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

FORM 10-Q

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

For the quarterly period ended March 31, 2002

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-15459

HORIZON MEDICAL PRODUCTS, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Yes   x   No   
o

The number of shares outstanding of the Registrants Common Stock, $.001 par
value, as of May 15, 2002 was 16,311,676.





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TABLE OF CONTENTS



|                              |                                                                                                |                                                              |  |  |  |  |  | 
|----------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------ |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS.                                                                 
|                              |                                                                                                | INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                                | INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                                | INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                                | NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                           
|PART II. OTHER INFORMATION   
|                              | ITEM 1. LEGAL PROCEEDINGS                                                                     
|                              | ITEM 2. CHANGES IN SECURITIES AND USE OF FUNDS.                                               
|                              | ITEM 3. DEFAULTS UPON SENIOR SECURITIES.                                                      
|                              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   
|                              | ITEM 5. OTHER INFORMATION                                                                     
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.                                                     
|                              | SIGNATURE                                                                                     



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HORIZON MEDICAL PRODUCTS, INC. AND SUBSIDIARIES

FORM 10-Q

For the Quarterly Period Ended March 31, 2002

INDEX

|        |  |                       |  |                                                                                       |  |   
|------- |  | --------------------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I  |  | FINANCIAL INFORMATION |  |                                                                                      
|        |  | ITEM 1                |  | Financial Statements
(unaudited)                                                      |  | 3 
|        |  |                       |  | Interim Condensed Consolidated Balance Sheets                                         |  | 4 
|        |  |                       |  | Interim Condensed Consolidated Statements of Operations                               |  | 5 
|        |  |                       |  | Interim Condensed Consolidated Statements of Cash Flows                               |  | 6 
|        |  |                       |  | Notes to Interim Condensed Consolidated Financial Statements                          |  | 7 
|        |  | ITEM 2                |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 19
|        |  | ITEM 3                |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 25
|PART II |  | OTHER INFORMATION     |  |                                                                                      
|        |  | ITEM 1                |  | Legal Proceedings                                                                     |  | 26
|        |  | ITEM 2                |  | Changes in Securities and Use of Proceeds                                             |  | 26
|        |  | ITEM 3                |  | Defaults Upon Senior Securities                                                       |  | 26
|        |  | ITEM 4                |  | Submission of Matters to a
Vote of Security Holders                                   |  | 26
|        |  | ITEM 5                |  | Other Information                                                                     |  | 26
|        |  | ITEM 6                |  | Exhibits and Reports on Form 8-K                                                      |  | 27
|        |  | SIGNATURE             |  | 29                                                                                   

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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 Report on Form 10-Q: |                                                                                                            
|                                                                                                       | Interim Condensed Consolidated Balance Sheets at March 31, 2002 and December 31, 2001.                      |  | 4
|                                                                                                       | Interim Condensed
Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001. |  | 5
|                                                                                                       | Interim Condensed
Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001. |  | 6
|                                                                                                       | Notes to Interim Condensed
Consolidated Financial Statements.                                               |  | 7

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

|                                                |                                                                                                                                                                           |                                            |            |             |            |           |            |              |            |  |  | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ----------- | ---------- | --------- | ---------- | ------------ | ---------- |  |  | 
|                                                |                                                                                                                                                                           |                                            |            |             |            | March 31, |            | December 31,
|                                                |                                                                                                                                                                           |                                            |            |             |            | 2002      |            | 2001        
|                                                |                                                                                                                                                                           |                                            |            |             |            |           |            |             
|ASSETS                                          |                                                                                                                                                                           |                                            |            |             |            |           |            |             
|Current assets:                                 |                                                                                                                                                                           |                                            |            |             |            |           |            |             
|                                                | Cash and cash equivalents                                                                                                                                                 |                                            | $          | 714,616     |            |           | $          | 2,772,888    |           
|                                                | Accounts receivable  trade, net                                                                                                                                          |                                            |            | 9,268,850   |            |           |            | 10,052,052   |           
|                                                | Inventories                                                                                                                                                               |                                            |            | 16,063,133  |            |           |            | 15,836,795   |           
|                                                | Prepaid expenses and other current assets                                                                                                                                 |                                            |            | 1,892,539   |            |           |            | 1,570,223    |           
|                                                |                                                                                                                                                                           |                                            |            |             |            |           |            |             
|                                                |                                                                                                                                                                           | Total current assets                       |            |             | 27,939,138 |           |            |              | 30,231,958 | 
|Property and equipment, net                     |                                                                                                                                                                           |                                            | 2,607,630  |             |            |           | 2,723,896  |             
|Goodwill                                        |                                                                                                                                                                           |                                            | 24,807,904 |             |            |           | 31,752,259 |             
|Intangible assets, net                          |                                                                                                                                                                           |                                            | 7,464,127  |             |            |           | 6,477,380  |             
|Other assets                                    |                                                                                                                                                                           |                                            | 146,447    |             |            |           | 162,047    |             
|                                                |                                                                                                                                                                           |                                            |            |             |            |           |            |             
|                                                |                                                                                                                                                                           | Total assets                               |            | $           | 62,965,246 |           |            | $            | 71,347,540 | 
|                                                |                                                                                                                                                                           |                                            |            |             |            |           |            |             
|LIABILITIES AND SHAREHOLDERS EQUITY            |                                                                                                                                                                           |                                            |            |             |            |           |            |             
|Current liabilities:                            |                                                                                                                                                                           |                                            |            |             |            |           |            |             
|                                                | Accounts payable  trade                                                                                                                                                  |                                            | $          | 9,571,096   |            |           |            | 9,090,686    |           
|                                                | Accrued salaries and commissions                                                                                                                                          |                                            |            | 350,009     |            |           |            | 341,788      |           
|                                                | Accrued interest                                                                                                                                                          |                                            |            | 90,507      |            |           |            | 256,106      |           
|                                                | Other accrued expenses                                                                                                                                                    |                                            |            | 1,984,178   |            |           |            | 1,317,193    |           
|                                                | Current portion of long-term debt                                                                                                                                         |                                            |            | 8,854,713   |            |           |            | 40,585,159   |           
|                                                |                                                                                                                                                                           |                                            |            |             |            |           |            |             
|                                                |                                                                                                                                                                           | Total current liabilities                  |            |             | 20,850,503 |           |            |              | 51,590,932 | 
|Long-term debt, net of current portion          |                                                                                                                                                                           |                                            | 18,290,851 |             |            |           | 1,354,703  |             
|Other liabilities                               |                                                                                                                                                                           |                                            | 116,061    |             |            |           | 119,761    |             
|                                                |                                                                                                                                                                           |                                            |            |             |            |           |            |             
|                                                |                                                                                                                                                                           | Total liabilities                          |            |             | 39,257,415 |           |            |              | 53,065,396 | 
|                                                |                                                                                                                                                                           |                                            |            |             |            |           |            |             
|Commitments and contingent liabilities (Note 6) |                                                                                                                                                                           |                                            |            |             |            |           |            |             
|Shareholders equity:                           |                                                                                                                                                                           |                                            |            |             |            |           |            |             
|                                                | Preferred stock, no par value; 5,000,000 shares authorized, none issued and outstanding                                                                                   |                                            |            |             |            |           |            |              |           
|                                                | Common stock, $.001 par value per share; 50,000,000 shares authorized, 16,311,676 and
13,366,278 shares issued and outstanding as of March 31, 2002
and December 31, 2001 |                                            |            | 16,312      |            |           |            | 13,366       |           
|                                                | Additional paid-in capital                                                                                                                                                |                                            |            | 56,537,716  |            |           |            | 52,086,125   |           
|                                                | Shareholders notes receivable                                                                                                                                            |                                            |            | (280,136    | )          |           |            | (615,940     | )         
|                                                | Accumulated deficit                                                                                                                                                       |                                            |            | (32,566,061 | )          |           |            | (33,201,407  | )         
|                                                |                                                                                                                                                                           |                                            |            |             |            |           |            |             
|                                                |                                                                                                                                                                           | Total shareholders equity                 |            |             | 23,707,831 |           |            |              | 18,282,144 | 
|                                                |                                                                                                                                                                           |                                            |            |             |            |           |            |             
|                                                |                                                                                                                                                                           | Total liabilities and shareholders equity |            | $           | 62,965,246 |           |            | $            | 71,347,540 | 
|                                                |                                                                                                                                                                           |                                            |            |             |            |           |            |             

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

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

|                                                                                             |                                                                                              |                                                                               |            |                    |            |      |            |       |            |  
|-------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ---------- | ------------------ | ---------- | ---- | ---------- | ----- | ---------- | -
|                                                                                             |                                                                                              |                                                                               |            | Three Months Ended
|                                                                                             |                                                                                              |                                                                               |            | March 31,         
|                                                                                             |                                                                                              |                                                                               |            |                   
|                                                                                             |                                                                                              |                                                                               |            | 2002               |            | 2001
|                                                                                             |                                                                                              |                                                                               |            |                    |            |     
|Net sales                                                                                    |                                                                                              | $                                                                             | 11,919,333 |                    |            | $    | 16,419,783 |      
|Cost of goods sold                                                                           |                                                                                              |                                                                               | 8,155,732  |                    |            |      | 10,491,092 |      
|                                                                                             |                                                                                              |                                                                               |            |                    |            |      |            |      
|                                                                                             |                                                                                              | Gross profit                                                                  |            |                    | 3,763,601  |      |            |       | 5,928,691  |  
|Selling, general and administrative expenses                                                 |                                                                                              |                                                                               | 6,713,236  |                    |            |      | 5,133,259  |      
|                                                                                             |                                                                                              |                                                                               |            |                    |            |      |            |      
|                                                                                             |                                                                                              | Operating (loss) income                                                       |            |                    | (2,949,635 | )    |            |       | 795,432    |  
|                                                                                             |                                                                                              |                                                                               |            |                    |            |      |            |      
|Other income (expense):                                                                      |                                                                                              |                                                                               |            |                    |            |      |            |      
|                                                                                             |                                                                                              | Interest
expense, net                                                         |            |                    | (1,169,874 | )    |            |       | (1,259,394 | )
|                                                                                             |                                                                                              | Other income (expense)                                                        |            |                    | (3,460     | )    |            |       | 29,439     |  
|                                                                                             |                                                                                              |                                                                               |            |                    |            |      |            |      
|                                                                                             |                                                                                              |                                                                               | (1,173,334 | )                  |            |      | (1,229,955 | )    
|                                                                                             |                                                                                              |                                                                               |            |                    |            |      |            |      
|                                                                                             |                                                                                              | Loss before extraordinary item and effect of a change in accounting principle |            |                    | (4,122,969 | )    |            |       | (434,523   | )
|Extraordinary gain on extinguishment of debt                                                 |                                                                                              |                                                                               | 11,702,671 |                    |            |      |            |      
|Effect of a change in accounting principle pursuant to adoption of SFAS 142 (Notes 1 and 10) |                                                                                              |                                                                               | (6,944,355 | )                  |            |      |            |      
|                                                                                             |                                                                                              |                                                                               |            |                    |            |      |            |      
|                                                                                             |                                                                                              | Net income (loss)                                                             |            | $                  | 635,347    |      |            | $     | (434,523   | )
|                                                                                             |                                                                                              |                                                                               |            |                    |            |      |            |      
|Basic and diluted earnings per share:                                                        |                                                                                              |                                                                               |            |                    |            |      |            |      
|                                                                                             | Loss before extraordinary item and effect of a change
in accounting principle                |                                                                               | $          | (0.29              | )          |      | $          | (0.03 | )         
|                                                                                             | Extraordinary gain on extinguishment of debt                                                 |                                                                               |            | 0.84               |            |      |            |       |           
|                                                                                             | Effect of a change in accounting principle pursuant to adoption of SFAS 142 (Notes 1 and 10) |                                                                               |            | (0.50              | )          |      |            |       |           
|                                                                                             | Net income (loss) per share  basic and diluted                                              |                                                                               | $          | 0.05               |            |      | $          | (0.03 | )         
|                                                                                             |                                                                                              |                                                                               |            |                    |            |      |            |      
|Weighted average common shares outstanding  basic and diluted                               |                                                                                              |                                                                               | 13,934,451 |                    |            |      | 13,366,278 |      
|                                                                                             |                                                                                              |                                                                               |            |                    |            |      |            |      

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

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

|                                                                                     |                                                               |                                        |             |                    |          |      |             |           |          |  
|------------------------------------------------------------------------------------ | ------------------------------------------------------------- | -------------------------------------- | ----------- | ------------------ | -------- | ---- | ----------- | --------- | -------- | -
|                                                                                     |                                                               |                                        |             | Three Months Ended
|                                                                                     |                                                               |                                        |             | March 31,         
|                                                                                     |                                                               |                                        |             |                   
|                                                                                     |                                                               |                                        |             | 2002               |          | 2001
|                                                                                     |                                                               |                                        |             |                    |          |     
|Cash flows from operating activities:                                                |                                                               |                                        |             |                    |          |      |             |          
|Net
income (loss)                                                                    |                                                               | $                                      | 635,347     |                    |          | $    | (434,523    | )        
|                                                                                     |                                                               |                                        |             |                    |          |      |             |          
|Adjustments
to reconcile net income (loss) to net cash used in operating activities: |                                                               |                                        |             |                    |          |      |             |          
|                                                                                     | Depreciation expense                                          |                                        |             | 189,843            |          |      |             | 295,669   |         
|                                                                                     | Amortization
of intangibles                                   |                                        |             | 335,449            |          |      |             | 616,695   |         
|                                                                                     | Amortization of discount                                      |                                        |             | 145,600            |          |      |             | 41,370    |         
|                                                                                     | Non-cash
compensation charge                                  |                                        |             | 1,555,468          |          |      |             |           |         
|                                                                                     | Impairment
charge                                             |                                        |             | 6,944,355          |          |      |             |           |         
|                                                                                     | Gain
on extinguishment of debt                                |                                        |             | (12,900,171        | )        |      |             |           |         
|                                                                                     | Non-cash increase in notes receivable-shareholders            |                                        |             |                    |          |      |             | (38,539   | )       
|                                                                                     | (Increase) decrease in operating assets and liabilities, net: |                                        |             |                    |          |      |             |           |         
|                                                                                     |                                                               | Accounts receivable-trade              |             |                    | 783,202  |      |             |           | 372,168  |  
|                                                                                     |                                                               | Inventories                            |             |                    | (226,338 | )    |             |           | (488,117 | )
|                                                                                     |                                                               | Prepaid expenses and other assets      |             |                    | (306,716 | )    |             |           | (464,783 | )
|                                                                                     |                                                               | Income tax receivable/payable          |             |                    |          |      |             |           | 89,944   |  
|                                                                                     |                                                               | Accounts payable-trade                 |             |                    | 480,410  |      |             |           | (411,881 | )
|                                                                                     |                                                               | Accrued expenses and other liabilities |             |                    | (34,093  | )    |             |           | (185,333 | )
|                                                                                     |                                                               |                                        |             |                    |          |      |             |          
|                                                                                     | Net
cash used in operating activities                         |                                        |             | (2,397,644         | )        |      |             | (607,330  | )       
|                                                                                     |                                                               |                                        |             |                    |          |      |             |          
|Cash flows from investing activities:                                                |                                                               |                                        |             |                    |          |      |             |          
|Cash proceeds from sale of IFM                                                       |                                                               |                                        |             |                    |          |      | 2,250,500   |          
|Proceeds
from shareholders notes receivable                                         |                                                               |                                        | 335,804     |                    |          |      |             |          
|Capital expenditures                                                                 |                                                               |                                        | (73,576     | )                  |          |      | (65,684     | )        
|                                                                                     |                                                               |                                        |             |                    |          |      |             |          
|                                                                                     | Net cash provided by investing activities                     |                                        |             | 262,228            |          |      |             | 2,184,816 |         
|                                                                                     |                                                               |                                        |             |                    |          |      |             |          
|Cash flows from financing activities:                                                |                                                               |                                        |             |                    |          |      |             |          
|Debt issuance costs                                                                  |                                                               |                                        | (1,450,087  | )                  |          |      |             |          
|Change in cash overdraft                                                             |                                                               |                                        |             |                    |          |      | (609,176    | )        
|Proceeds from issuance of long-term debt                                             |                                                               |                                        | 43,997,631  |                    |          |      | 19,667,500  |          
|Principal payments on long-term debt                                                 |                                                               |                                        | (42,470,400 | )                  |          |      | (19,856,878 | )        
|                                                                                     |                                                               |                                        |             |                    |          |      |             |          
|                                                                                     | Net
cash provided by (used in) financing activities           |                                        |             | 77,144             |          |      |             | (798,554  | )       
|                                                                                     |                                                               |                                        |             |                    |          |      |             |          
|                                                                                     | Net (decrease) increase in cash and cash equivalents          |                                        |             | (2,058,272         | )        |      |             | 778,932   |         
|Cash and cash equivalents, beginning of period                                       |                                                               |                                        | 2,772,888   |                    |          |      | 537,954     |          
|                                                                                     |                                                               |                                        |             |                    |          |      |             |          
|Cash and cash equivalents, end of period                                             |                                                               | $                                      | 714,616     |                    |          | $    | 1,316,886   |          
|                                                                                     |                                                               |                                        |             |                    |          |      |             |          

Supplemental disclosures on non-cash
investing and financing activities:



| |                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In connection with the March 2002
recapitalization transaction described in Note 4, the Company issued
notes with a beneficial conversion feature valued at $270,000, which
was recorded as a debt discount and a corresponding increase to
additional paid-in-capital.

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

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

1.   Basis of Presentation and Summary of Significant Accounting Policies



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The condensed consolidated balance sheet of Horizon Medical Products,
Inc. and Subsidiaries (the Company) at December 31, 2001 has been derived
from the Companys audited consolidated financial statements at such date.
Certain information and footnote disclosures normally included in complete
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC) and
instructions to Form 10-Q. The interim condensed consolidated financial
statements at March 31, 2002, and for the three months ended March 31, 2002
and 2001 are unaudited; however, these statements reflect all adjustments and
disclosures which are, in the opinion of management, necessary for a fair
presentation. All such adjustments are of a normal recurring nature unless
noted otherwise. The results of operations for the interim periods are not
necessarily indicative of the results of the full year. These financial
statements should be read in conjunction with the Companys Annual Report on
Form 10-K for the year ended December 31, 2001 (the Form 10-K), including,
without limitation, the summary of accounting policies and notes and
consolidated financial statements included therein.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company
has adopted Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations. SFAS No. 141 supercedes Accounting
Principles Board Opinion (APB) No. 16, Business Combinations, and SFAS No.
38, Accounting for Preacquisition Contingencies of Purchased Enterprises.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 and for all business
combinations accounted for by the purchase method for which the date of
acquisition is after June 30, 2001, establishes specific criteria for the
recognition of intangible assets separately from goodwill, and requires
unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized). The
adoption of SFAS No. 141 did not have a material impact on the
interim condensed consolidated financial statements.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill
and Other Intangible Assets. SFAS No. 142 supersedes APB No. 17, and requires
that: 1) goodwill and indefinite lived intangible assets will no longer be
amortized; 2) goodwill will be tested for impairment at least annually at the
reporting unit level; 3) intangible assets deemed to have an indefinite life
will be tested for impairment at least annually; and 4) the amortization
period of intangible assets with finite lives will no longer be limited to
forty years. Upon the adoption of SFAS No. 142, the Company recognized an
impairment loss of approximately $6.9 million related to its manufacturing
reporting unit. In addition, the Company ceased amortization of its goodwill
(See Note 10 to the interim condensed consolidated financial
statements for further information and required disclosures).



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective
January 1, 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This
statement, which supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, as well as
certain other accounting standards, establishes a single accounting model,
based on framework established in SFAS No. 121 for long-lived assets to be
disposed of by sale, including segments of a business accounted for as
discontinued operations. The impact of adopting SFAS No. 144 was
not material to the Companys interim condensed consolidated financial statements.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In April
2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 145, Recision of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS No. 145). SFAS No. 145 requires that
gains and losses from extinguishment of debt be classified as
extraordinary items only if they meet the criteria in Accounting
Principles Board Opinion No. 30 (Opinion No. 30).
Applying the provisions of Opinion No. 30 will distinguish
transactions that are part of an entitys recurring operations from
those that are unusual and infrequent that meet criteria for
classification as an extraordinary item. SFAS No. 145 is effective
for the Company beginning January 1, 2003, but the Company may
adopt the provisions of SFAS No. 145 prior to this date. The impact
of SFAS No. 145 is not expected to be material to the Companys interim
condensed consolidated financial statements.

-7-



---



##### Table of Contents



2.   Inventories



| |                                        
| | ---------------------------------------
| | A summary of inventories is as follows:

|                        |  |           |            |              |  |   |            |  
|----------------------- |  | --------- | ---------- | ------------ |  | - | ---------- | -
|                        |  | March 31, |            | December 31,
|                        |  | 2002      |            | 2001        
|                        |  |           |            |             
|Raw materials           |  | $         | 3,493,257  |              |  | $ | 3,413,158  |  
|Work in process         |  |           | 1,011,751  |              |  |   | 1,211,437  |  
|Finished goods          |  |           | 14,573,206 |              |  |   | 14,666,961 |  
|                        |  |           |            |              |  |   |            |  
|                        |  |           | 19,078,214 |              |  |   | 19,291,556 |  
|Less inventory reserves |  |           | (3,015,081 | )            |  |   | (3,454,761 | )
|                        |  |           |            |              |  |   |            |  
|                        |  | $         | 16,063,133 |              |  | $ | 15,836,795 |  
|                        |  |           |            |              |  |   |            |  

3.   Earnings Per Share



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

|            |  |                            |            |             |  |           |            |  |  |   |       |  
|----------- |  | -------------------------- | ---------- | ----------- |  | --------- | ---------- |  |  | - | ----- | -
|            |  | For the Three Months Ended
|            |  | March 31, 2002            
|            |  |                           
|            |  | Loss                       |            |             |  |          
|            |  | from
Continuing            |            |             |  |          
|            |  | Operations                 |            | Shares      |  | Per-share
|            |  | Numerator                  |            | Denominator |  | Amount   
|            |  |                            |            |             |  |          
|Basic EPS   |  | $                          | (4,122,969 | )           |  |           | 13,934,451 |  |  | $ | (0.29 | )
|            |  |                            |            |             |  |           |            |  |  |   |       |  
|Diluted EPS |  | $                          | (4,122,969 | )           |  |           | 13,934,451 |  |  | $ | (0.29 | )
|            |  |                            |            |             |  |           |            |  |  |   |       |  

|            |  |                            |          |             |  |           |            |  |  |   |       |  
|----------- |  | -------------------------- | -------- | ----------- |  | --------- | ---------- |  |  | - | ----- | -
|            |  | For the Three Months Ended
|            |  | March 31, 2001            
|            |  |                           
|            |  | Loss                       |          |             |  |          
|            |  | from
Continuing            |          |             |  |          
|            |  | Operations                 |          | Shares      |  | Per-share
|            |  | Numerator                  |          | Denominator |  | Amount   
|            |  |                            |          |             |  |          
|Basic EPS   |  | $                          | (434,523 | )           |  |           | 13,366,278 |  |  | $ | (0.03 | )
|            |  |                            |          |             |  |           |            |  |  |   |       |  
|Diluted EPS |  | $                          | (434,523 | )           |  |           | 13,366,278 |  |  | $ | (0.03 | )
|            |  |                            |          |             |  |           |            |  |  |   |       |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Options to
purchase 5,819,282 shares of common stock and
warrants to purchase 748,619 shares of common stock were outstanding as of
March 31, 2002, but are not included in the computation of the March 31, 2002
diluted EPS because the effect would be anti-dilutive. The options have
exercise prices ranging from $.44 to $15.50 and expire between 2008 and 2012.
The warrants have an exercise price of $.01 per share and expire in
2012.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | As discussed
in Note 4 to these interim condensed consolidated financial
statements contained elsewhere in this Form 10-Q, the Company has
issued notes, a portion of which is convertible into a maximum of
27,000,000 shares of common stock.                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | In addition,
options to purchase approximately 1,300,000 shares of common stock
were issued subsequent to March 31, 2002. These options have exercise
prices ranging from $.90 to $1.18 and expire in 2012. Of these options, 850,000 are performance-based options.
Additionally, the grant of 1,250,000 of these options in the
aggregate is expressly conditioned upon the affirmative vote of the
Company's shareholders, at its 2002 Annual Meeting of Shareholders,
approving an increase in the number of shares authorized for issuance
under the Company's 1998 Stock Incentive Plan.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Options to
purchase 544,800 shares of common stock and warrants to
purchase 500,000 shares of common stock were outstanding as of
March 31, 2001,
but are not included in the computation of the March 31, 2001 diluted EPS
because the effect would be anti-dilutive. The options have exercise prices
ranging from $.44 to $15.50 and expire between 2008 and 2011. The warrants
have an exercise price of $14.50 and expired in September 2001, as described
in Note 11 to the Companys consolidated financial statements included in the
Form 10-K.                                      

4.   Long-Term Debt



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 1, 2002, the Company entered into certain agreements with
ComVest Venture Partners, L.P. (ComVest), an affiliate of Commonwealth
Associates LP (Commonwealth) to recapitalize the Company (the
Recapitalization). The Company completed the Recapitalization on March 16,
2002 and the Forbearance Agreement between the Company and Bank of
America dated March 15, 2001, as subsequently amended (the
Forbearance Agreement), was
terminated as of March 15, 2002. The Forbearance Agreement is discussed below.
|
| | The details of the Recapitalization follow:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

-8-



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 19, 2002, the Company announced that it had completed an
arrangement with ComVest, LaSalle Business Credit, Inc. (LaSalle), and
Medtronic Inc. (Medtronic) to recapitalize the Company by extinguishing all
of the Companys senior debt and warrants held by Bank of America and
substantially reducing the Companys total outstanding debt. Pursuant to the
Recapitalization, the Company issued Senior Subordinated Convertible Notes
(Convertible Notes) in the amount of $15 million to ComVest, Medtronic and
other investors, assumed a $2 million Junior Subordinated Promissory Note
payable to Bank of America (the Junior Note), and entered into a new
revolving and term loan facility (the LaSalle Credit Facility) for up to
$22 million, of which approximately $8.8 million was outstanding as of March
31, 2002. The following is a summary of key provisions of the
Recapitalization:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On February 22, 2002, ComVest and Bank of America entered into an
assignment agreement under which ComVest agreed to acquire all of Bank of
Americas interest in the BofA Credit Facility. The purchase price for the
assignment was $22 million in cash, plus the $2 million Junior Note. The
Company subsequently assumed the Junior Note pursuant to the
Recapitalization, and
ComVest has been released from obligations under the Junior Note. Upon the
closing of the assignment on March 15, 2002, ComVest acquired all of Bank of
Americas interest in the note outstanding under the BofA Credit Facility
(the BofA Note), the warrants issued to Bank of America pursuant to the
BofA Credit Facility were surrendered and cancelled, and the Forbearance
Agreement was terminated. The estimated fair value of the warrants on March
15, 2002 of approximately $345,000 was recorded in additional
paid-in-capital, and the existing value of the warrant of $260,000 was
extinguished.



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The holders of the Convertible Notes have the right to convert in the
aggregate a total of $270,000 of the Convertible Notes into shares of the
Companys common stock at a conversion price of $0.01 per share for a total
of 27,000,000 shares, subject to a downward adjustment upon repayment of all
or a portion of the amounts due, as described below. Under the conversion
terms, if
the principal amount of the Convertible Notes, together with all interest due
is paid in full on or before 30 days following March 16, 2002 (the Closing
Date), then the maximum aggregate number of shares of common stock that all
the Convertible Notes may be converted into is 22,500,000. If the principal
amount of all the Convertible Notes and all interest due is paid on or before
March 16, 2004, then the maximum aggregate number of shares of the Companys
common stock that the Convertible Notes can be converted into is 19,500,000.
The terms of the applicable conversion periods and conversion amounts are as
follows:



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company recorded the value of the beneficial conversion feature at
the amount of proceeds allocated to the convertible instrument of $270,000 as
a credit to equity and as a debt discount and will amortize the debt discount
over the period to the Convertible Notes earliest conversion date using the
effective interest method. The Company recorded approximately
$146,000 in amortization expense in the three month period ended
March 31, 2002.



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | As of the
date of this filing, none of the Convertible Notes are eligible to be
converted pending shareholder approval which has not been obtained.

-9-



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company may prepay the Convertible Notes, subject to no prepayment
penalty within the first 12 months, with a prepayment penalty of 5% between
months 12 to 15, and a prepayment penalty of 10% between months 15 to 24. The
Note Purchase Agreement also contains certain affirmative and negative
covenants, including, but not limited to, restrictions on indebtedness and
liens, business combinations, sale or discount of receivables, conduct of the
Companys business, transactions with affiliates, ability to enter into
contracts outside the ordinary course of business, and ability to pay
dividends. The Events of Default include, but are not limited to, failure to
pay an obligation when due, breach of any covenant that remains uncured for
15 days, bankruptcy, change of control, and failure to obtain shareholder
approval of the Recapitalization within 105 days of the closing date of March
16, 2002. The shareholder approvals that the Company agreed to obtain and
will submit to the shareholders at the 2002 Annual Meeting include issuances
of common stock pursuant to the Recapitalization, amendments to the Companys
articles of incorporation to increase the number of authorized shares of
common stock from 50 million to 100 million and to declassify the staggered
board, amendments of the Bylaws to eliminate the fair price and business
combinations provisions, and the grant of options to the CEO and the
Companys President (as described below).



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 15, 2002, the Company and ComVest, as the holder of the
outstanding BofA Note, agreed to reduce the outstanding principal amount of
the BofA Note from $40.3 million to $22 million. As a result, the Company
recorded an extraordinary gain on the early extinguishment of debt of
approximately $11.7 million during
the first quarter of 2002. In exchange for funding a portion of the $22
million cash purchase price paid to BofA, ComVest assigned $4 million in
principal amount of the BofA Note to Medtronic and $6.6 million in principal
amount of the BofA Note to the Additional Note Purchasers while retaining
$11.4 million in principal amount of the BofA Note itself. After such
assignments, the Company issued the Convertible Notes under the Note Purchase
Agreement in the aggregate principal amount of $15 million in exchange for
the surrender of $15 million in principal amount of the BofA Note held by
ComVest, Medtronic and the Additional Note Purchasers. The remaining $7
million in principal amount of the BofA Note was repaid with the proceeds of
a bridge loan from ComVest to the Company made on March 15, 2002 (the Bridge
Loan).



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 18, 2002, the Company entered into the LaSalle Credit Facility
pursuant to a loan and security agreement (the Loan Agreement) with
Standard Federal Bank National Association (SFB), acting by and through
LaSalle, as SFBs agent (collectively the Lender). Under the Loan
Agreement, the Lender has provided a $20 million senior revolving loan
facility (the Revolving Loan) and a $2 million term loan facility (Term
Loan). The Company used the proceeds to repay the Bridge Loan and expenses
related to the Recapitalization and will use the remaining proceeds for
working capital and general corporate purposes. Both loan facilities will
bear interest at the LaSalle Bank Prime Rate plus 2%, subject to an
additional 2% that would be added to the interest rate upon the occurrence of
an Event of Default (as discussed below).



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As collateral, the Company granted a security interest in all of the
Companys present and future assets, whether now or hereafter owned,
existing, acquired or arising and wherever now or hereafter located,
including, but not limited to: all accounts receivable; all chattel paper,
instruments, documents and general intangibles including patents, patent
applications, trademarks, trademark applications, trade secrets, trade names,
goodwill, copyrights, copyright applications, registrations, licenses,
software, franchises, customer lists, tax refund claims, claims against
carriers and shippers, guaranty claims, contract rights, payment intangibles,
security interests, security deposits, and indemnification rights; all
inventory; all goods including equipment, vehicles, and fixtures; all
investment property; all deposit accounts, bank accounts, deposits and cash;
all letter-of-credit rights; certain commercial tort claims; all property of
the Company in control of the Lender or any affiliate of the Lender; and all
additions, substitutions, replacements, products, and proceeds of the
aforementioned property including proceeds from insurance policies and all
books and records relating to the Companys business.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Loan Agreement contains affirmative and negative covenants. The
affirmative covenants require the Company to, among other things, maintain
accurate and complete records, notify the Lender of major business changes,
comply with relevant laws, maintain proper permits, conduct relevant
inspections and audits, maintain adequate insurance with the Lender named as
loss payee, keep collateral in good condition, use proceeds only for business
purposes, pay required taxes, maintain all intellectual property, maintain a
checking account with LaSalle, hire a Chief Operating Officer with experience
in the medical products industry within 90 days of the date of the Loan
Agreement (which has been done), grant the Lender the right to conduct appraisals of the collateral
on a bi-annual basis, and deliver a survey of the property located at the
Companys offices on Northside Parkway in Atlanta within 60 days of the date
of the Loan Agreement (which has been done). The negative covenants restrict the Companys ability
to, among other things, make any guarantees, incur additional indebtedness,
grant liens on its assets, enter into business combinations outside the
ordinary course of business, pay dividends, make certain investments or
loans, allow its equipment to become a fixture to real estate or an accession
to personal property, alter its lines of business, settle accounts, or make
other fundamental corporate changes.



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | The Loan Agreement also contains financial maintenance covenants,
including, but not limited to, the following:

-10-



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##### Table of Contents





| |  |  | maintaining Minimum Availability at all times of at least $4
million under the Minimum Availability Test. Minimum Availability
is defined as (a) the lesser of: (i) the Revolving Loan Limit (which
is up to 85% of the face amount of the Companys eligible accounts
receivable; plus the lesser of (x) up to 55% of the lower of cost or
market value of the Companys eligible inventory or up to 85%
of the net orderly liquidation value of eligible inventory, whichever
is less, or (y) $11 million; plus such reserves as the Lender may
establish) and (ii) the Maximum Revolving Loan Limit of $20 million
minus (b) the sum of (i) the amount of all then outstanding and
unpaid Liabilities (to Lender, as defined) plus (ii) the aggregate
amount of all then outstanding and unpaid trade payables and other
obligations more than 60 days past due; plus (iii) the amount of
checks issued by the Company which are more than 60 days past due but
not yet sent and the book overdraft of the Company plus (iv)
$4,000,000 owed by the Company to Arrow International;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | maintaining Tangible Net Worth of $7,698,000 for the quarter
ending December 31, 2002, $8,522,000 for the quarter ending March 31,
2003, $9,475,000 for the quarter ending June 30, 2003, $10,544,000 for
the quarter ending September 30, 2003, $11,728,000 for the quarter
ending December 31, 2003 and each quarter thereafter (Tangible Net
Worth is defined as shareholders equity including retained earnings
less the book value of all intangible assets, prepaid and non-cash
items arising from the transactions contemplated by the Loan Agreement
and goodwill impairment charges recorded as a result of FASB No. 142
as determined solely by Lender plus the amount of any LIFO reserve
plus the amount of any debt subordinated to the Lender);                                                                                                                                                                                                                                                                                                                         
|
| |  |  | maintaining fixed charge coverage (ratio of EBITDA to fixed
charges) of 1.10 to 1.0 from April 1, 2002 through December 31, 2002,
1.20 to 1.0 from April 1, 2002 through March 30, 2003, 1.40 to 1.0 for
the quarter ending June 30, 2003 and for the immediately preceding
four fiscal quarters, and 1.50 to 1.0 for the quarter ending September
30, 2003 and for the immediately preceding four fiscal quarters and
each fiscal quarter thereafter;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | maintain EBITDA, based on the immediately preceding four fiscal
quarters, of $4,000,000 on December 31, 2002, $5,437,000 on March 31,
2003, $6,605,000 on June 30, 2003, $7,374,000 on September 30, 2003
and $7,482,000 on December 31, 2003 and each fiscal quarter
thereafter; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | limit capital expenditures to no more than $500,000 during any
fiscal year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



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



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company must repay the Revolving Loan on or before March 17, 2005,
the Termination Date, unless the Loan Agreement is renewed and the repayment
period is extended through a new Termination Date. The Company must repay the
Term Loan in 36 equal monthly installments of $55,556. The Loan Agreement
will automatically renew for one-year terms unless the Lender demands
repayment prior to the Termination Date as a result of an Event of Default,
the Company gives 90-days notice of its intent to terminate and pays all
amounts due in full, or the Lender elects to terminate on or after February
1, 2004 as a result of a Termination Event. A Termination Event is defined as
the failure of Medtronic, ComVest or any Additional Note Purchaser to extend
the maturity date of the Convertible Notes at least thirty days past the date
of the original term or any applicable renewal term.
|
| | Pursuant to the LaSalle Credit Facility, the Company also issued to
LaSalle and SFB warrants to purchase up to an aggregate of 748,619 shares of
common stock at an exercise price of $.01 per share. The Company recorded the
estimated fair value of the warrant as of March 18, 2002 of approximately
$695,000, determined using the Black-Scholes model (using weighted average
assumptions as follows: dividend yield of 0%, expected life of 3 years,
expected volatility of 112.2% and a risk free interest rate of 2.43%) as a
reduction of the gain on early extinguishment of debt.                                                                                                                                                                                                                                                                                                                   



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

-11-



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a condition to closing, the Company also agreed to enter into a
Securityholders Agreement dated March 16, 2002 with ComVest, Medtronic,
LaSalle, the CEO and the Companys President (together ComVest, Medtronic,
LaSalle, the CEO and the Companys President are the Investors) under which
the Company granted certain registration rights, rights of first refusal and
corporate governance rights to the Investors. The registration rights require
the Company to file a shelf registration statement covering the resale of
certain shares of common stock issuable pursuant to the Recapitalization and
to include, at the Investors option, certain of the Investors shares of
common stock in any registration statement undertaken by the Company, at the
Companys expense. Pursuant to the Securityholders Agreement, ComVest and
Medtronic have been granted (i) a right of first refusal to purchase all or
part of their pro rata share of new securities which the Company may propose
to sell or issue, (ii) the right of first refusal to participate in any sale
of the CEOs and/or the Companys Presidents shares of common stock of the
Company to third parties upon the same terms and conditions, (iii) the
co-sale right of first refusal to participate in sales of shares of the
Companys common stock by the CEO and/or the Companys President and (iv) the
bring-along right to require the CEO and the Companys President to sell
the same percentage of shares of common stock as the holders of the rights
propose to sell in the event that the rights holders propose to sell 51% or
more of their common stock. The corporate governance rights include, but are
not limited to, the following: (i) granting ComVest the right to designate
one ComVest director and two additional independent directors, (ii) requiring
that certain actions of the Board of Directors include the affirmative vote
of the ComVest director, (iii) requiring the Company to establish and
maintain an Executive Committee consisting of the ComVest director as
Chairman, one of the independent directors designated by ComVest, and the
CEO, and (iv) requiring that the Executive Committee approve certain actions.
Failure to comply with the Securityholders Agreement is considered an Event
of Default under the Note Purchase Agreement.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 15, 2002, the Company entered into a Co-Promotion Agreement
with Medtronic under which the Company will promote and provide technical
advice for Medtronics implantable drug delivery systems which are used for
the treatment of hepatic arterial infusion and malignant pain. After basic
sales training, sales representatives of the Company and of its distributors
will promote the sale of such systems, identify appropriate patients for such
systems, and after additional training provide assistance in the implantation
and refill procedure for such systems, for which identification and
assistance the Company will be
compensated by Medtronic. If the Company breaches or fails to comply with its
obligations under the Co-Promotion Agreement (after giving effect to any
applicable cure periods), then Medtronic or 51% of the holders of the
aggregate principal amount of the Convertible Notes may accelerate the due
date for payment of the Convertible Notes.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | To effect the Recapitalization, the Company also entered into certain
ancillary agreements including the following: (i) a voting agreement under
which the CEO and the Companys President have agreed to vote their shares in
favor of all proposals relating to the Recapitalization; (ii) a new
employment agreement and option agreements with the CEO that grants him
options to purchase an aggregate of 3,500,000 shares of common stock
(the new
employment agreement replaced the CEOs previous employment agreement and
reduced the previous term of employment and the previous severance
compensation and benefits from approximately four years to twelve months.);
(iii) a new employment agreement and an option agreement with the Companys
President that grants him options to purchase 1,000,000 shares of common
stock (the new employment agreement replaced the Presidents previous
employment agreement and reduced the previous term of employment from
approximately four years to six months and reduced the previous severance
compensation and benefits from approximately four years to twelve months.);
(iv) an advisory agreement with an affiliate of ComVest under which the
affiliate received 2,645,398 shares of common stock and a cash fee of
$750,000; (v) a note with ComVest under which ComVest received 75,000 shares
in exchange for advancing certain transaction expenses associated with the
Recapitalization; (vi) an expense guaranty with the CEO under which he
received 150,000 shares of common stock in exchange for agreeing to reimburse
ComVest for certain of its transaction expenses in the event that the
Recapitalization were not consummated; and (vii) an advance note with the CEO
under which he received 75,000 shares of common stock in exchange for
advancing to the Company certain transaction expenses associated with the
Recapitalization. The Company recognized compensation expense of
approximately $1,400,000 during the first quarter of 2002 related to
2,500,000 of the options granted to the CEO and all of the options granted to
the Companys President. The remaining 1,000,000 options that were granted to
the CEO are performance-based, and the Company will measure and recognize
compensation as the options are earned. The Company recorded the estimated
fair value of the shares of the common stock issued to ComVest of
approximately $2,500,000, as well as the cash fee of $750,000, as a reduction
of its extraordinary gain on early extinguishment of debt. The Company
recorded the value of the shares of the common stock issued to the CEO of
approximately $152,000 as debt cost and will amortize over the terms of the
related agreements.



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

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| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | such going concern language.
However, the default provisions relating to the audit opinion in the Loan
Agreement and the Note Purchase Agreement have been waived.



| |                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a result of the Recapitalization, the BofA Credit Facility, the
Forbearance Agreement with Bank of America, and all subsequent amendments
were terminated. Because those agreements were significant to the
capitalization of the Company prior to the Recapitalization, the terms of
those agreements are summarized below:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective March 30, 2001, the Company entered into a Forbearance
Agreement (as amended, the Forbearance Agreement) and a First Amendment to
Forbearance Agreement with Bank of America, N.A. (Bank of America) wherein
Bank of America agreed to forbear from exercising its rights and remedies
allowed under a $50 million amended and restated credit facility (the BofA
Credit Facility) due to certain defaults. The Company was in default at that
time for violating certain restrictive covenants and for failing to make
principal payments when due. All of the defaults were forborne as provided
for in the Forbearance Agreement, and revised restrictive covenants were set.
By September 30, 2001, the Company was in default under the Forbearance
Agreement for failing to comply with several of the revised covenants,
including minimum net worth, debt service coverage, leverage and minimum
EBITDA.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective October 15, 2001, the Company entered into a Second Amendment
to the Forbearance Agreement (the Second Amendment). The Second Amendment
amended the terms of the Forbearance Agreement as follows: (i) changed the
termination date of the Forbearance Agreement (the Termination Date) from
March 31, 2002 to January 15, 2002 (the period from March 30, 2001 through
January 15, 2002 being defined as the Forbearance Period); (ii) required
the Company to maintain a general operating account with Bank of America and
restricted the use of funds in a calendar month to payments equal to or less
than the monthly budget submitted to Bank of America; (iii) required the
Company to pay accrued or unpaid interest on the BofA Note on the first day
of each month beginning November 1, 2001 and each month thereafter during the
Forbearance Period at the Bank of America Prime Rate plus 2.5% per annum; and
(iv) added additional reporting requirements.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Second Amendment also amended the Termination Events as defined in
the Forbearance Agreement to include the following: (i) the Company fails to
execute and deliver or to cause the Companys Chief Executive Officer (the
CEO) and related entity to execute and deliver within ten days from the
effective date of the Second Amendment a pledge to Bank of America of all the
stock owned by the CEO and documentation to amend the current pledge
agreement between the CEO, an affiliate and the Company; (ii) the Company
fails to engage and hire within five days from the effective date of the
Second Amendment competent crisis and turn around management and a new Chief
Executive Officer to report directly to the independent members of the
Companys Board of Directors; (iii) the Company fails to provide Bank of
America within five days from the effective date of the Second Amendment a
copy of resolutions confirming the resignation of the CEO as an officer and
director of the Company and that no further salary or bonuses shall be paid
to the CEO; (iv) the Company fails to make efforts to refinance the amounts
outstanding under the BofA Credit Facility and fails to provide weekly status
reports; (v) on or before December 15, 2001, the Company fails to provide
Bank of America evidence that the Company has engaged an investment banking
firm to begin marketing the sale of the assets of the Company if the amounts
outstanding under the BofA Credit Facility are not paid off by the
Termination Date; or (vi) the Company fails to execute and deliver to Bank of
America within 24 hours of Bank of Americas request a consent order
consenting to the appointment of a Receiver in the event of a Termination
Event, as defined.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, the Second Amendment reduced the Working Capital Sublimit
under the BofA Credit Facility to $5,000,000 and limited the Working Capital
Loan to the smaller of the Working Capital Sublimit or an amount equal to the
Borrowing Base, as defined in the BofA Credit Facility. The Second Amendment
also amended several of the financial covenants previously contained in the
Forbearance Agreement.                                                                                                                                                                                       
|
| | The Forbearance Agreement provided for the payment of Excess Cash Flow,
as defined in the BofA Credit Facility, on the ninetieth day following the
last day of each fiscal year. There was no Excess Cash Flow payment required
for fiscal year 2001. In addition, the Forbearance Agreement required an
additional principal payment in the amount of the greater of $150,000 or the
gross proceeds payable to the Company in connection with the Companys sale
of the Ideas for Medicine business (IFM) (see Note 14 to the Companys
consolidated financial statements contained in the Form 10-K.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Forbearance Agreement further required payments of $300,000 each on
a short-term bridge loan (the BofA Bridge Loan) on May 31, 2001, August 31,
2001, and November 30, 2001. The proceeds of the BofA Bridge Loan were used
to fund a short-term bridge loan to the Companys Chairman of the Board, CEO,
and largest shareholder (the Shareholder Bridge Loan)
(see Note 11 to the Companys Consolidated Financial Statements
included in the 10-K). The
Company received approximately $474,000 from the CEO as payment on the
Shareholder Bridge Loan and

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| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | paid that amount to reduce the amount outstanding
under the BofA Bridge Loan. In addition, the CEO paid approximately $426,000
directly to Bank of America, which was applied against the BofA Bridge Loan
(and which the Company applied to the Shareholder Bridge Loan).



| |                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Forbearance Agreement also provided for a forbearance and
restructuring fee of $10,000 plus related expenses and interest at the rate
then in effect plus 6% upon a Termination Event, as defined in the
Forbearance Agreement.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As permitted under the BofA Credit Facility and BofA Bridge Loan
documents, Bank of America instituted a sweep arrangement whereby funds
collected in the Companys lockbox accounts were swept periodically into a
Bank of America account and applied against the outstanding loan under the
BofA Credit Facility. The financial institutions which held such accounts
were notified by Bank of America that such lockbox arrangements had been
instituted, and the Companys right to withdraw, transfer or pay funds from
the accounts had been terminated. The Company periodically applied to
receive additional loans under the Working Capital Loans under the BofA
Credit Facility to the extent such loan had been paid down under the lockbox
arrangement.



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



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



| |                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On December 15, 2001, the Company entered into a third amendment to the
Forbearance Agreement under which Bank of America consented to the increase
in payments of $8,000 per month to certain former shareholders of Stepic
Corporation (Stepic) (see Note 6 to the Companys
consolidated financial statements in the Form 10-K).



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In January 2002, the Company entered into a fourth amendment to
Forbearance Agreement with Bank of America, pursuant to which Bank of America
agreed to extend the Forbearance Period until March 15, 2002 (the Expiration
Date) in order for the Company to consider its strategic alternatives. On
March 15, 2002, the BofA Credit Facility was assigned from BofA to ComVest.
On March 16, 2002, the Company issued the Convertible Notes in an aggregate
amount of $15 million to ComVest, Medtronic and the Additional Note
Purchasers. On March 18, 2002, the Company entered into the LaSalle Credit
Facility.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2001, $3,465,874 was outstanding under the Working
Capital Loans, and $36,518,039 was outstanding under the Acquisition Loans,
each as defined in the BofA Credit Facility. No funds were available for
borrowing under the BofA Credit Facility as of December 31, 2001, except as
may be available under the sweep arrangement described below. In addition,
the Company had an outstanding standby letter of credit of $144,000 as of
December 31, 2001. The letter of credit, which had terms through January
2002, collateralized the Companys obligations to a third party in connection
with an acquisition (see Note 12 to the consolidated financial statements
included in the Form 10-K).
|
| | Effective March 30, 2001, through the Termination Date of the
Forbearance Agreement, the BofA Credit Facility bore interest at the Bank of
America prime rate plus 2.5% per annum. As of December 31, 2001, the
Companys interest rate on the BofA Credit Facility was approximately 7.25%.                                                                                                                                                                                                                                                                                                                                                                                                                            



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



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

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

5.   Related-Party Transactions



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As discussed
in Note 6 to the Companys consolidated financial statements in
the Form 10-K, on June 6, 2000, the Company obtained the BofA
Bridge Loan in the amount of $900,000, which was used to fund the Shareholder
Bridge Loan to the Companys CEO. The Shareholder Bridge Loan required
interest at either the Index Rate or adjusted LIBOR, as defined in the
Shareholder Bridge Loan, plus 4.5% as elected by the CEO. As of December 31,
2001, the interest rate was based on the Index Rate with a resulting rate of
approximately 11.32%. The Shareholder Bridge Loan and related accrued
interest were recorded as contra-equity in the consolidated balance sheets
and were due on August 30, 2000 but not paid. As a result, the Company was
unable to pay the amount due under the BofA Bridge Loan, thereby causing the
Company to default under the BofA Bridge Loan and the BofA Credit Facility
(see Note 6 to the Form 10-K). During 2001, the CEO paid the Shareholder
Bridge Loan obligation of $900,000 as described in Note 6 to the Form 10-K.
Accrued interest of $109,305 related to the Shareholder Bridge Loan was
outstanding as of March 31, 2002 and December 31, 2001 and recorded as
contra-equity.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has unsecured loans to the CEO, the President of the
Company, and a former Vice Chairman of the Board of the Company in the form
of notes receivable in the amount of $112,613 and $337,837, plus accrued
interest receivable of $58,218 and $168,800 as of March 31, 2002 and December
31, 2001, respectively. The notes require annual payments of interest at 8%
beginning on September 28, 1997 and were amended in September 2001 to extend
the maturity date from 2000 to December 31, 2002. The notes and related
accrued interest are recorded as contra-equity in the consolidated balance
sheets. In March of 2002, approximately $342,000 was paid to the Company
by the CEO and the President in full settlement of their outstanding
balances, which included accrued interest.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2001,
Tunstall Consulting, Inc., an affiliate of Gordon Tunstall, a
director of the Company, provided consulting services to the Company
with respect to financial and certain related matters, including the
Recapitalization. In 2001, the Company incurred fees of $484,013 in
consideration for such services. In the three months ended
March 31, 2002, the Company incurred fees of $318,185 to Tunstall Consulting for consulting services
rendered to the Company in connection with the Recapitalization.



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

6.   Commitments and Contingencies



| |                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially
affect the consolidated financial position, results of operations, or cash
flows of the Company.



| |                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is subject to numerous federal, state and local
environmental laws and regulations. Management believes that the Company is
in material compliance with such laws and regulations and that potential
environmental liabilities, if any, are not material to the consolidated
financial statements.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is party to license agreements with an individual (the
Licensor) for the right to manufacture and sell dual lumen fistula needles,
dual lumen over-the-needle catheters, dual lumen chronic and acute catheters,
and other products covered by the Licensors patents or derived from the
Licensors confidential information. Payments under the agreement vary,
depending upon the purchaser, and range from 9% to 15% of the Companys net
sales of such licensed products. Such payments shall continue until the
expiration date of each corresponding licensed patent right covering each
product under the agreement.
|
| | Effective November 15, 2001, the exclusive distributor agreement between
Stepic Corporation, the Companys wholly owned distributor subsidiary
(Stepic) and Pall Medical Companies (Pall) was terminated. As part of the
termination, Stepic was permitted to sell the Pall critical care products
through November 14, 2001 and the Pall blood products through January 31,
2002. In addition, Stepic has the right to return for credit all remaining
Pall inventory within 30 days of the last permitted sale date.                                                                                                                



| |                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 $571,000 and $649,000 as of March 31, 2002 and December 31,
2001, respectively, related to amounts to be rebated to the various
distributors.



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is party to numerous agreements which contain certain
provisions regarding change in control, as defined by the agreements, or the
acquisition of the Company by a third party. These provisions could result in
additional payments being required by the Company should these events, as
defined, occur.

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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective October 15, 1998, the Company completed the purchase of the
outstanding stock of Stepic for $8 million in cash and contingent payments of
up to $12 million over a three-year period based upon the successful
achievement of certain specified future earnings targets by Stepic. The Company recorded additional purchase price payable to the previous
Stepic shareholders of approximately $2.1 million, $1.2 million, and
$667,000, respectively, representing the Companys additional earned
contingent payments for the anniversary years ending October 31, 1999, 2000
and 2001, respectively, as required by the purchase agreement (the Purchase
Agreement). All additional
payments made have been accounted for as additional costs of acquired assets
and amortized over the remaining life of the assets.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The 2000 contingent payment was due December 15, 2000 and $2.4 million,
which was previously accrued, was paid from proceeds from the BofA Credit
Facility. On December 15, 2000, the Company amended the Purchase Agreement so
that the remaining portion of the 2000 contingent payment of approximately
$1.2 million could be paid, together with interest at 11%, through April
2001. The Company failed to make all required payments to the Stepic
shareholders under the December 15, 2000 amendment and on February 14, 2001,
two of the three previous Stepic shareholders (the Plaintiffs) filed suit
against the Company for non-payment. On March 30, 2001, the Company entered
into a Settlement Agreement with the Plaintiffs wherein the Plaintiffs agreed
to voluntarily dismiss their pending lawsuit against the Company, and the
Company agreed to pay the 2000 contingent payment at a rate of $9,400 per
month beginning on April 15, 2001, until final payment of the remaining
outstanding balance on February 10, 2002. In addition, under the terms of the
Settlement Agreement, the Company agreed to pay interest to the Plaintiffs on
the unpaid balance of the 2000 contingent payment at the rate of 11% per
annum, including a lump sum interest payment of approximately
$27,000. The 2001 contingent payment was due December 15, 2001, and $2.4 million,
which was previously accrued, was paid from proceeds from the BofA Credit
Facility.



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 14, 2002, the Company entered into an agreement with the
Plaintiffs, which replaces the Settlement Agreement, pursuant to which the
Company paid $100,000 to the Plaintiffs on March 15, 2002 and agreed to pay
monthly payments of principal and interest of approximately $36,000 through
March 2006.



| |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pursuant to
the terms of the Note Purchase Agreement, the holders of the
Convertible Notes have the right to convert in the aggregate a total
of $270,000 of the Convertible Notes into shares of the Companys common stock at a conversion price of $0.01 per share for a
total of 27,000,000 shares, subject to a downward adjustment. See
Note 4 to these interim condensed consolidated financial statements.



| |                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As described
in note 4 to the interim condensed consolidated financial statements
contained in this Form 10-Q, the Loan Agreement sets forth certain
Events of Default, the occurrence of which would allow the Lender to
accelerate the Companys obligations under the Loan Agreement. See
Note 4 to these interim condensed consolidated financial statements.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 15,
2002, the Company entered into a Co-Promotion Agreement with
Medtronic under which the Company will promote and provide technical
advice for Medtronic's implantable drug delivery systems which are
used for the treatment of hepatic arterial infusion and malignant
pain. If the Company breaches or fails to comply with its obligations
under the Co-Promotion Agreement (after giving effect to any
applicable cure periods), then Medtronic or 51% of the holders of the
aggregate principal amount of the Convertible Notes may accelerate
the due date for payment of the Convertible Notes. See Note 4
to these unaudited interim condensed consolidated financial
statements.

7.   Sale of IFM



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective March 30, 2001 (the IFM Closing Date), the Company completed
the sale of certain IFM assets for the assumption of the Note related to IFM
(see Note 6 of the consolidated financial
statements contained in the Form 10-K), cash of $2,250,500 upon closing, and cash of $150,000 due six
months from the IFM Closing Date (the Second Installment). Assets sold
included inventory of $3.3 million, property and equipment of $2.4 million,
and intangible assets of $1.6 million. The asset purchase agreement provided
for a purchase price adjustment related to certain inventory values within
five business days after the IFM Closing Date. Based on the values of the
inventory following the IFM Closing Date, the Company recorded an additional
purchase price receivable of approximately $70,000 which is to be paid as
part of the Second Installment. In addition to the purchase of certain
assets, the purchaser assumed the Companys sublease of the IFM facility and
the related employees.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Second Installment in the amount of approximately $220,000 was due
from the purchaser on September 30, 2001. As of March 31, 2002, the Second
Installment has not been paid, and the purchaser has sought indemnification
under the asset purchase agreement for the Companys alleged breach of its
representations and warranties set forth in the agreement. On September 24,
2001, the Company filed a Complaint for Declaratory Judgement and Breach of
Contract against the purchaser in the Superior Court of Fulton County in the
State of Georgia. As of March 31, 2002 and December 31, 2001, the Company has
fully reserved the amount due from the purchaser of approximately $220,000.

8.   Segment Information



| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company operates two reportable segments, manufacturing and
distribution. The manufacturing segment includes products manufactured by the
Company as well as products manufactured by third parties on behalf of the
Company through manufacturing and supply agreements.



| |                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company evaluates the performance of its segments based on gross
profit; therefore, selling, general, and administrative costs, as well as
research and development, interest income/expense, and provision for income
taxes, are reported on an entity wide basis only.



| |                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The table below presents information about the reported sales (which
include intersegment sales) and gross profit (which include intersegment
gross profit) of the Companys segments as of and for the three months ended
March 31, 2002 and 2001.

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|              |  |                    |            |                    |  |       |           |              |  |   |            |  |  |   |           | 
|------------- |  | ------------------ | ---------- | ------------------ |  | ----- | --------- | ------------ |  | - | ---------- |  |  | - | --------- | 
|              |  | Three Months Ended |            | Three Months Ended
|              |  | March 31, 2002     |            | March 31, 2001    
|              |  |                    |            |                   
|              |  | Sales              |            | Gross Profit       |  | Sales |           | Gross Profit
|              |  |                    |            |                    |  |       |           |             
|Manufacturing |  | $                  | 4,391,221  |                    |  | $     | 2,261,154 |              |  | $ | 7,285,449  |  |  | $ | 3,958,527 | 
|Distribution  |  |                    | 8,104,217  |                    |  |       | 1,489,703 |              |  |   | 9,565,534  |  |  |   | 1,819,458 | 
|              |  |                    |            |                    |  |       |           |              |  |   |            |  |  |   |           | 
|              |  | $                  | 12,495,438 |                    |  | $     | 3,750,857 |              |  | $ | 16,850,983 |  |  | $ | 5,777,985 | 
|              |  |                    |            |                    |  |       |           |              |  |   |            |  |  |   |           | 



| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A reconciliation of total segment sales to total consolidated sales and
total segment gross profit to total consolidated gross profit of the Company
for the three months ended March 31, 2002 and 2001 is as follows:

|                                  |  |                    |            |           |  |   |            |  
|--------------------------------- |  | ------------------ | ---------- | --------- |  | - | ---------- | -
|                                  |  | Three Months Ended
|                                  |  |                   
|                                  |  | March 31,          |            | March 31,
|                                  |  | 2002               |            | 2001     
|                                  |  |                    |            |          
|Total segment sales               |  | $                  | 12,495,438 |           |  | $ | 16,850,983 |  
|Elimination of intersegment sales |  |                    | (576,105   | )         |  |   | (431,200   | )
|                                  |  |                    |            |           |  |   |            |  
|Consolidated sales                |  | $                  | 11,919,333 |           |  | $ | 16,419,783 |  
|                                  |  |                    |            |           |  |   |            |  

|                                         |  |                    |           |           |  |   |           | 
|---------------------------------------- |  | ------------------ | --------- | --------- |  | - | --------- | 
|                                         |  | Three Months Ended
|                                         |  |                   
|                                         |  | March 31,          |           | March 31,
|                                         |  | 2002               |           | 2001     
|                                         |  |                    |           |          
|Total segment gross profit               |  | $                  | 3,750,857 |           |  | $ | 5,777,985 | 
|Elimination of intersegment gross profit |  |                    | 12,744    |           |  |   | 150,706   | 
|                                         |  |                    |           |           |  |   |           | 
|Consolidated gross profit                |  | $                  | 3,763,601 |           |  | $ | 5,928,691 | 
|                                         |  |                    |           |           |  |   |           | 



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

|                                        |                      |   |                |            |                   |   |            |            | 
|--------------------------------------- | -------------------- | - | -------------- | ---------- | ----------------- | - | ---------- | ---------- | 
|                                        |                      |   | March 31, 2002 |            | December 31, 2001
|                                        |                      |   |                |            |                  
|Manufacturing                           |                      | $ | 28,601,212     |            |                   | $ | 35,768,752 |           
|Distribution                            |                      |   | 34,400,177     |            |                   |   | 35,633,080 |           
|                                        |                      |   |                |            |                   |   |            |           
|                                        | Total segment assets |   |                | 63,001,389 |                   |   |            | 71,401,832 | 
|Elimination of intersegment receivables |                      |   | (36,143        | )          |                   |   | (54,292    | )         
|                                        |                      |   |                |            |                   |   |            |           
|                                        | Consolidated assets  |   | $              | 62,965,246 |                   |   | $          | 71,347,540 | 
|                                        |                      |   |                |            |                   |   |            |           



| |                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Except for a sales office located in Belgium, the Companys operations
are located in the United States. Thus, substantially all of the Companys
assets are located domestically. Sales information by geographic area for the
three months ended March 31, 2002 and 2001, is as follows:

|                       |  |                    |            |               |  |   |            | 
|---------------------- |  | ------------------ | ---------- | ------------- |  | - | ---------- | 
|                       |  | Three Months Ended
|                       |  |                   
|                       |  | March
31,2002      |            | March
31,2001
|                       |  |                    |            |              
|United States          |  | $                  | 11,443,025 |               |  | $ | 15,725,922 | 
|Foreign                |  |                    | 476,308    |               |  |   | 693,861    | 
|                       |  |                    |            |               |  |   |            | 
|Consolidated net sales |  | $                  | 11,919,333 |               |  | $ | 16,419,783 | 
|                       |  |                    |            |               |  |   |            | 

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9.   Liquidity



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company incurred a loss of approximately $5 million in 2001, and as
discussed in Note 6 of the consolidated financial statements included in the
Form 10-K, the Company was in violation of the Forbearance Agreement with
Bank of America as of December 31, 2001 and continuing into 2002. As more
fully described in Note 4 of the interim condensed consolidated financial
statements contained elsewhere in this Form 10-Q, the Company has completed a
recapitalization transaction that extinguished all of the Companys
outstanding debt and warrants held by Bank of America, entered into new
financing facilities with new lenders and substantially reduced the Companys
total outstanding debt. The Companys senior loan agreement contains certain
requirements which are either determined at the discretion of the lender or
involve meeting financial covenants. The Company is unable to objectively
determine or measure whether it can comply with those requirements. While
there can be no assurance, it is the Companys expectation to comply with
these requirements and to have the financing facilities available for its
working capital needs throughout 2002. If the Company is unable to comply
with the requirements of the new financing facilities during 2002, the
Company may not be able to borrow under the senior loan agreement, and all
amounts may become immediately due.

10.   Goodwill and Other Intangible Assets



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142 Goodwill and Other Intangible Assets effective January 1, 2002.
SFAS No. 142 requires that: 1) goodwill and indefinite lived intangible
assets will no longer be amortized; 2) goodwill will be tested for impairment
at least annually at the reporting unit level; 3) intangible assets deemed to
have an indefinite life will be tested for impairment at least annually; and
4) the amortization period of intangible assets with finite lives will no
longer be limited to forty years. Upon the adoption of SFAS No. 142, the
Company recorded an impairment loss of $6.9 million.



| |                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In accordance with SFAS No. 142, prior period amounts were not restated.
A reconciliation of the previously reported net income and earnings per
share for the three months ended March 31, 2001 to the amounts adjusted for
the reduction of amortization expense, net of the related income tax effect,
is as follows:

|                             |  |            |           |           |  |             |        |   |  |  |        |  
|---------------------------- |  | ---------- | --------- | --------- |  | ----------- | ------ | - |  |  | ------ | -
|                             |  | Net Income |           | Basic EPS |  | Diluted EPS
|                             |  |            |           |           |  |            
|Reported                     |  |            | ($434,523 | )         |  |             | ($0.03 | ) |  |  | ($0.03 | )
|Add: amortization adjustment |  |            | 212,976   |           |  |             | 0.01   |   |  |  | 0.01   |  
|                             |  |            |           |           |  |             |        |   |  |  |        |  
|Adjusted                     |  |            | ($221,547 | )         |  |             | ($0.02 | ) |  |  | ($0.02 | )
|                             |  |            |           |           |  |             |        |   |  |  |        |  



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | Finite
lived
intangible assets as of March 31, 2002, subject to amortization
expense, are comprised of the following:

|                                      |  |                |            |              |  |     |            |   |  |   |           | 
|------------------------------------- |  | -------------- | ---------- | ------------ |  | --- | ---------- | - |  | - | --------- | 
|                                      |  | Gross Carrying |            | Accumulated  |  |    
|                                      |  | Amount         |            | Amortization |  | Net
|                                      |  |                |            |              |  |    
|Patents                               |  | $              | 8,218,000  |              |  | $   | (2,423,283 | ) |  | $ | 5,794,717 | 
|Non-compete
and consulting agreements |  |                | 2,100,592  |              |  |     | (1,914,722 | ) |  |   | 185,870   | 
|Debt
issuance costs                   |  |                | 1,450,087  |              |  |     | (29,082    | ) |  |   | 1,421,005 | 
|Other                                 |  |                | 368,253    |              |  |     | (305,718   | ) |  |   | 62,535    | 
|                                      |  |                |            |              |  |    
|Total                                 |  | $              | 12,136,932 |              |  | $   | (4,672,805 | ) |  | $ | 7,464,127 | 
|                                      |  |                |            |              |  |    



| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Amortization
expense for finite lived intangible assets was $335,449 for the three
months ended March 31, 2002. Annual estimated amortization
expense for each of the five succeeding fiscal years is expected to
approximate $600,000.
|
| | The
net carrying value of goodwill as of March 31, 2002 by operating
segment is as follows:                                                                                                                                            

|               |  |  |  |  |  |  |  |  |  |   |            | 
|-------------- |  |  |  |  |  |  |  |  |  | - | ---------- | 
|               |  |  |  |  |  | 
|               |  |  |  |  |  | 
|               |  |  |  |  | 
|Manufacturing  |  |  |  |  |  |  |  |  |  | $ | 8,706,001  | 
|Distribution   |  |  |  |  |  |  |  |  |  |   | 16,101,903 | 
|               |  |  |  |  |  | 
|Total
Goodwill |  |  |  |  |  |  |  |  |  | $ | 24,807,904 | 
|               |  |  |  |  |  | 



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
change in the net carrying amount of goodwill during the three months
ended March 31, 2002 is due to the impairment loss recorded on
the manufacturing segment of $6.9 million upon the adoption of
SFAS 142.

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

Results of Operations

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001

Net Sales.Net sales decreased 27.4% to $11.9 million for the first
quarter of 2002 from $16.4 million for the first quarter of 2001. This decrease
is primarily attributable to the fact that sales of the IFM product
line (of approximately $1.7 million in the first
quarter of 2001) are not included in 2002 net sales as the product
line was sold on March 30, 2001, and a decline in distribution sales in the
first quarter of 2002, due to the loss of one of Stepics manufacturing product
lines (Pall) at the end of 2001 which represents an approximate
$1.1 million revenue loss in first quarter of 2002 from first quarter 2001. The allocation of net sales on a segment basis
for the three months ended March 31, 2002 resulted in net sales of $4.4 million
from the manufacturing segment and $8.1 million from the distribution segment,
before intersegment eliminations. The allocation of net sales on a segment
basis for the three months ended March 31, 2001 resulted in net sales of $7.3
million from the manufacturing segment and $9.6 million from the distribution
segment, before intersegment eliminations.

Gross Profit.Gross profit decreased 36.5% to $3.8 million for the first
quarter of 2002 from $5.9 million for the first quarter of 2001. Gross margin
percentage decreased to 31.6% in the first quarter of 2002 from 36.1% in the first quarter
of 2001. The decrease in gross profit is the result of decreased sales and the
decrease in gross margin percentage is the result of distribution sales, which generate a
lower gross margin percentage, comprising a larger percentage of total sales in the first
quarter of 2002 compared to the first quarter of 2001. The allocation of gross
profit between segments for the three months ended March 31, 2002 resulted in
gross profit of $2.3 million from the manufacturing segment and $1.5 million
from the distribution segment, before intersegment eliminations. The allocation
of gross profit between segments for the three months ended March 31, 2001
resulted in gross profit of $4 million from the manufacturing segment and $1.8
million from the distribution segment, before intersegment eliminations.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses (SG&A) increased approximately $1.6 million or 30.8%
to approximately $6.7 million for the first quarter of 2002 compared with $5.1
million for the first quarter of 2001. This increase is fully attributable to
recapitalization expenses of approximately $2.6 million incurred as a result of
the Companys recapitalization transaction in March 2002. Exclusive of the
recapitalization expenses, SG&A decreased approximately $1 million over the
first quarter of 2001. This decrease is a result of lower turnaround
expenses, including consulting fees, PR campaign fees and
severances, as well as lower salaries, travel and amortization expenses in
2002. SG&A expenses increased as a percentage of net sales to 56.3% for the
first quarter of 2002 from 31.3% for the first quarter of 2001. This increase
is due to decreased sales as well as the recapitalization expenses in the first
quarter of 2002 from the first quarter of 2001.

Interest Expense.Net interest expense decreased to approximately $1.2
million in the first quarter of 2002 compared to approximately $1.3 million in
the first quarter of 2001. The decrease in 2002 is due to lower debt
outstanding during the first quarter of 2002 compared to the first quarter of
2001 as well as lower interest rates under the Companys BofA Credit Facility in the first quarter of 2002.

Extraordinary Gain.The Company recorded an extraordinary gain of
approximately $11.7 million on the
extinguishment of its BofA debt as a result of the recapitalization transaction
during the first quarter of 2002.

Goodwill Impairment Loss.Upon the adoption of SFAS No. 142 on January 1,
2002, the Company recognized an impairment loss of approximately $6.9 million
related to its manufacturing reporting unit. The Company has
identified two reporting units, the aforementioned manufacturing unit
and the distribution unit. These reporting units are consistent with
the Company's previously identified reportable segments under
SFAS 131. In applying the transitional impairment model
prescribed by SFAS 142, the Company used a discounted cash flow
model to determine the fair value of the net assets of each of the
Company's reporting units. Significant assumptions utilized in the
model were revenue growth rates, gross margin percentages,
depreciation and amortization, capital expenditures, working capital
requirements, and the appropriate discount rate. The fair value of
the Company's manufacturing reporting unit's net assets were less
than the carrying value of those net assets; thus, the Company
proceeded to step 2 of the SFAS 142 impairment model,
whereby the Company allocated that fair value to the reporting unit's
tangible and intangible net assets. The Company utilized various
methods to determine the fair value of the manufacturing 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 distribution unit and concluded that the goodwill
associated with that reporting unit was not impaired.

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

Liquidity and Capital Resources

Net cash used in operating activities was
$2.4 million for the three
months ended March 31, 2002 compared with approximately $607,000 for the three
months ended March 31, 2001. The increase in cash used in operations during
2002 compared to 2001 was primarily attributable to the Recapitalization
transaction expenses paid in 2002, as well as the increased loss from
operations in 2002 from 2001 (see above description in "Results of
Operations").

Net cash provided by investing activities was
approximately $262,000 for the three
months ended March 31, 2002 compared to $2.2 million for the three months ended
March 31, 2001. Cash provided by investing activities in 2002 consisted of cash
proceeds from the CEO

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and President for payment of their shareholder notes outstanding. Cash provided
by investing activities in 2001 consisted of cash proceeds from the sale of IFM
of approximately $2.3 million. Cash used in investing activities in both 2002
and 2001 included capital expenditures for the Companys facilities.

Net cash provided by
(used in) financing activities
was approximately $77,000 for
the three months ended March 31, 2002 compared to approximately
($799,000)
for the three months ended March 31, 2001. Financing activities in
2002 substantially consisted of debt issuance costs paid as part of the
Recapitalization of approximately $1.5 million as well as net proceeds from the issuance
of long-term debt and payment of debt on the Companys BofA Credit
Facility, both pursuant to the Recapitalization. 2001 financing activities
primarily consisted of borrowings from and repayments of its working
capital loan under its BofA Credit Facility, as well as a principal
payment of its BofA Credit Facility of approximately
$2.3 million from the proceeds of the sale of IFM.

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

On March 19, 2002, the Company announced that it had completed an
arrangement with ComVest, LaSalle, and Medtronic to recapitalize the Company
by extinguishing all of the Companys senior debt and warrants held by Bank of
America and substantially reducing the Companys total outstanding debt.
Pursuant to the Recapitalization, the Company issued Convertible Notes in the
amount of $15 million to ComVest, Medtronic and other investors, assumed a $2
million Junior Note payable to Bank of America, and entered into the LaSalle
Credit Facility for up to $22 million, of which approximately $8.8 million was
outstanding as of March 31, 2002.

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

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

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

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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 will
record a net extraordinary gain on the early extinguishment of debt of
approximately $11 million, net of tax of approximately $4 million during the
first quarter of 2002. In exchange for funding a portion of the $22 million
cash purchase price paid to BofA, ComVest assigned $4 million in principal
amount of the BofA Note to Medtronic and $6.6 million in principal amount of
the BofA Note to the Additional Note Purchasers while retaining $11.4 million
in principal amount of the BofA Note itself. After such assignments, the
Company issued the Convertible Notes under the Note Purchase Agreement in the
aggregate principal amount of $15 million in exchange for the surrender of $15
million in principal amount of the BofA Note held by ComVest, Medtronic and the
Additional Note Purchasers. The remaining $7 million in principal amount of the
BofA Note was repaid with the proceeds of the Bridge Loan.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In January 2002, the Company entered into a Fourth
Amendment to the Forbearance Agreement with Bank of America, pursuant to which Bank of America
agreed to extend the Forbearance Period until March 15, 2002 (the Expiration
Date) in order for the Company to consider its strategic alternatives. On
March 15, 2002, the BofA Credit Facility was assigned from BofA to ComVest. On
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 and to
integrate newly acquired products with existing products, the possible failure
to successfully commence the manufacturing of new products, the possible
failure to maintain or increase production volumes of new or existing
products in a timely or cost-effective manner, the possible failure to maintain
compliance with applicable licensing or regulatory requirements, the inability
to successfully integrate acquired operations and products or to realize
anticipated synergies and economies of scale from acquired operations, the
dependence on patents, trademarks, licenses and proprietary rights, the
Companys potential exposure to product liability, the inability to introduce
new products, the Companys reliance on a few large customers, the Companys
dependence on key personnel, the fact that the Company is subject to control by
certain shareholders, pricing pressure related to healthcare reform and managed
care and other healthcare provider organizations, the possible failure to
comply with applicable federal, state or foreign laws or regulations,
limitations on third-party reimbursement, the highly competitive and fragmented
nature of the medical devices industry, deterioration in general economic
conditions and the Companys ability to pay its indebtedness. Management
believes that these forward-looking statements are reasonable. However, you should not place undue reliance on
such statements. These statements are based on current expectations and speak
only as of the date of such statements. The Company undertakes no obligation
to publicly update or revise any forward-looking statement, whether as a result
of future events, new information or otherwise. Additional information
concerning the risks and uncertainties listed above, and other factors that you
may wish to consider, is contained in Managements Discussion and Analysis of
Financial Condition and Results of Operations above and is also contained in
the Form 10-K under the section entitled Risk Factors and elsewhere and in
the Companys filings from time to time pursuant to the Securities Exchange Act
of 1934, as amended.

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Like other companies, the Company is exposed to market risks relating to
fluctuations in interest rates. Borrowings under the LaSalle Credit Facility
accrue interest at annual rate of prime plus 2%, plus an additional 2% upon the
occurrence of an event of default. As of March 31, 2002, the Company had
approximately $8.8 million outstanding under the LaSalle Credit Facility. If
market interest rates were to increase immediately and uniformly by 10% from
levels as of March 31, 2002, the additional interest expense would be
considered immaterial to the Companys interim condensed consolidated financial
position, results of operations and cash flows.

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PART II.   OTHER INFORMATION




ITEM 1.   LEGAL PROCEEDINGS

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




ITEM 2.   CHANGES IN SECURITIES AND USE OF FUNDS.

The Company issued convertible notes and shares of its common stock in
connection with the Recapitalization. See Note 4 to the Companys interim
condensed consolidated financial statements contained herein.




ITEM 3.   DEFAULTS UPON SENIOR SECURITIES.

Effective
March 30, 2001, the Company entered into a Forbearance Agreement
(as amended, the Forbearance Agreement) and a First
Amendment to the Forbearance Agreement with Bank of America, N.A. wherein
Bank of America agreed to forbear from exercising its rights and
remedies allowed under a $50 million amended and restated 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. Between March 31, 2001 and December 31, 2001, the
Company entered into three amendments to the Forbearance Agreement,
amending the termination dates and imposing covenants on the
Company.

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 in order for the
Company to consider its strategic alternatives. On March 16,
2002, the Company consummated the Recapitalization, and the
Forbearance Agreement was terminated.

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




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

Not applicable.




ITEM 5.   OTHER INFORMATION

Not applicable.

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

(a)  Exhibits.

|              |  |   |  |                                                                                                                                                                                                                                                                                                                                                       
|------------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  |   |  | Description of Exhibits                                                                                                                                                                                                                                                                                                                               
|              |  |   |  |                                                                                                                                                                                                                                                                                                                                                       
|3.1           |  |  |  | Amended and Restated Articles of Incorporation of the
Company, filed as Exhibit 3.1 to the Registrants Form S-1
dated April 14, 1998 (SEC File No. 333-46349) and
incorporated herein by reference.                                                                                                                                                  
|             
|3.2           |  |  |  | Amended and Restated Bylaws of the Company, filed as
Exhibit 3.2 to the Registrants Form S-1 dated April 14,
1998 (SEC File No. 333-46349) and incorporated herein by
reference.                                                                                                                                                                     
|             
|4.1           |  |  |  | See Articles II, III, VII and IX of the Amended and
Restated Articles of Incorporation filed as Exhibit 3.1 and
Articles I, VII, VIII and IX of the Amended and Restated
Bylaws filed as Exhibit 3.2, filed as Exhibit 4.1 to the
Registrants Form S-1 dated April 14, 1998 (SEC File No.
333-46349) and incorporated herein by reference.           
|             
|4.2           |  |  |  | Specimen Common Stock Certificate, filed as Exhibit 4.2
to the Registrants Form S-1 dated April 14, 1998 (SEC File
No. 333-46349) and incorporated herein by reference.                                                                                                                                                                              
|             
|4.3           |  |  |  | Rights Agreement dated April 9, 1998 by and between the
Company and Tapir Investments (Bahamas) Ltd., filed as
Exhibit 4.3 to the Registrants Form 10-K dated March 31,
1999 (SEC File No. 000-24025) and incorporated herein by
reference.                                                                                                          
|             
|10.1          |  |  |  | Note Purchase Agreement among the Company, ComVest
Venture Partners, L.P. and certain Additional Note
Purchasers dated March 1, 2002, filed as Exhibit 10.54 to
the Registrants Annual Report on Form 10-K for the year
ended December 31, 2001 (SEC File Number 001-15459) and
incorporated herein by reference.                                    
|             
|10.2          |  |  |  | Voting Agreement among the Company, ComVest Venture
Partners, L.P., Marshall B. Hunt, William E. Peterson, Jr.
and Hunt Family Investments L.L.L.P., dated March 1, 2002,
filed as Exhibit 10.55 to the Registrants Annual Report on
Form 10-K for the year ended December 31, 2001 (SEC File
Number 001-15459) and incorporated herein by reference.
|             
|10.3          |  |  |  | Securityholders Agreement among the Company, ComVest
Venture Partners, L.P., Medtronic, Inc. and certain
shareholders, dated March 16, 2002, filed as Exhibit 10.56
to the Registrants Annual Report on Form 10-K for the year
ended December 31, 2001, dated April 16, 2002 (SEC File
Number 001-15459) and incorporated herein by reference.       
|             
|10.4          |  |  |  | Senior Subordinated Convertible Note payable by the
Company to ComVest Venture Partners, L.P., dated March 16,
2002, filed as Exhibit 10.57 to the Registrants Annual
Report on Form 10-K for the year ended December 31, 2001
(SEC File Number 001-15459) and incorporated herein by
reference.                                                     
|             
|10.5          |  |  |  | Senior Subordinated Convertible Note payable by the
Company to Medtronic, Inc., dated March 16, 2002, filed as
Exhibit 10.58 to the Registrants Annual Report on Form
10-K for the year ended December 31, 2001 (SEC File Number
001-15459) and incorporated herein by reference.                                                                    
|             
|10.6          |  |  |  | Form of Senior Subordinated Convertible Note payable by
the Company to certain additional parties, dated March 16,
2002, filed as Exhibit 10.59 to the Registrants Annual
Report on Form 10-K for the year ended December 31, 2001
(SEC File Number 001-15459) and incorporated herein by
reference.                                                 
|             
|10.7          |  |  |  | Junior Subordinated Promissory Note payable by ComVest
Venture Partners, L.P. to Bank of America, dated March 15,
2002 and assumed by the Company on March 15, 2002, filed as
Exhibit 10.60 to the Registrants Annual Report on Form
10-K for the year ended December 31, 2001 (SEC File Number
001-15459) and incorporated herein by reference.     

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|      |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.8  |  |  |  | Securities Pledge Agreement among the Company, Marshall
B. Hunt and Hunt Family Investments, L.L.L.P., dated March
16, 2002, filed as Exhibit 10.61 to the Registrants Annual
Report on Form 10-K for the year ended December 31, 2001
(SEC File Number 001-15459) and incorporated herein by
reference.                                                                                                                                                                                                      
|     
|10.9  |  |  |  | Loan and Security Agreement between the Company and
Standard Federal Bank National Association acting by and
through LaSalle Business Credit, Inc., as its agent, dated
March 18, 2002, filed as Exhibit 10.62 to the Registrants
Annual Report on Form 10-K for the year ended December 31,
2001 (SEC File Number 001-15459) and incorporated herein by
reference.                                                                                                                                           
|     
|10.10 |  |  |  | Warrant, dated March 18, 2002, granted by the Company to
Standard Federal Bank National Association, acting by and
through LaSalle Business Credit, Inc, as its agent, which
grants the right to purchase 0.6% of the Companys common
stock outstanding at a price of $0.01 per share until March
18, 2012, filed as Exhibit 10.63 to the Registrants Annual
Report on Form 10-K for the year ended December 31, 2001,
dated April 16, 2002 (SEC File Number 001-15459) and
incorporated herein by reference.
|     
|10.11 |  |  |  | Warrant, dated March 18, 2002, granted by the Company to
Standard Federal Bank National Association, acting by and
through LaSalle Business Credit, Inc, as its agent, which
grants the right to purchase 0.9% of the Companys common
stock outstanding at a price of $0.01 per share until March
18, 2012, filed as Exhibit 10.64 to the Registrants Annual
Report on Form 10-K for the year ended December 31, 2001
(SEC File Number 001-15459) and incorporated herein by
reference.                      
|     
|10.12 |  |  |  | Employment Agreement between the Company and Marshall B.
Hunt, dated March 16, 2002, filed as Exhibit 10.65 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2001 (SEC File Number 001-15459) and
incorporated herein by reference.                                                                                                                                                                                                                                              
|     
|10.13 |  |  |  | Non-Qualified Stock Option Agreement between the Company
and Marshall B. Hunt, dated March 15, 2002, for the
purchase of 1,000,000 shares of the Companys common stock
at an option price of $0.45 per share, filed as Exhibit
10.66 to the Registrants Annual Report on Form 10-K for
the year ended December 31, 2001 (SEC File Number
001-15459) and incorporated herein by reference.                                                                                                                    
|     
|10.14 |  |  |  | Non-Qualified Stock Option Agreement between the Company
and Marshall B. Hunt, dated March 15, 2002, for the
purchase of 2,500,000 shares of the Companys common stock
at an option price of $0.45 per share, filed as Exhibit
10.67 to the Registrants Annual Report on Form 10-K for
the year ended December 31, 2001 (SEC File Number
001-15459) and incorporated herein by reference.                                                                                                                    
|     
|10.15 |  |  |  | Employment Agreement between the Company and William E.
Peterson, Jr., dated March 16, 2002, filed as Exhibit 10.68
to the Registrants Annual Report on Form 10-K for the year
ended December 31, 2001 (SEC File Number 001-15459) and
incorporated herein by reference.                                                                                                                                                                                                                                      
|     
|10.16 |  |  |  | Non-Qualified Stock Option Agreement between the Company
and William E. Peterson, Jr., dated March 15, 2002, for the
purchase of 1,000,000 shares of the Companys common stock
at an option price of $0.45 per share, filed as Exhibit
10.69 to the Registrants Annual Report on Form 10-K for
the year ended December 31, 2001 (SEC File Number
001-15459) and incorporated herein by reference.                                                                                                            
|     
|10.17 |  |  |  | Copromotion Agreement between the Company and Medtronic,
Inc., dated March 15, 2002, filed as Exhibit 10.70 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2001 (SEC File Number 001-15459) and
incorporated herein by reference.                                                                                                                                                                                                                                              
|     
|10.18 |  |  |  | Agreement between the Company, Steven Picheny and Howard
Fuchs, dated March 14, 2002, filed as Exhibit 10.71 to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2001 (SEC File Number 001-15459) and
incorporated herein by reference.                                                                                                                                                                                                                                             

(b)  Reports on Form 8-K

On March 20, 2002, the Company filed a Current Report on Form 8-K,
disclosing its results of operations for fiscal year 2001 and also announcing
that the Company had consummated the Recapitalization.

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HORIZON MEDICAL PRODUCTS, INC.




SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|             |  |                                                                    
|------------ |  | -------------------------------------------------------------------
|             |  | HORIZON MEDICAL PRODUCTS, INC.                                     
|             |  |                                                                    
|             |  | (Registrant)                                                       
|            
|May 15, 2002 |  | /s/ William E. Peterson, Jr.                                       
|             |  |                                                                    
|             |  | President (Principal Financial Officer and
Duly Authorized Officer)

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