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

FORM 10-Q

|                                             |  |                                                                                          
|-------------------------------------------- |  | -----------------------------------------------------------------------------------------
|[x]                                          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                             |  |                                                                                          
|For the quarterly period ended June 30, 2002
|                                             |  |                                                                                          
|[   ]                                        |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-15459

HORIZON MEDICAL PRODUCTS, INC.

(Exact name of registrant as specified in its charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Georgia                                                        |  | 58-1882343                          
|                                                               |  |                                     
|(State or other jurisdiction of
Incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                               |  |                                     
|One Horizon Way
P.O. Box 627
Manchester, Georgia               |  | 31816                               
|                                                               |  |                                     
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: 706-846-3126

Indicate by check mark whether the registrant: (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X]         No [   ]

The number of shares outstanding of the Registrants Common Stock, $.001 par
value, as of August 14, 2002 was 16,311,676.





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TABLE OF CONTENTS



|                                       |                                                                                                |                                                              |  |  |  |  |  | 
|-------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------ |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION         
|                                       | ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).                                                     
|                                       |                                                                                                | INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                       |                                                                                                | INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                       |                                                                                                | INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                       |                                                                                                | NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                       | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|                                       | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                           
|PART II. OTHER INFORMATION            
|                                       | ITEM 1. LEGAL PROCEEDINGS                                                                     
|                                       | ITEM 2. CHANGES IN SECURITIES AND USE OF FUNDS.                                               
|                                       | ITEM 3. DEFAULTS UPON SENIOR SECURITIES.                                                      
|                                       | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   
|                                       | ITEM 5. OTHER INFORMATION                                                                     
|                                       | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.                                                     
|SIGNATURE                             
|Employment Agreement, Robert J. Wenzel
|Amendment No. 1 to Note of Purchase   
|Amendment No. 2 to Note of Purchase   
|Section 906 Certification of CEO      
|Section 906 Certification of CFO      



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HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

FORM 10-Q

For the Quarterly Period Ended June 30, 2002

INDEX

|        |  |                       |  |                                                                                       |  |                                                              |    |  |    |  |  | 
|------- |  | --------------------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------ | -- |  | -- |  |  | 
|PART I  |  | FINANCIAL INFORMATION
|        |  | ITEM 1                |  | Financial Statements (unaudited)                                                      |  |                                                              | 3  | 
|        |  |                       |  |                                                                                       |  | Interim Condensed Consolidated Balance Sheets                |    |  | 4  | 
|        |  |                       |  |                                                                                       |  | Interim Condensed Consolidated Statements of Operations      |    |  | 5  | 
|        |  |                       |  |                                                                                       |  | Interim Condensed Consolidated Statements of Cash Flows      |    |  | 6  | 
|        |  |                       |  |                                                                                       |  | Notes to Interim Condensed Consolidated Financial Statements |    |  | 7  | 
|        |  | ITEM 2                |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  |                                                              | 23 | 
|        |  | ITEM 3                |  | Quantitative and Qualitative Disclosures about Market Risk                            |  |                                                              | 29 | 
|        |  |                       |  |                                                                                       |  |                                                              |    |  |    |  |  | 
|PART II |  | OTHER INFORMATION    
|        |  | ITEM 1                |  | Legal Proceedings                                                                     |  |                                                              | 30 | 
|        |  | ITEM 2                |  | Changes in Securities and Use of Funds                                                |  |                                                              | 30 | 
|        |  | ITEM 3                |  | Defaults Upon Senior Securities                                                       |  |                                                              | 30 | 
|        |  | ITEM 4                |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                              | 30 | 
|        |  | ITEM 5                |  | Other Information                                                                     |  |                                                              | 30 | 
|        |  | ITEM 6                |  | Exhibits and Reports on Form 8-K                                                      |  |                                                              | 31 | 
|        |  | SIGNATURE             |  |                                                                                       |  |                                                              |    |  | 33 | 

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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).

|                                                                                                       |                                                                                                                   |  |  |   | 
|------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------- |  |  | - | 
|The financial statements listed below are included on the following pages of this Report on Form 10-Q: |                                                                                                                   |  |  |  
|                                                                                                       | Interim Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001                              |  |  | 4 | 
|                                                                                                       | Interim Condensed Consolidated Statements of Operations for the three and six months ended June 30,
2002 and 2001 |  |  | 5 | 
|                                                                                                       | Interim Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001           |  |  | 6 | 
|                                                                                                       | Notes to Interim Condensed Consolidated Financial Statements                                                      |  |  | 7 | 

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HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

|                                                |                                                                                                                                                                          |                                      |                      |                                            |   |            |            |              |   |            |            | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------ | -------------------- | ------------------------------------------ | - | ---------- | ---------- | ------------ | - | ---------- | ---------- | 
|                                                |                                                                                                                                                                          |                                      |                      |                                            |   | June 30,   |            | December 31,
|                                                |                                                                                                                                                                          |                                      |                      |                                            |   | 2002       |            | 2001        
|                                                |                                                                                                                                                                          |                                      |                      |                                            |   |            |            |             
|                                                |                                                                                                                                                                          |                                      |                      | ASSETS                                     |   |            |            |              |   |            |            | 
|Current assets:                                 |                                                                                                                                                                          |                                      |                      |                                            |   |            |            |             
|                                                | Cash and cash equivalents                                                                                                                                                |                                      | $                    | 194,442                                    |   |            | $          | 2,748,617    |  
|                                                | Restricted cash                                                                                                                                                          |                                      |                      | 322,523                                    |   |            |            | 24,271       |  
|                                                | Accounts receivable  trade, net                                                                                                                                         |                                      |                      | 10,132,030                                 |   |            |            | 10,052,052   |  
|                                                | Inventories                                                                                                                                                              |                                      |                      | 14,675,311                                 |   |            |            | 15,836,795   |  
|                                                | Prepaid expenses and other current assets                                                                                                                                |                                      |                      | 2,054,538                                  |   |            |            | 1,570,223    |  
|                                                |                                                                                                                                                                          |                                      |                      |                                            |   |            |            |             
|                                                |                                                                                                                                                                          |                                      | Total current assets |                                            |   | 27,378,844 |            |              |   | 30,231,958 |           
|Property and equipment, net                     |                                                                                                                                                                          |                                      | 2,532,506            |                                            |   |            | 2,723,896  |             
|Goodwill                                        |                                                                                                                                                                          |                                      | 15,650,356           |                                            |   |            | 31,752,259 |             
|Intangible assets, net                          |                                                                                                                                                                          |                                      | 7,056,069            |                                            |   |            | 6,477,380  |             
|Other assets                                    |                                                                                                                                                                          |                                      | 147,341              |                                            |   |            | 162,047    |             
|                                                |                                                                                                                                                                          |                                      |                      |                                            |   |            |            |             
|                                                |                                                                                                                                                                          |                                      |                      | Total assets                               |   | $          | 52,765,116 |              |   | $          | 71,347,540 | 
|                                                |                                                                                                                                                                          |                                      |                      |                                            |   |            |            |             
|                                                |                                                                                                                                                                          | LIABILITIES AND SHAREHOLDERS EQUITY |                      |                                            |   |            |            |              |   |           
|Current liabilities:                            |                                                                                                                                                                          |                                      |                      |                                            |   |            |            |             
|                                                | Accounts payable  trade                                                                                                                                                 |                                      | $                    | 8,919,922                                  |   |            | $          | 9,090,686    |  
|                                                | Accrued salaries and commissions                                                                                                                                         |                                      |                      | 221,297                                    |   |            |            | 341,788      |  
|                                                | Accrued interest                                                                                                                                                         |                                      |                      | 187,142                                    |   |            |            | 256,106      |  
|                                                | Other accrued expenses                                                                                                                                                   |                                      |                      | 1,466,920                                  |   |            |            | 1,317,193    |  
|                                                | Current portion of long-term debt                                                                                                                                        |                                      |                      | 9,412,785                                  |   |            |            | 40,585,159   |  
|                                                |                                                                                                                                                                          |                                      |                      |                                            |   |            |            |             
|                                                |                                                                                                                                                                          |                                      |                      | Total current liabilities                  |   |            | 20,208,066 |              |   |            | 51,590,932 | 
|Long-term debt, net of current portion          |                                                                                                                                                                          |                                      | 18,193,366           |                                            |   |            | 1,354,703  |             
|Other liabilities                               |                                                                                                                                                                          |                                      | 112,362              |                                            |   |            | 119,761    |             
|                                                |                                                                                                                                                                          |                                      |                      |                                            |   |            |            |             
|                                                |                                                                                                                                                                          |                                      |                      | Total liabilities                          |   |            | 38,513,794 |              |   |            | 53,065,396 | 
|                                                |                                                                                                                                                                          |                                      |                      |                                            |   |            |            |             
|Commitments and contingent liabilities (Note 6) |                                                                                                                                                                          |                                      |                      |                                            |   |            |            |             
|Shareholders equity:                           |                                                                                                                                                                          |                                      |                      |                                            |   |            |            |             
|                                                | Preferred stock, no par value; 5,000,000 shares authorized, none
Issued and outstanding                                                                                  |                                      |                      |                                            |   |            |            |              |  
|                                                | Common stock, $.001 par value per share; 50,000,000 shares
Authorized, 16,311,676 and 13,366,278 shares issued and
Outstanding as of June 30, 2002 and December 31, 2001 |                                      |                      | 16,312                                     |   |            |            | 13,366       |  
|                                                | Additional paid-in capital                                                                                                                                               |                                      |                      | 74,611,401                                 |   |            |            | 52,086,125   |  
|                                                | Shareholders notes receivable                                                                                                                                           |                                      |                      | (170,831                                   | ) |            |            | (615,940     | )
|                                                | Accumulated deficit                                                                                                                                                      |                                      |                      | (60,205,560                                | ) |            |            | (33,201,407  | )
|                                                |                                                                                                                                                                          |                                      |                      |                                            |   |            |            |             
|                                                |                                                                                                                                                                          |                                      |                      | Total shareholders equity                 |   |            | 14,251,322 |              |   |            | 18,282,144 | 
|                                                |                                                                                                                                                                          |                                      |                      |                                            |   |            |            |             
|                                                |                                                                                                                                                                          |                                      |                      | Total liabilities and shareholders equity |   | $          | 52,765,116 |              |   | $          | 71,347,540 | 
|                                                |                                                                                                                                                                          |                                      |                      |                                            |   |            |            |             

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

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HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                                                                             |                                                                                              |   |                    |           |                  |   |            |            |      |   |             |             |   |   |            |            |  
|-------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | - | ------------------ | --------- | ---------------- | - | ---------- | ---------- | ---- | - | ----------- | ----------- | - | - | ---------- | ---------- | -
|                                                                                             |                                                                                              |   | Three Months Ended |           | Six Months Ended
|                                                                                             |                                                                                              |   | June 30,           |           | June 30,        
|                                                                                             |                                                                                              |   |                    |           |                 
|                                                                                             |                                                                                              |   | 2002               |           | 2001             |   | 2002       |            | 2001
|                                                                                             |                                                                                              |   |                    |           |                  |   |            |            |     
|Net sales                                                                                    |                                                                                              | $ | 13,876,782         |           |                  | $ | 15,070,099 |            |      | $ | 25,796,115  |             |   | $ | 31,489,882 |           
|Cost of goods sold                                                                           |                                                                                              |   | 8,877,548          |           |                  |   | 9,767,642  |            |      |   | 17,033,280  |             |   |   | 20,258,734 |           
|                                                                                             |                                                                                              |   |                    |           |                  |   |            |            |      |   |             |             |   |   |            |           
|                                                                                             | Gross profit                                                                                 |   |                    | 4,999,234 |                  |   |            | 5,302,457  |      |   |             | 8,762,835   |   |   |            | 11,231,148 |  
|Selling, general and administrative expenses                                                 |                                                                                              |   | 4,531,337          |           |                  |   | 5,473,935  |            |      |   | 11,244,573  |             |   |   | 10,607,194 |           
|                                                                                             |                                                                                              |   |                    |           |                  |   |            |            |      |   |             |             |   |   |            |           
|                                                                                             | Operating (loss) income                                                                      |   |                    | 467,897   |                  |   |            | (171,478   | )    |   |             | (2,481,738  | ) |   |            | 623,954    |  
|                                                                                             |                                                                                              |   |                    |           |                  |   |            |            |      |   |             |             |   |   |            |           
|Other income (expense):                                                                      |                                                                                              |   |                    |           |                  |   |            |            |      |   |             |             |   |   |            |           
|                                                                                             | Interest expense, net                                                                        |   |                    | (746,400  | )                |   |            | (1,189,455 | )    |   |             | (1,770,674  | ) |   |            | (2,448,849 | )
|                                                                                             | Other income (expense)                                                                       |   |                    | (5,366    | )                |   |            | 20,396     |      |   |             | (8,826      | ) |   |            | 49,835     |  
|                                                                                             |                                                                                              |   |                    |           |                  |   |            |            |      |   |             |             |   |   |            |           
|                                                                                             |                                                                                              |   | (751,766           | )         |                  |   | (1,169,059 | )          |      |   | (1,779,500  | )           |   |   | (2,399,014 | )         
|                                                                                             |                                                                                              |   |                    |           |                  |   |            |            |      |   |             |             |   |   |            |           
|                                                                                             | Loss before extraordinary item and effect of a change
in accounting principle                |   |                    | (283,869  | )                |   |            | (1,340,537 | )    |   |             | (4,261,238  | ) |   |            | (1,775,060 | )
|Extraordinary loss on extinguishment of debt                                                 |                                                                                              |   |                    |           |                  |   |            |            |      |   | (6,641,015  | )           |   |   |            |           
|Effect of a change in accounting principle
pursuant to adoption of SFAS 142 (Notes 1 and 10) |                                                                                              |   |                    |           |                  |   |            |            |      |   | (16,101,900 | )           |   |   |            |           
|                                                                                             |                                                                                              |   |                    |           |                  |   |            |            |      |   |             |             |   |   |            |           
|                                                                                             | Net loss                                                                                     |   | $                  | (283,869  | )                |   | $          | (1,340,537 | )    |   | $           | (27,004,153 | ) |   | $          | (1,775,060 | )
|                                                                                             |                                                                                              |   |                    |           |                  |   |            |            |      |   |             |             |   |   |            |           
|Basic and diluted earnings per share:                                                        |                                                                                              |   |                    |           |                  |   |            |            |      |   |             |             |   |   |            |           
|                                                                                             | Loss before extraordinary item and effect of a change
in accounting principle                |   | $                  | (0.02     | )                |   | $          | (0.10      | )    |   | $           | (0.28       | ) |   | $          | (0.13      | )
|                                                                                             | Extraordinary loss on extinguishment of debt                                                 |   |                    |           |                  |   |            |            |      |   |             | (0.44       | )
|                                                                                             | Effect of a change in accounting principle pursuant
to adoption of SFAS 142 (Notes 1 and 10) |   |                    |           |                  |   |            |            |      |   |             | (1.06       | ) |   |            |            |  
|                                                                                             | Net loss per share  basic and diluted                                                       |   | $                  | (0.02     | )                |   | $          | (0.10      | )    |   | $           | (1.78       | ) |   | $          | (0.13      | )
|                                                                                             |                                                                                              |   |                    |           |                  |   |            |            |      |   |             |             |   |   |            |           
|Weighted average common shares outstanding 
basic and diluted                               |                                                                                              |   | 16,311,676         |           |                  |   | 13,366,278 |            |      |   | 15,129,630  |             |   |   | 13,366,278 |           
|                                                                                             |                                                                                              |   |                    |           |                  |   |            |            |      |   |             |             |   |   |            |           

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

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HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                                                          |                                                               |                                        |             |                  |           |      |             |            |            |  
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------- | -------------------------------------- | ----------- | ---------------- | --------- | ---- | ----------- | ---------- | ---------- | -
|                                                                                          |                                                               |                                        |             | Six Months Ended
|                                                                                          |                                                               |                                        |             | June 30,        
|                                                                                          |                                                               |                                        |             |                 
|                                                                                          |                                                               |                                        |             | 2002             |           | 2001
|                                                                                          |                                                               |                                        |             |                  |           |     
|Cash flows from operating activities:                                                     |                                                               |                                        |             |                  |           |      |             |           
|Net loss                                                                                  |                                                               | $                                      | (27,004,153 | )                |           | $    | (1,775,060  | )         
|                                                                                          |                                                               |                                        |             |                  |           |      |             |           
|Adjustments to reconcile net loss to net cash
(used in) provided by operating activities: |                                                               |                                        |             |                  |           |      |             |           
|                                                                                          | Depreciation expense                                          |                                        |             | 377,764          |           |      |             | 509,088    |           
|                                                                                          | Amortization of intangibles                                   |                                        |             | 743,509          |           |      |             | 1,299,247  |           
|                                                                                          | Amortization of discount                                      |                                        |             |                  |           |      |             | 41,370     |           
|                                                                                          | Non-cash compensation charge                                  |                                        |             | 1,555,468        |           |      |             |            |           
|                                                                                          | Impairment charge                                             |                                        |             | 16,101,900       |           |      |             |            |           
|                                                                                          | Loss on extinguishment of debt                                |                                        |             | 5,443,515        |           |      |             |            |           
|                                                                                          | Non-cash increase in notes
receivable-shareholders            |                                        |             |                  |           |      |             | (65,232    | )         
|                                                                                          | (Increase) decrease in operating
assets and liabilities, net: |                                        |             |                  |           |      |             |            |           
|                                                                                          |                                                               | Accounts receivable-trade              |             |                  | (79,978   | )    |             |            | 2,082,034  |  
|                                                                                          |                                                               | Inventories                            |             |                  | 1,161,484 |      |             |            | 201,499    |  
|                                                                                          |                                                               | Prepaid expenses and other assets      |             |                  | (469,609  | )    |             |            | (227,803   | )
|                                                                                          |                                                               | Income tax receivable/payable          |             |                  |           |      |             |            | 1,938,909  |  
|                                                                                          |                                                               | Accounts payable-trade                 |             |                  | (170,764  | )    |             |            | (1,485,018 | )
|                                                                                          |                                                               | Accrued expenses and other liabilities |             |                  | (587,127  | )    |             |            | (245,343   | )
|                                                                                          |                                                               |                                        |             |                  |           |      |             |           
|                                                                                          | Net cash (used in) provided by operating activities           |                                        |             | (2,927,991       | )         |      |             | 2,273,691  |           
|                                                                                          |                                                               |                                        |             |                  |           |      |             |           
|Cash flows from investing activities:                                                     |                                                               |                                        |             |                  |           |      |             |           
|Cash proceeds from sale of IFM                                                            |                                                               |                                        |             |                  |           |      | 2,250,500   |           
|Proceeds from shareholders notes receivable                                              |                                                               |                                        | 445,109     |                  |           |      | 300,000     |           
|Capital expenditures                                                                      |                                                               |                                        | (186,374    | )                |           |      | (153,255    | )         
|                                                                                          |                                                               |                                        |             |                  |           |      |             |           
|                                                                                          | Net cash provided by investing activities                     |                                        |             | 258,735          |           |      |             | 2,397,245  |           
|                                                                                          |                                                               |                                        |             |                  |           |      |             |           
|Cash flows from financing activities:                                                     |                                                               |                                        |             |                  |           |      |             |           
|Change in restricted cash                                                                 |                                                               |                                        | (298,252    | )                |           |      | 373,697     |           
|Debt issuance costs                                                                       |                                                               |                                        | (1,450,087  | )                |           |      | (151,714    | )         
|Change in cash overdraft                                                                  |                                                               |                                        |             |                  |           |      | (609,176    | )         
|Proceeds from issuance of long-term debt                                                  |                                                               |                                        | 58,140,719  |                  |           |      | 36,818,333  |           
|Principal payments on long-term debt                                                      |                                                               |                                        | (56,277,299 | )                |           |      | (38,993,729 | )         
|                                                                                          |                                                               |                                        |             |                  |           |      |             |           
|                                                                                          | Net cash provided by (used in) financing activities           |                                        |             | 115,081          |           |      |             | (2,562,589 | )         
|                                                                                          |                                                               |                                        |             |                  |           |      |             |           
|                                                                                          | Net (decrease) increase in cash and
cash equivalents          |                                        |             | (2,554,175       | )         |      |             | 2,108,347  |           
|Cash and cash equivalents, beginning of period                                            |                                                               |                                        | 2,748,617   |                  |           |      | 164,257     |           
|                                                                                          |                                                               |                                        |             |                  |           |      |             |           
|Cash and cash equivalents, end of period                                                  |                                                               | $                                      | 194,442     |                  |           | $    | 2,272,604   |           
|                                                                                          |                                                               |                                        |             |                  |           |      |             |           

Supplemental disclosures of non-cash investing and financing activities:



| |  | In connection with the March 2002 recapitalization transaction described
in Note 4, the Company issued convertible notes that had a fair value
of $33,343,685. The Company recorded these notes at their face value of
$15,000,000, and the premium of $18,343,685 was recorded as an increase to
additional paid-in-capital.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                              

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

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##### Table of Contents






HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Summary of Significant Accounting Policies



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The condensed consolidated balance sheet of Horizon Medical Products,
Inc. and Subsidiaries (the Company) at December 31, 2001 has been derived
from the Companys audited consolidated financial statements at such date.
Certain information and footnote disclosures normally included in complete
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC) and
instructions to Form 10-Q. The interim condensed consolidated financial
statements at June 30, 2002, and for the three and six months ended June 30,
2002 and 2001 are unaudited; however, these statements reflect all
adjustments and disclosures which are, in the opinion of management,
necessary for a fair presentation. All such adjustments are of a normal
recurring nature unless noted otherwise. The results of operations for the
interim periods are not necessarily indicative of the results of the full
year. These financial statements should be read in conjunction with the
Companys Annual Report on Form 10-K for the year ended December 31, 2001
(the Form 10-K), including, without limitation, the summary of accounting
policies and notes and consolidated financial statements included therein.
|
| | The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations. SFAS No. 141 supercedes Accounting
Principles Board Opinion (APB) No. 16, Business
Combinations, and SFAS No.
38, Accounting for Preacquisition Contingencies of Purchased
Enterprises.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 and for all business
combinations accounted for by the purchase method for which the date of
acquisition is after June 30, 2001, establishes specific criteria for the
recognition of intangible assets separately from goodwill, and requires
unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized). The adoption of
SFAS No. 141 did not have a material impact on the interim condensed
consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | Effective
January 1, 2002, the Company adopted SFAS No. 142, Goodwill
and Other Intangible Assets. SFAS No. 142 supersedes APB No. 17, and requires
that: 1) goodwill and indefinite lived intangible assets will no longer be
amortized; 2) goodwill will be tested for impairment at least annually at the
reporting unit level; 3) intangible assets deemed to have an indefinite life
will be tested for impairment at least annually; and 4) the amortization
period of intangible assets with finite lives will no longer be limited to
forty years. Upon the adoption of SFAS No. 142, the Company recognized an
impairment loss of approximately $16.1 million related to its distribution
reporting unit. In addition, the Company ceased amortization of its goodwill
(See Note 10 to the interim condensed consolidated financial statements for
further information and required disclosures).                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Effective
January 1, 2002, the Company adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. This statement, which
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, as well as certain other
accounting standards, establishes a single accounting model, based on
framework established in SFAS No. 121 for long-lived assets to be disposed of
by sale, including segments of a business accounted for as discontinued
operations. The impact of adopting SFAS No. 144 was not material to the
Companys interim condensed consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | In April 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 145, Recision of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections
(SFAS No. 145). SFAS No. 145 requires that gains and losses from
extinguishment of debt be classified as extraordinary items only if they meet
the criteria in Accounting Principles Board Opinion No. 30 (Opinion No.
30). Applying the provisions of Opinion No. 30 will distinguish transactions
that are part of an entitys recurring operations from those that are unusual
and infrequent that meet criteria for classification as an extraordinary
item. SFAS No. 145 is effective for the Company beginning January 1, 2003,
but the Company may adopt the provisions of SFAS No. 145 prior to this date.
The impact of SFAS No. 145 is not expected to be material to the Companys
interim condensed consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                         
|
| | In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities(SFAS No. 146). SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value only
when the liability is incurred. SFAS No.
146 is effective for the Company beginning January 1, 2003, but the Company
may adopt the provisions of SFAS No. 146 prior to this date. The impact of
SFAS No. 146 is not expected to be material to the Companys interim
condensed consolidated financial statements.

2. Inventories

A summary of inventories is as follows:

|                        |  |          |            |              |  |   |            |  
|----------------------- |  | -------- | ---------- | ------------ |  | - | ---------- | -
|                        |  | June 30, |            | December 31,
|                        |  | 2002     |            | 2001        
|                        |  |          |            |             
|Raw materials           |  | $        | 3,210,462  |              |  | $ | 3,413,158  |  
|Work in process         |  |          | 1,062,140  |              |  |   | 1,211,437  |  
|Finished goods          |  |          | 13,239,704 |              |  |   | 14,666,961 |  
|                        |  |          |            |              |  |   |            |  
|                        |  |          | 17,512,306 |              |  |   | 19,291,556 |  
|Less inventory reserves |  |          | (2,836,995 | )            |  |   | (3,454,761 | )
|                        |  |          |            |              |  |   |            |  
|                        |  | $        | 14,675,311 |              |  | $ | 15,836,795 |  
|                        |  |          |            |              |  |   |            |  

3. Earnings Per Share

A summary of the calculation of basic and diluted earnings per share
(EPS) is as follows:

|            |  |                            |          |                          |  |           |            |            |  |             |       |                 |  |   |            |   |  |  |            |  |  |   |       |  
|----------- |  | -------------------------- | -------- | ------------------------ |  | --------- | ---------- | ---------- |  | ----------- | ----- | --------------- |  | - | ---------- | - |  |  | ---------- |  |  | - | ----- | -
|            |  | For the Three Months Ended |          | For the Six Months Ended
|            |  | June 30, 2002              |          | June 30, 2002           
|            |  |                            |          |                         
|            |  | Loss                       |          |                          |  |           |            |            |  |             |       | Loss            |  |   |            |   |  |  |            | 
|            |  | From Continuing            |          |                          |  |           |            |            |  |             |       | From Continuing |  |   |            |   |  |  |            | 
|            |  | Operations                 |          | Shares                   |  | Per-share |            | Operations |  | Shares      |       | Per-share      
|            |  | Numerator                  |          | Denominator              |  | Amount    |            | Numerator  |  | Denominator |       | Amount         
|            |  |                            |          |                          |  |           |            |            |  |             |       |                
|Basic EPS   |  | $                          | (283,869 | )                        |  |           | 16,311,676 |            |  | $           | (0.02 | )               |  | $ | (4,261,238 | ) |  |  | 15,129,630 |  |  | $ | (0.28 | )
|            |  |                            |          |                          |  |           |            |            |  |             |       |                 |  |   |            |   |  |  |            |  |  |   |       |  
|Diluted EPS |  | $                          | (283,869 | )                        |  |           | 16,311,676 |            |  | $           | (0.02 | )               |  | $ | (4,261,238 | ) |  |  | 15,129,630 |  |  | $ | (0.28 | )
|            |  |                            |          |                          |  |           |            |            |  |             |       |                 |  |   |            |   |  |  |            |  |  |   |       |  

|            |  |                            |            |                          |  |           |            |           |  |             |       |           |  |   |            |   |  |  |            |  |  |   |       |  
|----------- |  | -------------------------- | ---------- | ------------------------ |  | --------- | ---------- | --------- |  | ----------- | ----- | --------- |  | - | ---------- | - |  |  | ---------- |  |  | - | ----- | -
|            |  | For the Three Months Ended |            | For the Six Months Ended
|            |  | June 30, 2001              |            | June 30, 2001           
|            |  |                            |            |                         
|            |  | Loss                       |            | Shares                   |  | Per-share |            | Loss      |  | Shares      |       | Per-share
|            |  | Numerator                  |            | Denominator              |  | Amount    |            | Numerator |  | Denominator |       | Amount   
|            |  |                            |            |                          |  |           |            |           |  |             |       |          
|Basic EPS   |  | $                          | (1,340,537 | )                        |  |           | 13,366,278 |           |  | $           | (0.10 | )         |  | $ | (1,775,060 | ) |  |  | 13,366,278 |  |  | $ | (0.13 | )
|            |  |                            |            |                          |  |           |            |           |  |             |       |           |  |   |            |   |  |  |            |  |  |   |       |  
|Diluted EPS |  | $                          | (1,340,537 | )                        |  |           | 13,366,278 |           |  | $           | (0.10 | )         |  | $ | (1,775,060 | ) |  |  | 13,366,278 |  |  | $ | (0.13 | )
|            |  |                            |            |                          |  |           |            |           |  |             |       |           |  |   |            |   |  |  |            |  |  |   |       |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Options to purchase 7,153,570 shares of common stock and warrants to
purchase 748,619 shares of common stock were outstanding as of June 30, 2002,
but are not included in the computation of the June 30, 2002 diluted EPS
because the effect would be anti-dilutive. The options have exercise prices
ranging from $.44 to $15.50 and expire between 2008 and 2012. The warrants
have an exercise price of $.01 per share and expire in 2012. Additionally,
the grant of 1,250,000 of these options in the aggregate is expressly
conditioned upon the affirmative vote of the Companys shareholders, at its
2002 Annual Meeting of Shareholders, approving an increase in the number of
shares authorized for issuance under the Companys 1998 Stock Incentive Plan.

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| |                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As discussed in Note 4 to these interim condensed consolidated financial
statements contained elsewhere in this Form 10-Q, the Company has issued
notes, a portion of which is convertible into a maximum of 27,000,000 shares
of common stock. These shares are also excluded from the computation of the
June 30, 2002 diluted EPS because the effect would be anti-dilutive.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Options to purchase 620,550 shares of common stock and warrants to
purchase 735,157 shares of common stock were outstanding as of June 30, 2001,
but are not included in the computation of the June 30, 2001 diluted EPS
because the effect would be anti-dilutive. The options have exercise prices
ranging from $.44 to $15.50 and expire between 2008 and 2011. Warrants to
purchase 300,000 shares of common stock have an exercise price of $14.50 and
expired in September 2001, as described in Note 11 to the Companys
consolidated financial statements included in the Form 10-K. Warrants to
purchase 435,157 shares of common stock have an exercise price of $.05 per
share and were terminated in March 2002 as a result of the Recapitalization
as described in Note 4.

4. Long-Term Debt



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 1, 2002, the Company entered into certain agreements with
ComVest Venture Partners, L.P. (ComVest), an affiliate of Commonwealth
Associates LP (Commonwealth) to recapitalize the Company (the
Recapitalization). The Company completed the Recapitalization on March 16,
2002 and the Forbearance Agreement between the Company and Bank of America
dated March 15, 2001, as subsequently amended (the Forbearance Agreement),
was terminated as of March 15, 2002. The Forbearance Agreement is discussed
below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | The details of the Recapitalization follow:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | On March 19, 2002, the Company completed an arrangement with ComVest,
LaSalle Business Credit, Inc. (LaSalle), and Medtronic Inc. (Medtronic)
to recapitalize the Company by extinguishing all of the Companys senior debt
and warrants held by Bank of America and substantially reducing the Companys
total outstanding debt. Pursuant to the Recapitalization, the Company issued
Senior Subordinated Convertible Notes (Convertible Notes) in the amount of
$15 million to ComVest, Medtronic and other investors, assumed a $2 million
Junior Subordinated Promissory Note payable to Bank of America (the Junior
Note), and entered into a new revolving and term loan facility (the LaSalle
Credit Facility) for up to $22 million, of which approximately $8.8 million
was outstanding as of March 31, 2002. The following is a summary of key
provisions of the Recapitalization:                                                                                                                                                                                                                                                                                                   
|
| | On February 22, 2002, ComVest and Bank of America entered into an
assignment agreement under which ComVest agreed to acquire all of Bank of
Americas interest in the BofA Credit Facility. The purchase price for the
assignment was $22 million in cash, plus the $2 million Junior Note. The
Company subsequently assumed the Junior Note pursuant to the
Recapitalization, and ComVest has been released from obligations under the
Junior Note. Upon the closing of the assignment on March 15, 2002, ComVest
acquired all of Bank of Americas interest in the note outstanding under the
BofA Credit Facility (the BofA Note), the warrants issued to Bank of
America pursuant to the BofA Credit Facility were surrendered and cancelled,
and the Forbearance Agreement was terminated. The warrants, which had
previously been recorded in additional paid-in-capital at their estimated
fair value at issuance of $260,000, were extinguished at their estimated fair
value on the date of extinguishment of $345,000. As a result, $345,000 was
included as a component of the extraordinary loss on early extinguishment of
debt.                                                          
|
| | On March 1, 2002, the Company entered into a Note Purchase Agreement with
ComVest and certain Additional Note Purchasers, as defined. Under the Note
Purchase Agreement, the Company agreed to issue $15 million of Convertible
Notes. Interest on the Convertible Notes is payable quarterly beginning in
June 2002 and accrues at a rate of 6% per year for the first six months and 8%
per year thereafter until the notes are paid in full and mature on March 16,
2004. The Company issued the Convertible Notes as follows: $4.4 million to
ComVest, $4 million to Medtronic and $6.6 million to the Additional Note
Purchasers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | The holders of the Convertible Notes have the right to convert in the
aggregate a total of $270,000 of the Convertible Notes into shares of the
Companys common stock at a conversion price of $0.01 per share for a total of
27,000,000 shares, subject to a downward adjustment upon repayment of all or a
portion of the amounts due, as described below. If this $270,000 is converted,
the Company will still be obligated to repay, in the aggregate, $14,730,000 to
the holders of the Convertible Notes. The 27,000,000 shares also
includes up to
3,300,000 shares which may be issued upon conversion of the Bridge Note (as
described below). Under the conversion terms, if the principal amount of the
Additional Notes, together with all interest due were paid in full on or
before April 15, 2002, then the maximum aggregate number of shares of common
stock that all the Convertible Notes may be converted into is 22,500,000. The
Company did not repay any principal under the Convertible Notes by this date.
If the principal amount of all the Convertible Notes and all interest due are
paid on or before March 16, 2004, then the maximum aggregate number of shares
of the

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| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Companys common stock that the Convertible Notes can be converted into
is 19,500,000. The terms of the applicable conversion periods and conversion
amounts of the Convertible Notes (excluding the Bridge Note described below)
are as follows:

| |   |  |                                                                                                                                                                                                                                                                                                                                                                                                      
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | Between April 16, 2002 and March 16, 2004, ComVest has
the right to convert 1.25% of the Outstanding Balance (defined as
principal plus accrued and unpaid interest under the ComVest
Convertible Note) held under its $4.4 million Convertible Note plus
0.6% of the amount of principal repaid under the Additional Notes;                                                                         
| |  |  | Between March 16, 2003 and March 16, 2004, ComVest has the
right to convert an additional 0.25% of the Outstanding Balance;                                                                                                                                                                                                                                                                          
| |  |  | Between April 16, 2002 and March 16, 2004, Medtronic
has the right to convert 1.5% of its $4 million Convertible Note;                                                                                                                                                                                                                                                                               
| |  |  | Between March 16, 2003 and March 16, 2004, Medtronic
has the right to convert an additional 0.3% of $4 million if
ComVests Convertible Note and the notes held by the Additional Note
Purchasers have not been repaid;                                                                                                                                                                              
| |  |  | Between April 16, 2002 and March 16, 2004, the Additional Note
Purchasers have the right to convert 1.25% of the Additional Notes
Outstanding Balance (defined as principal plus accrued but unpaid
interest under the Additional Notes) held under their $6.6 million
Convertible Note plus 0.6% of the amount of principal repaid under
ComVests Convertible Note on or before April 16, 2002; and
| |  |  | Between March 16, 2003 and March 16, 2004, the Additional Note
Purchasers have the right to convert an additional 0.25% of the
Additional Notes Outstanding Balance.                                                                                                                                                                                                                                 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pursuant to
the rules and regulations of the American Stock Exchange, the Company
may issue up to 19.9% of its common stock, including upon conversion
of the Convertible Notes, without shareholder approval. The Company
is seeking shareholder approval at its 2002 annual meeting of
shareholders for the issuance of up to 27,000,000 shares of common
stock issuable upon conversion of the Convertible Notes.
If the Company does not obtain the requisite shareholder approvals
relating to certain amendments to the Companys articles of
incorporation and the common stock issuable upon conversion of the
Convertible Notes within 195 days from March 16, 2002, the closing
date of the Recapitalization, the Company will be in default under the Note
Purchase Agreement, which would require the Company to accelerate repayment
of the Convertible Notes and may subject the Company to cross-default
penalties pursuant to the Companys senior credit facility.
|
| | Additionally, in connection with the Bridge Loan, the Company issued a
Convertible Bridge Note (the Bridge Note) to ComVest. As of June 30, 2002,
ComVest had the right to convert this note into up to 3.3 million shares of
the Companys common stock. The number of shares of common stock issuable
pursuant to conversion of the Bridge Note is subject to the thresholds
outlined above in this Note 4. The conversion terms of the Bridge Note are
as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                    |  |                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                              
|----------------------------------- |  | --------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Applicable Period                   |  | Maximum Conversion Amount
During Applicable Period
(all shares convertible at $.01 per share)
|                                    |  |                                                                                              
|March 8, 2002 through March 8, 2003 |  |                                                                                              |  | 50% of the Original Amount (equal to
$33,000 as of June 30, 2002) may be
converted into shares of common stock
equal to (i) 0.6667, multiplied by (ii)
the aggregate principal amount
outstanding under the Additional Notes on
the date of issuance (equal to $6.6
million).                                                                                
|March 8, 2003 through March 8, 2004 |  |                                                                                              |  | In the event that the ComVest
Convertible Notes and the Additional
Notes have not been repaid in full by
March 8, 2003, 50% of the Original Amount
may be converted into shares of common
stock equal to (A)(i) 0.8 multiplied by
(ii) the aggregate principal amount
outstanding under the Additional Notes on
the date of issuance (equal to $6.6
million).

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company may prepay the Convertible Notes, subject to no prepayment
penalty within the first 12 months, with a prepayment penalty of 5% between
months 12 to 15, and a prepayment penalty of 10% between months 15 to 24. The
Note Purchase Agreement also contains certain affirmative and negative
covenants, including, but not limited to, restrictions on indebtedness and
liens, business combinations, sale or discount of receivables, conduct of the
Companys business, transactions with affiliates, ability to enter into
contracts outside the ordinary course of business, and ability to pay
dividends. The Events of Default include, but are not limited to, failure to
pay an obligation when due, breach of any covenant that remains uncured for
15 days, bankruptcy, change of control, and failure to obtain shareholder
approval of the Recapitalization within 105 days of the closing date of March
16, 2002. The shareholder approvals that the Company agreed to obtain and
will submit to the shareholders at the 2002 Annual Meeting include issuances
of common stock pursuant to the Recapitalization, amendments to the Companys
articles of incorporation to increase the number of authorized shares of
common stock from 50 million to 100 million and to declassify the staggered
board, amendments of the Bylaws to eliminate the fair price and business
combinations provisions, and the grant of options to the CEO and the
Companys President (as described below).                                                                                                                                                        
|
| | On March 15, 2002, the Company and ComVest, as the holder of the
outstanding BofA Note, agreed to reduce the outstanding principal amount of
the BofA Note from $40.3 million to $22 million. As a result, the Company
recorded an extraordinary loss on the early extinguishment of debt of
approximately $6.6 million during the first quarter of 2002. This
extraordinary loss was calculated by subtracting the fair value of the new
debt of $42.6 million, which included the amount outstanding under the
LaSalle Credit Facility ($7.3 million), the Convertible Notes ($33.3
million), and the BofA Junior Note ($2.0 million), from the amount
outstanding under the BofA debt of $40.3 million. Also included in the
extraordinary loss were various costs paid to ComVest/Commonwealth and
LaSalle, as the lenders, to effect the recapitalization transaction of $4.3

million. Included as components of the additional $4.3 million of transaction
expenses were the following: $570,000 in closing costs and due diligence fees
paid to LaSalle; a warrant to purchase the Companys common stock issued to
LaSalle valued at approximately $695,000; approximately 2.7 million shares
issued to ComVest valued at approximately $2.3 million; deferred loan costs
from the original BofA debt of approximately $128,000, and $1.15 million paid
to Commonwealth in closing costs and due diligence fees. Also included in the
additional expenses, but offsetting these amounts are approximately $130,000
in fees and accrued interest forgiven by BofA and the fair value of the BofA
warrant of $345,000 which was acquired and cancelled by ComVest.
|
| | The Company also incurred numerous other costs that were either expensed
as incurred or capitalized as debt issuance costs. Included in selling,
general, and administrative expenses for the six-month period ended June 30,
2002 are approximately $2.8 million of expenses related to the
recapitalization transaction. The primary components of those expenses are
$2.4 million in stock compensation and bonuses to two of the Companys
executive officers, $168,000 in consulting fees, and $227,000 in legal and
other fees. The Company capitalized approximately $1.5 million as debt
issuance costs, consisting primarily of $906,000 in legal fees, $322,000 of
consulting fees, and $222,000 of other miscellaneous fees paid for services
rendered in connection with the recapitalization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | In exchange for funding a portion of the $22 million cash purchase price
paid to BofA, ComVest assigned $4 million in principal amount of the BofA
Note to Medtronic and $6.6 million in principal amount of the BofA Note to
the Additional Note Purchasers while retaining $11.4 million in principal
amount of the BofA Note itself. After such assignments, the Company issued
the Convertible Notes under the Note Purchase Agreement in the aggregate
principal amount of $15 million in exchange for the surrender of $15 million
in principal amount of the BofA Note held by ComVest, Medtronic and the
Additional Note Purchasers. The remaining $7 million in principal amount of
the BofA Note was repaid with the proceeds of a bridge loan from ComVest to
the Company made on March 15, 2002 (the Bridge Loan).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | The fair value of the Convertible Notes, which was used in the
determination of the extraordinary loss on early extinguishment of debt, was
$33.3 million. As this value represents a substantial premium to the face
value of the debt, the Company recorded the debt at its face value of $15
million, and recorded the premium of $18.3 million as an increase to
additional paid-in-capital. The Company determined the fair value of the
convertible notes by considering their two components, the non-convertible
debt of $14,730,000 and the convertible debt of $270,000. The non-convertible
debt components carrying value of $14,730,000 represents its fair value
because, when considered with the convertible component, its terms yield a
market rate of return. The convertible components fair value was determined
by multiplying the fair value of the Companys stock by the number of shares
into which this component is convertible. Thus, 27 million shares multiplied
by $0.68940 per share equals $18,613,685. The sum of the non-convertible
components fair value of $14,730,000 and the convertible components fair
value of $18,613,685 equals the total debt instruments fair value of
$33,343,685.                                                                                                                                                                                                                                                                                                                                                                                                                                 

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company determined the fair value of its stock in a multiple-step
process. First, the Company computed its assumed fair value of $13,762,977 at
the date of the transaction by multiplying the number of outstanding shares
(16,311,676) by the then current market price per share of $0.84375, which
resulted in a fair value of the Company prior to any conversion of the
convertible portion of the notes. The Company then added to this computed
fair value $16,095,909, which represents the difference between the
extinguished Bank of America debt of $40,320,909 and the face value of the
new debt of $24,225,000. This $16,095,909 difference was credited to
additional paid-in-capital. Thus, the new fair value of the Company, prior to
any conversion, is $29,858,886. The Company then assumed full conversion of
the convertible portion of the notes, which resulted in an additional
27,000,000 shares becoming outstanding. After conversion, the Company would
have 43,311,676 shares outstanding, which when divided into the new fair
value of $29,858,886, yields a new per share market value of $0.68940.                                                                                                                                                                                                                                                                                                                                           
|
| | On March 18, 2002, the Company entered into the LaSalle Credit Facility
pursuant to a loan and security agreement (the Loan Agreement) with
Standard Federal Bank National Association (SFB), acting by and through
LaSalle, as SFBs agent (collectively the Lender). Under the Loan
Agreement, the Lender has provided a $20 million senior revolving loan
facility (the Revolving Loan) and a $2 million term loan facility (Term
Loan). The Company used the proceeds to repay the Bridge Loan and expenses
related to the Recapitalization and will use the remaining proceeds for
working capital and general corporate purposes. Both loan facilities will
bear interest at the LaSalle Bank Prime Rate plus 2%, subject to an
additional 2% that would be added to the interest rate upon the occurrence of
an Event of Default (as discussed below).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | As collateral, the Company granted a security interest in all of the
Companys present and future assets, whether now or hereafter owned,
existing, acquired or arising and wherever now or hereafter located,
including, but not limited to: all accounts receivable; all chattel paper,
instruments, documents and general intangibles including patents, patent
applications, trademarks, trademark applications, trade secrets, trade names,
goodwill, copyrights, copyright applications, registrations, licenses,
software, franchises, customer lists, tax refund claims, claims against
carriers and shippers, guaranty claims, contract rights, payment intangibles,
security interests, security deposits, and indemnification rights; all
inventory; all goods including equipment, vehicles, and fixtures; all
investment property; all deposit accounts, bank accounts, deposits and cash;
all letter-of-credit rights; certain commercial tort claims; all property of
the Company in control of the Lender or any affiliate of the Lender; and all
additions, substitutions, replacements, products, and proceeds of the
aforementioned property including proceeds from insurance policies and all
books and records relating to the Companys business.                                                                                                                                                                                                              
|
| | The Loan Agreement contains affirmative and negative covenants. The
affirmative covenants require the Company to, among other things, maintain
accurate and complete records, notify the Lender of major business changes,
comply with relevant laws, maintain proper permits, conduct relevant
inspections and audits, maintain adequate insurance with the Lender named as
loss payee, keep collateral in good condition, use proceeds only for business
purposes, pay required taxes, maintain all intellectual property, maintain a
checking account with LaSalle, hire a Chief Operating Officer with experience
in the medical products industry within 90 days of the date of the Loan
Agreement (which has been done), grant the Lender the right to conduct
appraisals of the collateral on a bi-annual basis, and deliver a survey of
the property located at the Companys offices on Northside Parkway in Atlanta
within 60 days of the date of the Loan Agreement (which has been done). The
negative covenants restrict the Companys ability to, among other things,
make any guarantees, incur additional indebtedness, grant liens on its
assets, enter into business combinations outside the ordinary course of
business, pay dividends, make certain investments or loans, allow its
equipment to become a fixture to real estate or an accession to personal
property, alter its lines of business, settle accounts, or make other
fundamental corporate changes.
|
| | The Loan Agreement also contains financial maintenance covenants,
including, but not limited to, the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | maintaining Minimum Availability at all times of at
least $4 million under the Minimum Availability Test. Minimum
Availability is defined as (a) the lesser of: (i) the Revolving Loan
Limit (which is up to 85% of the face amount of the Companys
eligible accounts receivable; plus the lesser of (x) up to 55% of the
lower of cost or market value of the Companys eligible inventory or
up to 85% of the net orderly liquidation value of eligible inventory,
whichever is less, or (y) $11 million; plus such reserves as the
Lender may establish) and (ii) the Maximum Revolving Loan Limit of
$20 million minus (b) the sum of (i) the amount of all then
outstanding and unpaid Liabilities (to Lender, as defined) plus (ii)
the aggregate amount of all then outstanding and unpaid trade
payables and other obligations more than 60 days past due; plus (iii)
the amount of checks issued by the Company which are more than 60
days past due but not yet sent and the book overdraft of the Company
plus (iv) $4,000,000 owed by the Company to Arrow International;

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| |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | maintaining Tangible Net Worth of $7,698,000 for the
quarter ending December 31, 2002, $8,522,000 for the quarter ending
March 31, 2003, $9,475,000 for the quarter ending June 30, 2003,
$10,544,000 for the quarter ending September 30, 2003, $11,728,000
for the quarter ending December 31, 2003 and each quarter thereafter
(Tangible Net Worth is defined as shareholders equity including
retained earnings less the book value of all intangible assets,
prepaid and non-cash items arising from the transactions contemplated
by the Loan Agreement and goodwill impairment charges recorded as a
result of FASB No. 142 as determined solely by Lender plus the amount
of any LIFO reserve plus the amount of any debt subordinated to the
Lender). The Companys current forecast indicates that the Company
will be in noncompliance with the Tangible Net Worth covenant at
December 31, 2002. The Loan Agreement is classified as current and
the Company plans to reset this covenant with the Lender prior to
year end;
| |  |  | maintaining fixed charge coverage (ratio of EBITDA to
fixed charges) of 1.10 to 1.0 from April 1, 2002 through December 31,
2002, 1.20 to 1.0 from April 1, 2002 through March 30, 2003, 1.40 to
1.0 for the quarter ending June 30, 2003 and for the immediately
preceding four fiscal quarters, and 1.50 to 1.0 for the quarter
ending September 30, 2003 and for the immediately preceding four
fiscal quarters and each fiscal quarter thereafter;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |  | maintain EBITDA, based on the immediately preceding four
fiscal quarters, of $4,000,000 on December 31, 2002, $5,437,000 on
March 31, 2003, $6,605,000 on June 30, 2003, $7,374,000 on September
30, 2003 and $7,482,000 on December 31, 2003 and each fiscal quarter
thereafter; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |  | limit capital expenditures to no more than $500,000 during any fiscal year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Loan Agreement also specifies certain Events of Default, including,
but not limited to, failure to pay obligations when due, failure to direct
its account debtors to make payments to an established lockbox, failure to
make timely financial reports to the Lender, the breach by the Company or any
guarantor of any obligations with any other Person (as defined in the Loan
Agreement) if such breach might have a material adverse effect on the Company
or such guarantor, breach of representations, warranties or covenants, loss
of collateral in excess of $50,000, bankruptcy, appointment of a receiver,
judgments in excess of $25,000, any attempt to levy fees or attach the
collateral, defaults or revocations of any guarantees, institution of
criminal proceedings against the Company or any guarantor, occurrence of a
change in control, the occurrence of a material adverse change or a default
or an event of default under certain subordinated debt documents. Upon the
occurrence of any Event of Default, the Lender may accelerate the Companys
obligations under the Loan Agreement.
|
| | As of the date of this filing, the Company has complied with all of the
requirements of the Loan Agreement and believes that it has the financial
resources available to meet its working capital needs through fiscal year
2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | The Company must repay the Revolving Loan on or before March 17, 2005,
the Termination Date, unless the Loan Agreement is renewed and the repayment
period is extended through a new Termination Date. The Company must repay the
Term Loan in 36 equal monthly installments of $55,556. The Loan Agreement
will automatically renew for one-year terms unless the Lender demands
repayment prior to the Termination Date as a result of an Event of Default,
the Company gives 90-days notice of its intent to terminate and pays all
amounts due in full, or the Lender elects to terminate on or after February
1, 2004 as a result of a Termination Event. A Termination Event is defined as
the failure of Medtronic, ComVest or any Additional Note Purchaser to extend
the maturity date of the Convertible Notes at least thirty days past the date
of the original term or any applicable renewal term.                                                                                                                                                                                                            
|
| | Pursuant to the LaSalle Credit Facility, the Company also issued to
LaSalle and SFB warrants to purchase up to an aggregate of 748,619 shares of
common stock at an exercise price of $.01 per share. The Company recorded the
estimated fair value of the warrant as of March 18, 2002 of approximately
$695,000, determined using the Black-Scholes model (using weighted average
assumptions as follows: dividend yield of 0%, expected life of 3 years,
expected volatility of 112.2% and a risk free interest rate of 2.43%) as a
reduction of the gain on early extinguishment of debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | The Junior Note in the amount of $2 million bears interest at a rate of
6% per annum, payable monthly beginning April 2002, and matures on March 15,
2007. Beginning on May 1, 2003, a principal payment on the Junior Note of
$22,500 is payable on the first day of each month until maturity of the
Junior Note.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | As a condition to closing, the Company also agreed to enter into a
Securityholders Agreement dated March 16, 2002 with ComVest, Medtronic,
LaSalle, the CEO and the Companys President (together ComVest, Medtronic,

LaSalle, the CEO and the Companys President are the Investors) under which
the Company granted certain registration rights, rights of first refusal and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | corporate governance rights to the Investors. The registration rights
require the Company to file a shelf registration statement covering the
resale of certain shares of common stock issuable pursuant to the
Recapitalization and to include, at the Investors option, certain of the
Investors shares of common stock in any registration statement undertaken by
the Company, at the Companys expense. Pursuant to the
Securityholders Agreement, ComVest and Medtronic have been granted (i) a right of first
refusal to purchase all or part of their pro rata share of new securities
which the Company may propose to sell or issue, (ii) the right of first
refusal to participate in any sale of the CEOs and/or the Companys
Presidents shares of common stock of the Company to third parties upon the
same terms and conditions, (iii) the co-sale right of first refusal to
participate in sales of shares of the Companys common stock by the CEO
and/or the Companys President and (iv) the bring-along right to require
the CEO and the Companys President to sell the same percentage of shares of
common stock as the holders of the rights propose to sell in the event that
the rights holders propose to sell 51% or more of their common stock. The
corporate governance rights include, but are not limited to, the following:
(i) granting ComVest the right to designate one ComVest director and two
additional independent directors, (ii) requiring that certain actions of the
Board of Directors include the affirmative vote of the ComVest director,
(iii) requiring the Company to establish and maintain an Executive Committee
consisting of the ComVest director as Chairman, one of the independent
directors designated by ComVest, and the CEO, and (iv) requiring that the
Executive Committee approve certain actions. Failure to comply with the
Securityholders Agreement is considered an Event of Default under the Note
Purchase Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | On March 15, 2002, the Company entered into a Co-Promotion Agreement
with Medtronic under which the Company will promote and provide technical
advice for Medtronics implantable drug delivery systems which are used for
the treatment of hepatic arterial infusion and malignant pain. After basic
sales training, sales representatives of the Company and of its distributors
will promote the sale of such systems, identify appropriate patients for such
systems, and after additional training provide assistance in the implantation
and refill procedure for such systems, for which identification and
assistance the Company will be compensated by Medtronic. If the Company
breaches or fails to comply with its obligations under the Co-Promotion
Agreement (after giving effect to any applicable cure periods), then
Medtronic or 51% of the holders of the aggregate principal amount of the
Convertible Notes may accelerate the due date for payment of the Convertible
Notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | To effect the Recapitalization, the Company also entered into certain
ancillary agreements including the following: (i) a voting agreement under
which the CEO and the Companys President have agreed to vote their shares in
favor of all proposals relating to the Recapitalization; (ii) a new
employment agreement and option agreements with the CEO that grants him
options to purchase an aggregate of 3,500,000 shares of common stock (the new
employment agreement replaced the CEOs previous employment agreement and
reduced the previous term of employment and the previous severance
compensation and benefits from approximately four years to twelve months.);
(iii) a new employment agreement and an option agreement with the Companys
President that grants him options to purchase 1,000,000 shares of common
stock (the new employment agreement replaced the Presidents previous
employment agreement and reduced the previous term of employment from
approximately four years to six months and reduced the previous severance
compensation and benefits from approximately four years to twelve months.);
(iv) an advisory agreement with an affiliate of ComVest under which the
affiliate received 2,645,398 shares of common stock and a cash fee of
$750,000; (v) a note with ComVest under which ComVest received 75,000 shares
in exchange for advancing certain transaction expenses associated with the
Recapitalization; (vi) an expense guaranty with the CEO under which he
received 150,000 shares of common stock in exchange for agreeing to reimburse
ComVest for certain of its transaction expenses in the event that the
Recapitalization were not consummated; and (vii) an advance note with the CEO
under which he received 75,000 shares of common stock in exchange for
advancing to the Company certain transaction expenses associated with the
Recapitalization. The Company recognized compensation expense of
approximately $1,400,000 during the first quarter of 2002 related to
2,500,000 of the options granted to the CEO and all of the options granted to
the Companys President. The remaining 1,000,000 options that were granted to
the CEO are performance-based, and the Company will measure and recognize
compensation as the options are earned. The Company recorded the estimated
fair value of the shares of the common stock issued to ComVest of
approximately $2,500,000, as well as the cash fee of $750,000, as a component
of its extraordinary loss on early extinguishment of debt. The Company
recorded the value of the shares of the common stock issued to the CEO of
approximately $152,000 as debt cost and will be amortized over the terms of
the related agreements.
|
| | The auditors opinion accompanying the consolidated financial statements
in the Form 10-K states that there is substantial doubt as to the Companys
ability to continue as a going concern. Delivery of this opinion would have
triggered an Event of Default under the Loan Agreement and the Note Purchase
Agreement as originally executed because both agreements require audited
financial statements to be delivered within 90 days of December 31, 2001 with
an auditors opinion that does not contain such going concern language.
However, the default provisions in the Loan Agreement and the Note Purchase
Agreement relating to the audit opinion for the Companys 2001 financial
statements have been waived.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a result of the Recapitalization, the BofA Credit Facility, the
Forbearance Agreement with Bank of America, and all subsequent amendments
were terminated. Because those agreements were significant to the
capitalization of the Company prior to the Recapitalization, the terms of
those agreements are summarized below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | Effective March 30, 2001, the Company entered into a Forbearance
Agreement (as amended, the Forbearance Agreement) and a First Amendment to
Forbearance Agreement with Bank of America, N.A. (Bank of America) wherein
Bank of America agreed to forbear from exercising its rights and remedies
allowed under a $50 million amended and restated credit facility (the BofA
Credit Facility) due to certain defaults. The Company was in default at that
time for violating certain restrictive covenants and for failing to make
principal payments when due. All of the defaults were forborne as provided
for in the Forbearance Agreement, and revised restrictive covenants were set.
By September 30, 2001, the Company was in default under the Forbearance
Agreement for failing to comply with several of the revised covenants,
including minimum net worth, debt service coverage, leverage and minimum
EBITDA.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | Effective October 15, 2001, the Company entered into a Second Amendment
to the Forbearance Agreement (the Second Amendment). The Second Amendment
amended the terms of the Forbearance Agreement as follows: (i) changed the
termination date of the Forbearance Agreement (the Termination Date) from
March 31, 2002 to January 15, 2002 (the period from March 30, 2001 through
January 15, 2002 being defined as the Forbearance Period); (ii) required
the Company to maintain a general operating account with Bank of America and
restricted the use of funds in a calendar month to payments equal to or less
than the monthly budget submitted to Bank of America; (iii) required the
Company to pay accrued or unpaid interest on the BofA Note on the first day
of each month beginning November 1, 2001 and each month thereafter during the
Forbearance Period at the Bank of America Prime Rate plus 2.5% per annum; and
(iv) added additional reporting requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | The Second Amendment also amended the Termination Events as defined in
the Forbearance Agreement to include the following: (i) the Company fails to
execute and deliver or to cause the Companys Chief Executive Officer (the
CEO) and related entity to execute and deliver within ten days from the
effective date of the Second Amendment a pledge to Bank of America of all the
stock owned by the CEO and documentation to amend the current pledge
agreement between the CEO, an affiliate and the Company; (ii) the Company
fails to engage and hire within five days from the effective date of the
Second Amendment competent crisis and turn around management and a new Chief
Executive Officer to report directly to the independent members of the
Companys Board of Directors; (iii) the Company fails to provide Bank of
America within five days from the effective date of the Second Amendment a
copy of resolutions confirming the resignation of the CEO as an officer and
director of the Company and that no further salary or bonuses shall be paid
to the CEO; (iv) the Company fails to make efforts to refinance the amounts
outstanding under the BofA Credit Facility and fails to provide weekly status
reports; (v) on or before December 15, 2001, the Company fails to provide
Bank of America evidence that the Company has engaged an investment banking
firm to begin marketing the sale of the assets of the Company if the amounts
outstanding under the BofA Credit Facility are not paid off by the
Termination Date; or (vi) the Company fails to execute and deliver to Bank of
America within 24 hours of Bank of Americas request a consent order
consenting to the appointment of a Receiver in the event of a Termination
Event, as defined.
|
| | In addition, the Second Amendment reduced the Working Capital Sublimit
under the BofA Credit Facility to $5,000,000 and limited the Working Capital
Loan to the smaller of the Working Capital Sublimit or an amount equal to the
Borrowing Base, as defined in the BofA Credit Facility. The Second Amendment
also amended several of the financial covenants previously contained in the
Forbearance Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | The Forbearance Agreement provided for the payment of Excess Cash Flow,
as defined in the BofA Credit Facility, on the ninetieth day following the
last day of each fiscal year. There was no Excess Cash Flow payment required
for fiscal year 2001. In addition, the Forbearance Agreement required an
additional principal payment in the amount of the greater of $150,000 or the
gross proceeds payable to the Company in connection with the Companys sale
of the Ideas for Medicine business (IFM) (see Note 14 to the Companys
consolidated financial statements contained in the Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | The Forbearance Agreement further required payments of $300,000 each on
a short-term bridge loan (the BofA Bridge Loan) on May 31, 2001, August 31,
2001, and November 30, 2001. The proceeds of the BofA Bridge Loan were used
to fund a short-term bridge loan to the Companys Chairman of the Board, CEO,
and largest shareholder (the Shareholder Bridge Loan) (see Note 11 to the
Companys Consolidated Financial Statements included in the 10-K). The
Company received approximately $474,000 from the CEO as payment on the
Shareholder Bridge Loan and paid that amount to reduce the amount outstanding
under the BofA Bridge Loan. In addition, the CEO paid approximately $426,000
directly to Bank of America, which was applied against the BofA Bridge Loan
(and which the Company applied to the Shareholder Bridge Loan).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Forbearance Agreement also provided for a forbearance and
restructuring fee of $10,000 plus related expenses and interest at the rate
then in effect plus 6% upon a Termination Event, as defined in the
Forbearance Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | As permitted under the BofA Credit Facility and BofA Bridge Loan
documents, Bank of America instituted a sweep arrangement whereby funds
collected in the Companys lockbox accounts were swept periodically into a
Bank of America account and applied against the outstanding loan under the
BofA Credit Facility. The financial institutions which held such accounts
were notified by Bank of America that such lockbox arrangements had been
instituted, and the Companys right to withdraw, transfer or pay funds from
the accounts had been terminated. The Company periodically applied to receive
additional loans under the Working Capital Loans under the BofA Credit
Facility to the extent such loan had been paid down under the lockbox
arrangement.                                                                                          
|
| | In connection with the Forbearance Agreement, the Company issued a
warrant to Bank of America to acquire 435,157 shares of the Companys common
stock for $.05 per share. The warrant was exercisable by Bank of America
during a three-year period without regard to the status of the BofA Credit
Facility or the BofA Bridge Loan. The Company recorded the estimated fair
value of the warrant as of April 2001 of $260,000, determined using the
Black-Scholes Model (using weighted average assumptions as follows: dividend
yield of 0%, expected life of five years, expected volatility of 107.6% and a
risk free interest rate of 4.44%) as a deferred cost which was being
amortized over the Forbearance Period. As with the BofA Credit Facility and
other related agreements, the warrant was terminated in connection with the
Recapitalization.
|
| | The Forbearance Agreement also required the Company to hire on or before
June 30, 2001 a new chief operating officer, restricted the repayment of

principal debt to junior lien holders, and to either (i) sell the assets of
IFM or (ii) obtain an agreement from the seller of the IFM business to defer
all payments under the related promissory note through the Termination Date
(see Note 7 to the Companys interim condensed consolidated financial
statements contained elsewhere in this Form 10-Q regarding the sale of the
IFM business.) The Company hired a Chief Operating Officer in April 2001 who
was terminated in June 2001, and the Company did not hire a replacement. The
Company sold the assets of the IFM business as of March 30, 2001 (see Note
7).                                                                              
|
| | On December 15, 2001, the Company entered into a third amendment to the
Forbearance Agreement under which Bank of America consented to the increase
in payments of $8,000 per month to certain former shareholders of Stepic
Corporation (Stepic) (see Note 6 to the Companys consolidated financial
statements in the Form 10-K).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | In January 2002, the Company entered into a fourth amendment to
Forbearance Agreement with Bank of America, pursuant to which Bank of America
agreed to extend the Forbearance Period until March 15, 2002 (the Expiration
Date) in order for the Company to consider its strategic alternatives. On
March 15, 2002, the BofA Credit Facility was assigned from BofA to ComVest.
On March 16, 2002, the Company issued the Convertible Notes in an aggregate
amount of $15 million to ComVest, Medtronic and the Additional Note
Purchasers. On March 18, 2002, the Company entered into the LaSalle Credit
Facility.                                                                                                                                                                                                                                        
|
| | As of December 31, 2001, $3,465,874 was outstanding under the Working
Capital Loans, and $36,518,039 was outstanding under the Acquisition Loans,
each as defined in the BofA Credit Facility. No funds were available for
borrowing under the BofA Credit Facility as of December 31, 2001, except as
may be available under the sweep arrangement described below. In addition,
the Company had an outstanding standby letter of credit of $144,000 as of
December 31, 2001. The letter of credit, which had terms through January
2002, collateralized the Companys obligations to a third party in connection
with an acquisition (see Note 12 to the consolidated financial statements
included in the Form 10-K).                                                                                                                                       
|
| | Effective March 30, 2001, through the Termination Date of the
Forbearance Agreement, the BofA Credit Facility bore interest at the Bank of
America prime rate plus 2.5% per annum. As of December 31, 2001, the
Companys interest rate on the BofA Credit Facility was approximately 7.25%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | The BofA Credit Facility called for an unused commitment fee payable
quarterly, in arrears, at a rate of .375% per annum, as well as a letter of
credit fee payable quarterly, in arrears, at a rate of 2% per annum. Both
fees were based on a defined calculation in the agreement. In addition, the
BofA Credit Facility required an administrative fee in the amount of $30,000
to be paid annually.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | The Companys obligations under the BofA Credit Facility were
collateralized by liens on substantially all of the Companys assets,
including inventory, accounts receivable and general intangibles as well as a
pledge of the stock of the Companys subsidiaries. The Companys obligations
under the BofA Credit Facility were also guaranteed individually by each of
the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Companys subsidiaries (the Guarantees). The obligations of such
subsidiaries under the Guarantees were collateralized by liens on
substantially all of their respective assets, including inventory, accounts
receivable and general intangibles. The Companys obligation under the Bridge
Loan was collateralized by the pledge of 2,813,943 shares of the Companys
common stock beneficially owned by the CEO and an affiliate, and by the
collateral previously pledged by the Company to Bank of America under the
BofA Credit Facility.

5. Related-Party Transactions



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As discussed in Note 6 to the Companys consolidated financial
statements in the Form 10-K, on June 6, 2000, the Company obtained the BofA
Bridge Loan in the amount of $900,000, which was used to fund the Shareholder
Bridge Loan to the Companys CEO. The Shareholder Bridge Loan required
interest at either the Index Rate or adjusted LIBOR, as defined in the
Shareholder Bridge Loan, plus 4.5% as elected by the CEO. As of December 31,
2001, the interest rate was based on the Index Rate with a resulting rate of
approximately 11.32%. The Shareholder Bridge Loan and related accrued
interest were recorded as contra-equity in the consolidated balance sheets
and were due on August 30, 2000 but not paid. As a result, the Company was
unable to pay the amount due under the BofA Bridge Loan, thereby causing the
Company to default under the BofA Bridge Loan and the BofA Credit Facility
(see Note 6 to the Form 10-K). During 2001, the CEO paid the Shareholder
Bridge Loan obligation of $900,000 as described in Note 6 to the Form 10-K.
Accrued interest of $109,305 related to the Shareholder Bridge Loan was
outstanding as of December 31, 2001 and recorded as contra-equity. The
accrued interest was paid to the Company by the CEO in June 2002.
|
| | The Company has unsecured loans to the CEO, the President of the
Company, and a former Vice Chairman of the Board of the Company in the form
of notes receivable, collectively in the amount of $112,613 and $337,837, plus accrued
interest receivable of $58,218 and $168,800 as of June 30, 2002 and December
31, 2001, respectively. The notes require annual payments of interest at 8%
beginning on September 28, 1997 and were amended in September 2001 to extend
the maturity date from 2000 to December 31, 2002. The notes and related
accrued interest are recorded as contra-equity in the consolidated balance
sheets. In March of 2002, approximately $342,000 was paid to the Company by
the CEO and the President in full settlement of their outstanding balances,
which included accrued interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | During 2001, Tunstall Consulting, Inc., an affiliate of Gordon Tunstall,
a director of the Company, provided consulting services to the Company with
respect to financial and certain related matters, including the
Recapitalization. In 2001, the Company incurred fees of $484,013 in
consideration for such services. In the six months ended June 30, 2002, the
Company incurred fees of $318,185 to Tunstall Consulting for consulting
services rendered to the Company in connection with the Recapitalization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | See Note 11 of the Companys consolidated financial statements included
in the Form 10-K for description of the Companys other related party
transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

6. Commitments and Contingencies



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially
affect the consolidated financial position, results of operations, or cash
flows of the Company.                                                                                                                                                                                                                                                                                                              
|
| | The Company is subject to numerous federal, state and local
environmental laws and regulations. Management believes that the Company is
in material compliance with such laws and regulations and that potential
environmental liabilities, if any, are not material to the consolidated
financial statements.                                                                                                                                                                                                                                                                                                                            
|
| | The Company is party to license agreements with an individual (the
Licensor) for the right to manufacture and sell dual lumen fistula needles,
dual lumen over-the-needle catheters, dual lumen chronic and acute catheters,
and other products covered by the Licensors patents or derived from the
Licensors confidential information. Payments under the agreement vary,
depending upon the purchaser, and range from 9% to 15% of the Companys net
sales of such licensed products. Such payments shall continue until the
expiration date of each corresponding licensed patent right covering each
product under the agreement.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective November 15, 2001, the exclusive distributor agreement between
Stepic Corporation, the Companys wholly owned distributor subsidiary
(Stepic), and Pall Medical Companies (Pall) was terminated. As part of
the termination, Stepic was permitted to sell the Pall critical care products
through November 14, 2001 and the Pall blood products through January 31,
2002. In addition, Stepic has returned for credit substantially all remaining
Pall inventory.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | The Company has entered into various distribution agreements under which
the Company has guaranteed certain gross margin percentages to its
distributors. As a result of these guarantees, the Company has accrued
approximately $579,000 and $649,000 as of June 30, 2002 and December 31,
2001, respectively, related to amounts to be rebated to the various
distributors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | The Company is party to numerous agreements which contain certain
provisions regarding change in control, as defined by the agreements, or the
acquisition of the Company by a third party. These provisions could result in
additional payments being required by the Company should these events, as
defined, occur.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Effective October 15, 1998, the Company completed the purchase of the
outstanding stock of Stepic for $8 million in cash and contingent payments of
up to $12 million over a three-year period based upon the successful
achievement of certain specified future earnings targets by Stepic. The
Company recorded additional purchase price payable to the previous Stepic
shareholders of approximately $2.1 million, $1.2 million, and $667,000,
respectively, representing the Companys additional earned contingent
payments for the anniversary years ending October 31, 1999, 2000 and 2001,
respectively, as required by the purchase agreement (the Purchase
Agreement). All additional payments made have been accounted for as
additional costs of acquired assets and amortized over the remaining life of
the assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | The 2000 contingent payment was due December 15, 2000 and $2.4 million,
which was previously accrued, was paid from proceeds from the BofA Credit
Facility. On December 15, 2000, the Company amended the Purchase Agreement so
that the remaining portion of the 2000 contingent payment of approximately
$1.2 million could be paid, together with interest at 11%, through April
2001. The Company failed to make all required payments to the Stepic
shareholders under the December 15, 2000 amendment and on February 14, 2001,
two of the three previous Stepic shareholders (the Plaintiffs) filed suit
against the Company for non-payment. On March 30, 2001, the Company entered
into a Settlement Agreement with the Plaintiffs wherein the Plaintiffs agreed
to voluntarily dismiss their pending lawsuit against the Company, and the
Company agreed to pay the 2000 contingent payment at a rate of $9,400 per
month beginning on April 15, 2001, until final payment of the remaining
outstanding balance on February 10, 2002. In addition, under the terms of the
Settlement Agreement, the Company agreed to pay interest to the Plaintiffs on
the unpaid balance of the 2000 contingent payment at the rate of 11% per
annum, including a lump sum interest payment of approximately $27,000. The
2001 contingent payment was due December 15, 2001, and $2.4 million, which
was previously accrued, was paid from proceeds from the BofA Credit Facility.
|
| | On March 14, 2002, the Company entered into an agreement with the
Plaintiffs, which replaces the Settlement Agreement, pursuant to which the
Company paid $100,000 to the Plaintiffs on March 15, 2002 and agreed to pay
monthly payments of principal and interest of approximately $36,000 through
March 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | Pursuant to the terms of the Note Purchase Agreement, the holders of the
Convertible Notes have the right to convert in the aggregate a total of
$270,000 of the Convertible Notes into shares of the Companys common stock
at a conversion price of $0.01 per share for a total of 27,000,000 shares,
subject to a downward adjustment. See Note 4 to these interim condensed
consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | As described in Note 4 to the interim condensed consolidated financial
statements contained in this Form 10-Q, the Loan Agreement sets forth certain
Events of Default, the occurrence of which would allow the Lender to
accelerate the Companys obligations under the Loan Agreement. See Note 4 to
these interim condensed consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | On March 15, 2002, the Company entered into a Co-Promotion Agreement
with Medtronic under which the Company will promote and provide technical
advice for Medtronics implantable drug delivery systems which are used for
the treatment of hepatic arterial infusion and malignant pain. If the Company
breaches or fails to comply with its obligations under the Co-Promotion
Agreement (after giving effect to any applicable cure periods), then
Medtronic or 51% of the holders of the aggregate principal amount of the
Convertible Notes may accelerate the due date for payment of the Convertible
Notes. See Note 4 to these unaudited interim condensed consolidated financial
statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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7. Sale of IFM



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective March 30, 2001 (the IFM Closing Date), the Company completed
the sale of certain IFM assets for the assumption of the Note related to IFM
(see Note 6 of the consolidated financial statements contained in the Form
10-K), cash of $2,250,500 upon closing, and cash of $150,000 due six months
from the IFM Closing Date (the Second Installment). Assets sold included
inventory of $3.3 million, property and equipment of $2.4 million, and
intangible assets of $1.6 million. The asset purchase agreement provided for
a purchase price adjustment related to certain inventory values within five
business days after the IFM Closing Date. Based on the values of the
inventory following the IFM Closing Date, the Company recorded an additional
purchase price receivable of approximately $70,000 which is to be paid as
part of the Second Installment. In addition to the purchase of certain
assets, the purchaser assumed the Companys sublease of the IFM facility and
the related employees.
|
| | The Second Installment in the amount of approximately $220,000 was due
from the purchaser on September 30, 2001. As of June 30, 2002, the Second
Installment has not been paid, and the purchaser has sought indemnification
under the asset purchase agreement for the Companys alleged breach of its
representations and warranties set forth in the agreement. On September 24,
2001, the Company filed a Complaint for Declaratory Judgement and Breach of
Contract against the purchaser in the Superior Court of Fulton County in the
State of Georgia. As of June 30, 2002 and December 31, 2001, the Company has
fully reserved the amount due from the purchaser of approximately
$220,000. The Company and IFM settled this lawsuit in August 2002.                                                                                                                                                                                                                                                                

8. Segment Information



| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company operates two reportable segments, manufacturing and
distribution. The manufacturing segment includes products manufactured by the
Company as well as products manufactured by third parties on behalf of the
Company through manufacturing and supply agreements.
|
| | The Company evaluates the performance of its segments based on gross
profit; therefore, selling, general, and administrative costs, as well as
research and development, interest income/expense, and provision for income
taxes, are reported on an entity wide basis only. 
|
| | The table below presents information about the reported sales (which
include intersegment sales) and gross profit (which include intersegment
gross profit) of the Companys segments as of and for the three and six
months ended June 30, 2002 and 2001.                   

|              |  |                    |            |                  |  |       |           |              |  |   |            |  |  |   |           | 
|------------- |  | ------------------ | ---------- | ---------------- |  | ----- | --------- | ------------ |  | - | ---------- |  |  | - | --------- | 
|              |  | Three Months Ended |            | Six Months Ended
|              |  | June 30, 2002      |            | June 30, 2002   
|              |  |                    |            |                 
|              |  | Sales              |            | Gross Profit     |  | Sales |           | Gross Profit
|              |  |                    |            |                  |  |       |           |             
|Manufacturing |  | $                  | 6,194,019  |                  |  | $     | 3,503,121 |              |  | $ | 10,585,241 |  |  | $ | 5,764,277 | 
|Distribution  |  |                    | 8,191,382  |                  |  |       | 1,476,281 |              |  |   | 16,295,598 |  |  |   | 2,965,982 | 
|              |  |                    |            |                  |  |       |           |              |  |   |            |  |  |   |           | 
|              |  | $                  | 14,385,401 |                  |  | $     | 4,979,402 |              |  | $ | 26,880,839 |  |  | $ | 8,730,259 | 
|              |  |                    |            |                  |  |       |           |              |  |   |            |  |  |   |           | 

|              |  |                    |            |                  |  |       |           |              |  |   |            |  |  |   |            | 
|------------- |  | ------------------ | ---------- | ---------------- |  | ----- | --------- | ------------ |  | - | ---------- |  |  | - | ---------- | 
|              |  | Three Months Ended |            | Six Months Ended
|              |  | June 30, 2001      |            | June 30, 2001   
|              |  |                    |            |                 
|              |  | Sales              |            | Gross Profit     |  | Sales |           | Gross Profit
|              |  |                    |            |                  |  |       |           |             
|Manufacturing |  |                    | 6,312,346  |                  |  |       | 3,486,875 |              |  | $ | 13,597,795 |  |  | $ | 7,445,402  | 
|Distribution  |  |                    | 9,231,653  |                  |  |       | 1,767,978 |              |  |   | 18,797,187 |  |  |   | 3,587,436  | 
|              |  |                    |            |                  |  |       |           |              |  |   |            |  |  |   |            | 
|              |  |                    | 15,543,999 |                  |  |       | 5,254,853 |              |  | $ | 32,394,982 |  |  | $ | 11,032,838 | 
|              |  |                    |            |                  |  |       |           |              |  |   |            |  |  |   |            | 

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| |                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A reconciliation of total segment sales to total consolidated sales and
total segment gross profit to total consolidated gross profit of the Company
for the three and six months ended June 30, 2002 and 2001 is as follows:

|                                  |  |                    |            |                  |  |          |            |          |  |   |            |   |  |   |            |  
|--------------------------------- |  | ------------------ | ---------- | ---------------- |  | -------- | ---------- | -------- |  | - | ---------- | - |  | - | ---------- | -
|                                  |  | Three Months Ended |            | Six Months Ended
|                                  |  |                    |            |                 
|                                  |  | June 30,           |            | June 30,         |  | June 30, |            | June 30,
|                                  |  | 2002               |            | 2001             |  | 2002     |            | 2001    
|                                  |  |                    |            |                  |  |          |            |         
|Total segment sales               |  | $                  | 14,385,401 |                  |  | $        | 15,543,999 |          |  | $ | 26,880,839 |   |  | $ | 32,394,982 |  
|Elimination of intersegment sales |  |                    | (508,619   | )                |  |          | (473,900   | )        |  |   | (1,084,724 | ) |  |   | (905,100   | )
|                                  |  |                    |            |                  |  |          |            |          |  |   |            |   |  |   |            |  
|Consolidated sales                |  | $                  | 13,876,782 |                  |  | $        | 15,070,099 |          |  | $ | 25,796,115 |   |  | $ | 31,489,882 |  
|                                  |  |                    |            |                  |  |          |            |          |  |   |            |   |  |   |            |  

|                                         |  |                    |           |                  |  |          |           |          |  |   |           |  |  |   |            | 
|---------------------------------------- |  | ------------------ | --------- | ---------------- |  | -------- | --------- | -------- |  | - | --------- |  |  | - | ---------- | 
|                                         |  | Three Months Ended |           | Six Months Ended
|                                         |  |                    |           |                 
|                                         |  | June 30,           |           | June 30,         |  | June 30, |           | June 30,
|                                         |  | 2002               |           | 2001             |  | 2002     |           | 2001    
|                                         |  |                    |           |                  |  |          |           |         
|Total segment gross profit               |  | $                  | 4,979,402 |                  |  | $        | 5,254,853 |          |  | $ | 8,730,259 |  |  | $ | 11,032,838 | 
|Elimination of intersegment gross profit |  |                    | 19,832    |                  |  |          | 47,604    |          |  |   | 32,576    |  |  |   | 198,310    | 
|                                         |  |                    |           |                  |  |          |           |          |  |   |           |  |  |   |            | 
|Consolidated gross profit                |  | $                  | 4,999,234 |                  |  | $        | 5,302,457 |          |  | $ | 8,762,835 |  |  | $ | 11,231,148 | 
|                                         |  |                    |           |                  |  |          |           |          |  |   |           |  |  |   |            | 



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | A reconciliation of total segment assets to total consolidated assets of
the Company as of June 30, 2002 and December 31, 2001 is as follows:

|                                        |  |               |            |                   |  |   |            |  
|--------------------------------------- |  | ------------- | ---------- | ----------------- |  | - | ---------- | -
|                                        |  | June 30, 2002 |            | December 31, 2001
|                                        |  |               |            |                  
|Manufacturing                           |  | $             | 35,860,674 |                   |  | $ | 35,768,752 |  
|Distribution                            |  |               | 16,972,505 |                   |  | $ | 35,633,080 |  
|                                        |  |               |            |                   |  |   |            |  
|Total segment assets                    |  |               | 52,833,179 |                   |  |   | 71,401,832 |  
|Elimination of intersegment receivables |  |               | (68,063    | )                 |  |   | (54,292    | )
|                                        |  |               |            |                   |  |   |            |  
|Consolidated assets                     |  | $             | 52,765,116 |                   |  | $ | 71,347,540 |  
|                                        |  |               |            |                   |  |   |            |  



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Except for a sales office located in Belgium, the Companys operations
are located in the United States. Thus, substantially all of the Companys
assets are located domestically. Sales information by geographic area for the
three and six months ended June 30, 2002 and 2001, is as follows:

|              |  |                    |            |                  |  |      |            |      |  |   |            |  |  |   |            | 
|------------- |  | ------------------ | ---------- | ---------------- |  | ---- | ---------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|              |  | Three Months Ended |            | Six Months Ended
|              |  | June 30,           |            | June 30,        
|              |  |                    |            |                 
|              |  | 2002               |            | 2001             |  | 2002 |            | 2001
|              |  |                    |            |                  |  |      |            |     
|United States |  | $                  | 13,436,178 |                  |  | $    | 14,647,503 |      |  | $ | 24,879,203 |  |  | $ | 30,378,545 | 
|Foreign       |  |                    | 440,604    |                  |  |      | 422,596    |      |  |   | 916,912    |  |  |   | 1,111,337  | 
|              |  |                    |            |                  |  |      |            |      |  |   |            |  |  |   |            | 
|              |  | $                  | 13,876,782 |                  |  | $    | 15,070,099 |      |  | $ | 25,796,115 |  |  | $ | 31,489,882 | 
|              |  |                    |            |                  |  |      |            |      |  |   |            |  |  |   |            | 

9. Liquidity



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company incurred a loss of approximately $5 million in 2001, and as
discussed in Note 6 of the consolidated financial statements included in the
Form 10-K, the Company was in violation of the Forbearance Agreement with
Bank of America as of December 31, 2001 and continuing into 2002. As more
fully described in Note 4 of the interim condensed consolidated financial
statements contained elsewhere in this Form 10-Q, the Company has completed a
recapitalization transaction that extinguished all

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | of the Companys outstanding debt and warrants held by Bank of America,
entered into new financing facilities with new lenders and substantially
reduced the Companys total outstanding debt. The Companys senior loan
agreement contains certain requirements which are either determined at the
discretion of the lender or involve meeting financial covenants. The Company
is unable to objectively determine or measure whether it can comply with
those requirements, raising substantial doubt about the Companys ability to
continue as a going concern. While there can be no assurance, it is the
Companys expectation to comply with these requirements and to have the
financing facilities available for its working capital needs throughout 2002.
If the Company is unable to comply with the requirements of the new financing
facilities during 2002, the Company may not be able to borrow under the
senior loan agreement, and all amounts may become immediately due.

10. Goodwill and Other Intangible Assets



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142 Goodwill and Other Intangible Assets effective January 1, 2002.
SFAS No. 142 requires that: 1) goodwill and indefinite lived intangible
assets will no longer be amortized; 2) goodwill will be tested for impairment
at least annually at the reporting unit level; 3) intangible assets deemed to
have an indefinite life will be tested for impairment at least annually; and
4) the amortization period of intangible assets with finite lives will no
longer be limited to forty years. Upon the adoption of SFAS No. 142, the
Company recorded an impairment loss of $16.1 million.
|
| | In accordance with SFAS No. 142, prior period amounts were not restated.
A reconciliation of the previously reported net income and earnings per
share for the three and six months ended June 30, 2001 to the amounts
adjusted for the reduction of amortization expense, net of the related income
tax effect, is as follows:                                                                                                                                                                                                                                                                                                                                           

|                  |  |                                          |             |           |  |             |        |   |  |  |        |  
|----------------- |  | ---------------------------------------- | ----------- | --------- |  | ----------- | ------ | - |  |  | ------ | -
|                  |  | For the Three Months Ended June 30, 2001
|                  |  |                                         
|                  |  | Net Loss                                 |             | Basic EPS |  | Diluted EPS
|                  |  |                                          |             |           |  |            
|Reported          |  |                                          | ($1,340,537 | )         |  |             | ($0.10 | ) |  |  | ($0.10 | )
|Add: amortization |  |                                          |             |           |  |             |        |   |  |  |        |  
|Adjustment        |  |                                          | 318,556     |           |  |             | 0.02   |   |  |  | 0.02   |  
|                  |  |                                          |             |           |  |             |        |   |  |  |        |  
|Adjusted          |  |                                          | ($1,021,981 | )         |  |             | ($0.08 | ) |  |  | ($0.08 | )
|                  |  |                                          |             |           |  |             |        |   |  |  |        |  

|                  |  |                                        |             |           |  |             |        |   |  |  |        |  
|----------------- |  | -------------------------------------- | ----------- | --------- |  | ----------- | ------ | - |  |  | ------ | -
|                  |  | For the Six Months Ended June 30, 2001
|                  |  |                                       
|                  |  | Net Loss                               |             | Basic EPS |  | Diluted EPS
|                  |  |                                        |             |           |  |            
|Reported          |  |                                        | ($1,775,060 | )         |  |             | ($0.13 | ) |  |  | ($0.13 | )
|Add: amortization |  |                                        |             |           |  |             |        |   |  |  |        |  
|Adjustment        |  |                                        | 752,038     |           |  |             | 0.06   |   |  |  | 0.06   |  
|                  |  |                                        |             |           |  |             |        |   |  |  |        |  
|Adjusted          |  |                                        | ($1,023,022 | )         |  |             | ($0.07 | ) |  |  | ($0.07 | )
|                  |  |                                        |             |           |  |             |        |   |  |  |        |  



| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | Finite lived intangible assets as of June 30, 2002, subject to
amortization expense, are comprised of the following:

|                                      |       |   |                |            |              |   |            |            |   |   |           |           | 
|------------------------------------- | ----- | - | -------------- | ---------- | ------------ | - | ---------- | ---------- | - | - | --------- | --------- | 
|                                      |       |   | Gross Carrying |            | Accumulated  |   |            |            |  
|                                      |       |   | Amount         |            | Amortization |   | Net       
|                                      |       |   |                |            |              |   |           
|Patents                               |       | $ | 8,218,000      |            |              | $ | (2,573,212 | )          |   | $ | 5,644,788 |          
|Non-compete and
consulting agreements |       |   | 2,100,592      |            |              |   | (1,976,261 | )          |   |   | 124,331   |          
|Debt issuance costs                   |       |   | 1,450,087      |            |              |   | (203,574   | )          |   |   | 1,246,513 |          
|Other                                 |       |   | 368,253        |            |              |   | (327,816   | )          |   |   | 40,437    |          
|                                      |       |   |                |            |              |   |            |            |   |   |           |          
|                                      | Total |   | $              | 12,136,932 |              |   | $          | (5,080,863 | ) |   | $         | 7,056,069 | 
|                                      |       |   |                |            |              |   |            |            |   |   |           |          



| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Amortization expense for finite lived intangible
    assets was $408,060 and $743,509 for the three and six months
    ended June 30, 2002. The expected amortization expense for
    each of the five succeeding years ended December 31 is as
    follows:



|           |           
|---------- | ----------
|2003       | 1,212,802 
|2004       | 887,249   
|2005       | 642,738   
|2006       | 599,724   
|2007       | 599,724   
|Thereafter | 2,346,306 
|           |           
|           | $6,288,543
|           |           



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | The net carrying value of goodwill as of
    June 30, 2002 by operating segment is as follows:



|               |            
|-------------- | -----------
|Manufacturing  | $15,650,356
|Distribution   |           
|               |            
|Total Goodwill | $15,650,356
|               |            

The change in the net carrying amount of goodwill
during the six months ended June 30, 2002 is due to the impairment
loss recorded on the distribution segment of $16.1 million upon the
adoption of SFAS 142.

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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

Results of Operations

Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

Net Sales.Net sales decreased 7.9% to $13.9 million for the second
quarter of 2002 from $15.1 million for the second quarter of 2001. This
decrease is attributable a decline in distribution sales in the second quarter
of 2002, due to the loss of one of Stepics manufacturing product lines (Pall)
at the end of 2001 which represents an approximate $1.4 million revenue loss in
second quarter of 2002 from second quarter 2001. The allocation of net sales on
a segment basis for the three months ended June 30, 2002 resulted in net sales
of $6.2 million from the manufacturing segment and $8.2 million from the
distribution segment, before intersegment eliminations. The allocation of net
sales on a segment basis for the three months ended June 30, 2001 resulted in
net sales of $6.3 million from the manufacturing segment and $9.2 million from
the distribution segment, before intersegment eliminations.

Gross Profit.Gross profit decreased 5.7% to $5 million for the second
quarter of 2002 from $5.3 million for the second quarter of 2001. Gross margin
percentage increased to 36.0% in the second quarter of 2002 from 35.2% in the
second quarter of 2001. The decrease in gross profit dollars is the result of
decreased sales, and the increase in gross margin percentage is the result of a
favorable change in product mix. The allocation of gross profit between
segments for the three months ended June 30, 2002 resulted in gross profit of
$3.5 million from the manufacturing segment and $1.5 million from the
distribution segment, before intersegment eliminations. The allocation of gross
profit between segments for the three months ended June 30, 2001 resulted in
gross profit of $3.5 million from the manufacturing segment and $1.8 million
from the distribution segment, before intersegment eliminations.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses (SG&A) decreased approximately $943,000 or 17.2% to
approximately $4.5 million for the second quarter of 2002 compared with $5.5
million for the second quarter of 2001. This decrease is attributable to lower
turnaround expenses, including consulting fees, PR campaign fees and
severances, as well as lower salaries, travel and amortization expenses in the
second quarter of 2002. Partially offsetting the decrease were ongoing
recapitalization expenses of approximately $212,000 incurred in the second
quarter of 2002. Exclusive of the recapitalization expenses, SG&A would have
decreased approximately $1.2 million in the second quarter of 2002 over the
second quarter of 2001. As a result of decreased SG&A expenses, SG&A as a
percentage of net sales decreased to 32.7% for the second quarter of 2002 from
36.3% for the second quarter of 2001.

Interest Expense.Net interest expense decreased to approximately $746,000
in the second quarter of 2002 compared to approximately $1.2 million in the
second quarter of 2001. The decrease in 2002 is due to lower debt outstanding
during and lower interest rates during the second quarter of 2002 compared to
the second quarter of 2001, both as a result of the Recapitalization in March
2002.

Income Taxes.The Companys projected taxable income from continuing
operations and extinguishment of the BofA Credit Facility is expected to be
fully offset by a net operating loss carryforward upon which a valuation
allowance had previously been established in 2001. This valuation allowance is
now being released to the extent of the projected taxable income in 2002. A
valuation allowance remains in effect on the remaining deferred tax assets
because, based on the weight of available evidence, it is more likely than not
that the deferred tax assets will not be realized.

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

Net Sales.Net sales decreased 18.1% to $25.8 million for the six months
ended June 30, 2002 from $31.5 million for the six months ended June 30, 2001.
This decrease is primarily attributable to the fact that sales of the IFM
product line (of approximately $1.8 million in the first six months of 2001)
are not included in 2002 net sales of the manufacturing segment as the product
line was sold on March 30, 2001, and a decline in distribution sales in the six
months ended June 30, 2002, due to the loss of one of Stepics manufacturing
product lines (Pall) at the end of 2001 which represents an approximate $2.5
million revenue loss in the six months ended 2002 from 2001. The allocation of
net sales on a segment basis for the six months ended June 30, 2002 resulted in
net sales of $10.6 million from the manufacturing segment and $16.3 million
from the distribution segment, before intersegment eliminations. The allocation
of net sales on a segment basis for the six months ended June 30, 2001 resulted
in net sales of $13.6 million from the manufacturing segment and $18.8 million
from the distribution segment, before intersegment eliminations.

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Gross Profit.Gross profit decreased 22% to $8.8 million for the six
months ended June 30, 2002 from $11.2 million for the six months ended June 30,
2001. Gross margin percentage decreased to 34.0% in 2002 from 35.7% in 2001.
The decrease in gross profit dollars is the result of decreased sales, and the
decrease in gross margin percentage is the result of distribution sales, which
generate a lower gross margin percentage, comprising a larger percentage of
total sales in the six month period ended June 30, 2002 compared to the six
month period ended June 30, 2001. The allocation of gross profit between
segments for the six months ended June 30, 2002 resulted in gross profit of
$5.8 million from the manufacturing segment and $3 million from the
distribution segment, before intersegment eliminations. The allocation of gross
profit between segments for the six months ended June 30, 2001 resulted in
gross profit of $7.4 million from the manufacturing segment and $3.6 million
from the distribution segment, before intersegment eliminations.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses (SG&A) increased approximately $637,000 or 6% to
approximately $11.2 million for the six months ended June 30, 2002 compared
with $10.6 million for the six months ended June 30, 2001. This increase is
fully attributable to recapitalization expenses of approximately $2.8 million
incurred as a result of the Companys recapitalization transaction in March
2002. Exclusive of the recapitalization expenses, SG&A decreased approximately
$2.2 million in 2002 from 2001. This decrease is a result of lower turnaround
expenses, including consulting fees, PR campaign fees and severances, as well
as lower salaries, travel and amortization expenses in 2002. SG&A expenses
increased as a percentage of net sales to 43.6% for the six months ended June
30, 2002 from 33.7% for the six months ended June 30, 2001. This increase is
due to decreased sales as well as the recapitalization expenses in 2002 from
2001.

Interest Expense.Net interest expense decreased to approximately $1.8
million in the six months ended June 30, 2002 compared to approximately $2.5
million in the six months ended June 30, 2001. The decrease in 2002 is due to
lower debt outstanding during 2002, as well as lower interest rates, both as a
result of the Recapitalization in March 2002.

Income Taxes.The Companys projected taxable income from continuing
operations and extinguishment of the BofA Credit Facility is expected to be
fully offset by a net operating loss carryforward upon which a valuation
allowance had previously been established in 2001. This valuation allowance is
now being released to the extent of the projected taxable income in 2002. A
valuation allowance remains in effect on the remaining deferred tax assets
because, based on the weight of available evidence, it is more likely than not
that the deferred tax assets will not be realized.

Extraordinary Loss.The Company recorded an extraordinary loss of
approximately $6.6 million on the extinguishment of its BofA debt as a result
of the recapitalization transaction during the first quarter of 2002.

Goodwill Impairment Loss.Upon the adoption of SFAS No. 142 on January 1,
2002, the Company recognized an impairment loss of approximately $16.1 million
related to its distribution reporting unit. The Company has identified two
reporting units, the aforementioned manufacturing unit and the distribution
unit. These reporting units are consistent with the Companys previously
identified reportable segments under SFAS 131. In applying the transitional
impairment model prescribed by SFAS 142, the Company used a discounted cash
flow model to determine the fair value of the net assets of each of the
Companys reporting units. Significant assumptions utilized in the model were
revenue growth rates, gross margin percentages, depreciation and amortization,
capital expenditures, working capital requirements, and the appropriate
discount rate. The fair value of the Companys distribution reporting units
net assets were less than the carrying value of those net assets; thus, the
Company proceeded to step 2 of the SFAS 142 impairment model, whereby the
Company allocated that fair value to the reporting units tangible and
intangible net assets. The Company utilized various methods to determine the
fair value of the distribution units identifiable intangible assets, including
discounted cash flows, royalty savings method, and the cost approach.
Significant assumptions used in valuing these intangible assets included price
premiums, expected effective tax rates, the discount rate, remaining useful
lives of intangible assets, royalty rates, and residual values. A comparison of
the implied fair value of goodwill, calculated from the allocation of fair
value described above, to the carrying net book value of goodwill at January 1,
2002 yielded the impairment charge described above. The Company applied the
same methodology to its manufacturing unit and concluded that the goodwill
associated with that reporting unit was not impaired.

Liquidity and Capital Resources

Net cash (used in) provided by operating activities was ($2.9 million) for
the six months ended June 30, 2002 compared with approximately $2.3 for the six
months ended June 30, 2001. The increase in cash used in operations during 2002
compared to 2001 was primarily attributable to the Recapitalization expenses
paid in 2002, as well as the increased loss from operations in 2002 from 2001
(see above description in Results of Operations).

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Net cash provided by investing activities was approximately $259,000 for
the six months ended June 30, 2002 compared to $2.4 million for the six months
ended June 30, 2001. Cash provided by investing activities in 2002 consisted of
cash proceeds from the CEO and President for payment of their shareholder notes
outstanding. Cash provided by investing activities in 2001 consisted of cash
proceeds from the sale of IFM of approximately $2.3 million and the payment of
$300,000 from the Companys CEO for the Shareholder Bridge Loan. Cash used in
investing activities in both 2002 and 2001 included capital expenditures for
the Companys facilities.

Net cash provided by (used in) financing activities was approximately
$115,000 for the six months ended June 30, 2002 compared to approximately ($2.6
million) for the six months ended June 30, 2001. Financing activities in 2002
substantially consisted of debt issuance costs paid as part of the
Recapitalization of approximately $1.5 million as well as net proceeds from the
issuance of long-term debt and payment of debt on the Companys BofA Credit
Facility, both pursuant to the Recapitalization. In addition, 2002 financing
activities included borrowings from and repayments of its Revolving Loan under
its LaSalle Credit Facility. In 2001, financing activities primarily consisted
of borrowings from and repayments of the Companys working capital loan under
its BofA Credit Facility, as well as a principal payment of its BofA Credit
Facility of approximately $2.3 million from the proceeds of the sale of IFM.

The Company incurred a loss of approximately $5 million in 2001, and as
discussed in Note 6 of the consolidated financial statements included in the
Form 10-K, the Company was in violation of the Forbearance Agreement with Bank
of America as of December 31, 2001 and continuing into 2002. As more fully
described below, the Company has completed a recapitalization transaction that
extinguished all of the Companys outstanding debt and warrants held by Bank of
America, entered into new financing facilities with new lenders and
substantially reduced the Companys total outstanding debt. The Companys
senior loan agreement contains certain requirements which are either determined
at the discretion of the lender or involve meeting financial covenants. The
Company is unable to objectively determine or measure whether it can comply
with those requirements, raising substantial doubt about the Companys ability
to continue as a going concern. While there can be no assurance, it is the
Companys expectation to comply with these requirements and to have the
financing facilities available for its working capital needs throughout 2002.
If the Company is unable to comply with the requirements of the new financing
facilities during 2002, the Company may not be able to borrow additional funds,
and all amounts under the senior loan agreement may become immediately due.

On March 19, 2002, the Company announced that it had completed an
arrangement with ComVest, LaSalle, and Medtronic to recapitalize the Company by
extinguishing all of the Companys senior debt and warrants held by Bank of
America and substantially reducing the Companys total outstanding debt.
Pursuant to the Recapitalization, the Company issued Convertible Notes in the
amount of $15 million to ComVest, Medtronic and other investors, assumed a $2
million Junior Note payable to Bank of America, and entered into the LaSalle
Credit Facility for up to $22 million, of which approximately $8.5 million was
outstanding as of June 30, 2002.

A summary of the details of the Recapitalization affecting the Companys
liquidity is as follows:

On February 22, 2002, ComVest and Bank of America entered into an
assignment agreement under which ComVest agreed to acquire all of Bank of
Americas interest in the outstanding $50 million BofA Credit Facility. The
purchase price for the assignment was $22 million in cash, plus the $2 million
Junior Note. The Company subsequently assumed the Junior Note pursuant to the
Recapitalization, and ComVest has been released from obligations under the
Junior Note. Upon the closing of the assignment on March 15, 2002, ComVest
acquired all of Bank of Americas interest in the BofA Note, the warrants
issued to Bank of America pursuant to the BofA Credit Facility were surrendered
and cancelled, and the Forbearance Agreement was terminated. The warrants,
which had previously been recorded in additional paid-in-capital at their
estimated fair value at issuance of $260,000, were extinguished at their
estimated fair value on the date of extinguishment of $345,000. As a result,
$345,000 was included as a component of the extraordinary loss on early
extinguishment of debt.

On March 1, 2002, the Company entered into the Note Purchase Agreement
with ComVest and certain Additional Note Purchasers. Under the Note Purchase
Agreement, the Company agreed to issue $15 million of Convertible Notes.
Interest on the Convertible Notes is payable quarterly beginning in June 2002
and accrues at a rate of 6% per year for the first six months and 8% per year
thereafter until the notes are paid in full and mature on March 16, 2004. The
Company issued the Convertible Notes as follows: $4.4 million to ComVest, $4
million to Medtronic and $6.6 million to the Additional Note Purchasers.

On March 15, 2002, the Company and ComVest, as the holder of the
outstanding BofA Note, agreed to reduce the outstanding principal amount of the
BofA Note from $40.3 million to $22 million. As a result, the Company has
recorded a net extraordinary loss on the early extinguishment of debt of
approximately $6.6 million, during the first quarter of 2002. This
extraordinary loss was calculated by subtracting the fair value of the new debt
of $42.6 million, which included the amount outstanding under the LaSalle

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Credit Facility ($7.3 million), the Convertible Notes ($33.3 million), and
the BofA Junior Note ($2.0 million), from the amount outstanding under the BofA
debt of $40.3 million. Also included in the extraordinary loss were various
costs paid to ComVest/Commonwealth and LaSalle, as the lenders, to effect the
recapitalization transaction of $4.3 million. Included as components of the
additional $4.3 million of transaction expenses were the following: $570,000 in
closing costs and due diligence fees paid to LaSalle; a warrant to purchase the
Companys common stock issued to LaSalle valued at approximately $695,000;
approximately 2.7 million shares issued to ComVest valued at approximately $2.3
million; deferred loan costs from the original BofA debt of approximately
$128,000, and $1.15 million paid to Commonwealth in closing costs and due
diligence fees. Also included in the additional expenses, but offsetting these
amounts are approximately $130,000 in fees and accrued interest forgiven by
BofA and the fair value of the BofA warrant of $345,000 which was acquired and
cancelled by ComVest.

The Company also incurred numerous other costs that were either expensed
as incurred or capitalized as debt issuance costs. Included in selling,
general, and administrative expenses for the six-month period ended June 30,
2002 are approximately $2.8 million of expenses related to the recapitalization
transaction. The primary components of those expenses are $2.4 million in stock
compensation and bonuses to two of the Companys executive officers, $168,000
in consulting fees, and $227,000 in legal and other fees. The Company
capitalized approximately $1.5 million as debt issuance costs, consisting
primarily of $906,000 in legal fees, $322,000 of consulting fees, and $222,000
of other miscellaneous fees paid for services rendered in connection with the
recapitalization.

In exchange for funding a portion of the $22 million cash purchase price
paid to BofA, ComVest assigned $4 million in principal amount of the BofA Note
to Medtronic and $6.6 million in principal amount of the BofA Note to the
Additional Note Purchasers while retaining $11.4 million in principal amount of
the BofA Note itself. After such assignments, the Company issued the
Convertible Notes under the Note Purchase Agreement in the aggregate principal
amount of $15 million in exchange for the surrender of $15 million in principal
amount of the BofA Note held by ComVest, Medtronic and the Additional Note
Purchasers. The remaining $7 million in principal amount of the BofA Note was
repaid with the proceeds of the Bridge Loan.

The fair value of the Convertible Notes, which was used in the
determination of the extraordinary loss on early extinguishment of debt was
$33.3 million. As this value represents a substantial premium to the face value
of the debt, the Company recorded the debt at its face value of $15 million,
and recorded the premium of $18.3 million as an increase to additional
paid-in-capital. The Company determined the fair value of the convertible notes
by considering their two components, the non-convertible debt of $14,730,000
and the convertible debt of $270,000. The non-convertible debt components
carrying value of $14,730,000 represents its fair value because, when
considered with the convertible component, its terms yield a market rate of
return. The convertible components fair value was determined by multiplying
the fair value of the Companys stock by the number of shares into which this
component is convertible. Thus, 27 million shares multiplied by $0.68940 per
share equals $18,613,685. The sum of the non-convertible components fair value
of $14,730,000 and the convertible components fair value of $18,613,685 equals
the total debt instruments fair value of $33,343,685.

The Company determined the fair value of its stock in a multiple-step
process. First, the Company computed its assumed fair value of $13,762,977 at
the date of the transaction by multiplying outstanding shares of 16,311,676 by
the then current market price per share of $0.84375, which resulted in a fair
value of the Company prior to any conversion of the convertible portion of the
notes. The Company then added to this computed fair value $16,095,909, which
represents the difference between the old Bank of America debt of $40,320,909
and the face value of the new debt of $24,225,000. This $16,095,909 difference
was credited to additional paid-in-capital. Thus, the new fair value of the
Company, prior to any conversion, is $29,858,886. The Company then assumed full
conversion of the convertible portion of the notes, which resulted in an
additional 27,000,000 shares becoming outstanding. After conversion, the
Company would have 43,311,676 shares outstanding, which when divided into the
new fair value of $29,858,886, yields a new per share market value of $0.68940.

On March 18, 2002, the Company entered into the LaSalle Credit Facility
pursuant to the Loan Agreement. Under the Loan Agreement, the Lender has
provided a $20 million Revolving Loan and a $2 million Term Loan. The Company
used the proceeds to repay the Bridge Loan and expenses related to the
Recapitalization and will use the remaining proceeds for working capital and
general corporate purposes. Both loan facilities will bear interest at the
LaSalle Bank Prime Rate plus 2%, subject to an additional 2% that would be
added to the interest rate upon the occurrence of an Event of Default (as
discussed below). As collateral, the Company granted a security interest in all
of the Companys present and future assets, whether now or hereafter owned,
existing, acquired or arising and wherever now or hereafter located. The Loan
Agreement contains affirmative and negative covenants as well as financial
maintenance covenants (See Note 4 to the interim condensed consolidated
financial statements included in this Form 10-Q).

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The Loan Agreement also specifies certain Events of Default, including,
but not limited to, failure to pay obligations when due, failure to direct its
account debtors to make payments to an established lockbox, failure to make
timely financial reports to the Lender, the breach by the Company or any
guarantor of any obligations with any other Person (as defined in the Loan
Agreement) if such breach might have a material adverse effect on the Company
or such guarantor, breach of representations, warranties or covenants, loss of
collateral in excess of $50,000, bankruptcy, appointment of a receiver,
judgments in excess of $25,000, any attempt to levy fees or attach the
collateral, defaults or revocations of any guarantees, institution of criminal
proceedings against the Company or any guarantor, occurrence of a change in
control, the occurrence of a Material Adverse Change or a default or an event
of default under certain subordinated debt documents. Upon the occurrence of
any Event of Default, the Lender may accelerate the Companys obligations under
the Loan Agreement.

The Company must repay the Revolving Loan on or before March 17, 2005, the
Termination Date, unless the Loan Agreement is renewed and the repayment period
is extended through a new Termination Date. The Company must repay the Term
Loan in 36 equal monthly installments of $55,556. The Loan Agreement will
automatically renew for one-year terms unless the Lender demands repayment
prior to the Termination Date as a result of an Event of Default, the Company
gives 90-days notice of its intent to terminate and pays all amounts due in
full, or the Lender elects to terminate on or after February 1, 2004 as a
result of a Termination Event. A Termination Event is defined as the failure of
Medtronic, ComVest or any Additional Note Purchaser to extend the maturity date
of the Convertible Notes at least thirty days past the date of the original
term or any applicable renewal term.

Pursuant to the LaSalle Credit Facility, the Company also issued to
LaSalle and SFB warrants to purchase up to an aggregate of 748,619 shares of
common stock at an exercise price of $.01 per share. The Company recorded the
estimated fair value of the warrant as of March 18, 2002 of approximately
$695,000, determined using the Black-Scholes model (using weighted average
assumptions as follows: dividend yield of 0%, expected life of 3 years,
expected volatility of 112.2% and a risk free interest rate of 2.43%) as a
reduction of the gain on early extinguishment of debt.

The Junior Note in the amount of $2 million bears interest at a rate of 6%
per annum, payable monthly beginning April 2002, and matures on March 15, 2007.
Beginning on May 1, 2003, a principal payment on the Junior Note of $22,500 is
payable on the first day of each month until maturity of the Junior Note.

The auditors opinion related to the consolidated financial statements
included in the Form 10-K, states that there is substantial doubt as to the
Companys ability to continue as a going concern. Delivery of this opinion
would have triggered an Event of Default under the Loan Agreement and the Note
Purchase Agreement as originally executed because both agreements require
audited financial statements to be delivered within 90 days of December 31,
2001 with an auditors opinion that does not contain such going concern
language. However, the default provisions relating to the audit opinion in the
Loan Agreement and the Note Purchase Agreement have been waived.

As of the date of this filing, the Company has complied with all of the
requirements of the Loan Agreement and believes that it has the financial
resources available to meet its working capital needs through fiscal year 2002.

As a result of the Recapitalization, the BofA Credit Facility, the
Forbearance Agreement with Bank of America, and all subsequent amendments were
terminated. However, because those agreements were significant to the
capitalization and liquidity of the Company in 2001, the terms of those
agreements are briefly summarized as follows:

On March 30, 2001, the Company entered into a Forbearance Agreement and a
First Amendment to the Forbearance Agreement wherein Bank of America agreed to
forbear from exercising its rights and remedies under the BofA Credit Facility
due to certain defaults. The Company was in default at that time for violating
certain restrictive covenants and for failing to make principal payments when
due. All of the defaults were forborne as provided for in the Forbearance
Agreement, and revised restrictive covenants were set. By September 30, 2001,
the Company was in default under the Forbearance Agreement for failing to
comply with some of the revised covenants, including minimum net worth, debt
service coverage, leverage and minimum EBITDA.

On October 15, 2001, the Company entered into the Second Amendment to the
Forbearance Agreement. The Second Amendment amended the Forbearance Agreement
as follows: (i) changed the termination date of the Forbearance Agreement from
March 31, 2002 to January 15, 2002 (the period from March 30, 2001 through
January 15, 2002 being defined as the Forbearance Period); (ii) required the
Company to maintain a general operating account with Bank of America and
restricted the use of funds in an calendar month to payments equal to or less
than a monthly budget submitted to Bank of America; (iii) required the Company
to pay any accrued or unpaid interest (but not principal) on the B of A Note on
the first day of each month and allow interest to continue to accrue at the
Bank of America Prime Rate plus two and one-half percent (2.5%) per annum;
and (iv) required the Company to furnish Bank of America with certain
financial reports.

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The Second Amendment also amended the Termination Events as defined in
the Forbearance Agreement to include the following: (i) the Company fails to
execute and deliver or to cause the Companys CEO, Marshall B. Hunt and Hunt
LLLP to execute and deliver within 10 days from the effective date of the
Second Amendment a pledge to Bank of America of all the stock owned by Hunt and
documentation to amend the current Pledge Agreement between Hunt, Hunt LLLP and
the Company. The pledge documents will be held in escrow and will be released
only in the event that Hunt interferes with the daily operations of the Company
determinable at the Bank of Americas discretion at any point prior to January
1, 2005; (ii) the Company fails to engage and hire within five days from the
effective date of the Second Amendment competent crisis and turn around
management and a new Chief Executive Officer who shall report directly to the
independent members of the Companys Board of Directors; (iii) the Company
fails to provide Bank of America within five days from the effective date of
the Second Amendment a copy of resolutions confirming Hunts resignation as an
officer and director of the Company and that no further salary or bonuses shall
be paid to Hunt; (iv) the Company fails to make efforts to refinance the
amounts outstanding under the BofA Credit Facility and fails to provide weekly
status reports; (v) on or before December 15, 2001, the Company fails to
provide Bank of America evidence that the Company has engaged an investment
banking firm to begin marketing the sale of the assets of the Company if the
amounts outstanding under the BofA Credit Facility are not paid off by the
Termination Date; or (vi) the Company fails to execute and deliver to Bank of
America within 24 hours of Bank of Americas request a consent order consenting
to the appointment of a receiver in the event of a Termination Event.

In addition, the Second Amendment reduced the Working Capital Sublimit to
$5,000,000 and limited the Working Capital Loan to the smaller of the Working
Capital Sublimit or an amount equal to the Borrowing Base, as defined in the
BofA Credit Facility. The Second Amendment also amended several of the
financial covenants previously contained in the Forbearance Agreement.

The Forbearance Agreement provided for the payment of Excess Cash Flow, as
defined in the BofA Credit Facility, on the ninetieth day following the last
day of each fiscal year. There was no Excess Cash Flow payment required for
fiscal year 2001. In addition, the Forbearance Agreement required an additional
principal payment in the amount of the greater of $150,000 or the gross
proceeds payable to the Company in connection with the Companys sale of the
IFM product line (see Note 14 to the Companys consolidated financial
statements contained in the Form 10-K).

The Forbearance Agreement further required payments of $300,000 each on
the BofA Bridge Loan on May 31, 2001, August 31, 2001, and November 30, 2001.
All of the installments under the BofA Bridge Loan were paid. The Forbearance
Agreement also provided for a forbearance and restructuring fee of $10,000 plus
related expenses and interest at the rate then in effect plus 6% upon a
Termination Event, as defined in the Forbearance Agreement.

In connection with the Forbearance Agreement, the Company issued a warrant
to Bank of America to acquire 435,157 shares of the Companys common stock for
$.05 per share. The warrant was exercisable by Bank of America during a
three-year period without regard to the status of the BofA Credit Facility or
the BofA Bridge Loan. The Company recorded the estimated fair value of the
warrant as of December 31, 2001 of $260,000, determined using the Black-Scholes
Model (using weighted average assumptions as follows: dividend yield of 0%,
expected life of five years, expected volatility of 107.6% and a risk free
interest rate of 4.44%) as a deferred cost and amortized the deferred cost over
the Forbearance Period. As with the BofA Credit Facility and other related
agreements, the warrant was cancelled pursuant to the Recapitalization.

The Forbearance Agreement also required the Company to hire on or before
June 30, 2001 a new chief operating officer, restricted the repayment of
principal debt to junior lien holders, and to either i) sell the assets of IFM
or ii) obtain an agreement from the seller of the IFM product line to defer all
payments under the related promissory note (see below) through the Termination
Date (see Note 7 to the Companys interim condensed consolidated financial
statements included elsewhere in this Form 10-Q regarding the sale of the IFM
product line). The Company hired a Chief Operating Officer in April 2001 who
was terminated in June 2001, and the Company did not hire a replacement. The
Company sold the assets of the IFM product line as of March 30, 2001 (see Note
7).

On December 15, 2001, the Company entered into a Third Amendment to the
Forbearance Agreement under which Bank of America consented to the increase in
payments of $8,000 per month to certain former shareholders of Stepic.

In January 2002, the Company entered into a Fourth Amendment to the
Forbearance Agreement with Bank of America, pursuant to which Bank of America
agreed to extend the Forbearance Period until March 15, 2002 (the Expiration
Date) in order for the Company to consider its strategic alternatives. On
March 15, 2002, the BofA Credit Facility was assigned from BofA to ComVest. On

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March 16, 2002, the Company issued the Convertible Notes in an aggregate
amount of $15 million to ComVest, Medtronic and the Additional Note Purchasers.
On March 18, 2002, the Company entered into the LaSalle Credit Facility.

Recently Issued Accounting Standards

Note 1 and Note 10 of the interim condensed consolidated financial
statements included elsewhere in this Form 10-Q describes the recently issued
accounting standards and, where applicable, the effects of such standards on
the Company.

Forward-looking Statements

Certain statements made in this quarterly report, and other written or
oral statements made by or on behalf of the Company, may constitute
forward-looking statements within the meaning of the federal securities laws.
Statements regarding future events and developments and the Companys future
performance, as well as managements expectations, beliefs, plans, estimates or
projections relating to the future, are forward-looking statements within the
meaning of these laws. All forward-looking statements are subject to certain
risks and uncertainties that could cause actual events to differ materially
from those projected. Such risks and uncertainties include, among others, the
possible inadequacy of the Companys cash flow from operations and cash
available from external financing, the possibility of a breach of covenants in
the Companys senior credit facility, the satisfaction of which cannot be
objectively determined, the Companys limited manufacturing experience, the
inability to efficiently manufacture different products, the possible failure
to successfully commence the manufacturing of new products, the possible
failure to maintain or increase production volumes of new or existing products
in a timely or cost-effective manner, the possible failure to maintain
compliance with applicable licensing or regulatory requirements, the inability
to successfully integrate acquired operations and products or to realize
anticipated synergies and economies of scale from acquired operations, the
dependence on patents, trademarks, licenses and proprietary rights, the
Companys potential exposure to product liability, the inability to introduce
new products, the Companys reliance on a few large customers, the Companys
dependence on key personnel, the fact that the Company is subject to control by
certain shareholders, pricing pressure related to healthcare reform and managed
care and other healthcare provider organizations, the possible failure to
comply with applicable federal, state or foreign laws or regulations,
limitations on third-party reimbursement, the highly competitive and fragmented
nature of the medical devices industry, deterioration in general economic
conditions and the Companys ability to pay its indebtedness. Management
believes that these forward-looking statements are reasonable. However, you
should not place undue reliance on such statements. These statements are based
on current expectations and speak only as of the date of such statements. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of future events, new
information or otherwise. Additional information concerning the risks and
uncertainties listed above, and other factors that you may wish to consider, is
contained in Managements Discussion and Analysis of Financial Condition and
Results of Operations above and is also contained in the Form 10-K under the
section entitled Risk Factors and elsewhere and in the Companys filings from
time to time pursuant to the Securities Exchange Act of 1934, as amended.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Like other companies, the Company is exposed to market risks relating to
fluctuations in interest rates. Borrowings under the LaSalle Credit Facility
accrue interest at annual rate of prime plus 2%, plus an additional 2% upon the
occurrence of an event of default. As of June 30, 2002, the Company had
approximately $8.5 million outstanding under the LaSalle Credit Facility. If
market interest rates were to increase immediately and uniformly by 10% from
levels as of June 30, 2002, the additional interest expense would be considered
immaterial to the Companys interim condensed consolidated financial position,
results of operations and cash flows.

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PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

See Item 3. Legal
Proceedings in the Form 10-K for a discussion of legal
proceedings affecting the Company. Except for the IFM settlement
relating to the Georgia case filed in September 2001 referenced in
Note 7 to the Companys interim condensed consolidated financial statements
contained herein, there have been no material developments in such legal
proceedings since the filing of the Form 10-K.

On August 8,
2002, the Company received a subpoena from the Office of Inspector General of the
Department of Health & Human Services requesting documents relating
to the Company's agreement with a group purchasing organization. The
Company plans to cooperate fully with the request.




ITEM 2. CHANGES IN SECURITIES AND USE OF FUNDS.

The Company issued convertible notes and shares of its common stock in
connection with the Recapitalization. In connection with the advisory
agreement entered into in connection with the Recapitalization, the Company
issued 2,645,398 shares of common stock to Commonwealth Associates, L.P., an
affiliate of ComVest. See Note 4 to the Companys interim condensed
consolidated financial statements contained herein.




ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.




ITEM 5. OTHER INFORMATION

Not applicable.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a)  Exhibits.

|        |  |   |  |                                                                                                                                                                                                                                                                                                                                            
|------- |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                                                            
|Number  |  |   |  | Description of Exhibits                                                                                                                                                                                                                                                                                                                    
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                            
|3.1     |  |  |  | Amended and Restated Articles of Incorporation of the
Company, filed as Exhibit 3.1 to the Registrants
Form S-1 dated April 14, 1998 (SEC File No.
333-46349) and incorporated herein by reference.                                                                                                                                       
|3.2     |  |  |  | Amended and Restated Bylaws of the Company, filed as
Exhibit 3.2 to the Registrants Form S-1 dated April
14, 1998 (SEC File No. 333-46349) and incorporated
herein by reference.                                                                                                                                                          
|4.1     |  |  |  | See Articles II, III, VII and IX of the Amended and
Restated Articles of Incorporation filed as Exhibit
3.1 and Articles I, VII, VIII and IX of the Amended
and Restated Bylaws filed as Exhibit 3.2, filed as
Exhibit 4.1 to the Registrants Form S-1 dated April
14, 1998 (SEC File No. 333-46349) and incorporated
herein by reference.
|4.2     |  |  |  | Specimen Common Stock Certificate, filed as Exhibit
4.2 to the Registrants Form S-1 dated April 14, 1998
(SEC File No. 333-46349) and incorporated herein by
reference.                                                                                                                                                                   
|4.3     |  |  |  | Rights Agreement dated April 9, 1998 by and between
the Company and Tapir Investments (Bahamas) Ltd.,
filed as Exhibit 4.3 to the Registrants Form 10-K
dated March 31, 1999 (SEC File No. 000-24025) and
incorporated herein by reference.                                                                                               
|10.1    |  |  |  | Employment Agreement between the Company and Robert J. Wenzel,
dated May 8, 2002.                                                                                                                                                                                                                                                          
|10.2    |  |  |  | Amendment No. 1 to Note Purchase Agreement, dated as of June 10,
2002, by and among the Company, ComVest Venture Partners, L.P. and the Additional Note Purchasers.                                                                                                                                                                        
|10.3    |  |  |  | Amendment No. 2 to Note Purchase Agreement, dated as of July 29,
2002, by and among the Company, ComVest Venture Partners, L.P.
and the Additional Note Purchasers.                                                                                                                                                                        
|99.1    |  |  |  | Certification of the Chief Executive Officer of the Company pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                                                      
|99.2    |  |  |  | Certification of the Principal Financial Officer of the Company pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                                                  

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(b)  Reports on Form 8-K

On May 29, 2002, the Company filed a Current Report on Form 8-K, attaching
as an exhibit a revised version of the Note Purchase Agreement to include
Annex 1, identifying certain Additional Note Purchasers, and Exhibit C,
outlining the conversion features applicable to the Convertible Notes issued in
the Recapitalization. On July 3, 2002, the Company filed an amended Current
Report on Form 8-K/A relating thereto.

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HORIZON MEDICAL PRODUCTS, INC.




SIGNATURE

Pursuant to the requirements 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.

|                |  |                                                                                                                 
|--------------- |  | ----------------------------------------------------------------------------------------------------------------
|                |  | HORIZON MEDICAL PRODUCTS, INC.                                                                                  
|                |  |                                                                                                                 
|                |  | (Registrant)                                                                                                    
|                |  |                                                                                                                 
|August 14, 2002 |  | /s/ Julie F. Lancaster                                                                                          
|                |  |                                                                                                                 
|                |  | Vice President  Finance (Principal Financial Officer, Principal Accounting Officer and Duly Authorized Officer)

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