##### Table of Contents



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 March 31, 2003

o 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          |  | (I.R.S. Employer   
|incorporation or organization)           |  | 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 o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).

Yes o No x

The number of shares outstanding of the Registrants Common Stock, $.001 par
value, as of May 15, 2003 was 36,165,876.





---

TABLE OF CONTENTS



|                                                 |                                                                                                |                                                              |  |  |  |  |  | 
|------------------------------------------------ | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------ |  |  |  |  |  | 
|                                                 |                                                                                                | 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.                           
|                                                 | ITEM 4. CONTROLS AND PROCEDURES                                                               
|PART II. OTHER INFORMATION                      
|                                                 | ITEM 1. LEGAL PROCEEDINGS                                                                     
|                                                 | ITEM 2. CHANGES IN SECURITIES AND USE OF FUNDS                                                
|                                                 | 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                                       
|CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER    
|CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
|EX-99.1 SECTION 906 CERTIFICATION OF THE CEO    
|EX-99.2 SECTION 906 CERTIFICATION OF THE CFO    



---



##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

FORM 10-Q

For the Quarterly Period Ended March 31, 2003

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 |                                                              |  | 21 |  
|                              | ITEM 3 Quantitative and Qualitative Disclosures about Market Risk                            |                                                              |  | 28 |  
|                              | ITEM 4 Controls and Procedures                                                               |                                                              |  | 28 |  
|PART II  OTHER INFORMATION    |                                                                                              |                                                              |  |   
|                              | ITEM 1 Legal Proceedings                                                                     |                                                              |  | 29 |  
|                              | ITEM 2 Changes in Securities and Use of Funds                                                |                                                              |  | 29 |  
|                              | ITEM 4 Submission of Matters to a Vote of Security Holders                                   |                                                              |  | 29 |  
|                              | ITEM 5 Other Information                                                                     |                                                              |  | 29 |  
|                              | ITEM 6 Exhibits and Reports on Form 8-K                                                      |                                                              |  | 29 |  
|                              | SIGNATURE                                                                                    |                                                              |  | 31 |  
|                              | CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER                                                 |                                                              |  | 32 |  
|                              | CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER                                             |                                                              |  | 33 |  

2



---



##### 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 March 31, 2003 and December 31, 2002                      |  |  | 4 | 
|                                                                                                       | Interim Condensed Consolidated Statements of Operations for the three months ended March
31, 2003 and 2002 |  |  | 5 | 
|                                                                                                       | Interim Condensed Consolidated Statements of Cash Flows for the three months ended March
31, 2003 and 2002 |  |  | 6 | 
|                                                                                                       | Notes to Interim Condensed Consolidated Financial Statements                                               |  |  | 7 | 

3



---



##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES




INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

|                                                |                                                                                                                                                                            |                                      |                      |                                            |   |            |            |              |   |            |            | 
|----------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | -------------------- | ------------------------------------------ | - | ---------- | ---------- | ------------ | - | ---------- | ---------- | 
|                                                |                                                                                                                                                                            |                                      |                      |                                            |   | March 31,  |            | December 31,
|                                                |                                                                                                                                                                            |                                      |                      |                                            |   | 2003       |            | 2002        
|                                                |                                                                                                                                                                            |                                      |                      |                                            |   |            |            |             
|                                                |                                                                                                                                                                            |                                      |                      | ASSETS                                     |   |            |            |              |   |            |            | 
|Current assets:                                 |                                                                                                                                                                            |                                      |                      |                                            |   |            |            |             
|                                                | Cash and cash equivalents                                                                                                                                                  |                                      | $                    | 3,094,895                                  |   |            | $          | 3,711,514    |  
|                                                | Accounts receivable  trade, net                                                                                                                                           |                                      |                      | 3,422,525                                  |   |            |            | 3,037,974    |  
|                                                | Inventories                                                                                                                                                                |                                      |                      | 5,258,327                                  |   |            |            | 5,607,965    |  
|                                                | Prepaid expenses and other current assets                                                                                                                                  |                                      |                      | 185,069                                    |   |            |            | 515,077      |  
|                                                |                                                                                                                                                                            |                                      |                      |                                            |   |            |            |             
|                                                |                                                                                                                                                                            |                                      | Total current assets |                                            |   | 11,960,816 |            |              |   | 12,872,530 |           
|Property and equipment, net                     |                                                                                                                                                                            |                                      | 2,158,303            |                                            |   |            | 2,199,307  |             
|Goodwill, net                                   |                                                                                                                                                                            |                                      | 15,650,356           |                                            |   |            | 15,650,356 |             
|Intangible assets, net                          |                                                                                                                                                                            |                                      | 6,270,030            |                                            |   |            | 6,361,844  |             
|Other assets                                    |                                                                                                                                                                            |                                      | 87,184               |                                            |   |            | 106,088    |             
|                                                |                                                                                                                                                                            |                                      |                      |                                            |   |            |            |             
|                                                |                                                                                                                                                                            |                                      |                      | Total assets                               |   | $          | 36,126,689 |              |   | $          | 37,190,125 | 
|                                                |                                                                                                                                                                            |                                      |                      |                                            |   |            |            |              |  
|                                                |                                                                                                                                                                            | LIABILITIES AND SHAREHOLDERS EQUITY |                      |                                            |   |            |            |              |   |           
|Current liabilities:                            |                                                                                                                                                                            |                                      |                      |                                            |   |            |            |             
|                                                | Accounts payable  trade                                                                                                                                                   |                                      | $                    | 866,579                                    |   |            | $          | 807,146      |  
|                                                | Accrued salaries and commissions                                                                                                                                           |                                      |                      | 289,306                                    |   |            |            | 279,346      |  
|                                                | Accrued interest                                                                                                                                                           |                                      |                      | 91,587                                     |   |            |            | 122,645      |  
|                                                | Other accrued expenses                                                                                                                                                     |                                      |                      | 662,799                                    |   |            |            | 651,199      |  
|                                                | Current portion of long-term debt                                                                                                                                          |                                      |                      | 16,167,247                                 |   |            |            | 1,552,782    |  
|                                                |                                                                                                                                                                            |                                      |                      |                                            |   |            |            |             
|                                                |                                                                                                                                                                            |                                      |                      | Total current liabilities                  |   |            | 18,077,518 |              |   |            | 3,413,118  | 
|Long-term debt, net of current portion          |                                                                                                                                                                            |                                      | 3,242,870            |                                            |   |            | 18,341,903 |             
|Other liabilities                               |                                                                                                                                                                            |                                      | 101,264              |                                            |   |            | 104,963    |             
|                                                |                                                                                                                                                                            |                                      |                      |                                            |   |            |            |             
|                                                |                                                                                                                                                                            |                                      |                      | Total liabilities                          |   |            | 21,421,652 |              |   |            | 21,859,984 | 
|                                                |                                                                                                                                                                            |                                      |                      |                                            |   |            |            |             
|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; 100,000,000 shares
authorized, 36,165,876 and 33,415,876 shares issued and
outstanding as of March 31, 2003 and December 31, 2002 |                                      |                      | 36,166                                     |   |            |            | 33,416       |  
|                                                | Additional paid-in capital                                                                                                                                                 |                                      |                      | 74,864,139                                 |   |            |            | 74,839,389   |  
|                                                | Shareholders notes receivable                                                                                                                                             |                                      |                      | (170,831                                   | ) |            |            | (170,831     | )
|                                                | Accumulated deficit                                                                                                                                                        |                                      |                      | (60,024,437                                | ) |            |            | (59,371,833  | )
|                                                |                                                                                                                                                                            |                                      |                      |                                            |   |            |            |             
|                                                |                                                                                                                                                                            |                                      |                      | Total shareholders equity                 |   |            | 14,705,037 |              |   |            | 15,330,141 | 
|                                                |                                                                                                                                                                            |                                      |                      |                                            |   |            |            |             
|                                                |                                                                                                                                                                            |                                      |                      | Total liabilities and shareholders equity |   | $          | 36,126,689 |              |   | $          | 37,190,125 | 
|                                                |                                                                                                                                                                            |                                      |                      |                                            |   |            |            |              |  

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

4



---



##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES




INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                                                                            |                                                                                             |                        |                                 |            |                    |           |             |            |          |             |  
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------- | ------------------------------- | ---------- | ------------------ | --------- | ----------- | ---------- | -------- | ----------- | -
|                                                                                            |                                                                                             |                        |                                 |            | Three Months Ended
|                                                                                            |                                                                                             |                        |                                 |            | March 31,         
|                                                                                            |                                                                                             |                        |                                 |            |                   
|                                                                                            |                                                                                             |                        |                                 |            | 2003               |           | 2002       
|                                                                                            |                                                                                             |                        |                                 |            |                    |           |            
|Net sales                                                                                   |                                                                                             | $                      | 6,087,516                       |            |                    | $         | 4,391,221   |           
|Cost of goods sold                                                                          |                                                                                             |                        | 2,453,159                       |            |                    |           | 2,130,067   |           
|                                                                                            |                                                                                             |                        |                                 |            |                    |           |             |           
|                                                                                            |                                                                                             |                        | Gross profit                    |            |                    | 3,634,357 |             |            |          | 2,261,154   |  
|Selling, general and administrative expenses                                                |                                                                                             |                        | 3,645,050                       |            |                    |           | 5,628,410   |           
|                                                                                            |                                                                                             |                        |                                 |            |                    |           |             |           
|                                                                                            |                                                                                             |                        | Loss from operations            |            |                    | (10,693   | )           |            |          | (3,367,256  | )
|                                                                                            |                                                                                             |                        |                                 |            |                    |           |             |           
|Other income (expense):                                                                     |                                                                                             |                        |                                 |            |                    |           |             |           
|                                                                                            |                                                                                             | Interest expense, net  |                                 |            | (627,662           | )         |             |            | (637,808 | )          
|                                                                                            |                                                                                             | Other income (expense) |                                 |            | (14,249            | )         |             |            | (3,460   | )          
|                                                                                            |                                                                                             |                        |                                 |            |                    |           |             |           
|                                                                                            |                                                                                             |                        | (641,911                        | )          |                    |           | (641,268    | )         
|                                                                                            |                                                                                             |                        |                                 |            |                    |           |             |           
|                                                                                            |                                                                                             |                        | Loss from continuing operations |            |                    | (652,604  | )           |            |          | (4,008,524  | )
|Discontinued operations:                                                                    |                                                                                             |                        |                                 |            |                    |           |             |           
|                                                                                            | Income from operations of discontinued distribution segment                                 |                        |                                 |           |                    |           |             | 31,155     |         
|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 8) |                                                                                             |                        |                                |            |                    |           | (16,101,900 | )         
|                                                                                            |                                                                                             |                        |                                 |            |                    |           |             |           
|                                                                                            |                                                                                             |                        | Net loss                        |            | $                  | (652,604  | )           |            | $        | (26,720,284 | )
|                                                                                            |                                                                                             |                        |                                 |            |                    |           |             |           
|Basic and diluted earnings per share:                                                       |                                                                                             |                        |                                 |            |                    |           |             |           
|                                                                                            | Loss from continuing operations per share                                                   |                        | $                               | (0.02      | )                  |           | $           | (0.29      | )       
|                                                                                            | Income from operations of discontinued distribution segment                                 |                        | $                               |           |                    |           | $           | 0.00       |         
|                                                                                            | Extraordinary loss on extinguishment of debt                                                |                        | $                               |           |                    |           | $           | (0.48      | )       
|                                                                                            | Effect of a change in accounting principle pursuant to adoption of
SFAS 142 (Notes 1 and 8) |                        | $                               |           |                    |           | $           | (1.16      | )       
|                                                                                            |                                                                                             |                        |                                 |            |                    |           |             |           
|                                                                                            | Net loss per share  basic and diluted                                                      |                        | $                               | (0.02      | )                  |           | $           | (1.92      | )       
|                                                                                            |                                                                                             |                        |                                 |            |                    |           |             |           
|                                                                                            | Weighted average common shares outstanding  basic and diluted                              |                        |                                 | 33,904,765 |                    |           |             | 13,934,451 |         
|                                                                                            |                                                                                             |                        |                                 |            |                    |           |             |           

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

5



---



##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES




INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                                            |                                                               |                                        |           |                    |          |      |             |            |          |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------- | -------------------------------------- | --------- | ------------------ | -------- | ---- | ----------- | ---------- | -------- | -
|                                                                            |                                                               |                                        |           | Three Months Ended
|                                                                            |                                                               |                                        |           | March 31,         
|                                                                            |                                                               |                                        |           |                   
|                                                                            |                                                               |                                        |           | 2003               |          | 2002
|                                                                            |                                                               |                                        |           |                    |          |     
|Cash flows from operating activities:                                       |                                                               |                                        |           |                    |          |      |             |           
|Net loss                                                                    |                                                               | $                                      | (652,604  | )                  |          | $    | (26,720,284 | )         
|                                                                            |                                                               |                                        |           |                    |          |      |             |           
|Adjustments to reconcile net loss to net cash
used in operating activities: |                                                               |                                        |           |                    |          |      |             |           
|                                                                            | Depreciation expense                                          |                                        |           | 166,153            |          |      |             | 189,843    |         
|                                                                            | Amortization of intangibles                                   |                                        |           | 378,083            |          |      |             | 335,449    |         
|                                                                            | Non-cash compensation charge                                  |                                        |           |                    |          |      |             | 1,555,468  |         
|                                                                            | Impairment charge                                             |                                        |           |                    |          |      |             | 16,101,900 |         
|                                                                            | Loss on extinguishment of debt                                |                                        |           |                    |          |      |             | 5,443,515  |         
|                                                                            | (Increase) decrease in operating
assets and liabilities, net: |                                        |           |                    |          |      |             |            |         
|                                                                            |                                                               | Accounts receivable-trade              |           |                    | (384,551 | )    |             |            | 783,202  |  
|                                                                            |                                                               | Inventories                            |           |                    | 349,638  |      |             |            | (226,338 | )
|                                                                            |                                                               | Prepaid expenses and other assets      |           |                    | 95,969   |      |             |            | (306,716 | )
|                                                                            |                                                               | Accounts payable-trade                 |           |                    | 59,433   |      |             |            | 480,410  |  
|                                                                            |                                                               | Accrued expenses and other liabilities |           |                    | (13,197  | )    |             |            | (34,093  | )
|                                                                            |                                                               |                                        |           |                    |          |      |             |           
|                                                                            | Net cash used in operating activities                         |                                        |           | (1,076             | )        |      |             | (2,397,644 | )       
|                                                                            |                                                               |                                        |           |                    |          |      |             |           
|Cash flows from investing activities:                                       |                                                               |                                        |           |                    |          |      |             |           
|Cash proceeds from disposition of distribution segment                      |                                                               |                                        | 252,943   |                    |          |      |             |           
|Proceeds from shareholders notes receivable                                |                                                               |                                        |           |                    |          |      | 335,804     |           
|Acquisition of intangible assets                                            |                                                               |                                        | (286,269  | )                  |          |      |             |           
|Capital expenditures                                                        |                                                               |                                        | (125,149  | )                  |          |      | (73,576     | )         
|                                                                            |                                                               |                                        |           |                    |          |      |             |           
|                                                                            | Net cash (used in) provided by investing
activities           |                                        |           | (158,475           | )        |      |             | 262,228    |         
|                                                                            |                                                               |                                        |           |                    |          |      |             |           
|Cash flows from financing activities:                                       |                                                               |                                        |           |                    |          |      |             |           
|Change in restricted cash                                                   |                                                               |                                        |           |                    |          |      | (38,089     | )         
|Debt issuance costs                                                         |                                                               |                                        |           |                    |          |      | (1,450,087  | )         
|Proceeds from issuance of long-term debt                                    |                                                               |                                        |           |                    |          |      | 43,997,631  |           
|Principal payments on long-term debt                                        |                                                               |                                        | (457,068  | )                  |          |      | (42,470,400 | )         
|                                                                            |                                                               |                                        |           |                    |          |      |             |           
|                                                                            | Net cash (used in) provided by financing
activities           |                                        |           | (457,068           | )        |      |             | 39,055     |         
|                                                                            |                                                               |                                        |           |                    |          |      |             |           
|                                                                            | Net (decrease) increase in cash and
cash equivalents          |                                        |           | (616,619           | )        |      |             | (2,096,361 | )       
|Cash and cash equivalents, beginning of period                              |                                                               |                                        | 3,711,514 |                    |          |      | 2,748,617   |           
|                                                                            |                                                               |                                        |           |                    |          |      |             |           
|Cash and cash equivalents, end of period                                    |                                                               | $                                      | 3,094,895 |                    |          | $    | 652,256     |           
|                                                                            |                                                               |                                        |           |                    |          |      |             |           

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

6



---



##### 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 (collectively, the Company) at December 31, 2002 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 March 31, 2003, and for the three months ended March 31, 2003
and 2002 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, 2002 (the Form 10-K), including,
without limitation, the summary of accounting policies and notes and
consolidated financial statements included therein.

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.
SFAS No. 142 supercedes Auditing Practices Board (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 on January 1, 2002,
the Company recognized an estimated impairment loss of approximately $16.1
million related to its distribution reporting unit. In addition, the Company
ceased amortization of its goodwill. The Companys goodwill amortization was
approximately $1.3 million and $1.7 during the years ended December 31, 2001
and 2000. See Note 5 for the Companys expected future amortization charges
after adoption of SFAS No. 142.

In October 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, which has an effective date for financial statements for fiscal years
beginning after December 15, 2001. The Company adopted SFAS No. 144
effective as of January 1, 2002. This statement, which supercedes 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 did not have a material impact on the Companys
financial statements.

In April 2002, the FASB issued SFAS No. 145. This Statement rescinds
FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt,
and an amendment of that Statement, FASB Statement No. 64, Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements. This Statement amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The Company does not believe SFAS 145 will have a material
effect on its financial statements.

In September 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal. SFAS No. 146 eliminates the definition and
requirements for recognition of exit costs in EITF Issue No. 94-3. 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 exit or disposal
activities that are initiated after December 31, 2002. The Company does not
believe SFAS No. 146 will have a material effect on its financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based CompensationTransition and Disclosure. This Statement amends
SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for companies that voluntary change to the
fair-value-based method of accounting for stock-based employee compensation.
In addition, this Statement amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the

7



---



##### Table of Contents



effect of the method used on reported results. The Company does not
believe SFAS No. 148 will have a material effect on its financial statements.

As of March 31, 2003, the Company has a stock-based employee
compensation plan, the 1998 Stock Incentive Plan (the Incentive Plan), as
described in Note 9 of the Companys consolidated financial statements
included in the Form 10-K. The Company
applies APB No. 25 and related interpretations in accounting for the
Incentive Plan, which is an acceptable method for accounting for stock-based
employee compensation, despite the adoption of SFAS No. 123. Accordingly, no
compensation expense has been recognized by the Company for fixed stock
option awards under the Incentive Plan. Had compensation expense for options
granted under the Incentive Plan and outside of the Incentive Plan been
determined based on the fair value at the grant dates consistent with the
method of SFAS No. 123, the Companys net loss and net loss per share would
have been increased to the pro forma amounts indicated below:

|                                        |             |  |                            |            |      |  |   |             |  
|--------------------------------------- | ----------- |  | -------------------------- | ---------- | ---- |  | - | ----------- | -
|                                        |             |  | For the Three Months Ended
|                                        |             |  | March 31,                 
|                                        |             |  |                           
|                                        |             |  | 2003                       |            | 2002
|                                        |             |  |                            |            |     
|Net loss:                               |             |  |                            |            |      |  |   |            
|                                        | As reported |  | $                          | (652,604   | )    |  | $ | (26,720,284 | )
|                                        | Pro forma   |  | $                          | (1,357,553 | )    |  | $ | (26,932,688 | )
|Net loss per share  basic and diluted: |             |  |                            |            |      |  |   |            
|                                        | As reported |  | $                          | (0.02      | )    |  | $ | (1.92       | )
|                                        | Pro forma   |  | $                          | (0.04      | )    |  | $ | (1.93       | )

Through September 3, 2002, the Company operated as 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. The Company sold its distribution
business on September 3, 2002 and currently operates as only the
manufacturing segment. As a result of the sale, the results of operations of
the distribution segment have been reclassed and are included in discontinued
operations on the Companys interim condensed consolidated statement of
operations for the three months ended March 31, 2002.

The Companys operations are located in the United States, except for a
sales office in Belgium. Thus, substantially all of the Companys assets are
located domestically. Sales information by geographic area for the three
months ended March 31, 2003 and 2002 is as follows:

|              |                        |   |                            |           |      |   |           |           | 
|------------- | ---------------------- | - | -------------------------- | --------- | ---- | - | --------- | --------- | 
|              |                        |   | For the Three Months Ended
|              |                        |   | March 31,                 
|              |                        |   |                           
|              |                        |   | 2003                       |           | 2002
|              |                        |   |                            |           |     
|United States |                        | $ | 5,648,499                  |           |      | $ | 3,914,913 |          
|Foreign       |                        |   | 439,017                    |           |      |   | 476,308   |          
|              |                        |   |                            |           |      |   |           |          
|              | Consolidated net sales |   | $                          | 6,087,516 |      |   | $         | 4,391,221 | 
|              |                        |   |                            |           |      |   |           |          

The table below presents net sales by major product category for the three
months ended March 31, 2003 and 2002:

|                 |                 |   |                            |           |      |   |           |           | 
|---------------- | --------------- | - | -------------------------- | --------- | ---- | - | --------- | --------- | 
|                 |                 |   | For the Three Months Ended
|                 |                 |   | March 31,                 
|                 |                 |   |                           
|                 |                 |   | 2003                       |           | 2002
|                 |                 |   |                            |           |     
|Ports            |                 | $ | 4,550,021                  |           |      | $ | 3,414,425 |          
|Port accessories |                 |   | 584,118                    |           |      |   | 377,785   |          
|Catheters        |                 |   | 767,990                    |           |      |   | 730,105   |          
|All other        |                 |   | 185,387                    |           |      |   | (131,094  | )        
|                 |                 |   |                            |           |      |   |           |          
|                 | Total net sales |   | $                          | 6,087,516 |      |   | $         | 4,391,221 | 
|                 |                 |   |                            |           |      |   |           |          

8



---



##### Table of Contents



2.     Inventories

A summary of inventories is as follows:

|                        |  |           |            |              |  |   |            |  
|----------------------- |  | --------- | ---------- | ------------ |  | - | ---------- | -
|                        |  | March 31, |            | December 31,
|                        |  | 2003      |            | 2002        
|                        |  |           |            |             
|Raw materials           |  | $         | 3,410,877  |              |  | $ | 3,273,806  |  
|Work in process         |  |           | 237,369    |              |  |   | 347,622    |  
|Finished goods          |  |           | 3,865,568  |              |  |   | 4,517,675  |  
|                        |  |           |            |              |  |   |            |  
|                        |  |           | 7,513,814  |              |  |   | 8,139,103  |  
|Less inventory reserves |  |           | (2,255,487 | )            |  |   | (2,531,138 | )
|                        |  |           |            |              |  |   |            |  
|                        |  | $         | 5,258,327  |              |  | $ | 5,607,965  |  
|                        |  |           |            |              |  |   |            |  

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
|                        |  | March 31, 2003            
|                        |  |                           
|                        |  | Loss                       |          |             |  |           |            |  |  |  
|                        |  | from Continuing            |          |             |  |           |            |  |  |  
|                        |  | Operations                 |          | Shares      |  | Per-share
|                        |  | Numerator                  |          | Denominator |  | Amount   
|                        |  |                            |          |             |  |          
|EPS  basic and diluted |  | $                          | (652,604 | )           |  |           | 33,904,765 |  |  | $ | (0.02 | )
|                        |  |                            |          |             |  |           |            |  |  |   |       |  

|                        |  |                            |            |             |  |           |            |  |  |   |       |  
|----------------------- |  | -------------------------- | ---------- | ----------- |  | --------- | ---------- |  |  | - | ----- | -
|                        |  | For the Three Months Ended
|                        |  | March 31, 2002            
|                        |  |                           
|                        |  | Loss                       |            |             |  |           |            |  |  |  
|                        |  | from Continuing            |            |             |  |           |            |  |  |  
|                        |  | Operations                 |            | Shares      |  | Per-share
|                        |  | Numerator                  |            | Denominator |  | Amount   
|                        |  |                            |            |             |  |          
|EPS  basic and diluted |  | $                          | (4,008,524 | )           |  |           | 13,934,451 |  |  | $ | (0.29 | )
|                        |  |                            |            |             |  |           |            |  |  |   |       |  

Options to purchase 9,445,900 shares of common stock and warrants to
purchase 823,619 shares of common stock were outstanding as of March 31,
2003, but are not included in the computation of the March 31, 2003 diluted
EPS because the effect would be anti-dilutive. The options have exercise
prices ranging from $0.43 to $14.63 and expire between 2008 and 2013.
Warrants to purchase 748,619 shares of common stock have an exercise price of
$0.01 and expire in 2012. Warrants to purchase 25,000 shares of common stock
have an exercise price of $1.22 and expire in 2011. Warrants to purchase
50,000 shares of common stock have an exercise price of $0.93 and expire in
2005.

As discussed in Note 4 to these interim condensed consolidated financial
statements contained elsewhere in this Form 10-Q, the Company has issued
Senior Subordinated Convertible Notes (the Convertible Notes), a portion of
which is convertible into a maximum of 27,000,000 shares of common stock. As
of March 31, 2003, there were 9,900,000 shares of common stock issued and
outstanding as a result of conversion of a portion of Convertible Notes held
by the Additional Note Purchasers (as defined in Note 4 below) and 9,900,000 shares of common stock outstanding as a result of conversion of a portion of
Convertible Notes held by ComVest Venture Partners, L.P. (ComVest). The
remaining 7,200,000 shares of common stock issuable upon conversion of
Convertible Notes held by one noteholder are excluded from the computation of
the March 31, 2003 diluted EPS because the effect would be anti-dilutive.

Options to purchase 5,819,282 shares of common stock and warrants to
purchase 748,619 shares of common stock were outstanding as of March 31,
2002, but are not included in the computation of the March 31, 2002 diluted
EPS because the effect

9



---



##### Table of Contents



would be anti-dilutive. The options have exercise prices ranging from
$0.44 to $15.50 and expire between 2008 and 2012. The warrants have an
exercise price of $0.01 and expire in 2012.

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 L.P. (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,
N.A. (Bank of America or BofA) dated March 30, 2001, as subsequently
amended (the Forbearance Agreement), was terminated as of March 15, 2002.
The Forbearance Agreement is described below.

The following is a summary of the 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 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 a Note Purchase Agreement
(the Note Purchase Agreement) with ComVest, Medtronic, Inc. (Medtronic),
and 26 individual and entity Additional Note Purchasers (collectively, the
Additional Note Purchasers). Under the Note Purchase Agreement, the
Company agreed to issue $15 million of Senior Subordinated Convertible Notes
(the Convertible Notes). Interest on these 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.

Under the Note Purchase Agreement, the Events of Default include, but
are not limited to, failure to pay an obligation when due, failure to comply
with obligations under the Securityholders Agreement (the Securityholders
Agreement) or the Co-Promotion Agreement with Medtronic (as described
below), breach of any covenant which remains uncured for 15 days, bankruptcy,
a change of control and failure to obtain shareholder approval of certain
proposals related to the Recapitalization at the Companys 2002 annual
meeting of shareholders (the Annual Meeting) within 195 of the closing date
of the Recapitalization (March 16, 2002). On September 17, 2002, at the
Annual Meeting, the Companys shareholders approved all such proposals
relating to the Recapitalization. Generally, upon an Event of Default, the
holders of a majority of the aggregate principal amount of Convertible Notes
outstanding may declare the unpaid principal and interest on the Notes
immediately due and payable. Additionally, Medtronic may, upon a breach by
HMP of its obligations (after applicable cure periods) under the Co-Promotion
Agreement or a breach of covenants in the Convertible Notes held by
Medtronic, declare the unpaid principal and interest on such Notes
immediately due and payable.

Also, if the Company defaults under the Note Purchase Agreement, it will
be in default under the Loan Agreement with LaSalle (as described below)
pursuant to the cross-default provisions contained therein. At March 31,
2003, the aggregate amount of indebtedness which would be subject to
acceleration under the Note Purchase Agreement, the Companys credit facility
with LaSalle (as described below) and the Junior Note (as described below),
causing the same to become immediately due and payable, was approximately
$18.2 million. 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. 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. As of March 31, 2003, an
aggregate of 19,800,000 shares of
the Companys common stock had been issued to holders of the Convertible
Notes upon conversion thereof.

This 27,000,000 shares also includes 3,300,000 shares of common stock
which were issued to ComVest upon conversion of the Bridge Note (as described
below) in the third quarter of 2002. Under the conversion terms, if the
principal amount of the Additional Notes, together with all interest due,
were paid in full on or before 30 days following March 16, 2002, the Closing

10



---



##### Table of Contents



Date for the transaction, then the maximum aggregate number of shares of
common stock that all the Convertible Notes may be converted into is
22,500,000. The Additional Notes were not repaid by April 15, 2002 and have
not been repaid as of the date of this report. The terms of the applicable
conversion periods and conversion amounts for the Convertible Notes are as
follows:

|                                                                                                                              |  |                                       |  |                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                              |  |                                       |  | Maximum Conversion Amount                                                                                                                                      
|                                                                                                                              |  |                                       |  | During Applicable Period                                                                                                                                       
|                                                                                                                              |  |                                       |  | (all shares
exercisable at $0.01 per share)                                                                                                                    
|Note                                                                                                                          |  | Applicable Period                     |  |                                                                                                                                                                
|                                                                                                                              |  |                                       |  |                                                                                                                                                                
|                                                                                                                              |  |                                       |  |                                                                                                                                                                
|ComVest Convertible Note
($4.4 million principal
amount)                                                                      |  | April 16, 2002 through
March 16, 2004 |  | 1.25% of the Outstanding Balance
(defined as principal plus accrued
and unpaid interest under the
ComVest Convertible Note), plus                              
|                                                                                                                              |  |                                       |  |                                                                                                                                                                
|                                                                                                                              |  |                                       |  | 0.6% of the amount of
principal repaid under the
Additional Notes on or prior to
April 16, 2002*                                                               
|                                                                                                                              |  |                                       |  |                                                                                                                                                                
|                                                                                                                              |  | March 16, 2003 through
March 16, 2004 |  | An additional 0.25% of the
Outstanding Balance                                                                                                                 
|                                                                                                                              |  |                                       |  |                                                                                                                                                                
|Medtronic Convertible Note
($4 million principal amount)                                                                      |  | April 16, 2002 through
March 16, 2004 |  | 1.5% of $4 million                                                                                                                                             
|                                                                                                                              |  |                                       |  |                                                                                                                                                                
|                                                                                                                              |  | March 16, 2003 through
March 16, 2004 |  | An additional 0.3% of $4 million
if the ComVest
Convertible Note and the
Additional Notes held by the
Additional Note Purchasers
have not been repaid.         
|                                                                                                                              |  |                                       |  |                                                                                                                                                                
|Convertible Notes issued to
Additional Note Purchasers
($6.6 million principal
amount) (collectively, the
Additional Notes) |  | April 16, 2002 through
April 16, 2004 |  | 1.25% of the Additional Notes
Outstanding Balance (defined
as up to $6.6 million in
principal plus accrued but
unpaid interest under the
Additional Notes) plus
|                                                                                                                              |  |                                       |  |                                                                                                                                                                
|                                                                                                                              |  |                                       |  | 0.6% of the amount of
principal repaid under the
ComVest Convertible Note on
or prior to April 16, 2002*                                                       
|                                                                                                                              |  |                                       |  |                                                                                                                                                                
|                                                                                                                              |  | March 16, 2003 through
March 16, 2004 |  | An additional 0.25% of the
Additional Notes Outstanding
Balance                                                                                                

     As of the date of the filing of this report, the Company had not
repaid any principal under the Convertible Notes.

In connection with the Recapitalization, the Company issued a
Convertible Bridge Note (the Bridge Note) to ComVest. ComVest has
converted this note into 3,300,000 shares of the Companys common stock at a
conversion price of $0.01 per share. As a result of such conversion, the
Bridge Note has been extinguished. The number of shares of common stock
issued pursuant to conversion of the Bridge Note is subject to the thresholds
outlined above in this section.

11



---



##### Table of Contents



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. On
March 15, 2002, the Company and ComVest, as the holder of an outstanding Bank
of America Note (the 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 extinguishment of debt of
approximately $6.6 million during the first quarter of 2002. In exchange for
funding a portion of the $22 million cash purchase price paid to Bank of
America, 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 (the
Bridge Loan).

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 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 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 Bank of America debt of $40.3 million. Also included in
the extraordinary loss were various costs paid to ComVest, Commonwealth
Associates, L.P. and LaSalle, as the lenders, to effect the Recapitalization
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 Bank of
America 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 fiscal 2002 are approximately $3
million of expenses related to the Recapitalization. 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
$428,000 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 Bank of America, 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, 27,000,000 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

12



---



##### Table of Contents



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 Convertible
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 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 provided a $20 million Revolving Loan (the Revolving
Loan) and a $2 million Term Loan (the Term Loan). Effective December 23,
2002, in connection with the December Amendment (as defined below), the
Revolving Loan limit was reduced to $10 million. The Company used the
proceeds to repay the Bridge Loan and expenses related to the
Recapitalization and 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.

Effective December 23, 2002, the Company and the Lender amended the Loan
Agreement (the December Amendment) to, among other things, amend certain
financial maintenance covenants. These covenants, include, but are not
limited to, the following:



| |  |  | maintaining Tangible Net Worth of $7,500,000 for the quarters
ending December 31, 2002, March 31, 2003, June 30, 2003 and September
30, 2003, and $8,000,000 for the quarter ending December 31, 2003 and
each quarter thereafter (Tangible Net Worth is defined as the
Companys 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 Statement of
Financial Accounting Standards (SFAS) No. 142 as determined solely
by the Lender on a consistent basis plus the amount of any LIFO
reserve plus the amount of any debt subordinated to the Lender);
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | maintaining fixed charge coverage (ratio of EBITDA to fixed
charges) of 0.15 to 1.0 for the fiscal quarter ending December 31,
2002, 0.3 to 1.0 for the fiscal quarters ending March 31, 2003, June
30, 2003 and September 30, 2003,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

13



---



##### Table of Contents





| |   |  | 0.50 to 1.0 for the fiscal quarter ending December 31, 2003, 0.75 to
1.0 for the fiscal quarter ending March 31, 2004 and 1.0 to 1.0 for
the fiscal quarter ending June 30, 2004 and for each fiscal quarter
thereafter;                                                                                                           
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | maintain EBITDA, based on the immediately preceding four fiscal
quarters, of $750,000 on December 31, 2002, $1,350,000 on March 31,
2003, $1,475,000 on June 30, 2003 and September 30, 2003, $2,500,000
on December 31, 2003, $3,675,000 on March 31, 2004 and $4,900,000 on
June 30, 2004 and each fiscal quarter thereafter; and
|
| |  |  | limit capital expenditures to no more than $1,500,000 during any
fiscal year.                                                                                                                                                                                                                                                      

The December Amendment also established a $10 million revolving loan
limit and provided that, commencing January 1, 2003, the Company shall pay to
the Lender an annual facility fee of $100,000. As of March 31, 2003 and
December 31, 2002, the Company had $2.7 million and $2.1 million,
respectively, available for borrowing under the revolving portion of the Loan
Agreement. As of March 31, 2003 and December 31, 2002, the Company had $1.3
million and $1.5 million, respectively, in borrowings outstanding under the
Term Loan. The Company had no borrowings outstanding under the revolving
loan as of March 31, 2003 and approximately $128,000 in borrowings
outstanding under the revolving loan as of December 31, 2002. As of March
31, 2003, the Company believes it was in compliance with all covenants in the
Loan Agreement (as amended by the December Amendment) set forth above.

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 commencing April
2002. The Loan Agreement will automatically renew for one-year terms unless
the Lender demands repayment on the Termination Date, the due date is
accelerated 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 (March 15, 2004) of the Convertible Notes at least thirty days past the
date of the original term (March 17, 2005) 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.

On September 3, 2002, the Company sold Stepic Corporation (Stepic),
the Companys distribution business, to Arrow International, Inc. (Arrow)
for approximately $12.6 million, consisting of $11 million in cash, $1.1
million placed in escrow and a note receivable in the amount of $500,000. In
addition, the Company retained assets of approximately $1.1 million in the
transaction. The Company used $7.8 million of the proceeds to pay off the
amount then outstanding under its Revolving Loan from LaSalle. The Company
was paid $1,051,317 plus interest of $904 out of escrow. In addition, under
the terms of the note receivable, the Company was paid $500,000 plus interest
of $9,863 as payment in full.

In the fourth quarter of 2002, the Companys management and Executive
Committee delivered to each of ComVest and Medtronic an operating plan and
budget (including working capital needs) reflecting its business following
the sale of Stepic and

14



---



##### Table of Contents



a proposal for the use of proceeds from the sale of Stepic. This
operating plan and budget, together with the use of proceeds, was approved by
ComVest and Medtronic and was subsequently ratified by the Companys board of
directors as required under the Note Purchase Agreement. In connection with
this sale, the Company received the consent of LaSalle and the requisite
noteholders under the Note Purchase Agreement. (See Note 7 to these interim
condensed consolidated financial statements contained herein for further
discussion on the sale of Stepic).

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 of the Company prior to the Recapitalization, 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). 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.

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, as defined.

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 Ideas for Medicine business (IFM) (see Note 14 of the Companys
consolidated financial statements contained in the Form 10-K).

15



---



##### Table of Contents



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 chief executive officer
(the CEO), Marshall B. Hunt (the Shareholder Bridge Loan). All of the
installments under the BofA Bridge Loan and the Shareholder 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.

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 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 14 of the Companys consolidated financial
statements included in the Form 10-K for the year ended December 31, 2002).
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 14 of the
Companys consolidated financial statements included in the Form 10-K).

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 (see
Note 6 of the Companys consolidated financial statements included in the
Form 10-K).

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 Bank of America 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 of the Companys consolidated financial
statements included in the Form 10-K for the year ended December 31, 2002).

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

16



---



##### Table of Contents



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 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

In connection with the Recapitalization, the Company entered into an
expense guaranty with the CEO under which he received 150,000 shares of the
Companys common stock in exchange for agreeing to reimburse ComVest for up
to a maximum of $400,000 of its transaction expenses in the event that the
Recapitalization was not consummated. The value of these shares of common
stock was $130,500 on the date of issuance. Also, pursuant to an advance
note, the CEO received 75,000 shares of the Companys common stock in
exchange for advancing to the Company $17,500 in transaction expenses
associated with the Recapitalization. The value of these shares of common
stock was $62,250 on the date of issuance.

The Company had 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. 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. The loans payable by the former Vice
Chairman of the Board remain outstanding in the principal amount of $112,613,
plus accrued interest receivable of $58,218 as of March 31, 2003.

As discussed in Note 6, on June 6, 2000, the Company obtained the BofA
Bridge Loan in the principal amount of $900,000, which was used to fund the
Shareholder Bridge Loan to the Companys CEO. The CEOs obligations under the
Shareholder Bridge Loan are collateralized by the pledge of 2,813,943 shares
of the Companys common stock owned beneficially by the CEO. The Companys
obligations under the BofA Bridge Loan were collateralized by the pledge of
the CEOs shares to BofA and by the collateral previously pledged by the
Company to BofA under the Companys then-existing credit facility with BofA.
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, 2000, 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 these interim condensed
consolidated financial statements contained herein). During 2001, the CEO
paid the Shareholder Bridge Loan obligation of $900,000 as described in Note
6. The accrued interest of $109,303 under the Shareholder Bridge Loan was
paid to the Company by the CEO in June 2002.

During 2002, 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 the three months ended March 31, 2002, the Company
incurred fees of $318,185 to Tunstall Consulting for consulting services
rendered to the Company in connection with the Recapitalization. The Company
incurred no Recapitalization-related expenses to Tunstall Consulting in the
three months ended March 31, 2003.

See Note 11 of the Companys consolidated financial statements included
in the Form 10-K for a description of the Companys other related party
transactions.

17



---



##### Table of Contents



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.

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 $285,000 and $282,000 as of March 31, 2003 and December 31,
2002, 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.

In November 2002, the Company was served with a complaint filed in the
United States District Court for the Northern District of Georgia by Chepstow
Limited (Chepstow) against the Company, its Chief Executive Officer,
Marshall B. Hunt, its President, William E. Peterson, Jr., and members of Mr.
Hunts family and a family limited partnership established by Mr. Hunt and
his wife. Chepstow alleges that it has a judgment on a promissory note
against Mr. Hunt, that it is engaging in post-judgment collection efforts,
and that the defendant parties in this action have engaged with Mr. Hunt in
fraudulent conveyances of Mr. Hunts assets. Specifically, with respect to
the Company, Chepstow alleges that, in March 2002, Mr. Hunt transferred
225,000 shares of the Companys common stock to his family limited
partnership, that such transfer was a fraudulent conveyance under Georgia
law, that the Company assisted in such transfer, and that the Company engaged
in an unlawful conspiracy to hinder, delay or defraud Chepstow as Mr. Hunts
creditor. Chepstow seeks to void such transfers and injunctive relief,
compensatory damages, and punitive damages from the defendants, including the
Company. The Company is vigorously contesting such matter and has filed a
motion to dismiss the action against the Company on the basis that the
Companys only involvement with Mr. Hunts transfer of such shares was to
instruct the Companys stock transfer agent and registrar, SunTrust Bank, to
issue and register the shares in question. At this time, it is not possible
for the Company to evaluate the likelihood of an unfavorable outcome or to
estimate whether the ultimate result will have a material adverse effect on
the Companys operations.

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 of March 31, 2003 and December 31,
2002, respectively, there were 9,900,000 and 8,250,000 shares outstanding as
a result of conversions by the Additional Note purchasers and 9,900,000 and
8,800,000 shares outstanding as a result of conversions by ComVest.

As described in Note 4 to the interim condensed
consolidated financial
statements contained herein, 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 interim condensed consolidated financial
statements).

18



---



##### Table of Contents



7.     Sale of Distribution Segment

On September 3, 2002, the Company sold Stepic to Arrow International,
Inc. (Arrow) for approximately $12.6 million, consisting of $11 million in
cash, $1.1 million placed in escrow and a note receivable in the amount of
$500,000. In addition, the Company retained assets of approximately $1.1
million in the transaction.

Approximately $7.8 million of the cash proceeds of the Stepic sale were
used to pay down all amounts outstanding at closing under the Companys
revolving senior credit facility with the Lender. The Company has used a
portion of the remaining proceeds for working capital purposes.
Additionally, as required pursuant to a letter agreement among the Company,
ComVest and Medtronic, in the fourth quarter of 2002, the Companys
management and Executive Committee delivered to each of ComVest and Medtronic
an operating plan and budget (including working capital needs) reflecting its
business following the sale of Stepic and a proposal for the use of proceeds
from the sale of Stepic. This operating plan and budget, together with the
use of proceeds, was approved by ComVest and Medtronic and was subsequently
ratified by the Companys board of directors. In connection with this sale,
the Company received the consent of LaSalle and the requisite noteholders
under the Note Purchase Agreement (see Note 15 of the notes to the Companys
audited consolidated financial statements contained in the Companys Form
10-K for further discussion on the sale of Stepic).

Arrow paid $1.1 million of the cash purchase price into escrow, which
sum has been distributed to the Company (in an amount equal to $1,051,317
plus interest of $904) and to Arrow (in an amount equal to $48,683) in
accordance with the terms of the asset purchase agreement and escrow
agreement entered into in connection with the Stepic sale. Finally, Arrow
issued to the Company a promissory note in the principal amount of $500,000,
which bore interest at an annual rate of 5%. Pursuant to the terms of this
note, $250,000 plus interest of $3,664 was paid to the Company on December
19, 2002 and the balance of $250,000 plus interest of $6,199 and was paid to
the Company on March 3, 2003.

Net sales and income from the discontinued operations of the
distribution reporting unit as of March 31, 2002 are as follows:

|                                    |  |   |           | 
|----------------------------------- |  | - | --------- | 
|Net sales                           |  | $ | 8,104,217 | 
|Income from discontinued operations |  | $ | 31,155    | 

The major classes of assets and liabilities disposed of were as follows
at September 3, 2002:

|                                       |  |   |           | 
|-------------------------------------- |  | - | --------- | 
|Accounts, receivable, net              |  | $ | 6,602,504 | 
|Inventory                              |  | $ | 9,117,434 | 
|Prepaid expenses and other assets      |  | $ | 1,100,030 | 
|Property and equipment, net            |  | $ | 115,628   | 
|Intangibles, net                       |  | $ | 25,703    | 
|Accounts payable                       |  | $ | 7,518,071 | 
|Accrued expenses and other liabilities |  | $ | 336,823   | 

Goodwill of $16.1 million for the Stepic distribution segment was
written off in the first quarter of 2002 as part of the Companys adoption of
SFAS No. 142 (see Notes 1 and 8 to these interim condensed consolidated
financial statements contained herein).

8.     Goodwill and Other Intangible Assets

The Company adopted SFAS No. 142 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 with respect to its distribution
business.

19



---



##### Table of Contents



A summary of the Companys intangible assets as of March 31, 2003 is as
follows:

Indefinite lived intangible assets:

|         |  |   |            | 
|-------- |  | - | ---------- | 
|Goodwill |  | $ | 15,650,356 | 

Finite lived intangible assets as of March 31, 2003, subject to
amortization expense, are comprised of the following:

|                                      |       |   |                |            |              |   |            |            |   |   |           |           | 
|------------------------------------- | ----- | - | -------------- | ---------- | ------------ | - | ---------- | ---------- | - | - | --------- | --------- | 
|                                      |       |   | Gross Carrying |            | Accumulated  |   |            |            |  
|                                      |       |   | Amount         |            | Amortization |   | Net       
|                                      |       |   |                |            |              |   |           
|Patents                               |       | $ | 8,218,000      |            |              | $ | (3,023,000 | )          |   | $ | 5,195,000 |          
|Non-compete and consulting agreements |       |   | 2,308,727      |            |              |   | (2,113,277 | )          |   |   | 195,450   |          
|Debt issuance costs                   |       |   | 1,650,087      |            |              |   | (950,991   | )          |   |   | 699,096   |          
|Other                                 |       |   | 212,702        |            |              |   | (32,217    | )          |   |   | 180,485   |          
|                                      |       |   |                |            |              |   |            |            |   |   |           |          
|                                      | Total |   | $              | 12,389,516 |              |   | $          | (6,119,485 | ) |   | $         | 6,270,031 | 
|                                      |       |   |                |            |              |   |            |            |   |   |           |          

Amortization expense for finite lived intangible assets was $378,083 for
the three months ended March 31, 2003. The expected amortization expense for
each of the five succeeding fiscal years ended December 31 is as follows:

|               |  |   |           | 
|-------------- |  | - | --------- | 
|Remaining 2003 |  | $ | 1,027,764 | 
|2004           |  |   | 1,037,275 | 
|2005           |  |   | 659,233   | 
|2006           |  |   | 599,724   | 
|2007           |  |   | 599,724   | 
|2008           |  |   | 599,724   | 
|Thereafter     |  |   | 1,746,587 | 
|               |  |   |           | 
|               |  | $ | 6,270,031 | 
|               |  |   |           | 

The changes in the net carrying amount of goodwill during the three
months ended March 31, 2002 are as follows:

|                              |  |               |            |              |  |       |             |   |  |   |             |  
|----------------------------- |  | ------------- | ---------- | ------------ |  | ----- | ----------- | - |  | - | ----------- | -
|                              |  | Manufacturing |            | Distribution |  |       |             |  
|                              |  | Segment       |            | Segment      |  | Total
|                              |  |               |            |              |  |      
|Balance as of January 1, 2002 |  | $             | 15,650,356 |              |  | $     | 16,101,903  |   |  | $ | 31,752,259  |  
|Impairment losses             |  |               |            |              |  |       | (16,101,903 | ) |  |   | (16,101,903 | )
|                              |  |               |            |              |  |       |             |   |  |   |             |  
|Balance as of March 31, 2002  |  | $             | 15,650,356 |              |  | $     |            |   |  | $ | 15,650,356  |  
|                              |  |               |            |              |  |       |             |   |  |   |             |  

During the first quarter of 2003, the Company acquired a portion of the
business of one of its former independent distributors, which consisted of
inventory, a non-compete agreement and a customer list in the amounts of
$56,245, $143,135 and $143,134, respectively, and ended its relationship with
the distributor.

20



---



##### Table of Contents






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

Critical Accounting Policies

For a discussion of critical accounting policies utilized by the Company,
see the Form 10-K. Since the date of the Form 10-K, there has been no material
change in the Companys critical accounting policies.

Results of Operations

First Quarter of 2003 Compared to First Quarter of 2002

Net Sales.Net sales increased 38.7% to $6.1 million in the first
quarter of 2003 from $4.4 million in the first quarter of 2002. The increase
in sales is primarily attributable to the continuing sales growth from the
Companys new products, including LifeGuard, LifeJet
F-16 and LifeValve®. In
addition, there was overall sales growth resulting from the Companys direct
sales expansion program implemented in late 2002 in which a larger portion of
the Companys sales is derived from its direct sales force, as compared to the
past, which featured a larger mix of distributors and direct sales
representatives.

Gross Profit.Gross profit increased 60.8% to $3.6 million in the first
quarter of 2003, from $2.3 million in the first quarter of 2002. Gross margin
percentage increased to 59.7% in the first quarter of 2003 from 51.5% in the
first quarter of 2002. The increase in gross profit is the result of increased
sales, and the increase in gross margin percentage is the result of favorable
manufacturing production efficiencies and a favorable change in product mix as
well as lower distributor rebates for the first quarter of 2003 compared to the
first quarter of 2002.

Selling, General and Administrative Expenses.Selling, General and
Administrative expenses (SG&A) decreased to $3.6 million in the first quarter
of 2003 from $5.6 million in the first quarter of 2002. The decrease in SG&A
was attributable to recapitalization expenses of approximately $2.6 million
incurred in the first quarter of 2002 as a result of the Companys
recapitalization transaction in March 2002. Exclusive of the Recapitalization
expenses, SG&A increased approximately $600,000 in the first quarter of 2003
from the first quarter of 2002. This increase is primarily the result of
higher selling expenses resulting from the Companys direct sales expansion
program, including salaries, travel, and other selling expenses. SG&A expenses
decreased as a percentage of net sales to 59.9% in the first quarter of 2003
from 128.2% in the first quarter of 2002 due to increased sales as well as the
Recapitalization expenses incurred in the first quarter of 2002.

Interest Expense.Interest expense, net of interest income, decreased
slightly by $10,146 from $637,808 in the first quarter of 2002 to $627,662 in
the first quarter of 2003. This decrease is the result of lower debt
outstanding and offset by increased deferred loan costs during the first
quarter of 2003 as compared to the first quarter of 2002, both as a result of
the Companys recapitalization in March 2002.

Discontinued Operations.Income from operations of the Companys
discontinued distribution segment (Stepic) was $31,155 for the first quarter of
2002. The Company sold Stepic on September 3, 2002.

Income Taxes.The Company generated an income tax benefit of approximately
$625,000 during the first quarter of 2003, which was reduced fully by a
valuation allowance established on the Companys deferred tax assets generated
by the income tax benefit. The income tax benefit for the first quarter of
2003 consists of the federal and state benefits, adjusted for certain
nondeductible items, reduced by a valuation allowance on the Companys deferred
tax assets. The Companys taxable income generated as a result of the
extinguishment of the BofA Credit Facility pursuant to the Recapitalization in
the first quarter of 2002 was fully offset by a net operating loss carryforward
upon which a valuation allowance had previously been established in
2001. As a result of the conversion of debt to common shares with the
Recapitalization, the Company may have had a change in control for
income tax purposes. Section 382 of the Internal Revenue Code of
1986, as amended, restricts the utilization of net operating loss
(NOL) carryforwards and the benefit of certain built in
losses when there has been a change in control as defined in the tax
code. The Companys NOL of approximately $18.8 million and
the majority of the tax loss for the first quarter of 2003 of
approximately $1.6 million are subject to this restriction.
Management is in the process of determining whether the conversion
triggered a change in control, and additionally, is calculating the
tax implications of the potential change of control.

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.

21



---



##### Table of Contents



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 No. 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 No. 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

The Companys principal capital requirements are to fund working capital
requirements and capital expenditures for its existing facility. Historically,
the Company has used cash generated by operations, bank financing and, in 1998,
proceeds from its initial public equity offering to fund its capital
requirements. Additionally, the Company requires capital to finance accounts
receivable and inventory. The Companys working capital requirements vary from
period to period depending on its production volume, the timing of shipments
and the payment terms offered to its customers.

Net cash used in operating activities was $1,076 for the first quarter of
2003 compared with approximately $2.4 million for the first quarter of 2002.
The decrease in cash used in operations during 2003 compared to 2002 was
primarily attributable to the recapitalization transaction expenses paid in
2002, as well as the decreased loss from operations in 2003 compared to 2002
(see above description in Results of Operations).

Net cash (used in) provided by investing activities was approximately
($158,000) for the first quarter of 2003 compared to $262,000 for the first
quarter of 2002. Cash used in investing activities in 2003 consisted of cash
paid for the acquisition of intangible assets as a result of the Companys
acquisition of a portion of the business of one of its former independent
distributors. In addition, cash used in investing activities in both 2003 and
2002 included capital expenditures for the Companys facilities. Cash provided
by investing activities in 2003 consisted of cash proceeds from the payment on
the note (as described below) issued in connection with the sale of the
Companys distribution segment (Stepic). Cash provided by investing activities
in 2002 consisted of cash proceeds from the CEO and President for payment of
their shareholder notes outstanding.

Net cash (used in) provided by financing activities was approximately
($457,000) for the first quarter of 2003 compared to approximately $39,000 for
the first quarter of 2002. Financing activities in 2003 consisted of principal
payments of long-term debt. 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.

On March 1, 2002, the Company entered into certain agreements with ComVest
Venture Partners, L.P. (ComVest), an affiliate of Commonwealth Associates
L.P. (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, N.A. (Bank of
America) dated March 30, 2001, as subsequently amended (the Forbearance
Agreement), was terminated as of March 15, 2002. The Forbearance Agreement is
described below.

The following is a summary of the key provisions of the Recapitalization:

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 the
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 (the
Junior Note), and entered into a new revolving and term loan facility (the
LaSalle Credit

22



---



##### Table of Contents



Facility) for up to $22 million, of which approximately $1.6 million was
outstanding as of December 31, 2002. The following is a summary of the 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 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, Medtronic and the 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 Convertible 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. Additionally, in connection with the Recapitalization, the
Company issued a Convertible Bridge Note (the Bridge Note) to ComVest.
ComVest has converted this note into 3,300,000 shares of the Companys common
stock at a conversion price of $0.01 per share. As a result of such
conversion, the Bridge Note has been extinguished.

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
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 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 Bank of America debt of $40.3
million. Also included in the extraordinary loss were various costs paid to
ComVest, Commonwealth Associates, L.P. and LaSalle, as the lenders, to effect
the Recapitalization 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
Bank of America 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 fiscal 2002 are approximately $3
million of expenses related to the Recapitalization. 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 $428,000 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 Bank of America, 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

23



---



##### Table of Contents



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, 27,000,000 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
Convertible 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 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
provided a $20 million Revolving Loan and a $2 million Term Loan. Effective
December 23, 2002, in connection with the December Amendment (as defined
below), the revolving loan limit was reduced to $10 million. 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 (as discussed below).

Effective December 23, 2002, the Company and the Lender amended the Loan
Agreement (the December Amendment) to, among other things, amend certain
financial maintenance covenants. These covenants, include, but are not limited
to, the following:



| |  | maintaining Tangible Net Worth of $7,500,000 for the quarters ending
December 31, 2002, March 31, 2003, June 30, 2003 and September 30, 2003,
and $8,000,000 for the quarter ending December 31, 2003 and each quarter
thereafter (Tangible Net Worth is defined as the Companys 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 Statement of Financial Accounting Standards
(SFAS) No. 142 as determined solely by the Lender on a consistent
basis plus the amount of any LIFO reserve plus the amount of any debt
subordinated to the Lender);
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | maintaining fixed charge coverage (ratio of EBITDA to fixed charges)
of 0.15 to 1.0 for the fiscal quarter ending December 31, 2002, 0.3 to
1.0 for the fiscal quarters ending March 31, 2003, June 30, 2003 and
September 30, 2003, 0.50 to 1.0 for the fiscal quarter ending December
31, 2003, 0.75 to 1.0 for the fiscal quarter ending March 31, 2004 and
1.0 to 1.0 for the fiscal quarter ending June 30, 2004 and for each
fiscal quarter thereafter;                                                                                                                                                                                                                                                                                          
| 
| |  | maintain EBITDA, based on the immediately preceding four fiscal
quarters, of $750,000 on December 31, 2002, $1,350,000 on March 31,
2003, $1,475,000 on June 30, 2003 and September 30, 2003, $2,500,000 on
December 31, 2003, $3,675,000 on March 31, 2004 and $4,900,000 on June
30, 2004 and each fiscal quarter thereafter; and                                                                                                                                                                                                                                                                                                                                                                                                                    
| 
| |  | limit capital expenditures to no more than $1,500,000 during any fiscal
year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

The December Amendment also established a $10 million revolving loan limit
and provided that, commencing January 1, 2003, the Company shall pay to the
Lender an annual facility fee of $100,000. As of March 31, 2003 and December
31, 2002, the Company had $2.7 million and $2.1 million, respectively,
available for borrowing under the revolving portion of the Loan Agreement. As
of March 31, 2003 and December 31, 2002, the Company had $1.3 million and $1.5
million, respectively, in borrowings outstanding under the Term Loan. The
Company had no borrowings under the revolving loan as of March 31, 2003 and
approximately $128,000 in borrowings outstanding under the revolving loan as of
December 31, 2002. As of March 31, 2003, the Company believes it was in
compliance with all such covenants set forth in the Loan Agreement, as amended
by the December Amendment.

24



---



##### Table of Contents



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 commencing April 2002. The
Loan Agreement will automatically renew for one-year terms unless the Lender
demands repayment on the Termination Date, the due date is accelerated 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 (March 15, 2004) of the
Convertible Notes at least thirty days past the date of the original term
(March 17, 2005) 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.

On September 3, 2002, the Company sold Stepic to Arrow International, Inc.
(Arrow) for approximately $12.6 million, consisting of $11 million in cash,
$1.1 million placed in escrow and a note receivable in the amount of $500,000.
In addition, the Company retained assets of approximately $1.1 million in the
transaction.

Approximately $7.8 million of the cash proceeds of the Stepic sale were
used to pay down all amounts outstanding at closing under the Companys
revolving senior credit facility with the Lender. The Company has used a
portion of the remaining proceeds for working capital purposes. Additionally,
as required pursuant to a letter agreement among the Company, ComVest and
Medtronic, the Companys management and Executive Committee delivered to each
of ComVest and Medtronic an operating plan and budget (including working
capital needs) reflecting its business following the sale of Stepic and a
proposal for the use of proceeds from the sale of Stepic. This operating plan
and budget, together with the use of proceeds, was approved by ComVest and
Medtronic and was subsequently ratified by the Companys board of directors.
In connection with this sale, the Company received the consent of LaSalle and
the requisite noteholders under the Note Purchase Agreement. (See Note 15 of
the notes to the Companys audited consolidated financial statements contained
in the Companys Form 10-K).

Arrow paid $1.1 million of the cash purchase price into escrow, which sum
has been distributed to the Company (in an amount equal to $1,051,317 plus
interest of $904) and to Arrow (in an amount equal to $48,683) in accordance
with the terms of the asset purchase agreement and escrow agreement entered
into in connection with the Stepic sale. Finally, Arrow issued to the Company
a promissory note in the principal amount of $500,000, which bore interest at
an annual rate of 5%. Pursuant to the terms of this note, $250,000 plus
interest of $3,664 was paid to the Company on December 19, 2002 and the balance
of $250,000 plus interest of $6,199 and was paid to the Company on March 3,
2003.

As of the date of this filing, the Company has complied with all of the
requirements of the Loan Agreement and currently does not have any borrowings
under the Revolving Loan. The Company believes it has available cash resources
to meet its working capital needs through fiscal year 2003.

25



---



##### Table of Contents



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 of the Company prior to the Recapitalization, 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). 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.

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, as
defined.

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
Ideas for Medicine business (IFM) (see Note 14 of the notes to the
consolidated financial statements included herein).

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 CEO, Marshall B. Hunt (the
Shareholder Bridge Loan). All of the installments under the BofA Bridge Loan
and the Shareholder 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

26



---



##### Table of Contents



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 14 of the notes to the consolidated financial
statements included herein). 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 14 of the notes to the consolidated financial statements
included herein).

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 of the notes to the consolidated financial
statements included herein).

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 Bank of America 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.

Recently Issued Accounting Standards

Note 1 of the interim condensed consolidated financial statements included
elsewhere in this Form 10-Q describes the recently issued accounting standards.

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 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.

27



---



##### Table of Contents






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 thereunder. As of March 31, 2003, the Company
had approximately $1.3 million outstanding under the LaSalle Credit Facility.
If market interest rates were to increase immediately and uniformly by 10% from
levels as of March 31, 2003, the additional interest expense would be
considered immaterial to the Companys interim condensed consolidated financial
position, results of operations and cash flows.




ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Companys reports
filed under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules, regulations and forms,
and that such information is accumulated and communicated to the Companys
management, including its Chief Executive Officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. Within 90 days prior to the date of this quarterly report, the
Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer along with the Companys principal financial officer, on the
effectiveness of the Companys disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon the foregoing, the Companys Chief
Executive Officer along with the Companys principal financial officer
concluded that the Companys disclosure controls and procedures are effective
in timely and effectively alerting them to material information relating to the
Company required to be included in the Companys Exchange Act reports.

There have been no significant changes in the Companys internal controls
or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.

28



---



##### Table of Contents






PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

See Item 3. Legal Proceedings in the Form 10-K for the fiscal year ended
December 31, 2002 for a discussion of legal proceedings affecting the Company.
There have been no material developments in such legal proceedings since the
filing of the Form 10-K.




ITEM 2. CHANGES IN SECURITIES AND USE OF FUNDS

In the first quarter of 2003, the Company issued an aggregate of 2,750,000
shares of its common stock upon conversion of the Companys Senior Subordinated
Convertible Notes issued in March 2002 in connection with the Recapitalization. The issuance of these shares of common stock upon conversion
was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended. See Note 4 herein.




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



| | (a) |  | The Companys Annual Meeting of Shareholders was held on May 13, 2003.    
| | --- |  | --------------------------------------------------------------------------
|
| | (b) |  | Not applicable.                                                           
|
| | (c) |  | The following proposals were submitted to the shareholders of the
Company:
|
| | (1) |  | The election of seven directors. The vote on this proposal was:           

|                         |     |            |         |  |  |         | 
|------------------------ | --- | ---------- | ------- |  |  | ------- | 
|                         | For |            | Abstain
|                         |     |            |        
|H. Ross Arnold, III      |     | 25,207,067 |         |  |  | 65,050  | 
|Harold Blue              |     | 25,207,067 |         |  |  | 65,050  | 
|James E. Brands          |     | 25,207,067 |         |  |  | 65,050  | 
|Marshall B. Hunt         |     | 25,089,667 |         |  |  | 182,450 | 
|William E. Peterson, Jr. |     | 25,091,867 |         |  |  | 180,250 | 
|Robert D. Tucker         |     | 25,207,067 |         |  |  | 65,050  | 
|A. Gordon Tunstall       |     | 25,171,067 |         |  |  | 101,050 | 



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) A proposal to ratify the appointment of Grant Thornton LLP as the
Companys independent auditors for the fiscal year ended December 31, 2003.
The vote on this proposal was:

|           |  |         |  |        
|---------- |  | ------- |  | -------
|For        |  | Against |  | Abstain
|           |  |         |  |        
|25,265,044 |  | 6,200   |  | 873    




ITEM 5. OTHER INFORMATION

Not applicable.




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

(a) Exhibits.

29



---



##### Table of Contents



|        |  |   |  |                                                                                                                                                                                                                                                                                                                                    
|------- |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                                                    
|Number  |  |   |  | Description of Exhibits                                                                                                                                                                                                                                                                                                            
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                    
|3.1     |  |  |  | Restated and Amended Articles of Incorporation of the
Company, as amended to date, filed as Exhibit 3.1 to the Registrants
Quarterly Report on Form 10-Q for the quarter ended September
30, 2002 and incorporated herein by reference.                                                                                           
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                    
|3.2     |  |  |  | Amended and Restated Bylaws of the Company, as amended to
date, filed as Exhibit 3.2 to the Registrants Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002 and
incorporated herein by reference.                                                                                                              
|       
|4.1     |  |  |  | See Articles 2, 3, 7 and 9 of the Restated and
Amended Articles of Incorporation, as amended, filed as Exhibit
3.1 and Articles I and VII of the Amended and Restated
Bylaws filed as Exhibit 3.2, to the Registrants Quarterly Report
on Form 10-Q for the quarter ended September 30, 2002
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    |  |  |  | Amendment to Employment Agreement, dated March 7, 2003, between the
Company and William E. Peterson, Jr., filed as Exhibit 10.45 to the
Registrants Annual Report on Form 10-K for the year ended December
31, 2002 and incorporated herein by reference.                                                                         
|       
|10.2    |  |  |  | Option Agreement, dated February 25, 2003 between the Company and
Marshall B. Hunt, filed as Exhibit 10.46 to the Registrants Annual
Report on Form 10-K for the year ended December 31, 2002 and
incorporated herein by reference.                                                                                               
|       
|10.3    |  |  |  | Option Agreement, dated February 25, 2003 between the Company and
William E. Peterson, Jr., filed as Exhibit 10.47 to the Registrants
Annual Report on Form 10-K for the year ended December 31, 2002 and
incorporated herein by reference.                                                                                       
|       
|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.                                                                                                                                                          

(b)  Reports on Form 8-K

On April 25, 2003, the Company furnished a Current Report on Form 8-K
relating to the initial release of the Companys results of operations for the
quarter ended March 31, 2003.

30



---



##### Table of Contents



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)                                                                                                                         
|            
|             |  |                                                                                                                                      
|            
|May 15, 2003 |  | /s/ Julie F. LancasterVice President  Finance(Principal
Financial Officer, Principal Accounting
Officer and Duly Authorized Officer)

31



---



##### Table of Contents






CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

I, Marshall B. Hunt, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Horizon
Medical Products, Inc.;                                                                                                                                                                                                                                         
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:                                                                                                     



| | (a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | (c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



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



| | (a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors
any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



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

|                   |  |                                                                                       
|------------------ |  | --------------------------------------------------------------------------------------
|Date: May 15, 2003 |  | /s/ Marshall B. HuntMarshall B. Hunt
Chairman of the Board and Chief Executive Officer

32



---



##### Table of Contents






CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER

I, Julie F. Lancaster, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Horizon Medical
Products, Inc.;

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

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

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



| | (a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | (c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

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



| | (a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        



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

|                   |  |                                                                                                
|------------------ |  | -----------------------------------------------------------------------------------------------
|Date: May 15, 2003 |  | /s/ Julie F. LancasterJulie F. Lancaster
Vice President  Finance (Principal
Financial Officer)

33