Deferred consulting expense                                                              (40,200)               -
  Deficit accumulated during the development stage                                      (7,951,444)        (3,858,056)
                                                                                       -----------        -----------
    Total stockholders' equity                                                           1,513,217          5,369,805
                                                                                       -----------        -----------
                                                                                       $ 1,848,839        $ 5,950,728
                                                                                       ===========        ===========
</TABLE>


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

                                         F-4
<PAGE>


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

                           CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>                                                                                                 Period from
                                                                                                          Inception to
                                                      Year Ended December 31,                             December 31,
                                                 1996                  1995                1994           1996 (Note 1)
                                             -----------           -----------         -----------        -------------

<S>                                              <C>                <C>                <C>                <C> 
NET SALES                                        $    74,563         $   447,844         $    33,256         $   555,663
COST OF SALES                                         70,257             294,171              21,669             386,097
                                                 -----------         -----------         -----------         -----------
    Gross profit                                       4,306             153,673              11,587             169,566
                                                 -----------         -----------         -----------         -----------

OPERATING EXPENSES:
  Selling, general and
    administrative                                 2,901,434           2,133,021             620,022           5,657,927
  Research and development                         1,264,186             804,639             290,950           2,359,775
  Write-off of operating assets                       72,363             255,072                 -               327,435
                                                 -----------         -----------         -----------         -----------
    Total operating expenses                       4,237,983           3,192,732             910,972           8,345,137
                                                 -----------         -----------         -----------         -----------

LOSS FROM OPERATIONS                              (4,233,677)         (3,039,059)           (899,385)         (8,175,571)
                                                 -----------         -----------         -----------         -----------

OTHER INCOME (EXPENSE):
  Interest income                                    108,701             135,428                 237             244,366
  Interest expense                                       -               (15,858)             (7,800)            (23,658)
  Other, net                                          31,588                 -                   -                31,588
                                                 -----------         -----------         -----------         -----------

    Net other income (expense)                       140,289             119,570              (7,563)            252,296
                                                 -----------         -----------         -----------         -----------

NET LOSS                                          (4,093,388)         (2,919,489)           (906,948)         (7,923,275)

LESS PREFERENCE STOCK DIVIDENDS                          -               (11,389)            (16,780)            (28,169)
                                                 -----------         -----------         -----------         -----------

NET LOSS APPLICABLE TO
  COMMON SHARES                                  $(4,093,388)        $(2,930,878)        $  (923,728)        $(7,951,444)
                                                 ===========         ===========         ===========         ===========

NET LOSS PER COMMON SHARE                        $      (.48)        $      (.69)        $      (.75)
                                                 ===========         ===========         ===========

WEIGHTED AVERAGE COMMON SHARES
  OUTSTANDING                                      8,589,952           4,269,131           1,224,074
                                                 ===========         ===========         ===========
</TABLE>


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

                                        F-5
<PAGE>


                                                                    Page 1 of 2
         SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
                      (A Company in the Development Stage)

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                                     Common
                                                                                   Stock Sub-    Additional   Deferred      Accum-
                                   Preferred Stock            Common Stock         scriptions     Paid-In    Consulting     ulated
                              Shares         Amount       Shares       Amount      Receivable     Capital     Expense        Deficit
<S>                            <C>       <C>            <C>          <C>         <C>             <C>           <C>       <C>   
Issuance of common
  stock for cash
  at inception                     -      $      -       1,170,000   $  1,300    $      -        $      -      $    -     $     -

Net loss                           -             -             -          -             -               -           -        (3,450)
                             ---------    ----------     ---------   --------    ----------      ----------    --------   ---------

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

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

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

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

Net loss                           -             -             -          -             -               -           -      (906,948)
                             ---------    ----------     ---------   --------    ----------      ----------    --------   ---------

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

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

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

Cash received for
  stock
  subscriptions
  receivable                       -             -             -          -         280,000             -           -           -

Services provided for
  stock subscriptions
  receivable                       -             -             -          -           8,500             -           -           -

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

Exchange of debt
  for common stock                 -             -         396,500    386,000           -            99,000         -           -
</TABLE>

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

                                        F-6


<PAGE>

                                                                  Page 2 of 2
         SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
                      (A Company in the Development Stage)

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>

                                                                                     Common
                                                                                   Stock Sub-    Additional   Deferred       Accum-
                                  Preferred Stock             Common Stock         scriptions     Paid-In    Consulting      ulated
                              Shares         Amount       Shares       Amount      Receivable     Capital      Expense       Deficit

<S>                        <C>           <C>            <C>         <C>          <C>             <C>         <C>          
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         -              -

Deferred consulting
  expense                          -             -             -           -            -           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)
                            ==========     =========    ==========    ========    =========      ==========   ========= ===========
</TABLE>

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

                                         F-7

<PAGE>
                                                                    Page 1 of 2


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

                          CONSOLIDATED STATEMENTS OF CASH FLOWS

                    Increase (Decrease) in Cash and Cash Equivalents

<TABLE>
<CAPTION>
                                                                                                              Period from
                                                                                                              Inception to
                                                                    Year Ended December 31,                   December 31,
                                                              1996             1995             1994           1996 (Note 1)
                                                          -----------      -----------       ----------        -------------

CASH FLOWS FROM OPERATING ACTIVITIES:
    <S>                                                    <C>               <C>               <C>              <C>
    Net loss                                               $(4,093,388)      $(2,919,489)      $(906,948)       $(7,923,275)
    Adjustments to reconcile net loss to
      net cash used in operating activities:
        Depreciation and amortization                          203,523            74,542          29,317            307,382
        Common stock issued for services                             -             8,500          10,000             18,500
        Noncash consulting expense                              93,800               -               -               93,800
        Loss on disposition of assets                           72,363           256,363             -              328,726
        Changes in operating assets and
          liabilities:
            Accounts receivable                                349,559          (346,247)         (4,471)            (1,159)
            Inventories                                            612           (16,322)          6,104            (15,710)
            Prepaid expenses and other                         (62,796)          (28,581)         (5,290)           (96,813)
            Amounts due from related parties                   122,850          (122,850)            -                    -
            Accounts payable                                   (33,763)           49,794          92,455            108,486
            Accrued liabilities                               (284,690)          438,674             -              153,984
            Amounts due to related parties                      73,152               -               -               73,152
                                                           -----------       -----------       ---------        -----------

                Net cash used in operating
                  activities                                (3,558,778)       (2,605,616)       (778,833)        (6,952,927)
                                                           -----------       -----------       ---------        -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment                        (580,468)         (794,434)       (287,523)        (1,662,425)
    Purchase of patents and technology                          (2,644)          (64,750)       (278,752)          (356,146)
                                                           -----------       -----------       ---------        -----------

                Net cash used in investing
                  activities                                  (583,112)         (859,184)       (566,275)        (2,018,571)
                                                           -----------       -----------       ---------        -----------
</TABLE>


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

                                       F-8

<PAGE>
                                                                    Page 2 of 2

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

                   CONSOLIDATED STATEMENTS OF CASH FLOWS AND SUBSIDIARY

                    FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

                     Increase (Decrease) in Cash and Cash Equivalents

<TABLE>
<CAPTION>
                                                                                                              Period from 
                                                                                                              Inception to
                                                                    Year Ended December 31,                   December 31,
                                                              1996             1995             1994           1996 (Note 1)
                                                          -----------      -----------       ----------        -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   <S>                                                     <C>             <C>             <C>                <C>
   Proceeds from issuance of common stock                  $    92,700        $7,279,060      $      -           $7,373,060
   Proceeds from stock subscriptions                            50,300           280,000             -              330,300
   Proceeds from issuance of preferred stock                       -             604,001         560,000          1,164,001
   Proceeds from issuance of redeemable
     preference stock                                              -                 -           240,000            240,000
   Payments on redeemable preference stock
     and dividends                                                 -            (268,169)            -             (268,169)
   Net (repayments) borrowings on
     stockholder loans                                             -            (167,833)        534,133            385,000
   Bank overdraft                                                  -             (10,675)         10,675                -
                                                           -----------        -----------     ----------         --------

                Net cash provided by
                  financing activities                         143,000         7,716,384       1,344,808          9,224,192
                                                           -----------        ----------      ----------         ----------

NET (DECREASE) INCREASE IN CASH AND
  CASH EQUIVALENTS                                          (3,998,890)        4,251,584            (300)           252,694

CASH AND CASH EQUIVALENTS AT BEGINNING
  OF THE PERIOD                                              4,251,584               -               300                -
                                                           -----------        ----------      ----------         --------

CASH AND CASH EQUIVALENTS AT END OF
  THE PERIOD                                               $   252,694        $4,251,584      $      -           $  252,694
                                                           ===========        ==========      ==========         ==========


SUPPLEMENTAL CASH FLOW INFORMATION:

  Cash paid during the period for interest                 $       -          $   15,858      $    7,800         $   23,658

SUPPLEMENTAL DISCLOSURES OF NONCASH
  INVESTING AND FINANCING ACTIVITIES:

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

    Common stock issued for subscriptions
      receivable                                                   -             349,500         198,500            548,000

    Conversion of stockholder loans and
      amounts due to stockholders to
      common stock                                                 -             485,000             -              485,000

    Acquisition of technology and
      patents for stockholder payable                              -                 -           100,000            100,000
</TABLE>

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

                                          F-9
<PAGE>

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

                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)    NATURE OF OPERATIONS AND BUSINESS COMBINATION

Nature of Operations

Specialized  Health Products  International,  Inc. ("SHPI") and its wholly owned
subsidiary,   Specialized  Health  Products,  Inc.  ("SHP")  (collectively,  the
"Company")  is a  development  stage  company  which  is  primarily  engaged  in
developing cost-effective,  disposable, proprietary healthcare products designed
to limit or prevent the risk of  accidental  needle  sticks  which may cause the
spread of blood-borne diseases such as HIV/AIDS and hepatitis B, and secondarily
develops  other  products  for use in the  healthcare  industry.  The  Company's
activities since inception have focused on research and development of products,
obtaining  financing,  recruiting personnel and identifying and contracting with
manufacturers and  distributors.  The Company  principally  intends to use third
parties to manufacture, market and distribute its products worldwide.

The Company has a portfolio of proprietary,  safety healthcare products that are
in various stages of production,  pre-production,  development and research. The
Company's  earliest safety product line is its Safety Cradle(R) sharps container
products designed to reduce the risk of accidental needle sticks and exposure to
contaminated  instruments when disposing of contaminated sharps. In August 1996,
the Company entered into an exclusive  distribution agreement (the "Distribution
Agreement")  with Becton  Dickinson and Company ("BD") relating to the Company's
sharps container  products.  The  Distribution  Agreement grants BD an exclusive
worldwide right to market and distribute the Company's sharps container products
for an initial term of three years. The first sales pursuant to the Distribution
Agreement   occurred  in  the  first  quarter  of  1997.   Other  products  near
commercialization  or  under  development  include  the  Company's Extresafe(TM)
Lancet Strip and a line of products using the  Company's  ExtreSafe(TM)  medical
needle withdrawal  technology  including  safety  phlebotomy  devices, catheters
and  syringes. Manual  production and  sales of  the Extresafe(TM)  Lancet Strip
began in the first  quarter of 1997 and  automated  production  is  projected to
commence later in 1997.

Development Stage Presentation

The Company is in the  development  stage and from its  inception  has  incurred
losses from operations. During the years ended December 31, 1996, 1995 and 1994,
the Company  experienced  losses from  operations of $4,233,677,  $3,039,059 and
$899,385,  respectively,  and negative cash flows from  operating  activities of
$3,558,778,  $2,605,616 and $778,833, respectively. As of December 31, 1996, the
Company had an accumulated deficit of $7,951,444.  Net sales declined to $74,563
during the year ended December 31, 1996 compared to net sales of $447,844 during
the year ended December 31, 1995.  These matters raise  substantial  doubt about
the Company's  ability to continue as a going concern.  The Company's  continued
existence is dependent upon several factors  including the Company's  success in
raising sufficient funding, bringing its products to commercialization, reducing
costs and entering into favorable  contracts with third-party  manufacturers and
distributors.

As  discussed  in Note 11,  on March  31,  1997,  the  Company  closed a private
placement  offering  wherein the Company raised  approximately  $1,539,000.  The
Company estimates that after the payment of existing  obligations,  it will have
approximately  $1,000,000 in remaining  funds.  The Company  believes that these
remaining funds from the private placement offering and sales generated from the
Safety  Cradle(R) sharps  container and ExtreSafe(TM) Lancet Strip products will
be sufficient to support the Company's operations  through  December  31,  1997.
However,  this would  require the Company to slow the  commercialization  of its
products in development and increase its sales of sharps  containers and lancets
substantially.

                                      F-10
<PAGE>


The Company's  operating plan includes seeking to raise additional funds through
a public or private offering of securities in order for commercialization of its
products under  development to not be further delayed.  Management is attempting
to  negotiate  favorable   agreements  with  third  parties  to  assist  in  the
development,  financing,  manufacturing  and  distribution of its products under
development  or near  commercialization  (see Note 11). In addition,  management
believes it has the ability to further cut certain operating costs. Nonetheless,
the  Company's  inability  to obtain  additional  funding,  as  required,  could
severely  impair its business  operations and there can be no assurance that the
Company's operating plan will be successful.

The  Company is subject to special  risk  factors due to its  development  stage
status that may impact its ability to become an operating enterprise. These risk
factors include:

a)   The Company has  experienced  limited sales of its Safety Cradle(R)  sharps
     containers and ExtreSafe(TM)  Lancet Strip products,  the  Company's   only
     commercialized products. Sales of Safety Cradle(R) sharps container through
     BD and sales of ExtreSafe(TM) Lancet Strip products did not commence  until
     the first quarter of 1997.  There is no assurance  that other products will
     be commercially  viable and no assurance can be given that the Company will
     have sufficient sales or a sufficient  customer base to become  profitable.
     The  business  prospects  of the  Company  will be  affected  by  expenses,
     operational  difficulties and other factors  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 vary based
     upon a number of factors,  including  the rate at which demand for products
     expands,  the  level of  sales  and  marketing  activities  for the  Safety
     Cradle(R) sharps container and ExtreSafe(TM) Lancet Strip products and  the
     level  of  effort  needed  to  develop  and  commercialize  other  products
     utilizing the Company's ExtreSafe(TM) medical needle withdrawal technology.
     If additional  funds are  not successfully  raised,  the lack of additional
     funds will likely have a material adverse effect on the Company.

c)   The  Company's  Safety Cradle(R) sharps  container and ExtreSafe(TM) Lancet
     Strip products  are  each produced  by a single  manufacturer.  If  one  of
     the Company's  manufacturers  fails to perform its  obligations in a timely
     and  satisfactory   manner  or if  there  is  a  change  in  the  Company's
     manufacturers, it could  have a  material  adverse  effect on the  Company.
     There can be no assurance that the Company would be successful in replacing
     its  current manufacturers  on terms  favorable to  the Company.  Likewise,
     there can be no assurance that the Company  will be  successful  in finding
     additional  manufacturers to  manufacture its  products on favorable  terms
     should product demand  increase.  The  Company,  however,  owns  the  molds
     and  automated equipment which can be moved to different manufacturers.

d)   The Company is dependent on one  distributor  for the  distribution  of its
     Safety Cradle(R) sharps container  products and anticipates that it will be
     dependent on third parties for the distribution of its ExtreSafe(TM) Lancet
     Strip and follow-on products.

e)   The Company uses  polypropylene  and other resins in the manufacture of its
     products.  Prices are subject to fluctuations  caused in part by changes in
     supply and  demand.  Significant  increases  in the prices of these  resins
     could have a material  adverse  effect on the Company's  ability to produce
     cost effective products.

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

                                          F-11
<PAGE>


     competing products could adversely affect the Company's attempts to develop
     and market its products successfully.

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

h)   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.  Currently,  the  Company  owns six Safety Cradle(R)  related
     patents, two patents associated with its ExtreSafe(TM) Lancet Strip and six
     patents which protect its ExtreSafe(TM) needle withdrawal technology. There
     can be no assurance that the  protection  provided by patents will be broad
     enough to prevent  competitors  from  introducing  similar products or that
     such  patents,  if  challenged,  will  be  upheld  by  the  courts  of  any
     jurisdiction.

i)   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 claims 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 currently  maintains  product liability  insurance;
     however,  there is no  assurance  that the Company will be able to maintain
     adequate product liability insurance on acceptable terms in the future.

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

k)   The Company is  highly-dependent  upon the efforts and abilities of certain
     of its senior  management  personnel.  The loss of any of these individuals
     could have a material adverse effect on the Company, its operations and its
     prospects.

Business Combination

SHP was  organized  November 19, 1993,  with a commercial  objective to develop,
manufacture,  and market safe,  easy-to-use and cost-effective  products for the
health care industry.  SHP entered into a business combination in July 1995 with
Russco,  Inc.  ("Russco")  wherein it became a wholly owned subsidiary of Russco
and Russco's name was changed to Specialized Health Products International, Inc.
Russco  was  organized  in  February  1986  as a  public  company  to  evaluate,
structure,  and complete a merger with, or  acquisition  of, any privately  held
business  seeking to obtain the perceived  advantages of being a publicly  owned
company.  Russco had no significant operations and minimal capital with which to
conduct its business.

At the  closing of the  business  combination,  the  300,000  shares of Russco's
common stock  previously  outstanding  (as  adjusted for a reverse  stock split)
remained  outstanding as common stock of the Company and Russco issued 3,602,403
shares of its common stock for all of the issued and outstanding shares of SHP's
common stock and  preferred  stock.  The business  combination  was treated as a
reverse merger for accounting  purposes.  SHP was shown as the acquiring company
even  though  Russco  issued  its  common  shares to  acquire  SHP  because  the
stockholders of SHP received the significant  majority of the outstanding common
stock of the Company.  In addition,  management of SHP became the  management of

                                    F-12

<PAGE>


the Company. Because Russco had limited operations, the business combination was
accounted  for as a purchase  transaction  with the net assets of Russco  (which
were  insignificant)  being  recorded at their fair value at the date of closing
and  operating  results of Russco  prior to the business  combination  not being
included with the historical operating results of SHP.

Contemporaneously  with the  business  combination,  SHP  engaged  in a  private
placement of securities  wherein  4,376,250 shares of the Company's common stock
were issued for  consideration  of $7,519,060,  net of offering  costs,  as more
fully discussed in Note 7.


(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Pervasiveness of Estimates

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

Cash and Cash Equivalents

Cash and cash  equivalents  are comprised of a checking and money market account
at a bank. The Company  considers all  investments  with original  maturities of
three months or less to be cash equivalents.

Inventories

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

Property and Equipment

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

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

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

Other Assets

Other assets consist primarily of purchased  technology rights and patents,  and
related patent costs such as outside legal fees. These costs are being amortized
on a  straight-line  basis over seven years.  Accumulated  amortization  totaled
approximately $155,400 and $90,300 at December 31, 1996 and 1995,  respectively.
Management  evaluates  the  recoverability  of these costs on a periodic  basis,

                                      F-13

<PAGE>


based on sales of the product  related to the  technology,  existing or expected
sales contracts, revenue trends and projected cash flows.

Revenue Recognition

Sales are recognized when the product is shipped to the customer.

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 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.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents.

Fair Value of Financial Instruments

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

Net Loss Per Common Share

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

Reclassifications

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


(3)      INVESTMENT

In October  1995,  the  Company  entered  into a Joint  Venture  Agreement  (the
"Agreement") with Zerbec, Inc. ("Zerbec"), a Texas corporation.  Under the terms
of the Agreement, the Company and Zerbec formed Quantum Imaging Corporation (the
"Venture"), a Utah corporation, to develop,  manufacture,  distribute and market
products  and  technologies  using a patented  solid  state  filmless  digitized
imaging system.  For a 50 percent  interest in the Venture  (before  dilution by
potential  financing  investors),  the Company was  obligated to pay the Venture
$15,000  a month,  which in turn was paid to  Zerbec  to  perform  research  and
development on the Venture's  behalf through March 31, 1997.  Additionally,  the
Company was  obligated  to pay the general  and  administrative  expenses of the
Venture up to $15,000 per month through  March 31, 1997.  In accordance  with an
oral  amendment to the  Agreement,  the Company is obligated  to  contribute  an
additional  $25,000 to the  Venture  through  June 1,  1997.  The  Company  will
continue  to pay the general  and  administrative  expenses of the Venture up to
$15,000 per month through June 1, 1997.

For the Venture to be  successful,  the Company  estimates that an additional $3
million to $6 million in funding will be required.  In addition,  if at least $3
million  in  funding  is not  raised by June 1,  1997,  Zerbec  has the right to

                                      F-14

<PAGE>


acquire  two-thirds of the Company's interest in the Venture for one dollar (the
"Zerbec  Option").  The Company is trying to negotiate an agreement  with Zerbec
whereby the Company can acquire Zerbec's interest in the Venture or an extension
of the date on which the Zerbec Option vests. There can be no assurance that the
Company  will be able to  negotiate  an  agreement  with  Zerbec to acquire  its
interest in the Venture or an extension  of the date on which the Zerbec  Option
vests.

The Company  contributed total capital to the Venture of approximately  $435,200
and  $83,600  during  1996 and  1995,  respectively,  all of which  the  Company
expensed and the Venture  used to fund  research  and  development  and to cover
administrative  expenses.  The Company accounts for the Venture using the equity
method.  Assets and liabilities of the Venture were insignificant as of December
31, 1996 and 1995.


(4)      STOCKHOLDER LOANS

During  1995 and  1994,  prior to the  business  combination,  certain  existing
stockholders made direct loans to SHP aggregating  $385,000 and bearing interest
at ten percent  under a bridge loan  agreement.  Subscriptions  under the bridge
loan agreement were offered  proportionately to stockholders based on the number
of shares held. The subscribers to the bridge loan agreement were issued a total
of 346,500  warrants  permitting  them to  acquire an equal  number of shares of
common stock at $1.11 per share on or before  December  31,  1996.  No value was
ascribed to the warrants.  In connection with the business combination discussed
in Note 1,  the  346,500  warrants  were  exercised  through  conversion  of the
outstanding loans.


(5)      COMMITMENTS AND CONTINGENCIES

Lease Obligations

The Company leases office space,  equipment,  and vehicles  under  noncancelable
operating leases.  The following  summarizes future minimum lease payments under
operating leases at December 31, 1996:

                 Year Ending December 31,

                               1997                     $109,960
                               1998                       56,547
                               1999                       17,614
                                                        --------

                                                        $184,121
                                                        ========

Rental  expense for the years ended  December  31,  1996,  1995 and 1994 totaled
approximately $72,000, $67,100 and $52,100, respectively.

Royalty Agreements

In connection  with  acquiring  technology  rights and patents,  the Company has
entered into various  royalty  agreements.  Generally,  the agreements  call for
royalties to be paid based on various percentages of revenues generated from the
related technologies or patents.

                                       F-15

<PAGE>


In order to maintain  certain  licenses,  the Company is obligated to pay future
minimum  royalties,  which royalties may be used to satisfy  percentage  royalty
requirements.  The following summarizes future minimum royalties at December 31,
1996:

                      Year Ending December 31,

                                1997                    $ 20,000
                                1998                     160,000
                                1999                     100,000
                                2000                     100,000
                                2001                     100,000
                             Thereafter                  100,000
                                                        --------
                                                        $580,000
                                                        ========

As the Company has not generated any revenue from licensed technology rights and
patents at December 31, 1996, no royalties have been accrued or paid.


(6)      STOCK OPTIONS

During 1994, the Board of Directors of SHP approved a nonqualified  stock option
plan (the "SHP Option Plan") for its  officers,  directors  and  employees,  and
authorized 396,000 shares of common stock for issuance.  During 1994, options to
acquire  396,000 common shares were granted at prices ranging from $.39 to $1.11
per share.  The exercise  prices of the options were equivalent to the estimated
fair  market  value of the  underlying  stock as  determined  by SHP's  Board of
Directors  at the dates of grant.  No options were  exercised  or lapsed  during
1994.  On the date of the business  combination,  as discussed in Note 1, all of
the options issued under the SHP Option 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 common stock subscriptions  receivable.  All common
stock  subscriptions  receivable  are due upon demand.  During 1996,  options to
acquire  45,000 shares were  exercised at $.39 per share and 22,500 options were
canceled. The remaining 40,500 options will become exercisable during 1997.

Effective  September 1, 1995,  the  Company's  Board of  Directors  approved the
adoption of the  Specialized  Health Products  International,  Inc. Stock Option
Plan (the "Option  Plan").  The Option Plan is a nonqualified  stock option plan
and is administered by the Compensation  Committee (the  "Committee") made up of
nonemployee members of the Board of Directors.  The Option Plan provides for the
issuance of 1,500,000 shares of common stock to officers,  directors,  other key
employees and consultants  which number may be adjusted from time to time by the
Committee.  As of December 31, 1996, the Company had granted options to purchase
1,491,000  shares of common  stock under the Option  Plan.  The options  will be
granted at not less than 100 percent of the fair market value of the  underlying
common stock on the date of grant. The options are exercisable for the period as
defined by the Committee at the date granted;  however,  no stock option will be
exercisable more than five years from the date of grant.

The Company applies APB Opinion No. 25 ("APB 25") and related interpretations in
accounting for its stock-based compensation plans. Accordingly,  no compensation
cost has been  recognized for stock options  granted to officers,  directors and
other key employees as options were granted at the intrinsic fair market value.

                                F-16

<PAGE>


The Company  recognized  $93,800 of  consulting  expense  during 1996 related to
certain options granted to nonemployee  consultants.  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 Statement  of  Financial  Accounting
Standards No. 123 ("SFAS  123"),  the Company's net loss and net loss per common
share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
                                                                            1996              1995
                                                                         ----------        -------

      <S>                                      <C>                     <C>               <C>
      Net loss:                                  As reported             $4,093,388        $2,930,878
                                                 Pro forma                4,130,140         3,841,677

      Net loss per common share:                 As reported              .48               .69
                                                 Pro forma                .48               .90
</TABLE>

Because  the SFAS 123  method of  accounting  has not been  applied  to  options
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 plans as of December 31, 1996 and 1995,
and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
                                                   1996                                       1995
                                          -----------------------                  ---------------
                                                               Wtd. Avg.                             Wtd. Avg.
                                                               Exercise                              Exercise
                                                Shares          Prices              Shares            Prices
     <S>                                      <C>                 <C>              <C>                <C>
      Outstanding at
       beginning of year                       1,279,810           $1.95             396,000          $ .67
     Granted                                     319,190            2.63           1,171,810           2.00
     Exercised                                   (45,000)            .39            (288,000)           .73
     Forfeited                                   (22,500)            .39                 -
                                               ---------                          --------
     Outstanding at end
       of year                                 1,531,500            2.10           1,279,810           1.95
                                              ==========                          ==========

     Exercisable at end
       of year                                 1,187,000            2.04           1,117,000           2.00
                                              ==========                          ==========

     Weighted average fair
       value of options
       granted                              $     1.24                          $      .82
                                            ==========                          ==========
</TABLE>

The following table summarizes  information about the stock options  outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
                                           Options Outstanding                          Options Exercisable
                                  ------------------------------------               ---------------------
      <S>                     <C>               <C>              <C>              <C>                 <C>   
                                 Number            Wtd. Avg.                          Number
           Range of            Outstanding        Remaining        Wtd. Avg.        Exercisable         Wtd. Avg.
      Exercise   Prices        at December       Contractual       Exercise         at December         Exercise
                                 31, 1996            Life            Price           31, 1996             Price
                               -----------       -----------       ---------        -----------         -------

             $.39 to $1.11           40,500       2.5 years          $ .71                   -              $ -
                      2.00        1,171,810       3.7                 2.00             1,117,000             2.00
                      2.63          319,190       4.8                 2.63                70,000             2.63
                                  ---------                                            ---------

             $.39 to $2.63        1,531,500       3.9 years          $2.10             1,187,000            $2.04
                                  =========                                            =========
</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 both 1996 and 1995:  risk-free  interest rate of
5.95 percent;  expected  dividend yields of zero percent;  expected lives of 2.3
years; expected volatility of 68 percent.
 
                                            F-17

<PAGE>


(7)      COMMON AND PREFERRED STOCK

In connection with the business combination discussed in Note 1, SHP completed a
9 for 1 forward stock split of both its common and preferred  stock.  The number
of  common  and  preferred  shares  and  per  share  amounts  presented  in  the
accompanying consolidated financial statements have been restated for the effect
of this split.  Each common and preferred  share of SHP was  converted  into one
common share of the Company.  In addition,  the Company  issued 90,000 shares of
common stock to non-affiliated  stockholders existing at the time of the private
placement under antidilutive provisions.

The Company  completed a private  placement of securities in July 1995,  wherein
860.25  units  were sold at  $10,000  per unit for total  consideration,  net of
expenses, of $7,519,060. This consideration was comprised of $7,279,060 of cash,
$100,000 of debt  converted  to common  stock,  and common  stock  subscriptions
receivable  of $140,000.  Each unit  consisted of 5,000 shares of the  Company's
common  stock and Series A warrants to purchase an  aggregate of 3,000 shares of
common  stock  at  $3.50  per  share.   The  private   placement  was  completed
contemporaneously with the business combination. Through this private placement,
the Company  sold an aggregate of  4,301,250  shares of the  Company's  $.02 par
value  common  stock and Series A warrants to purchase an aggregate of 2,580,750
shares of the Company's common stock at a price of $3.00 per share,  exercisable
for a period  of two  years  from the date of  effectiveness  of a  registration
statement  covering the issuance of the shares of common  stock  underlying  the
Series A warrants.

For services  provided in connection  with the private  placement of securities,
the  underwriter  received a commission  of $860,251 in cash,  75,000  shares of
common stock,  Series A warrants to purchase  530,125 shares of common stock for
$3.00 per share,  and Series B warrants to purchase  1,290,375  shares of common
stock for $2.00 per share.  The warrants  expire on the earlier of (a) two years
from the effective date of a registration statement covering the issuance of the
shares of common stock  underlying  such warrants which two year period shall be
extended  day-for-day  for  any  time  that  a  registration  statement  is  not
available,  or (b) the date specified in a notice of redemption from the Company
in the event that the closing price of the common stock for any ten  consecutive
trading days  preceding  such notice  exceeds $6.00 per share and subject to the
availability of a current prospectus covering the underlying shares. The Company
may redeem all or a portion of the  warrants,  in each case at $.001 per warrant
upon at least 20 days prior written notice to the warrant holders.  The warrants
may only be redeemed if a current  prospectus  is available  with respect to the
issuance of shares of common stock upon the exercise thereof.

During 1995, the Company issued warrants to a  nonaffiliated  stockholder of the
Company  to  purchase  45,000  shares of common  stock at $1.67 per  share.  The
warrants  were  exercised in full during  1996.  There were no other Series A or
Series B warrants exercised during 1996 or 1995.

The Company has granted to a former director and certain officers of the Company
the right to receive up to an aggregate of 2,000,000 additional shares of common
stock based upon the achievement of certain levels of pre-tax  consolidated  net
income  ("PTNI") for 1996,  1997 or 1998. If PTNI equals or exceeds  $1,500,000,
$5,000,000,  or $8,000,000 in any of these years the individuals will receive an
aggregate of 350,000, 1,100,000, or 2,000,000 common shares, respectively,  less
shares previously received, but no more than an aggregate of 2,000,000 shares.

The Company  expects  that the  issuance of such shares will be deemed to be the
payment of  compensation  to the recipients and will result in an expense to the
Company in the year or years the shares are  earned,  in an amount  equal to the
fair market value of the shares. This expense could have a substantial  negative
impact  on the  earnings  of the  Company  in the year or  years  in  which  the
compensation expense is recognized.

                                         F-18

<PAGE>


The effect of the expense associated with the issuance of the shares could place
the Company in a net loss position for the relevant  year,  even though the PTNI
was at a level  requiring  the  issuance of the  shares.  Because the shares are
issuable  based on the results of a single year,  the PTNI in a particular  year
could  require the  issuance of shares even though the  cumulative  PTNI for the
three years 1996,  1997,  and 1998,  or any  combination  of those years,  could
reflect a lower  amount of PTNI that would not require the Company to issue such
shares or even a pre-tax net loss.  During  1996,  the Company did not issue any
shares of common  stock under this  arrangement  as the Company did not meet the
PTNI requirement.


(8)      REDEEMABLE PREFERENCE STOCK

Prior  to the  business  combination,  SHP  had  authorized  250,000  shares  of
redeemable  preference  stock  with a par  value of $1.50  per  share,  of which
160,000 shares were issued and outstanding at December 31, 1994. Each redeemable
preference share was entitled to a cumulative annual dividend of nine percent of
the par value from the date of original  issue.  Dividends were payable when and
as declared by the Board of  Directors.  The  preference  stock was redeemed and
related dividends were paid in cash at the time of the business combination.


(9)      INCOME TAXES

The Company  recognized no income tax expense in 1996, 1995 and 1994, due to net
operating losses. The Company did not record the expected tax benefit related to
the net operating losses and other deferred tax assets as these assets are being
offset  by a  valuation  allowance.  Significant  components  of  the  Company's
deferred  income tax assets and deferred  income tax  liabilities as of December
31, 1996 and 1995, are comprised of the following:
<TABLE>
<CAPTION>
                                                                       1996                   1995
                                                                    ----------            --------
Deferred income tax assets:
  <S>                                                                <C>                   <C>
  Net operating loss carryforwards                                   $2,803,220            $ 1,374,198
  Equity loss in joint venture                                              -                   31,214
  Accrued vacation                                                       33,649                 19,894
  Patent costs                                                           30,983                 19,244
  Other                                                                   8,257                  4,574
                                                                     ----------            -----------
     Total gross deferred tax assets                                  2,876,109              1,449,124
  Less valuation allowance                                           (2,794,882)            (1,449,124)
                                                                     ----------            -----------
     Net deferred income tax assets                                      81,227                    -

Deferred income tax liability -
  Property and equipment                                                (81,227)                   -
                                                                     ----------            ---------

     Net deferred income tax liability                               $      -              $       -
                                                                     ==========            =========
</TABLE>

The net change in the total valuation allowance for the years ended December 31,
1996 and 1995, was an increase of $1,345,758 and $1,109,545, respectively.

At  December  31,  1996,  the  Company  had  total tax net  operating  losses of
$7,515,335  that can be carried  forward to reduce federal income taxes.  If not
utilized,  the tax net operating loss carryforwards  begin to expire in 2009. As
defined in Section 382 of the Internal Revenue Code, the Company has undergone a
greater than 50 percent ownership change.  Consequently, a certain amount of the
Company's  tax net  operating  loss  carryforwards  available  to offset  future
taxable  income  in  any  one  year  may  be  limited.  The  maximum  amount  of
carryforwards  available  in a  given  year is  limited  to the  product  of the
Company's  value on the  date of  ownership  change  and the  federal  long-term
tax-exempt rate, plus any limited carryforwards not utilized in prior years.

                                     F-19

<PAGE>



(10)     RELATED-PARTY TRANSACTIONS

During 1996 and 1995, the Company advanced  approximately  $121,800 and $122,900
respectively,  to a former director and stockholder of the Company. The advances
are due on demand and are non-interest bearing. In addition, the Company paid to
an  entity,  owned  in  part by  this  same  former  director  and  stockholder,
approximately  $203,100 and  $231,500  during 1996 and 1995,  respectively,  for
consulting and professional  services  rendered in behalf of the Company.  As of
December  31, 1996 and 1995,  the net amount  owed by and due the Company  under
these arrangements was approximately $73,200 and $122,850, respectively.

The Company has entered  into  certain  license  agreements  with a director and
officer of the  Company  as a result of the  acquisition  of certain  technology
rights and patents. Under the terms of the agreements,  the Company is obligated
to pay minimum royalty payments  totaling  $435,000 over the next six years (see
Note 5).


(11)     SUBSEQUENT EVENTS

On March 31, 1997, the Company closed a private placement offering (the "Private
Placement") wherein the Company raised approximately $1,539,500 through offering
Units to certain accredited  investors at $45 per Unit. Each Unit consists of 15
shares of the  Company's  common  stock and Series C warrants to  purchase  five
shares of the Company's common stock at a price of $3.00 per share. The Series C
warrants  are  currently  exercisable  and  expire  two  years  from the date of
effectiveness of a registration  statement under the Securities Act of 1933 (the
"Act") covering the resale of the shares of common stock underlying the Series C
warrants by the holder,  which period shall be extended day-for-day for any time
that a prospectus  meeting the  requirements  of the Act is not  available.  The
Company may accelerate the expiration of the Series C warrants in the event that
the average  market  price of the  Company's  common  stock for ten  consecutive
trading days exceeds $6.00 per share. In the event that the Company  accelerates
the  expiration  of the Series C warrants,  the holders of the Series C warrants
would be permitted to exercise the Series C warrants during a period of not less
than 20 days  following  notice of such event.  Each  investor  was  required to
subscribe for a minimum of 400 Units ($18,000).

On March 27,  1997,  the  Company  entered  into a letter of intent  with Becton
Dickinson and Company ("BD") which  contemplates a license  agreement related to
the development,  manufacture,  distribution and  commercialization of a product
utilizing  the  Company's ExtreSafe(TM) technology. If a  license  agreement  is
consummated,  the Company  anticipates that BD will distribute at least one, and
possibly  several,  of  the  Company's  products  utilizing  the   ExtreSafe(TM)
technology on  an exclusive basis. Under the  terms of the letter of intent,  BD
would pay the Company  $4  million  in prepaid  royalties  and  development fees
in two equal payments.  The first  payment would be made within  thirty  days of
execution  of a license  agreement and  the second payment  no later  than March
1998. The proposal  is subject to  the satisfactory  completion  of a  legal and
business investigation  and due diligence  review of the Company's  intellectual
property  portfolio by  BD and the  approval of the boards  of directors  of the
Company and BD.

                                      F-20