##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q/A

(Amendment No. 1)

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|X |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

| |  |                                                                                          
| |  | -----------------------------------------------------------------------------------------
| |  | 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

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

Yes    No   X

The number of shares outstanding of the Registrants Common Stock, $.001 par
value, as of August 14, 2003 was 36,209,076.





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##### 



Explanatory Note:

Horizon Medical Products, Inc. (the Company) is filing this Amendment on Form 10-Q/A
to revise Part 1, Item 1, Financial Statements and
Part 1, Item 2, Managements Discussion
and Analysis of Financial Condition and Results of Operations (MD & A) contained in the Form 10-Q
for the quarter ended June 30, 2003 (the Original Filing).

In April 2002, the Financial Accounting Standards Board (FASB) adopted Statement of Financial
Accounting Standards No. 145 Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections (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 also rescinds FASB Statement No. 44, Accounting for
Intangible Assets of Motor Carriers. 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. Statement No. 145 is effective for fiscal years
beginning after May 15, 2002, with early adoption encouraged.

The Company has adopted SFAS No. 145 effective as of January 1, 2003 and for the year then ended. As
a result and in accordance with Statement No. 145 and Accounting Principles Board Opinion 30 (APB No. 30),
the extraordinary loss on the extinguishment of debt recognized in
2002 is reclassified from extraordinary items to a component of other income/(expense) in the
continuing operations portion of the Companys statement of operations. The Company has determined that the
items originally reported as extraordinary in the 2003 financial statements
which relate to historical figures require revision in order to be presented in
accordance with SFAS No. 145 and APB No. 30. The effect of this revision is to reclassify the extraordinary
items to other income/expense from continuing operations. There was no effect on the balance
sheet, stockholders equity, net income or cash flow of the Company.

Except for the financial statement information and related disclosures that are specifically
related to the reclassification discussed above, all information contained in this quarterly report is
stated as of the date of the Original Filing. This amendment does not otherwise update information in
the Original Filing to reflect facts or events occurring subsequent to the date of the Original Filing.





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##### 



HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

FORM 10-Q/A

For the Quarterly Period Ended June 30, 2003

INDEX

|          |  |                                                                                       | Page
|--------- |  | ------------------------------------------------------------------------------------- | ----
|PART I.   |  | FINANCIAL INFORMATION                                                                 | 3   
|ITEM 1.   |  | Financial Statements (unaudited)                                                      | 3   
|          |  | Interim Condensed Consolidated Balance Sheets                                         | 4   
|          |  | Interim Condensed Consolidated Statements of Operations                               |     
|          |  | 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 | 26  
|ITEM 4.   |  | Controls and Procedures                                                               | 36  
|PART II.  |  | OTHER INFORMATION                                                                     | 37  
|ITEM 6.   |  | Exhibits and Reports on Form 8-K                                                      | 37  
|SIGNATURE |  |                                                                                       | 39  

2



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##### 



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).

The financial statements listed below are included on the following pages
of this Quarterly Report on Form 10-Q:



| |  |  | Interim Condensed Consolidated Balance Sheets at June 30,
2003 and December 31, 2002                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Interim Condensed Consolidated Statements of Operations for
the three months and six months ended June 30, 2003 and 2002
|
| |  |  | Interim Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2003 and 2002                 
|
| |  |  | Notes to Interim Condensed Consolidated Financial Statements                                                            

3



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##### 



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

|                                                |                                                                                                                                                                           |                                      |  |             |            |              |  |             |            | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ |  | ----------- | ---------- | ------------ |  | ----------- | ---------- | 
|                                                |                                                                                                                                                                           |                                      |  | June 30,    |            | December 31,
|                                                |                                                                                                                                                                           |                                      |  | 2003        |            | 2002        
|                                                |                                                                                                                                                                           |                                      |  |             |            |             
|                                                |                                                                                                                                                                           | ASSETS                               |  |             |            |              |  |             |            | 
|Current
Assets:                                 |                                                                                                                                                                           |                                      |  |             |            |              |  |            
|                                                | Cash and cash equivalents                                                                                                                                                 |                                      |  | $2,571,529  |            |              |  | $3,711,514  |           
|                                                | Accounts receivable - trade, net                                                                                                                                          |                                      |  | 3,853,502   |            |              |  | 3,037,974   |           
|                                                | Inventory, net                                                                                                                                                            |                                      |  | 5,364,439   |            |              |  | 5,607,965   |           
|                                                | Prepaid expenses and other current assets                                                                                                                                 |                                      |  | 752,940     |            |              |  | 515,077     |           
|                                                |                                                                                                                                                                           |                                      |  |             |            |              |  |            
|                                                |                                                                                                                                                                           | Total Current Assets                 |  |             | 12,542,410 |              |  |             | 12,872,530 | 
|                                                | Property and equipment, net                                                                                                                                               |                                      |  | 2,130,046   |            |              |  | 2,199,307   |           
|                                                | Goodwill, net                                                                                                                                                             |                                      |  | 15,650,356  |            |              |  | 15,650,356  |           
|                                                | Intangible assets, net                                                                                                                                                    |                                      |  | 5,924,448   |            |              |  | 6,361,844   |           
|                                                | Other assets                                                                                                                                                              |                                      |  | 134,184     |            |              |  | 106,088     |           
|                                                |                                                                                                                                                                           |                                      |  |             |            |              |  |            
|                                                | Total Assets                                                                                                                                                              |                                      |  | $36,381,444 |            |              |  | $37,190,125 |           
|                                                |                                                                                                                                                                           |                                      |  |             |            |              |  |            
|                                                |                                                                                                                                                                           | LIABILITIES AND SHAREHOLDERS EQUITY |  |             |            |              |  |             |            | 
|Current
liabilities:                            |                                                                                                                                                                           |                                      |  |             |            |              |  |            
|                                                | Accounts payable - trade                                                                                                                                                  |                                      |  | $1,419,100  |            |              |  | $807,146    |           
|                                                | Accrued salaries and commissions                                                                                                                                          |                                      |  | 432,804     |            |              |  | 279,346     |           
|                                                | Accrued interest                                                                                                                                                          |                                      |  | 93,636      |            |              |  | 122,645     |           
|                                                | Other accrued expenses                                                                                                                                                    |                                      |  | 611,404     |            |              |  | 651,199     |           
|                                                | Current portion of long-term debt                                                                                                                                         |                                      |  | 16,535,147  |            |              |  | 1,552,782   |           
|                                                |                                                                                                                                                                           |                                      |  |             |            |              |  |            
|                                                |                                                                                                                                                                           | Total current liabilities            |  |             | 19,092,091 |              |  |             | 3,413,118  | 
|                                                | Long-term debt, net of current portion                                                                                                                                    |                                      |  | 2,906,150   |            |              |  | 18,341,903  |           
|                                                | Other liabilities                                                                                                                                                         |                                      |  | 97,564      |            |              |  | 104,963     |           
|                                                |                                                                                                                                                                           |                                      |  |             |            |              |  |            
|                                                |                                                                                                                                                                           | Total Liabilities                    |  |             | 22,095,805 |              |  |             | 21,859,984 | 
|                                                |                                                                                                                                                                           |                                      |  |             |            |              |  |            
|Commitments and contingent liabilities (Note 6) |                                                                                                                                                                           |                                      |  |             |            |              |  |            
|Shareholders
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 June 30, 2003 and December 31, 2002 |                                      |  | 36,166      |            |              |  | 33,416      |           
|                                                | Additional
paid-in capital                                                                                                                                                |                                      |  | 74,864,139  |            |              |  | 74,839,389  |           
|                                                | Shareholders note receivable                                                                                                                                             |                                      |  | (170,831    | )          |              |  | (170,831    | )         
|                                                | Accumulated deficit                                                                                                                                                       |                                      |  | (60,443,835 | )          |              |  | (59,371,833 | )         
|                                                |                                                                                                                                                                           |                                      |  |             |            |              |  |            
|                                                |                                                                                                                                                                           | Total shareholders equity           |  |             | 14,285,639 |              |  |             | 15,330,141 | 
|                                                |                                                                                                                                                                           |                                      |  |             |            |              |  |            
|                                                | Total liabilities & shareholders equity                                                                                                                                  |                                      |  | $36,381,444 |            |              |  | $37,190,125 |           
|                                                |                                                                                                                                                                           |                                      |  |             |            |              |  |            

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

4



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##### 



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

|                                                                                            |                                                                             |                                                             |            |                    |          |                  |            |       |          |      |            |       |            |   |             |       |             |  
|------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------------------------- | ---------- | ------------------ | -------- | ---------------- | ---------- | ----- | -------- | ---- | ---------- | ----- | ---------- | - | ----------- | ----- | ----------- | -
|                                                                                            |                                                                             |                                                             |            | Three Months Ended |          | Six Months Ended
|                                                                                            |                                                                             |                                                             |            | June 30,           |          | June 30,        
|                                                                                            |                                                                             |                                                             |            |                    |          |                 
|                                                                                            |                                                                             |                                                             |            | 2003               |          | 2002             |            | 2003  |          | 2002
|                                                                                            |                                                                             |                                                             |            |                    |          |                  |            |       |          |     
|                                                                                            |                                                                             |                                                             |            |                    |          |                  |            |       |          |      |            |       |            |   |             |      
|Net sales                                                                                   |                                                                             | $                                                           | 6,618,538  |                    |          | $                | 6,194,020  |       |          | $    | 12,706,054 |       |            | $ | 10,585,241  |      
|Cost of goods sold                                                                          |                                                                             |                                                             | 2,709,570  |                    |          |                  | 2,690,897  |       |          |      | 5,162,729  |       |            |   | 4,820,964   |      
|                                                                                            |                                                                             |                                                             |            |                    |          |                  |            |       |          |      |            |       |            |   |             |      
|Gross profit                                                                                |                                                                             |                                                             | 3,908,968  |                    |          |                  | 3,503,123  |       |          |      | 7,543,325  |       |            |   | 5,764,277   |      
|Selling, general and administrative expenses                                                |                                                                             |                                                             | 3,721,431  |                    |          |                  | 3,466,128  |       |          |      | 7,366,481  |       |            |   | 9,094,538   |      
|                                                                                            |                                                                             |                                                             |            |                    |          |                  |            |       |          |      |            |       |            |   |             |      
|                                                                                            |                                                                             | Income
(loss) from operations                               |            |                    | 187,537  |                  |            |       | 36,995   |      |            |       | 176,844    |   |             |       | (3,330,261  | )
|                                                                                            |                                                                             |                                                             |            |                    |          |                  |            |       |          |      |            |       |            |   |             |      
|Other income (expense):                                                                     |                                                                             |                                                             |            |                    |          |                  |            |       |          |      |            |       |            |   |             |      
|                                                                                            |                                                                             | Loss
on early extinguishment of debt                        |            |                    |         |                  |            |       |         |      |            |       |           |   |             |       | (6,641,015  | )
|                                                                                            |                                                                             | Interest
expense, net                                       |            |                    | (596,484 | )                |            |       | (746,199 | )    |            |       | (1,224,146 | ) |             |       | (1,384,007  | )
|                                                                                            |                                                                             | Other income (expense):                                     |            |                    | (10,451  | )                |            |       | (5,366   | )    |            |       | (24,700    | ) |             |       | (8,826      | )
|                                                                                            |                                                                             |                                                             |            |                    |          |                  |            |       |          |      |            |       |            |   |             |      
|                                                                                            |                                                                             |                                                             | (606,935   | )                  |          |                  | (751,565   | )     |          |      | (1,248,846 | )     |            |   | (8,033,848  | )    
|                                                                                            |                                                                             |                                                             |            |                    |          |                  |            |       |          |      |            |       |            |   |             |      
|                                                                                            |                                                                             | Loss from continuing operations                             |            |                    | (419,398 | )                |            |       | (714,570 | )    |            |       | (1,072,002 | ) |             |       | (11,364,109 | )
|Discontinued operations:                                                                    |                                                                             |                                                             |            |                    |          |                  |            |       |          |      |            |       |            |   |             |      
|                                                                                            |                                                                             | Income from operations of discontinued
distribution segment |            |                    |         |                  |            |       | 430,387  |      |            |       |           |   |             |       | 461,542     |  
|Effect of a change
in accounting principle pursuant to adoption of SFAS 142 (Notes 1 and
8) |                                                                             |                                                             |           |                    |          |                  |           |       |          |      |           |       |            |   | (16,101,900 | )    
|                                                                                            |                                                                             |                                                             |            |                    |          |                  |            |       |          |      |            |       |            |   |             |      
|                                                                                            |                                                                             | Net loss                                                    |            | $                  | (419,398 | )                |            | $     | (284,183 | )    |            | $     | (1,072,002 | ) |             | $     | (27,004,467 | )
|                                                                                            |                                                                             |                                                             |            |                    |          |                  |            |       |          |      |            |       |            |   |             |      
|Basic and diluted earnings per share:                                                       |                                                                             |                                                             |            |                    |          |                  |            |       |          |      |            |       |            |   |             |      
|                                                                                            | Loss from continuing operations                                             |                                                             | $          | (0.01              | )        |                  | $          | (0.04 | )        |      | $          | (0.03 | )          |   | $           | (0.75 | )          
|                                                                                            | Income from operations of discontinued distribution segment                 |                                                             |            |                   |          |                  |            | 0.02  |          |      |            |      |            |   |             | 0.03  |            
|                                                                                            | Effect of a change in accounting principle pursuant to adoption of SFAS 142 |                                                             |            |                   |          |                  |            |      |          |      |            |      |            |   |             | (1.06 | )          
|                                                                                            |                                                                             |                                                             |            |                    |          |                  |            |       |          |      |            |       |            |   |             |      
|                                                                                            | Net loss per share - basic and diluted                                      |                                                             | $          | (0.01              | )        |                  | $          | (0.02 | )        |      | $          | (0.03 | )          |   | $           | (1.78 | )          
|                                                                                            |                                                                             |                                                             |            |                    |          |                  |            |       |          |      |            |       |            |   |             |      
|Weighted average common shares outstanding - basic and diluted                              |                                                                             |                                                             | 36,165,876 |                    |          |                  | 16,311,676 |       |          |      | 35,041,567 |       |            |   | 15,129,630  |      
|                                                                                            |                                                                             |                                                             |            |                    |          |                  |            |       |          |      |            |       |            |   |             |      

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

5



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

|                                               |                                                                             |                                                        |                                                               |                                                     |          |                  |            |   |  |   |           |              |            |            |            |   |  |  |  | 
|---------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------ | ------------------------------------------------------------- | --------------------------------------------------- | -------- | ---------------- | ---------- | - |  | - | --------- | ------------ | ---------- | ---------- | ---------- | - |  |  |  | 
|                                               |                                                                             |                                                        |                                                               |                                                     |          | Six Months Ended
|                                               |                                                                             |                                                        |                                                               |                                                     |          | June 30,        
|                                               |                                                                             |                                                        |                                                               |                                                     |          | 2003             |            |   |  |   |           | 2002         |            |            |            |  
|                                               |                                                                             |                                                        |                                                               |                                                     |          |                  |            |   |  |   |           |              |            |            |            |  
|Cash flows from operating activities:          |                                                                             |                                                        |                                                               |                                                     |          |                  |            |   |  |   |           |             
|                                               | Net
loss                                                                    |                                                        |                                                               | ($1,072,002                                         | )        |                  |            |   |  |   |           | ($27,004,467 | )         
|                                               | Adjustments to
reconcile net loss to net cash used in operating activities: |                                                        |                                                               |                                                     |          |                  |            |   |  |   |           |              |           
|                                               |                                                                             |                                                        | Depreciation expense                                          |                                                     |          | 329,382          |            |   |  |   |           |              |            | 377,764    |           
|                                               |                                                                             |                                                        | Amortization of intangibles                                   |                                                     |          | 723,665          |            |   |  |   |           |              |            | 743,509    |           
|                                               |                                                                             |                                                        | Non-cash compensation charge                                  |                                                     |          | 0                |            |   |  |   |           |              |            | 1,555,468  |           
|                                               |                                                                             |                                                        | Impairment charge                                             |                                                     |          | 0                |            |   |  |   |           |              |            | 16,101,900 |           
|                                               |                                                                             |                                                        | Loss
on early extinguishment of debt                          |                                                     |          | 0                |            |   |  |   |           |              |            | 5,443,515  |           
|                                               |                                                                             |                                                        | (Increase) decrease in operating assets and liabilities, net: |                                                     |          |                  |            |   |  |   |           |              |            |            |           
|                                               |                                                                             |                                                        |                                                               | Accounts receivable, trade                          |          |                  | (815,528   | ) |  |   |           |              |            |            | (79,978    | )
|                                               |                                                                             |                                                        |                                                               | Inventories                                         |          |                  | 243,526    |   |  |   |           |              |            |            | 1,161,484  |  
|                                               |                                                                             |                                                        |                                                               | Prepaid expenses and other assets                   |          |                  | (507,649   | ) |  |   |           |              |            |            | (469,609   | )
|                                               |                                                                             |                                                        |                                                               | Accounts payable, trade                             |          |                  | 611,954    |   |  |   |           |              |            |            | (170,450   | )
|                                               |                                                                             |                                                        |                                                               | Accrued expenses and other liabilities              |          |                  | 77,255     |   |  |   |           |              |            |            | (587,127   | )
|                                               |                                                                             |                                                        |                                                               |                                                     |          |                  |            |   |  |   |           |              |           
|                                               |                                                                             |                                                        |                                                               | Net cash used
in operating activities               |          |                  | (409,397   | ) |  |   |           |              |            |            | (2,927,991 | )
|                                               |                                                                             |                                                        |                                                               |                                                     |          |                  |            |   |  |   |           |              |           
|Cash flows from investing activities:          |                                                                             |                                                        |                                                               |                                                     |          |                  |            |   |  |   |           |             
|                                               | Capital expenditures                                                        |                                                        |                                                               | (260,121                                            | )        |                  |            |   |  |   |           | (186,374     | )         
|                                               |                                                                             | Acquisition of intangible assets                       |                                                               |                                                     | (286,269 | )                |            |   |  |   |           |              |            |           
|                                               |                                                                             | Cash proceeds from disposition of distribution segment |                                                               |                                                     | 241,690  |                  |            |   |  |   |           |              |            |           
|                                               |                                                                             | Proceeds from shareholders notes receivable           |                                                               |                                                     |          |                  |            |   |  |   |           |              | 445,109    |           
|                                               |                                                                             |                                                        |                                                               |                                                     |          |                  |            |   |  |   |           |              |           
|                                               |                                                                             |                                                        |                                                               | Net
cash (used in) provided by investing activities |          |                  | (304,700   | ) |  |   |           |              |            |            | 258,735    |  
|                                               |                                                                             |                                                        |                                                               |                                                     |          |                  |            |   |  |   |           |              |           
|Cash flows from financing activities:          |                                                                             |                                                        |                                                               |                                                     |          |                  |            |   |  |   |           |             
|                                               | Proceeds from issuance of long term debt                                    |                                                        |                                                               | 464,540                                             |          |                  |            |   |  |   |           | 58,140,719   |           
|                                               | Principal payments on long term debt                                        |                                                        |                                                               | (890,428                                            | )        |                  |            |   |  |   |           | (56,277,299  | )         
|                                               |                                                                             | Change in restricted cash                              |                                                               |                                                     | 0        |                  |            |   |  |   |           |              | (298,252   | )         
|                                               |                                                                             | Debt issuance costs                                    |                                                               |                                                     | 0        |                  |            |   |  |   |           |              | (1,450,087 | )         
|                                               |                                                                             |                                                        |                                                               |                                                     |          |                  |            |   |  |   |           |              |           
|                                               |                                                                             |                                                        |                                                               | Net
cash (used in) provided by financing activities |          |                  | (425,888   | ) |  |   |           |              |            |            | 115,081    |  
|                                               |                                                                             |                                                        |                                                               |                                                     |          |                  |            |   |  |   |           |              |           
|                                               |                                                                             |                                                        |                                                               | Net decrease in cash and cash equivalents           |          |                  | (1,139,985 | ) |  |   |           |              |            |            | (2,554,175 | )
|Cash and cash equivalents, beginning of period |                                                                             |                                                        | 3,711,514                                                     |                                                     |          |                  |            |   |  |   | 2,748,617 |             
|                                               |                                                                             |                                                        |                                                               |                                                     |          |                  |            |   |  |   |           |              |           
|Cash and cash equivalents, end of period       |                                                                             | $                                                      | 2,571,529                                                     |                                                     |          |                  |            |   |  | $ | 194,442   |             
|                                               |                                                                             |                                                        |                                                               |                                                     |          |                  |            |   |  |   |           |              |           

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

6



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##### 



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 June
30, 2003, and for the three and six months ended June 30, 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 Financial Accounting Standards Board (FASB)
adopted Statement of Financial Accounting Standards No. 145
Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections
(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 also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. 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.
Statement No. 145 is effective for fiscal years beginning after
May 15, 2002, with early adoption encouraged.

The Company has adopted SFAS
No. 145 effective as of January 1, 2003 and for the year
then ended. As a result and in accordance with Statement No. 145
and Accounting Principles Board Opinion 30 (APB
No. 30), the extraordinary loss on the extinguishment of
debt recognized in 2002 is reclassified from extraordinary items to a component of
other income/(expense) in the continuing operations
portion of the Company's statement of operations. The Company has
determined that the items originally reported as extraordinary in the 2003
financial statements which relate to
historical figures require revision in order to be presented in
accordance with SFAS No. 145 and APB No. 30. The effect of
this revision is to reclassify the extraordinary items to other
income/expense from continuing operations. There was no effect
on the balance sheet, stockholders equity, net income or cash
flow of the Company.

7



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##### 



did not have a material effect on the
Companys 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
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.

The FASB issued Statement 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, in April 2003. Statement 149:



| |  |  | clarifies implementation issues raised by constituents regarding
the following:
| | - |  | -------------------------------------------------------------------------------



| |  |  | what is meant by an initial net investment that is smaller than
would be required for other types of contracts that would be expected
to have a similar response to changes in market factors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | what is meant by underlying;and                                                                                                                                                               
|
| |  |  | how to identify a derivative that contains a financing element;                                                                                                                               



| |  |  | amends Statement 133, Accounting for Derivative Instruments and
Hedging Activities(AC Section D50), to include the conclusions reached
by the FASB on certain FASB Staff Implementation Issues that, while
inconsistent with Statement 133s conclusions, were considered by the
Board to be preferable;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | amends Statement 133s discussion of financial guarantee contracts
and the application of the shortcut method to an interest-rate swap
agreement that includes an embedded option; and                                                                                                                  
|
| |  |  | amends other pronouncements.                                                                                                                                                                                                                                                                            

The guidance in Statement 149 is effective for new contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
that date, except for the following:



| |  |  | guidance incorporated from FASB Staff Implementation Issues that
was effective for periods beginning prior to June 15, 2003 should
continue to be applied according to the effective dates in those
issues; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | guidance relating to forward purchase and sale agreements involving
when-issuedsecurities should be applied to both existing contracts and
new contracts entered into after June 30, 2003.                     

8



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##### 



The Company does not believe that Statement 149 will have a material
effect on its financial statements.

The FASB issued Statement 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, in May 2003.
Statement 150 changes the classification in the statement of financial position
of certain common financial instruments from either equity or mezzanine
presentation to liabilities and requires an issuer of those financial
statements to recognize changes in the fair value or the redemption amount, as
applicable, in earnings.

Statement 150 requires an issuer to classify the following financial
instruments as liabilities:



| |  |  | mandatorily redeemable preferred and common stocks;                                                                                                                                                                                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | forward purchase contracts that obligate the issuer to repurchase
shares of its stock by transferring assets;                                                                                                                                           
|
| |  |  | freestanding put options that may obligate the issuer to repurchase
shares of its stock by transferring assets; and                                                                                                                                     
|
| |  |  | freestanding financial instruments that require or permit the
issuer to settle an obligation by issuing a variable number of its
shares if, at inception, the monetary value of the obligation is based
solely or predominantly on any of the following:



| |  |  | a fixed monetary amount known at inception;                                                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | variations in something other than the issuers shares, such as the
price of gold multiplied by a fixed notional amount; and            
|
| |  |  | variations inversely related to changes in the value of the
issuers shares, such as a written put option that can be net share
settled.

Statement 150 is effective immediately for financial instruments (except
for mandatorily redeemable financial instruments issued by nonpublic companies)
entered into or modified after May 31, 2003. It is effective for financial
instruments (except for mandatorily redeemable financial instruments issued by
nonpublic companies) issued on or before May 31, 2003 at the beginning of the
first interim period beginning after June 15, 2003. Finally, it is effective
for mandatorily redeemable financial instruments issued by nonpublic companies
for fiscal years beginning after December 15, 2003. The effect of adopting
Statement 150 will be recognized as a cumulative effect of an accounting change
as of the beginning of the period of adoption. Restatement of prior periods is
not permitted.

The Company does not believe Statement 150 will have a material effect on
its financial statements.

As of June 30, 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

9



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##### 



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 |          | For the Six Months
|                                       |             |  | Ended June 30,       |          | Ended June 30,    
|                                       |             |  |                      |          |                   
|                                       |             |  | 2003                 |          | 2002               |  | 2003 |          | 2002
|                                       |             |  |                      |          |                    |  |      |          |     
|Net Loss:                              |             |  |                      |          |                    |  |      |          |      |  |   |            |   |  |   |            
|                                       | As
reported |  | $                    | (419,398 | )                  |  | $    | (284,183 | )    |  | $ | (1,072,002 | ) |  | $ | (27,004,467 | )
|                                       | Pro
Forma   |  | $                    | (886,806 | )                  |  | $    | (954,095 | )    |  | $ | (1,863,394 | ) |  | $ | (28,022,582 | )
|Net Loss per share - basic and diluted |             |  |                      |          |                    |  |      |          |      |  |   |            |   |  |   |            
|                                       | As
reported |  | $                    | (0.01    | )                  |  | $    | (0.02    | )    |  | $ | (0.03      | ) |  | $ | (1.78       | )
|                                       | Pro
Forma   |  | $                    | (0.02    | )                  |  | $    | (0.06    | )    |  | $ | (0.05      | ) |  | $ | (1.85       | )

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
and six months ended June 30, 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 and
six months ended June 30, 2003 and 2002 is as follows:

|              |                        |   |                      |           |                    |   |           |           |      |   |            |            |  |   |           |            | 
|------------- | ---------------------- | - | -------------------- | --------- | ------------------ | - | --------- | --------- | ---- | - | ---------- | ---------- |  | - | --------- | ---------- | 
|              |                        |   | For the Three Months |           | For the Six Months
|              |                        |   | Ended June 30,       |           | Ended June 30,    
|              |                        |   |                      |           |                   
|              |                        |   | 2003                 |           | 2002               |   | 2003      |           | 2002
|              |                        |   |                      |           |                    |   |           |           |     
|United States |                        | $ | 6,154,017            |           |                    | $ | 5,753,416 |           |      | $ | 11,802,516 |            |  | $ | 9,668,329 |           
|Foreign       |                        |   | 464,521              |           |                    |   | 440,604   |           |      |   | 903,538    |            |  |   | 916,912   |           
|              |                        |   |                      |           |                    |   |           |           |      |   |            |            | 
|              | Consolidated Net Sales |   | $                    | 6,618,538 |                    |   | $         | 6,194,020 |      |   | $          | 12,706,054 |  |   | $         | 10,585,241 | 

The table below presents net sales by major product category for the three
and six months ended June 30, 2003 and 2002:

|                 |                        |   |                      |           |                    |   |           |           |      |   |           |            |  |   |           |            | 
|---------------- | ---------------------- | - | -------------------- | --------- | ------------------ | - | --------- | --------- | ---- | - | --------- | ---------- |  | - | --------- | ---------- | 
|                 |                        |   | For the Three Months |           | For the Six Months
|                 |                        |   | Ended June 30,       |           | Ended June 30,    
|                 |                        |   |                      |           |                   
|                 |                        |   | 2003                 |           | 2002               |   | 2003      |           | 2002
|                 |                        |   |                      |           |                    |   |           |           |     
|Ports            |                        | $ | 4,580,062            |           |                    | $ | 4,966,725 |           |      | $ | 9,130,083 |            |  | $ | 8,381,150 |           
|Port
Accessories |                        |   | 804,585              |           |                    |   | 454,302   |           |      |   | 1,388,703 |            |  |   | 832,087   |           
|Catheters        |                        |   | 797,705              |           |                    |   | 949,389   |           |      |   | 1,565,695 |            |  |   | 1,679,494 |           
|Pumps            |                        |   | 299,667              |           |                    |   | 0         |           |      |   | 299,667   |            |  |   | 0         |           
|All
other        |                        |   | 136,519              |           |                    |   | (176,396  | )         |      |   | 321,906   |            |  |   | (307,490  | )         
|                 |                        |   |                      |           |                    |   |           |           |      |   |           |            |  |   |           |           
|                 | Consolidated Net
Sales |   | $                    | 6,618,538 |                    |   | $         | 6,194,020 |      |   | $         | 12,706,054 |  |   | $         | 10,585,241 | 
|                 |                        |   |                      |           |                    |   |           |           |      |   |           |            |  |   |           |           



10



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##### 



|2. |  | Inventories
|-- |  | -----------

A summary of inventories is as follows:

|                        |  |   |               |           |                   |   |            |           | 
|----------------------- |  | - | ------------- | --------- | ----------------- | - | ---------- | --------- | 
|                        |  |   | June 30, 2003 |           | December 31, 2002
|                        |  |   |               |           |                  
|Raw Materials           |  | $ | 3,620,004     |           |                   | $ | 3,273,806  |          
|Work in process         |  |   | 414,494       |           |                   |   | 347,622    |          
|Finished Goods          |  |   | 3,721,009     |           |                   |   | 4,517,675  |          
|                        |  |   |               |           |                   |   |            |          
|                        |  |   | $             | 7,755,507 |                   |   | $          | 8,139,103 | 
|Less inventory reserves |  |   | (2,391,068    | )         |                   |   | (2,531,138 | )        
|                        |  |   |               |           |                   |   |            |          
|                        |  | $ | 5,364,439     |           |                   | $ | 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 |          | For the Six Months 
|                        |  | Ended June 30, 2003  |          | Ended June 30, 2003
|                        |  |                      |          |                    
|                        |  | Loss from            |          |                     |  |           |            |            |  |             |       | Loss from  |  |   |            |   |  |  |            | 
|                        |  | Continuing           |          |                     |  |           |            |            |  |             |       | Continuing |  |   |            |   |  |  |            | 
|                        |  | Operations           |          | Shares              |  | Per-share |            | Operations |  | Shares      |       | Per-share 
|                        |  | Numerator            |          | Denominator         |  | Amount    |            | Numerator  |  | Denominator |       | Amount    
|                        |  |                      |          |                     |  |           |            |            |  |             |       |           
|EPS  basic and
diluted |  | $                    | (419,398 | )                   |  |           | 36,165,876 |            |  | $           | (0.01 | )          |  | $ | (1,072,002 | ) |  |  | 35,041,567 |  |  | $ | (0.03 | )

|                        |  |                      |          |                     |  |           |            |            |  |             |       |            |  |   |             |   |  |  |            |  |  |   |       |  
|----------------------- |  | -------------------- | -------- | ------------------- |  | --------- | ---------- | ---------- |  | ----------- | ----- | ---------- |  | - | ----------- | - |  |  | ---------- |  |  | - | ----- | -
|                        |  | For the Three Months |          | For the Six Months 
|                        |  | Ended June 30, 2002  |          | Ended June 30, 2002
|                        |  |                      |          |                    
|                        |  | Loss from            |          |                     |  |           |            |            |  |             |       | Loss from  |  |   |             |   |  |  |            | 
|                        |  | Continuing           |          |                     |  |           |            |            |  |             |       | Continuing |  |   |             |   |  |  |            | 
|                        |  | Operations           |          | Shares              |  | Per-share |            | Operations |  | Shares      |       | Per-share 
|                        |  | Numerator            |          | Denominator         |  | Amount    |            | Numerator  |  | Denominator |       | Amount    
|                        |  |                      |          |                     |  |           |            |            |  |             |       |           
|EPS  basic and
diluted |  | $                    | (714,570 | )                   |  |           | 16,311,676 |            |  | $           | (0.04 | )          |  | $ | (11,364,109 | ) |  |  | 15,129,630 |  |  | $ | (0.75 | )

Options
to purchase 8,794,717 shares of common stock and warrants to
purchase 873,619 shares of common stock were outstanding as of June 30, 2003,
but are not included in the computation of the June 30, 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. Warrants
to purchase 50,000 shares of common stock have an exercise price of $0.69 and
expire in 2006.

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 June
30, 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

11



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##### 



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 June 30, 2003 diluted EPS because the effect would be anti-dilutive.

Options to purchase 7,153,570 shares of common stock and warrants to
purchase 748,619 shares of common stock were outstanding as of June 30, 2002,
but are not included in the computation of the June 30, 2002 diluted EPS
because the effect would be anti-dilutive. The options have exercise prices
ranging from $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, 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. The Company has adopted SFAS No. 145
effective as of January 1, 2003 and for the year then ended. As a
result and in accordance with Statement No. 145 and Accounting
Principles Board Opinion 30 (APB No.
30), the extraordinary loss on the extinguishment of debt
recognized in 2002 is reclassified from extraordinary items to a
component of other income/(expense) in the continuing
operations portion of the Companys statement of operations. The
Company has determined that the items reported as extraordinary
require revision in order to be presented in accordance with SFAS
No. 145 and APB No. 30. The effect of this revision is to
reclassify the extraordinary items to other
income/(expense) from continuing operations. There was no
effect on the balance sheet, stockholders equity, net income or
cash flow of the Company.

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

12



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##### 



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 June 30, 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 $17.9 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 June 30, 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 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. As of June 30, 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 and 9,900,000
shares of common stock outstanding as a result of conversion of a portion of
Convertible Notes held by ComVest. The remaining 7,200,000 shares of common
stock issuable upon conversion of Convertible Notes are held by Medtronic. The
terms of the applicable conversion periods and conversion amounts for the
Convertible Notes held by Medtronic are as follows:

|                                      |  |                                                                                                                                                               
|------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                      |  | Maximum Conversion Amount                                                                                                                                     
|                                      |  | During Applicable Period (all                                                                                                                                 
|                                      |  | shares exercisable                                                                                                                                            
|Applicable Period                     |  | at $0.01 per share)*                                                                                                                                          
|                                      |  |                                                                                                                                                               
|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 Convertible Note held by ComVest and the
Additional Notes held by the
Additional Note Purchasers have not
been repaid.

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

13



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The Company may prepay the Convertible Notes, subject to no prepayment
penalty within the first 12 months, with a prepayment penalty of 5% between
months 12 to 15, and a prepayment penalty of 10% between months 15 to 24. 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. The Company has adopted SFAS No. 145
effective as of January 1, 2003 and for the year then ended. As a
result and in accordance with Statement No. 145 and Accounting
Principles Board Opinion 30 (APB No.
30), the extraordinary loss on the extinguishment of debt
recognized in 2002 is reclassified from extraordinary items to a
component of other income/(expense) in the continuing
operations portion of the Companys statement of operations. The
Company has determined that the items reported as extraordinary
require revision in order to be presented in accordance with SFAS
No. 145 and APB No. 30. The effect of this revision is to
reclassify the extraordinary items to other
income/(expense) from continuing operations. There was no
effect on the balance sheet, stockholders equity, net income or
cash flow of the Company. 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. The Company has adopted SFAS No. 145
effective as of January 1, 2003 and for the year then ended. As a
result and in accordance with Statement No. 145 and Accounting
Principles Board Opinion 30 (APB No.
30), the extraordinary loss on the extinguishment of debt
recognized in 2002 is reclassified from extraordinary items to a
component of other income/(expense) in the continuing
operations portion of the Companys statement of operations. The
Company has determined that the items reported as extraordinary
require revision in order to be presented in accordance with SFAS
No. 145 and APB No. 30. The effect of this revision is to
reclassify the extraordinary items to other
income/(expense) from continuing operations. There was no
effect on the balance sheet, stockholders equity, net income or
cash flow of the Company. This loss on
extinguishment of debt 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 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

14



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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 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 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,

15



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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, 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 June 30, 2003 and December
31, 2002, the Company had $3.0 million and $2.1 million, respectively,
available for borrowing under the revolving portion of the Loan Agreement. As
of June 30, 2003 and December 31, 2002, the Company had $1.2 million and $1.5
million, respectively, in

16



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borrowings outstanding under the Term Loan. The Company had no borrowings
outstanding under the revolving loan as of June 30, 2003 and approximately
$128,000 in borrowings outstanding under the revolving loan as of December 31,
2002. As of June 30, 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)

17



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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 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

18



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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).

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). 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).

19



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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).

Effective March 30, 2001, through the Termination Date of the Forbearance
Agreement, the BofA Credit Facility bore interest at the Bank of America prime
rate plus 2.5% per annum. As of December 31, 2001, the Companys interest rate
on the BofA Credit Facility was approximately 7.25%.

The BofA Credit Facility called for an unused commitment fee payable
quarterly, in arrears, at a rate of .375% per annum, as well as a letter of
credit fee payable quarterly, in arrears, at a rate of 2% per annum. Both fees
were based on a defined calculation in the agreement. In addition, the BofA
Credit Facility required an administrative fee in the amount of $30,000 to be
paid annually.

The Companys obligations under the BofA Credit Facility were
collateralized by liens on substantially all of the Companys assets, including
inventory, accounts receivable and general intangibles as well as a pledge of
the stock of the Companys subsidiaries. The Companys obligations under the
BofA Credit Facility were also guaranteed individually by each of the 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

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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
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 June 30, 2003. Subsequent to June 30, 2003,
these notes were amended to provide for payment by the former Vice Chairman of
the Board of principal and interest outstanding under the notes in 12 equal
monthly installments, commencing on July 15, 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 were 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 six months ended June 30, 2002, the Company incurred
fees of $318,185 to Tunstall Consulting for consulting services rendered to the
Company in connection with the Recapitalization. The Company incurred no
Recapitalization-related expenses to Tunstall Consulting in the six months
ended June 30, 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.

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

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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 $170,484 and $282,000 as of June 30, 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 alleged that it had 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 had engaged with Mr. Hunt in fraudulent conveyances of
Mr. Hunts assets. Specifically, with respect to the Company, Chepstow alleged
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 sought to void such
transfers and injunctive relief, compensatory damages, and punitive damages
from the defendants, including the Company. The Company filed a motion to
dismiss the action against the Company. In July 2003, the court granted the
Companys motion to dismiss and dismissed the lawsuit against all
parties. In August 2003, plaintiff filed a Notice of Appeal with
respect to the court's dismissal.

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 June 30, 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

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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).

On April 15, 2003, the Company entered into the Second Amendment (the
Amendment) to Co-Promotion Agreement with Medtronic, and on April 17, 2003,
the Company entered into the Exclusive Distributor Agreement with Medtronic
(Distributor Agreement). Under the Distributor Agreement, the Company became
the exclusive distributor commencing June 1, 2003 in the United States for
Medtronics IsoMed® constant flow infusion system for the delivery of
chemotherapy agents for use in hepatic arterial infusion therapy for patients
with colorectal liver cancer. The term of the Distributor Agreement is for
three years through May 31, 2006 with two renewal terms of one year each unless
either party terminates the relationship prior to the commencement of either
renewal term. Under the Amendment, the IsoMed® infusion system was removed
from the Co-Promotion Agreement (leaving the Medtronic SynchroMed® infusion
system for the treatment of malignant pain as the only product under the
Co-Promotion Agreement) and the compensation structure in the Co-Promotion
Agreement was modified.

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 for the three and six months ended June 30, 2002 are as follows:

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|                                    |  |                    |           |                  |  |   |            | 
|----------------------------------- |  | ------------------ | --------- | ---------------- |  | - | ---------- | 
|                                    |  | Three Months Ended |           | Six Months Ended
|                                    |  | June 30, 2002      |           | June 30, 2002   
|                                    |  |                    |           |                 
|Net
Sales                           |  | $                  | 8,191,382 |                  |  | $ | 16,295,598 | 
|Income from discontinued
operations |  |                    | 430,387   |                  |  |   | 461,542    | 

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 six months ended June 30, 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.

A summary of the Companys intangible assets as of June 30, 2003 is as
follows:

Indefinite lived intangible assets:

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

Finite lived intangible assets as of June 30, 2003, subject to
amortization expense, are comprised of the following:

|                                      |       |   |                |            |              |   |            |            |   |   |           |           | 
|------------------------------------- | ----- | - | -------------- | ---------- | ------------ | - | ---------- | ---------- | - | - | --------- | --------- | 
|                                      |       |   | Gross Carrying |            | Accumulated  |   |            |            |  
|                                      |       |   | Amount         |            | Amortization |   | Net       
|                                      |       |   |                |            |              |   |           
|Patents                               |       | $ | 8,218,000      |            |              | $ | (3,172,930 | )          |   | $ | 5,045,070 |          
|Non-compete and
consulting
agreements |       |   | 2,308,727      |            |              |   | (2,156,348 | )          |   |   | 152,379   |          
|Debt issuance
costs                   |       |   | 1,650,087      |            |              |   | (1,076,986 | )          |   |   | 573,101   |          
|Other                                 |       |   | 212,702        |            |              |   | (58,804    | )          |   |   | 153,898   |          
|                                      |       |   |                |            |              |   |            |            |   |   |           |          
|                                      | Total |   | $              | 12,389,516 |              |   | $          | (6,465,068 | ) |   | $         | 5,924,448 | 
|                                      |       |   |                |            |              |   |            |            |   |   |           |          

Amortization expense for finite lived intangible assets was $345,583 and
$723,665 for the three and six months ended June 30, 2003. The expected
amortization expense for each of the five succeeding fiscal years ended
December 31 is as follows:

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|               |            |      |           |           |           | 
|-------------- | ---------- | ---- | --------- | --------- | --------- | 
|Remaining 2003 |            | $    | 682,181   |          
|               |            | 2004 |           |           | 1,037,275 | 
|               |            | 2005 |           |           | 659,233   | 
|               |            | 2006 |           |           | 599,724   | 
|               |            | 2007 |           |           | 599,724   | 
|               |            | 2008 |           |           | 599,724   | 
|               | Thereafter |      |           | 1,746,587 |          
|               |            |      |           |          
|               |            | $    | 5,924,448 |          
|               |            |      |           |          

There
was no change in carrying values of the Companys goodwill for
the six months ended June 30, 2003.

During the six months ended June 30, 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.

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|        |  |                                                                                       
|------- |  | --------------------------------------------------------------------------------------
|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

Second Quarter of 2003 Compared to Second Quarter of 2002

Net Sales. Net sales increased 6.8% to $6.6 million in the second quarter
of 2003 from $6.2 million in the second quarter of 2002. The increase in
sales is primarily attributable to the continuing sales growth from the
Companys new products, including LifeGuard(TM) and the addition of the Isomed
HAI product line. 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
rather than direct sales representatives.

Gross Profit. Gross profit increased 11.5% to $3.9 million in the second
quarter of 2003, from $3.5 million in the second quarter of 2002. Gross margin
percentage increased to 59.0% in the second quarter of 2003 from 56.6% in the
second quarter of 2002. The increase in gross profit is the result of
increased manufacturing efficiencies and a favorable change in product mix.

Selling, General and Administrative Expenses. Selling, General and
Administrative expenses (SG&A) increased to $3.7 million in the second
quarter of 2003 from $3.5 million in the second quarter of 2002. The increase
in SG&A was attributable to increased research and development expenses and
increased costs associated with the direct sales expansion program implemented
in late 2002. These increases were partially offset by
Recapitalization expenses of approximately $212,000 which were
incurred in the second quarter of 2002 and were not recurring in
2003. These factors were the primary causes of SG&A expenses
increasing as a percentage of net sales to 56.2% in the second
quarter of 2003 from 55.9% in the second quarter of 2002.

Interest Expense. Interest expense, net of interest income, decreased by
$149,715 from $746,199 in the second quarter of 2002 to $596,484 in the second
quarter of 2003. This decrease is the result of result of lower debt
outstanding and lower deferred loan costs.

Discontinued Operations. Income from operations of the Companys
discontinued distribution segment (Stepic) was $430,387 for the second quarter
of 2002. The Company sold Stepic on September 3, 2002.

Income Taxes.
The Company generated an income tax benefit of
approximately $492,000 during the second 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 second 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.
As a result of the conversion to common stock of debt issued in the
Recapitalization in 2002, 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 second three months of 2003 of
approximately $1.3 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.

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

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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.

Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

Net Sales.Net sales increased 20.0% to $12.7 million for the six months
ended June 30, 2003 from $10.6 million for the six months ended June 30, 2002.
This increase is primarily attributable to continued growth in sales from new
products introduced in the second half of 2002 and the addition of the Isomed
HAI product line in June 2003. 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 rather than direct sales representatives.

Gross Profit.Gross profit increased 30.9% to $7.5 million for the six
months ended June 30, 2003 from $5.8 million for the six months ended June 30,
2002. Gross margin percentage increased to 59.3% in 2003 from 54.5% in 2002.
The increase in gross profit is the result of increased manufacturing
efficiencies and a favorable change in product mix.

Selling, General and Administrative Expenses.SG&A expenses decreased
approximately $1.7 million or 19.0% to approximately $7.4 million for the six
months ended June 30, 2003 compared with $9.1 million for the six months ended
June 30, 2002. This decrease is attributable to $2.8 million of
Recapitalization expenses incurred in 2002, which were not recurring in 2003.
Exclusive of Recapitalization-related expenses, SG&A increased approximately
$1.1 million for the six months ended June 30, 2003 from the six months ended
June 30, 2002. The increase in SG&A was attributable to increased research and
development expenses and increased costs associated with the direct sales
expansion program implemented in late 2002. SG&A expenses decreased as a
percentage of net sales to 57.9% for the six months ended June 30, 2003 from
85.9% for the six months ended June 30, 2002. This decrease is
primarily due to the
Recapitalization expenses incurred in the six months ended June 30, 2002.

Discontinued
Operations. Income from operations of the Companys
discontinued distribution segment (Stepic) was $461,542 for the six
months ended June 30, 2002. The Company sold Stepic on
September 3, 2002.

Loss
on Early Extinguishment of Debt.The Company originally 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 six months ended June 30, 2002. The Company has adopted SFAS No. 145
effective as of January 1, 2003 and for the year then ended. As a
result and in accordance with Statement No. 145 and Accounting
Principles Board Opinion 30 (APB No.
30), the extraordinary loss on the extinguishment of debt
recognized in 2002 is reclassified from extraordinary items to a
component of other income/(expense) in the continuing
operations portion of the Companys statement of operations. The
Company has determined that the item reported as extraordinary
requires revision in order to be presented in accordance with SFAS
No. 145 and APB No. 30. The effect of this revision is to
reclassify the extraordinary item to other
income/(expense) from continuing operations. There was no
effect on the previously reported balance sheet, stockholders equity, net income or
cash flows of the Company.

Interest Expense.Interest expense, net of interest income, decreased to
approximately $1.2 million in the six months ended June 30, 2003 compared to
approximately $1.4 million in the six months ended June 30, 2002. The decrease
for the six months ended June 30, 2003 is due primarily to lower outstanding
debt.

Income
Taxes.The Company generated an income tax benefit of
approximately $1.1 million during the first six months 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 six months 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 six months 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 to common stock of debt issued in 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 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 six
months of 2003 of approximately $2.9 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.

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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 $409,397 for the six months
ended June 30, 2003 compared with approximately $2.9 million for the six months
ended June 30, 2002. The decrease in cash used in operations during 2003
compared to 2002 was primarily attributable to the Recapitalization transaction
expenses paid in 2002.

Net cash (used in) investing activities was approximately $304,700 for the
six months ended June 30, 2003, as compared to cash provided by investing
activities of $258,735 for the six months ended June 30, 2002. Cash used in
investing activities in 2003 consisted of capital expenditures and acquisition
of intangibles assets as a result of the Companys acquisition of a portion of
the business of one of its former independent distributors. The decrease in
cash provided by investing activities during 2003 compared to 2002 was
attributable to 2002 proceeds from shareholders note receivables.

Net cash (used in) financing activities was approximately $425,888 for the
six months ended June 30, 2003 compared to cash provided by financing
activities of approximately $115,081 for the six months ended June 30, 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

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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. The increase in cash used in
financing activities during 2003 compared to 2002 was attributable 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 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 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 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 originally included as a component of the extraordinary loss on early
extinguishment of debt. The Company has adopted SFAS No. 145
effective as of January 1, 2003 and for the year then ended. As a
result and in accordance with Statement No. 145 and Accounting
Principles Board Opinion 30 (APB No.
30), the extraordinary loss on the extinguishment of debt
recognized in 2002 is reclassified from extraordinary items to a
component of other income/(expense) in the continuing
operations portion of the Companys statement of operations. The
Company has determined that the items reported as extraordinary
require revision in order to be presented in accordance with SFAS
No. 145 and APB No. 30. The effect of this revision is to
reclassify the extraordinary items to other
income/(expense) from continuing operations. There was no
effect on the balance sheet, stockholders equity, net income or
cash flow of the Company.

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 originally recorded
a net extraordinary loss on the early
extinguishment of debt of approximately $6.6 million during the first quarter
of 2002. The Company has adopted SFAS No. 145
effective as of January 1, 2003 and for the year then ended. As a
result and in accordance with Statement No. 145 and Accounting
Principles Board Opinion 30 (APB No.
30), the extraordinary loss on the extinguishment of debt
recognized in 2002 is reclassified from extraordinary items to a
component of other income/(expense) in the continuing
operations portion of the Companys statement of operations. The
Company has determined that the items reported as extraordinary
require revision in order to be presented in accordance with SFAS
No. 145 and APB No. 30. The effect of this revision is to
reclassify the extraordinary items to other
income/(expense) from continuing operations. There was no
effect on the balance sheet, stockholders equity, net income or
cash flow of the Company. This loss on extinguishment of debt was calculated by

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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 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 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 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

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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.

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As of June 30, 2003 and December 31, 2002, the Company had $3.0 million and
$2.1 million, respectively, available for borrowing under the revolving portion
of the Loan Agreement. As of June 30, 2003 and December 31, 2002, the Company
had $1.2 million and $1.5 million, respectively, in borrowings outstanding
under the Term Loan. The Company had no borrowings under the revolving loan as
of June 30, 2003 and approximately $128,000 in borrowings outstanding under the
revolving loan as of December 31, 2002. As of June 30, 2003, the Company
believes it was in compliance with all such covenants set forth in the Loan
Agreement, as amended by the December Amendment.

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

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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 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.

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

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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 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

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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

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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 (the Exchange Act).

ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures are the Companys controls and other
procedures that are designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed,
summarized and reported, within the time periods specified in the Securities
and Exchange Commissions rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files
under the Exchange Act is accumulated and communicated to management, including
the Chief Executive Officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision of the Chief Executive Officer and
principal financial officer and with the participation of the Companys management,
of the effectiveness of the design and operation of the Companys disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, the Chief Executive Officer and principal financial officer concluded
that the Companys disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company required to be
included in the Companys periodic Securities and Exchange Commission filings.
No significant changes were made in the Companys internal controls during the
second quarter of 2003 that have materially affected, or are reasonably likely
to materially affect, the Companys internal controls over financial reporting.

36



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##### 



PART II. OTHER INFORMATION

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



| | (a) |  | Exhibits.
| | --- |  | ---------

|        |  |                                                                                                                                                                                                                                                                                                                                    
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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   |  | Second Amendment to Co-Promotion Agreement between the Registrant
and Medtronic, Inc., dated April 15, 2003.                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                    
|10.2   |  | Exclusive Distributor Agreement, effective as of April 17, 2003,
by and between the Registrant and Medtronic, Inc.                                                                                                                                                                                                                 

37



---



##### 



|        |  |                                                                                                                                                                          
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                          
|Number  |  | Description of Exhibits                                                                                                                                                  
|        |  |                                                                                                                                                                          
|10.3   |  | Amendment to Employment Agreement between the Company and William
E. Peterson, Jr., dated June 17, 2003.                                                                 
|        |  |                                                                                                                                                                          
|10.4   |  | Amendment to Employment Agreement between the Company and Robert
R. Singer, dated June 21, 2003.                                                                         
|        |  |                                                                                                                                                                          
|10.5   |  | Common Stock Purchase Warrant, dated as of June 17, 2003, by and
between the Registrant and Lippert/Heilshorn & Associates, Inc.                                         
|        |  |                                                                                                                                                                          
|10.6   |  | Amendment to Promissory Note of Roy C. Mallady, Jr. payable to the
order of the Registrant in the principal amount of $77,612.43,
dated as of July 15, 2003.             
|        |  |                                                                                                                                                                          
|10.7   |  | Amendment to Promissory Note of Roy C. Mallady, Jr. payable to the
order of the Registrant in the principal amount of $35,000.00,
dated as of July 15, 2003.             
|        |  |                                                                                                                                                                          
|31.1*  |  | Certification of the Chief Executive Officer of the Company
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                   
|        |  |                                                                                                                                                                          
|31.2*  |  | Certification of the Principal Financial Officer of the Company
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|        |  |                                                                                                                                                                          
|32.1*  |  | 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.    
|        |  |                                                                                                                                                                          
|32.2*  |  | 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.



---

* Filed herewith

(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. On August 6, 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 June 30, 2003.

38



---



##### 



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.      
| |  |                                     
| |  | /s/ Marshall B. Hunt                
| |  |                                     
| |  | Marshall B. Hunt                    
| |  | Chairman and Chief Executive Officer

Dated: December 2, 2003

39