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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549




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Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the financial year ended December 31,
    2003                                          
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number 001-15459



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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(Address of principal executive
    offices) |  | 31816(Zip Code)                         

(Registrants telephone number, including
area code):

(706) 846-3126


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

Common Stock, $.001 Par Value

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

None

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

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

Indicate by check
mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes o     No þ

The aggregate
market value of the voting stock held by non-affiliates of the
Registrant was $9,326,005 on June 30, 2003, based on the
closing sale price of such stock on The American Stock Exchange
of $0.57 on such date.

The number of
shares outstanding of the Registrants Common Stock, $.001
par value, as of March 26, 2004 was 43,943,653.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Items 10, 11,
12, 13 and 14 of Part III is incorporated by reference from the
proxy statement of the Company for the 2004 Annual Meeting of
Shareholders to be filed with the Commission pursuant to
Regulation 14A not later than 120 days after the end
of the fiscal year covered by this annual report. The Company
anticipates its 2004 Annual Meeting of Shareholders will be held
on or about May 11, 2004.



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TABLE OF CONTENTS

|        |  |                                                                                          |  |      |    | 
|------- |  | ---------------------------------------------------------------------------------------- |  | ---- | -- | 
|        |  |                                                                                          |  | Page
|        |  |                                                                                          |  |     
|       
|PART I 
|Item 1. |  | Description of Business                                                                  |  |      | 1  | 
|        |  | Background                                                                               |  |      | 1  | 
|        |  | Recapitalization                                                                         |  |      | 2  | 
|        |  | LaSalle Credit Facility                                                                  |  |      | 4  | 
|        |  | Ancillary Recapitalization Agreements                                                    |  |      | 6  | 
|        |  | Description of Business                                                                  |  |      | 8  | 
|        |  | Results by Industry Segment                                                              |  |      | 9  | 
|        |  | Acquisitions and Divestitures                                                            |  |      | 10 | 
|        |  | Manufacturing                                                                            |  |      | 11 | 
|        |  | Government Regulation                                                                    |  |      | 11 | 
|        |  | Anti-Kickback Statute                                                                    |  |      | 13 | 
|        |  | Healthcare Reform                                                                        |  |      | 13 | 
|        |  | Insurance                                                                                |  |      | 14 | 
|        |  | Patents, Trademarks, Licenses and Proprietary
    Rights                                 |  |      | 14 | 
|        |  | Environmental Compliance                                                                 |  |      | 15 | 
|        |  | Raw Materials                                                                            |  |      | 15 | 
|        |  | Backlog                                                                                  |  |      | 16 | 
|        |  | Research and Product Development                                                         |  |      | 16 | 
|        |  | Competition                                                                              |  |      | 16 | 
|        |  | Employees                                                                                |  |      | 16 | 
|        |  | Availability of Company Information, Code of
    Ethics                                  |  |      | 16 | 
|Item 2. |  | Properties                                                                               |  |      | 17 | 
|Item 3. |  | Legal Proceedings                                                                        |  |      | 17 | 
|Item 4. |  | Submission of Matters to a
    Vote of Security Holders                                  |  |      | 18 | 
|       
|PART II
|Item 5. |  | Market for the
    Registrants Common Stock and Related Security Holder
    Matters     |  |      | 18 | 
|        |  | Sales of Unregistered Securities During the
    Fourth Quarter of 2003                   |  |      | 19 | 
|Item 6. |  | Selected Financial Data                                                                  |  |      | 20 | 
|Item 7. |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operation |  |      | 21 | 
|        |  | Cautionary Statement Regarding Forward-Looking
    Statements                            |  |      | 21 | 
|        |  | Background                                                                               |  |      | 21 | 
|        |  | Critical Accounting Policies                                                             |  |      | 23 | 
|        |  | Related Party Transactions                                                               |  |      | 23 | 
|        |  | Results of Operations                                                                    |  |      | 24 | 
|        |  | Year Ended December 31, 2003 compared to
    Year Ended December 31, 2002                |  |      | 24 | 

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|                                               |  |                                                                                          |    |      |    | 
|---------------------------------------------- |  | ---------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                               |  |                                                                                          |    | Page
|                                               |  |                                                                                          |    |     
|                                               |  | Year Ended December 31, 2002 compared to
    Year Ended December 31, 2001                |    |      | 26 | 
|                                               |  | Reconciliation of EBITDA to Net Income (loss)                                            |    |      | 28 | 
|                                               |  | Quarterly Results                                                                        |    |      | 28 | 
|                                               |  | Liquidity and Capital Resources                                                          |    |      | 29 | 
|                                               |  | Recently Issued Accounting Standards                                                     |    |      | 36 | 
|                                               |  | Impact of Inflation and Foreign Currency Exchange
    Fluctuation                        |    |      | 36 | 
|                                               |  | Risk Factors                                                                             |    |      | 36 | 
|Item 7A.                                       |  | Quantitative and Qualitative
    Disclosures About Market Risk                           |    |      | 43 | 
|Item 8.                                        |  | Financial Statements and
    Supplementary Data                                          |    |      | 43 | 
|Item 9.                                        |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure |    |      | 43 | 
|Item 9A.                                       |  | Controls and Procedures                                                                  |    |      | 44 | 
|                                              
|PART III                                      
|Item 10.                                       |  | Directors and Executive
    Officers of the Registrant                                   |    |      | 44 | 
|Item 11.                                       |  | Executive Compensation                                                                   |    |      | 44 | 
|Item 12.                                       |  | Security Ownership of
    Certain Beneficial Owners and Management                       |    |      | 44 | 
|Item 13.                                       |  | Certain Relationships and
    Related Transactions                                       |    |      | 44 | 
|Item 14.                                       |  | Principal Accountant Fees
    and Services                                               |    |      | 44 | 
|Item 15.                                       |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                      |    |      | 45 | 
|SIGNATURES                                     |  |                                                                                          | 51 |     
|EX-10.59 SEPARATION AGREEMENT                 
|EX-10.60 AMENDMENT TO EMPLOYMENT AGREEMENT    
|EX-10.61 FORM OF BONUS AGREEMENT              
|EX-14.1 CODE OF CONDUCT AND ETHICS            
|EX-23.1 CONSENT OF GRANT THORNTON LLP         
|EX-23.2 CONSENT OF PRICEWATERHOUSE COOPERS LLP
|EX-31.1 CERTIFICATION OF THE C.E.O.           
|EX-31.2 CERTIFICATION OF THE P.F.O.           
|EX-32.1 CERTIFICATION OF THE C.E.O.           
|EX-32.2 CERTIFICATION OF THE P.F.O.           



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PART I




Item 1. Description of
Business

Founded in 1990, Horizon Medical Products, Inc.
(including its subsidiaries, we or the
Company) is a leader in design, development,
manufacture and sale of technologically advanced, high
value-added, percutaneous vascular and spinal access systems.
The Companys oncology product lines include implantable
ports, some of which feature its proprietary VTX®
technology; tunneled central venous catheters; and stem-cell
transplant catheters used primarily in cancer treatment
protocols. The Company also markets a complete line of acute and
chronic dialysis catheters used for kidney failure patients. In
June 2003, the Company gained exclusive U.S. rights to
distribute Medtronic Inc.s Hepatic Arterial Infusion
(HAI) product line, including sales and case support of
Medtronics IsoMed® infusion system and related
products.

Vascular access ports are implantable devices
used for the central venous administration of chemotherapy,
antibiotics, and for blood samples and diagnostic tests. Central
venous access facilitates a more systemic, long-term delivery of
treatment agents, while mitigating certain harsh side effects of
certain treatment protocols and eliminating the need for
repeated access to peripheral veins. Once implanted in the body,
a port can be utilized for up to approximately 2,000 accesses
depending upon needle gauge size and the part size. Our vascular
access ports are used primarily in systemic or regional
short-and long-term cancer treatment protocols that require
frequent infusions of highly concentrated or toxic medications
(such chemotherapy agents) and frequent blood samplings. Our
lines of vascular access ports consist of the following families
of products: (1) the Vortex® family of ports including
Vortex®VTX®, LifePort®VTX® and
TriumphTM VTX®; (2) LifePort®;
(3) Triumph-1®; (4) Infuse-a-Port®; and
(5) TitanPortTM.

We also manufacture and market hemodialysis and
apheresis catheters. Hemodialysis catheters are used to treat
patients suffering from renal failure who are required to
undergo short-term (acute) care or long-term (chronic)
hemodialysis, a process involving the removal of waste products
from the blood by passing a patients blood through a
dialysis machine. Stem cell apheresis is a protocol for treating
certain forms of mid- and late-stage cancers, particularly
breast cancer. The typical apheresis procedure involves
inserting a catheter into a patient through which (1) blood
is withdrawn from the patient, cycled through an apheresis
machine in which stem cells are removed from the blood and the
blood is reinfused into the body, (2) high doses of
chemotherapy agents, as well as antibiotics and blood products,
are administered to the patient over extended periods of time,
and (3) the previously removed stem cells are subsequently
reintroduced into the patient. Our catheters include the
following families of products: (1) Circle C® chronic
and acute hemodialysis catheters, including the
LifeJetTM and LifeJetTM F-16 chronic
hemodialysis catheters; (2) triple lumen central venous
catheters; (3) peripherally inserted central venous
catheters; and (4) a valved central venous catheter called
the LifeValve® Platinum catheter. We also manufacture and
sell the LifeGuardTM safety infusion needle, which is
designed for use with vascular access ports.




Background

The Company was incorporated and began its
operations in February 1990 as a distributor of medical devices
and began to distribute vascular access devices in 1990. In
November 1992, the Company entered into a collaborative effort
with a leading heart valve manufacturer to design and develop a
new line of vascular access ports for the Company. This new line
of ports, the Triumph-1® line, was introduced in September
1994. The Company continues to market a line of Triumph-1®
vascular access ports and in September 2001, it transitioned the
manufacturing of the Triumph-1® line in-house to the
Companys current manufacturing facility. Prior to that
transition, since 1996, certain models in the Triumph-1®
line had been manufactured for the Company by ACT Medical. In
May 1995, the Company began to distribute the NeoStar
Medical® line of hemodialysis catheters, and acquired that
line in October 1995.

In March 1996, the Company began construction of
a 20,000 square foot manufacturing, distribution and
administrative facility in Manchester, Georgia. The Company
began manufacturing the NeoStar Medical® product line at
this facility in October 1996 and expanded this facility in 1998
and in 2000 to its current configuration of approximately
60,000 square feet. In July 1997, the Company acquired the
port business of

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Strato/Infusaid. The primary product lines
obtained in the Strato/Infusaid acquisition included the
LifePort® and Infuse-a-Port® vascular access ports and
the Infuse-a-Cath® line of catheters. In 1998, the Company
made additional product acquisitions, including the
Vortex®, TitanPortTM and OmegaPort® lines
acquired from Norfolk Medical. In addition, the Company acquired
the Columbia Vital Systems, Inc. (CVS) and the
Stepic Medical device distribution businesses. In September
2002, the Company divested the Stepic business. See
Acquisitions and Divestitures below.


On October 9, 2000, the Company consummated
the acquisition of certain assets used in the manufacture and
sale of medical devices by Ideas for Medicine, Inc., or IFM, a
wholly-owned subsidiary of CryoLife, Inc., or CryoLife. This
acquisition effectively completed the acquisition by the Company
of the IFM product line which was acquired in September of 1998.
In addition to the purchase of assets, consisting primarily of
inventory and leasehold improvements, the Company also assumed
control of IFMs approximately 30,000 square foot
manufacturing facility in St. Petersburg, Florida and the 80
employees there. On March 30, 2001, the Company sold the
IFM business to Vascutech, Inc. and Vascutech assumed control of
such facility. See Acquisitions and Divestitures
below.

While the Company has acquired products through
the acquisitions described above, more recently the Company has
developed new products. The Companys VTX® technology,
which was introduced by the Company in 2000, is featured in its
Vortex® port, its new LifePort®VTX® titanium and
plastic ports, and its new TriumphTM VTX®
titanium and plastic ports. VTX® technology refers to the
swirling blood flow produced by a uniquely rounded reservoir
design and tangential outlet, which substantially reduces
thrombosis or the build up of sludge from blood and drug
products in the port reservoir. The square cornered reservoirs
and perpendicular outlets that are common to other vascular
access ports promote the formation of sludge, flush less
efficiently, and provide chaotic blood flow. These conditions,
in turn, cause complications that require additional procedures
at additional cost. The Company introduced its new chronic
hemodialysis catheter, LifeJetTM, in December 2001
and its LifeJetTM F-16 in January 2003. The
Companys new safety infusion needle,
LifeGuardTM, designed for use with vascular access
ports, was released in June 2002 and its new central venous
catheter, LifeValve®, was released in October 2002.

In September 2003, we launched a new central
venous catheter, the LifeValve® Platinum, and in February
2004, we launched our Vortex® MP port system which is
designed for peripheral use. The Vortex® MP port system
incorporates a rounded chamber and off-set stem to promote more
efficient flushing. The Vortex®VTX® design has been
clinically proven to significantly reduce complications, and the
port is guaranteed against sludge buildup in the chamber of the
port.




Recapitalization

On March 1, 2002, the Company entered into a
Note Purchase Agreement (as amended by Amendment No. 1 on
October 21, 2003, the Note Purchase Agreement
and together with the transactions contemplated thereby, the
Recapitalization) with ComVest Venture Partners,
L.P. (ComVest), Medtronic, Inc.
(Medtronic), and 26 individual and entity Additional
Note Purchasers (collectively, the Additional Note
Purchasers). Under the Note Purchase Agreement, the
Company issued $15 million of Senior Subordinated
Convertible Notes (the Convertible Notes). We began
making quarterly interest payments on these Convertible Notes in
June 2002. For the initial six-month period beginning June 2002,
interest accrued at a rate of 6% per year. Currently, interest
accrues at a rate of 8% per year and will continue to do so
until the notes are paid in full and mature on July 16,
2005. 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
material terms of the Convertible Notes are described below.

The Note Purchase Agreement contains certain
affirmative and negative covenants, including, but not limited
to the following:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | the provision of quarterly and annual financial
    statements to the holders of the Convertible Notes;
|
| |  | rights of inspection of the Companys books
    and records;                                           
|
| |  | maintenance of properties and the Companys
    corporate existence;                                   

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| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | restrictions on indebtedness, other than
    indebtedness relating to permitted liens and certain
    indebtedness to affiliates;
|
| |  | restrictions on liens, except for certain
    purchase money liens, statutory liens, tax liens and judicial
    liens;           
|
| |  | restrictions on certain business combinations and
    disposition of the Companys assets;                                       
|
| |  | restrictions on the sale or discount of
    receivables;                                                                         
|
| |  | restrictions on transactions with affiliates
    outside of the ordinary course of business;                                     
|
| |  | restrictions on making loans or advances to
    third-parties, and guarantees of third-party obligations;                        
|
| |  | restrictions on entering into, or modifying any
    existing material contract of the Company;                                   
|
| |  | restrictions on certain capital expenditures by
    the Company;                                                                 
|
| |  | restrictions on the Companys redemption of
    its securities; and                                                              
|
| |  | prohibitions on the ability to pay dividends.                                                                                    

The Events of Default include, but are not
limited to, failure to pay an obligation when due, failure to
comply with obligations under the Amended and Restated
Securityholders Agreement, dated as of October 21, 2003
(the Securityholders Agreement), or the Co-Promotion
Agreement with Medtronic (as described below), breach of any
covenant which remains uncured for 15 days, bankruptcy, a
change of control and failure to obtain shareholder approval of
certain proposals related to the Recapitalization at the
Companys 2002 annual meeting of shareholders (the
2002 Annual Meeting) within 195 of the closing date
of March 16, 2002. On September 17, 2002, at the 2002
Annual Meeting, the Companys shareholders approved all
such proposals relating to the Recapitalization. Generally, upon
an Event of Default, the holders of a majority of the aggregate
principal amount of Convertible Notes outstanding may declare
the unpaid principal and interest on the Notes immediately due
and payable. Additionally, Medtronic may, upon a breach of
covenants concerning the Co-Promotion Agreement or the
Convertible Notes held by Medtronic, declare the unpaid
principal and interest on such Notes immediately due and payable.

Also, if the Company defaults under the Note
Purchase Agreement, it will be in default under the Loan
Agreement with LaSalle (as described below) pursuant to the
cross-default provisions contained therein. At December 31,
2003, the aggregate amount of indebtedness which would be
subject to acceleration under the Note Purchase Agreement, the
Companys credit facility with LaSalle (as described below)
and the Junior Note (as described below), causing the same to
become immediately due and payable, was approximately $17.4
million.

As of December 31, 2003, the holders of the
Convertible Notes have converted, 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 of
the Companys common stock. As a result, $14,763,000 in
aggregate principal amount of Convertible Notes are issued and
outstanding as of the date of this report. As of the date of the
filing of this report, the Company had not repaid any principal
under the Convertible Notes. No further shares of the
Companys common stock may be issued upon conversion of the
Convertible Notes. This 27,000,000 shares also includes
3,300,000 shares of common stock which were issued to
ComVest upon conversion of the Bridge Note (as described below)
in the third quarter of 2002.

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

Pursuant to the terms of the Note Purchase
Agreement, the Company may prepay the Convertible Notes, subject
to no prepayment penalty on or before March 16, 2003, a
prepayment penalty of 5% between March 17, 2003 and
March 16, 2004, and no prepayment penalty through the
maturity date of the Convertible Notes (July 16, 2005). On
March 15, 2002, the Company and ComVest, as the holder of
an outstanding Bank of America Note (the Bank of America
Note), agreed to reduce the outstanding principal amount
of the Bank of America Note from $40.3 million to
$22 million.

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LaSalle Credit Facility

On March 18, 2002, the Company entered into
a credit facility with LaSalle Business Credit, Inc.
(LaSalle) pursuant to a Loan and Security Agreement
(as amended, the Loan Agreement or the LaSalle
Credit Facility) with Standard Federal Bank National
Association (SFB) acting by and through LaSalle, as
SFBs agent (SFB and LaSalle, collectively, the
Lender). Under the Loan Agreement, the Lender
provided the Company a $20 million senior Revolving Loan
(the Revolving Loan) and a $2 million Term Loan
(the Term Loan). The Company used the proceeds to
repay the Bridge Loan, expenses related to the Recapitalization
and for working capital and general corporate purposes. Both
loan facilities 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 of
the Companys property 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, grant the Lender the right to conduct
appraisals of the collateral on a biannual basis, and deliver a
survey of the property located at the Companys offices on
Northside Parkway in Atlanta, Georgia within 60 days of the
date of the Loan Agreement. The Company satisfied the
above-described covenants relating to the hiring of the Chief
Operating Officer and delivery of a property survey in a timely
fashion.

The negative covenants restrict the
Companys ability to, among other things, make any
guarantees, incur additional indebtedness, grant liens on the
Companys assets, enter into business combinations outside
the ordinary course of business, pay dividends, make certain
investments or loans, allow the Companys equipment to
become a fixture to real estate or an accession to personal
property, alter the Companys lines of business, settle
accounts, or make other fundamental corporate changes.

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | maintaining Tangible Net Worth of $7,500,000 for
    the quarters ending December 31, 2002, March 31, 2003,
    June 30, 2003 and September 30, 2003, and $8,000,000
    for the quarter ending December 31, 2003 and each quarter
    thereafter (Tangible Net Worth is defined as the Companys
    shareholders equity including retained earnings less the
    book value of all intangible assets, prepaid and non-cash items
    arising from the transactions contemplated by the Loan Agreement
    and goodwill impairment charges recorded as a result of
    Statement of Financial Accounting Standards (SFAS)
    No. 142 as determined solely by the Lender on a consistent
    basis plus the amount of any LIFO reserve plus the amount of any
    debt subordinated to the Lender);

4



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | maintaining fixed charge coverage (ratio of
    EBITDA to fixed charges) of 0.15 to 1.0 for the fiscal quarter
    ending December 31, 2002, 0.3 to 1.0 for the fiscal
    quarters ending March 31, 2003, June 30, 2003 and
    September 30, 2003, 0.50 to 1.0 for the fiscal quarter
    ending December 31, 2003, 0.75 to 1.0 for the fiscal
    quarter ending March 31, 2004 and 1.0 to 1.0 for the fiscal
    quarter ending June 30, 2004 and for each fiscal quarter
    thereafter;
|
| |  | maintain EBITDA, based on the immediately
    preceding four fiscal quarters, of $750,000 on December 31,
    2002, $1,350,000 on March 31, 2003, $1,475,000 on
    June 30, 2003 and September 30, 2003, $2,500,000 on
    December 31, 2003, $3,675,000 on March 31, 2004 and
    $4,900,000 on June 30, 2004 and each fiscal quarter
    thereafter; and                                                                                                                                  
|
| |  | limit capital expenditures to no more than
    $1,500,000 during any fiscal year.                                                                                                                                                                                                                                                                                                                                                                                                            

The December Amendment also established a
$10 million revolving loan limit and provided that,
commencing January 1, 2003, the Company shall pay to the
Lender an annual facility fee of $100,000. As of
December 31, 2003, the Company had $2.821 million
available for borrowing under the revolving portion of the Loan
Agreement. As of December 31, 2003, the Company had
$833,333 in borrowings outstanding under the Term Loan and no
borrowings outstanding under the Revolving Loan. As of
December 31, 2003, the Company believes it was in
compliance with all such covenants set forth in the Loan
Agreement.

The Loan Agreement also specifies certain Events
of Default, including, but not limited to, failure to pay
obligations when due, failure to direct the Companys
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 us 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 the Companys 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 (30) days
past the date of the original term (March 16, 2004) or any
applicable renewal term. As discussed elsewhere in this report,
the maturity date of the Convertible Notes was extended to
July 16, 2005. As a result, no such Termination Event
occurred, and no termination election was made by the Lender.

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 the Companys common
stock at an exercise price of $.01 per share. Such warrants are
subject to adjustment pursuant to certain anti-dilution
protections contained therein. During the fourth quarter of
2003, an assignee of SFB exercised in full one of these warrants
in a cashless exercise, purchasing an aggregate of
446,177 shares of the Companys common stock. Warrants
to purchase up to an aggregate of 299,448 shares of the
Companys common stock remain outstanding.

The Company is the maker of a promissory note
payable to Bank of America (the Junior Note) in the
amount of $2 million, which Junior Note bears interest at a
rate of 6% per annum. The Company began making monthly interest
payments beginning in April 2002, and will continue to do so
until the Junior Note matures on March 15, 2007. On
May 1, 2003, the Company began making a monthly principal
payment on the Junior Note of $22,500. This payment is payable
on the first day of each month until maturity of the

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Junior Note on March 15, 2007. As of
December 31, 2003, the Junior Note was subordinated to
approximately $1,797,500 of senior indebtedness, representing
the indebtedness as of such date under the Loan Agreement. The
Junior Note ranks pari passu with the Convertible Notes.


In connection with the sale of the Companys
Stepic business (as described below) on September 3, 2002,
the Company repaid the then outstanding balance of the revolving
portion of the LaSalle credit facility.




Ancillary Recapitalization
Agreements

As a condition to closing the Recapitalization,
the Company entered into a Securityholders Agreement dated
March 16, 2002, with ComVest, Medtronic, LaSalle, Marshall
B. Hunt and William E. Peterson, Jr. (together, ComVest,
Medtronic, LaSalle and Messrs. Hunt and Peterson 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
required 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 its expense. In the third quarter of fiscal 2002,
the Company filed a registration statement on Form S-1 to
satisfy this obligation under the Securityholders Agreement. On
October 21, 2003, the Company entered into an Amended and
Restated Securityholders Agreement, which superceded the
March 16, 2002 agreement. Mr. Peterson is not a party
to this Amended and Restated Securityholders Agreement. In this
filing, unless otherwise clearly indicated, all references to
the Securityholders Agreement refer to the Amended
and Restated Securityholders Agreement entered into on
October 21, 2003.

Pursuant to the Securityholders Agreement,
ComVest and Medtronic have been granted (1) a right of
first refusal to purchase all or part of their pro rata share of
new securities which we may propose to sell or issue, and
(2) a right of first refusal to participate in any sale of
Mr. Hunts shares of common stock (with certain
exceptions) to third parties upon the same terms and conditions.

The corporate governance rights include, but are
not limited to, the following:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | granting ComVest the right to designate two
    ComVest directors, and one additional independent director;                                 
|
| |  | granting Medtronic the right to designate one
    independent director;                                                                     
|
| |  | granting ComVest and Medtronic the right to
    jointly designate one independent director; and                                             
|
| |  | providing that the Companys Board of
    Directors the right to designate two members of senior
    management as directors of the Company.

Failure to comply with the Securityholders
Agreement is considered an Event of Default under the Note
Purchase Agreement. On or prior to the date of the
Companys 2004 annual meeting of shareholders, the Company
intends to amend these corporate governance rights in order to
ensure compliance with the rules and regulations of the American
Stock Exchange, which require listed companies to have at least
a majority of independent directors.

On March 15, 2002, the Company entered into
a Co-Promotion Agreement with Medtronic under which the Company
has agreed to 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. Such breach or failure to comply would cause the
$4 million principal amount of Convertible Notes issued to
Medtronic to become immediately due and payable, and would cause
a cross-default, causing (1) all remaining Convertible
Notes to become due and payable immediately,
(2) $2 million under the Junior Note to become due and
payable immediately and (3) all amounts outstanding under
the LaSalle credit facility to become immediately due and
payable. As of December 31, 2003, this would total
approximately $17.4 million as subject to repayment.

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In this event, the Company would need to seek
additional financing or obtain waivers of such defaults.
Management has not undertaken a process of securing additional
financing in the event of this contingency.


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

To effect the Recapitalization, the Company
entered into certain ancillary agreements including the
following: (i) a voting agreement under which
Messrs. Hunt and Peterson agreed to vote their shares in
favor of all proposals relating to the Recapitalization at the
Companys 2002 annual meeting of shareholders; (ii) a
new employment agreement and option agreements with
Mr. Hunt that granted him options to purchase an aggregate
of 3,500,000 shares of common stock; and (iii) a new
employment agreement and an option agreement with
Mr. Peterson that granted him options to purchase 1,000,000
shares of common stock.

The Company also entered into an expense guaranty
with Mr. Hunt under which he received 150,000 shares
of the Companys common stock in exchange for agreeing to
reimburse ComVest for up to a maximum of $400,000 of the
companys transaction expenses in the event that the
Recapitalization were not consummated. Finally, pursuant to an
advance note, Mr. Hunt received 75,000 shares of the
Companys common stock in exchange for advancing to the
Company $17,500 in transaction expenses associated with the
Recapitalization.

In addition to the agreements described above, in
connection with and prior to the Recapitalization, the Company
entered into an advisory agreement with Commonwealth Associates,
L.P., an affiliate of ComVest under which Commonwealth
Associates, L.P. received 2,645,398 shares of the Companys
common stock (a value equal to $2,248,588, based on the closing
price of the Companys common stock on March 15, 2002,
the date immediately prior to the closing date of the
Recapitalization) and a cash fee of $750,000. Pursuant to the
terms of this advisory agreement, Commonwealth Associates, L.P.,
provided the Company with financial consulting advice in
developing a strategy for restructuring the Companys in
connection with the Recapitalization. The advisory agreement did
not provide for ongoing services to be rendered after the
Recapitalization.

Also, pursuant to a note, ComVest received 75,000
shares of the Companys common stock in exchange for
advancing $17,500 in transaction expenses associated with the
Recapitalization.

As a result of the Recapitalization, the credit
facility and the Forbearance Agreement (as amended, the
Forbearance Agreement) with Bank of America, and all
subsequent amendments were terminated. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations herein.




Description of Business



| |                                
| | -------------------------------
| | Product Manufacturing and Sales

The Company manufactures and/or markets vascular
access products including implantable ports, hemodialysis
catheters, central venous catheters, needle infusion sets,
peripherally inserted central venous catheters and other
accessories used in vascular procedures. Vascular access ports
are implantable devices utilized for the central venous
administration of a variety of medical therapies and for blood
sampling and diagnostic purposes. Central venous access
facilitates a more systemic delivery of treatment agents, while
mitigating certain of the harsh side effects of certain
treatment protocols and eliminating the need for repeated access
to peripheral veins. Once implanted in the body, a port can be
utilized for up to approximately 2,000 accesses depending upon
needle gauge size and the port size. The Companys vascular
access ports are used

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primarily in systemic or regional short-and
long-term cancer treatment protocols that require frequent
infusions of highly concentrated or toxic medications (such as
chemotherapy agents, antibiotics or analgesics) and frequent
blood samplings. Port sales totaled $18.5 million,
$16.9 million and $18.9 million for fiscal 2001, 2002
and 2003, respectively.


The Companys lines of vascular access ports
consist of the following families of products: (i) the
Vortex® family of ports including Vortex® VTX®,
LifePort® VTX®, TriumphTM VTX® and
GenesisTM VTX®; (ii) LifePort®;
(iii) Triumph-1®; (iv) Infuse-a-Port®;
(v) OmegaPort®; (vi) TitanPort and
(vii) the Vortex® MP Port system.

The Company produces and markets hemodialysis and
apheresis catheters. Hemodialysis catheters are used in the
treatment of patients suffering from renal failure who are
required to undergo short-term (acute) care or long-term
(chronic) hemodialysis, a process involving the removal of waste
products from the blood by passing a patients blood
through a dialysis machine. Stem cell apheresis is a protocol
for treating certain forms of mid- and late-stage cancers,
particularly breast cancer. The typical apheresis procedure
involves the insertion of a catheter into a patient through
which (i) blood is withdrawn from the patient, cycled
through an apheresis machine in which stem cells (cells which
perform a key role in the bodys immune system) are removed
from the blood and the blood is reinfused into the body,
(ii) high doses of chemotherapy agents, as well as
antibiotics and blood products, are administered to the patient
over extended periods of time, and (iii) the previously
removed stem cells are subsequently reintroduced into the
patient. The Companys catheters are used primarily in
hemodialysis and apheresis procedures. Catheter sales totaled
$2.9 million, $2.9 million and $3.6 million for
fiscal 2001, 2002 and 2003, respectively.

The Companys catheters include the
following families of products: (i) Circle C® chronic and
acute hemodialysis catheters, including the new LifeJet
and LifeJet F-16 chronic hemodialysis catheters;
(ii) long-term triple lumen central venous catheters; (iii)
peripherally inserted central venous catheters and (iv) the
LifeValve® Platinum central venous catheter, which was
launched in September 2003. The Company expects that its
specialty hemodialysis and apheresis families of catheters will
continue to benefit from unique designs, allowing some of the
highest flow rates available in the market.

The Company maintains a sales and marketing
organization for its vascular access products of approximately
55 full-time employees and three independent specialty
distributors employing over 15 sales representatives. The
Companys direct sales force, consisting of 43 direct
representatives as of December 31, 2003, focuses primarily
on vascular, general and oncological surgeons and interventional
radiologists who implant vascular access devices and other
physicians and clinicians who utilize vascular access devices in
the delivery of treatments. The Companys marketing
strategy emphasizes the importance of building relationships
with these medical professionals in order to provide such
professionals with the benefits of the Companys broad
knowledge of vascular access products and procedures and focused
clinical support. These relationships also facilitate the
Companys ability to modify its product lines in response
to new clinical protocols and to meet its customers
changing needs. As of December 31, 2003, the Company also
had a network of approximately 20 active distributors in Europe
and approximately 29 active international distributors outside
of Europe. The Company has placed an increased emphasis on
expanding its direct sales force and anticipates continuing to
do so in the near future. Additionally, the Company has
terminated relationships with certain of its third-party
distributors.

Hospital chains and large buying groups have
played, and are expected to continue to play, an increasingly
significant role in the purchase of medical devices. In 1997,
group purchasing organization (GPO) purchasing
accounted for approximately $28 billion of sales in the
medical products industry. In recent years, these groups have
sought to narrow their list of suppliers. By acting as a
supplier to a GPO, the Company can operate its sales force much
more efficiently. The Companys direct sales force calls on
physicians associated with these buying groups in order to
improve compliance with these GPOs and improve market
share. Although GPOs will continue to be a vital part of
the GPO sales process, the Company has seen great success in
selling its new and differentiated technologies to the end users
regardless of GPO affiliation.

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The Company is currently a party to a group
purchasing agreement (GPO) with AmeriNet Inc., as
well as a number of regional and/or local Integrated Delivery
Networks (IDNs) that serve small groups of
hospitals or a single hospital. The AmeriNet purchasing
agreement, which serves approximately 2,000 hospitals, runs
through 2004 and covers substantially all of the Companys
products. The Company pays administrative fees on sales through
certain purchasing agreements (both GPO and IDN). During fiscal
2003, the Company generated approximately $2.7 million in
sales on which administrative fees were paid. The Company will
continue to submit competitive product offering proposals to
GPOs and IDNs looking to standardize their purchases of vascular
access products. While the Company is willing to enter into a
GPO or IDN agreement, the majority of the Companys sales
are in GPO facilities with which the Company is not affiliated.

The Company has entered into the Distribution
Agreement with Medtronic under which the Company is distributing
and selling Medtronics IsoMed® constant flow infusion
system for the delivery of chemotherapy agents for use in
hepatic arterial infusion therapy for patients with colorectal
liver cancer. On March 15, 2002, the Company entered into a
Co-Promotion Agreement with Medtronic under which the Company
had agreed to promote and provide technical advise for
Medtronics implantable drug delivery systems which are
used for the treatment of hepatic arterial infusion and
malignant pain. This Agreement was amended in April 2003 in the
Second Amendment to Co-Promotion Agreement, pursuant to which
the IsoMed® infusion system was removed from the
Co-Promotion Agreement, leaving the Medtronic SynchroMed®
infusion system for the treatment of malignant pain as the only
product under the Co-Promotion Agreement. See
Business  Recapitalization.



| |                     
| | --------------------
| | Product Distribution

Through the operations the Company acquired in
the CVS and Stepic acquisitions, distribution of medical devices
was the largest revenue-generating segment of the Companys
business, comprising 55.1% of total revenues through the first
nine months of fiscal 2002. Subsequent to consummating the
Stepic acquisition in 1998, the Company consolidated the CVS
operations into Stepic to establish a centralized distribution
operation. Prior to the sale of Stepic in September 2002, the
Company distributed a broad range of specialty medical products
throughout the Northeast United States to hospitals and regional
and hospital owned blood banks. As described below, the Company
sold substantially all of the assets of Stepic in September 2002.




Results by Industry Segment

Information relating to the Companys
industry segments on a historical basis, including revenues,
gross profit and identifiable assets attributable to each
segment for fiscal year 2002 is presented in Note 15 of the
notes to the Companys audited consolidated financial
statements included herein.




Acquisitions and Divestitures



| |                         
| | ------------------------
| | Vascular Access Products

On May 19, 1998, the Company acquired the
vascular access port product line of IFM, a wholly owned
subsidiary of CryoLife, Inc., and on September 30, 1998,
the Company consummated the acquisition of certain medical
device products, product lines and assets used in the
manufacture and sale of such medical devices by IFM for
$15,000,000 in cash. The assets acquired included certain of the
assets used by IFM to manufacture its product line. In this
transaction, the Company acquired several products including
embolectomy catheters, carotid shunts, occlusion catheters and
surgical instruments (the Products). In connection
with the acquisition, the Company and IFM entered into a
manufacturing agreement (the Manufacturing
Agreement) pursuant to which, for a four year term, IFM
agreed to manufacture exclusively for the Company, and the
Company agreed to purchase from IFM a minimum of $6,000,000 per
year of the Products.

On October 9, 2000, the Company acquired
certain additional assets from IFM, including inventory,
leasehold improvements, and other fixed assets and assumed
IFMs lease for its 30,000 square foot manufacturing
facility located in St. Petersburg, Florida, pursuant to an
asset purchase agreement dated October 9, 2000. In
connection with the October 2000 asset purchase agreement, the
Manufacturing

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Agreement was terminated, and the Company had no
further obligation, after October 9, 2000, to purchase
products from IFM. On March 30, 2001, the Company completed
the sale of the IFM business for an aggregate sale price of
approximately $8 million.




| |                            
| | ---------------------------
| | Medical Device Distribution

Effective October 15, 1998, the Company
consummated the acquisition of the outstanding stock of Stepic.
The assets held by Stepic included primarily accounts receivable
and inventory derived from and used in the distribution of
medical products. The Company paid Stepics shareholders
$8 million in cash at closing, paid $2.4 million in
December 1999, paid $2.4 million between December 2000 and
January 2001 and paid $2.4 million between December 2001
and January 2002, all previously supported by standby letters of
credit. In addition, the Company agreed to pay up to an
additional $4.8 million under the terms of the stock
purchase agreement upon the successful achievement of certain
specified future earnings targets by Stepic. Of this amount,
$2.05 million was earned in 1999 and subsequently paid. In
2000, an additional $1.2 million was earned and in 2001, an
additional $667,000 was earned. The balance owed under the stock
purchase agreement was approximately $1,665,000 as of
March 15, 2002. On March 14, 2002, the Company entered
an agreement with two of the former Stepic shareholders, which
replaced an earlier settlement agreement, pursuant to which the
Company paid $100,000 on March 15, 2002 and will make
monthly payments of approximately $36,000 through March 15,
2006.

The Stepic acquisition, together with the
Companys acquisition of CVS in September 1998, allowed the
Company to form a medical device distribution business
distributing general and emergency surgery, radiology,
anesthesiology, respiratory therapy, blood filtration and
critical care medical products, as well as products manufactured
and distributed by the Company.

On September 3, 2002, the Company sold
Stepic to Arrow International, Inc. (Arrow) for
approximately $12.6 million, consisting of $11 million
in cash, $1.1 million placed in escrow and a note
receivable in the amount of $500,000. In addition, the Company
retained assets of approximately $1.1 million in the
transaction. Approximately $7.8 million of the cash
proceeds of the Stepic sale were used to pay down all amounts
outstanding at closing under the Companys revolving senior
credit facility with the Lender. The Company used the remaining
proceeds for working capital purposes. Arrow paid
$1.1 million of the cash purchase price into escrow, which
sum was distributed to the Company (in an amount equal to
$1,051,317 plus interest of $904) and to Arrow (in an amount
equal to $48,683) in accordance with the terms of the asset
purchase agreement and escrow agreement entered into in
connection with the Stepic sale. Finally, Arrow issued to the
Company a promissory note in the principal amount of $500,000,
which bore interest at an annual rate of 5%. Pursuant to the
terms of this note, $250,000 plus interest of $3,664 was paid to
the Company on December 19, 2002 and the balance of
$250,000 plus interest of $6,199 and was paid to the Company on
March 3, 2003.




Manufacturing

At the Companys Manchester, Georgia
facility, the Company manufactures its complete line of ports;
infusion sets; and Circle C® hemodialysis catheters,
and other miscellaneous catheters, and dialysis accessories,
except for a peripherally inserted central venous catheter
(PICC) line and certain product accessories, and
component parts produced for the Company by other manufacturers.

The Company has received certification as an ISO
9001 medical device manufacturer for its Manchester facility.
The Company also has obtained the right to affix CE (Conformite
Europeenne) marking to the Companys product lines
manufactured at the facility except for the LifeJetTM
and LifeValve® products. CE marking is a European symbol of
conformance to strict product manufacturing and quality system
standards.

While the Company believes it has a good
relationship with each third party manufacturer that supplies
certain component parts for the Companys products or
product accessories, there can be no assurance that such
relationships will not deteriorate in the future or be
terminated. Deterioration in or termination of these
manufacturing relationships could cause the Company to
experience interruptions in its manufacturing and delivery
processes and have a material adverse impact on its business,
financial condition and operating results.

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Furthermore, when the manufacturing arrangements
with these third parties expire, the Company will have to make
other manufacturing arrangements or manufacture such component
parts or product accessories at its facilities.





Government Regulation

As a manufacturer and distributor of medical
devices, the Company is subject to regulation by, among other
governmental entities, the U.S. Food and Drug
Administration, (the FDA), and the corresponding
agencies of the states and foreign countries in which the
Company sells its products. These regulations govern the
introduction of new medical devices, the observance of certain
standards with respect to the manufacture, testing and labeling
of such devices, the maintenance of certain records, the
tracking of devices, and other matters. These regulations may
have a material impact on the Companys operations. The FDA
pursues a rigorous enforcement program to ensure that regulated
businesses, like that of the Company, comply with applicable
laws and regulations.

All medical device manufacturing establishments
are required to be registered with the FDA. Similarly, all
categories of medical devices marketed by a company in the
United States are required to be listed. The Company must update
its establishment and listing information pursuant to FDA
regulations. The FDA can take regulatory action against a
company that does not provide or update its registration and
listing information. Pursuant to the Food, Drug and Cosmetic Act
(the FDC Act), medical devices intended for human
use are classified into three categories, Classes I, II and
III, on the basis of the controls deemed necessary by the FDA to
reasonably assure their safety and effectiveness. Class I
devices are subject to general controls (for example, labeling,
premarket notification and adherence to good manufacturing
practice regulations) and Class II devices are subject to
general and special controls (for example, performance
standards, postmarket surveillance, patient registries and FDA
guidelines). Generally, Class III devices are those which
must receive premarket approval (PMA) from the FDA
to ensure their safety and effectiveness (for example,
life-sustaining, life-supporting and implantable devices, or new
devices which have not been found substantially equivalent to
legally marketed devices).

Some Class I devices and most Class II
devices require premarket notification (510(k)) clearance
pursuant to Section 510(k) of the FDC Act. Most
Class III devices are required to have an approved PMA
application. Obtaining PMA approval can take up to several years
or more and involve preclinical studies and clinical testing. In
contrast, the process of obtaining a 510(k) clearance typically
requires the submission of substantially less data and generally
involves a shorter review period, although obtaining a 510(k)
clearance may involve the submission of a substantial volume of
data, including clinical data, and may require a substantial
review period. A 510(k) premarket notification clearance
indicates that the FDA agrees with an applicants
determination that the product for which clearance has been
sought is substantially equivalent in terms of safety and
effectiveness to another medical device that has been previously
marketed but does not indicate that the product is safe and
effective. A PMA indicates that the FDA has approved as safe and
effective a product to be marketed for the uses described in the
approved labeling.

In addition to requiring clearance or approval
for new products, the FDA may require clearance or approval
prior to marketing products that are modifications of existing
products. FDA regulations provide that new 510(k) clearances are
required when, among other things, there is a major change or
modification in the intended use of the device or a change or
modification to a legally marketed device that could
significantly affect its safety or effectiveness. A manufacturer
is expected to make the initial determination as to whether a
proposed change to a cleared device or to its intended use is of
a kind that would necessitate the filing of a new 510(k)
notification. The Company has made certain modifications to its
cleared devices for which it has determined that new 510(k)
clearances are not required. There can be no assurance, however,
that the FDA would concur with the Companys conclusion
that a particular change does not necessitate a new 510(k)
application. If the FDA were to investigate and disagree with
the Companys determinations and conclude that one or more
implemented changes requires a new 510(k), the FDA could take
regulatory actions, such as issuance of a warning letter or
requiring that the Company cease marketing modified devices
until new 510(k) notifications are cleared.

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In order to conduct clinical trials of an
uncleared or unapproved device, companies generally are required
to comply with the FDAs Investigational Device Exemptions
(an IDE) regulations (IDE regulations).
For significant risk devices, the IDE regulations require FDA
approval of an IDE before a clinical study may begin. In its
approval letter for significant risk device IDE studies, the
agency may limit the number of patients that may be treated with
the device and/or the number of institutions at which the device
may be used. Device studies subject to the IDE regulations,
including both significant risk and non-significant risk device
studies, are subject to various restrictions imposed by the FDA.
Patients must give informed consent to be treated with an
investigational device. The institutional review board of each
institution where a study is being conducted must also approve
the clinical study. The device generally may not be advertised
or otherwise promoted.

Unexpected adverse experiences must be reported
to the FDA. The company sponsoring the investigation must ensure
that the investigation is being conducted in accordance with the
IDE regulations.

To date, the Companys products have
received FDA marketing clearances only through the 510(k)
process. Certain future product applications, however, could
require approval through the PMA process. In addition, future
products may require approval of an IDE. There can be no
assurance that all necessary 510(k) clearances or PMA or IDE
approvals will be granted on a timely basis or at all. The FDA
review process may delay the Companys product
introductions in the future. It is possible that delays in
receipt of or failure to receive any necessary clearance or
approval could have a material adverse effect on the
Companys operations. Pursuant to the FDAs Good
Manufacturing Practices under the Quality System Regulations
(GMP/QSR), the Company must manufacture its products
and maintain its records in a prescribed manner with respect to
manufacturing, testing and control activities. Further, the
Company is required to comply with FDA requirements for labeling
and promotion of its products. For example, the FDA prohibits
cleared or approved devices from being marketed or promoted for
uncleared or unapproved uses. The medical device reporting
regulation requires that the Company provide information to the
FDA whenever there is evidence to reasonably suggest that one of
the Companys devices may have caused or contributed to a
death or serious injury, or that there has occurred a
malfunction that would be likely to cause or contribute to a
death or serious injury if the malfunction were to recur.
Additionally, the FDA imposes other requirements on medical
device manufacturers, including reporting and record keeping
requirements for device corrections and removals (recalls).

Medical device manufacturers and distributors are
generally subject to periodic inspections by the FDA. If the FDA
determines that a company is not in compliance with applicable
laws and regulations, it can, among other things, issue a
warning letter apprising the company of violative conduct,
detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against the
company, its officers or its employees. The FDA completed an
inspection of the Companys Manchester, Georgia facility
and in September 2002 issued a Form FDA-483 specifying five
items. The Company has responded to such observations and has
worked with the FDA to resolve these observations.

In addition, it is possible that clearances or
approvals could be withdrawn in certain circumstances. Failure
to comply with regulatory requirements or any adverse regulatory
action could have a material adverse effect on the
Companys business, financial condition and results of
operations. Medical device laws and regulations are also in
effect in many of the countries in which the Company does
business outside the United States. These range from
comprehensive device approval requirements for some or all of
the Companys medical device products to simple requests
for product data or certifications. The number and scope of
these requirements are increasing. Medical device laws and
regulations are also in effect in many of the states in which
the Company does business. State and foreign medical device laws
and regulations may have a material impact on the Company. In
addition, international sales of certain medical devices
manufactured in the United States but not cleared or approved by
the FDA for distribution in the United States are subject to FDA
export requirements and policies, including a policy whereby the
Company provides a statement to the FDA certifying that the
product to be exported meets certain criteria and the FDA issues
a certificate to facilitate device export.

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Federal, state and foreign laws and regulations
regarding the manufacture, sale and distribution of medical
devices are subject to future changes. For example, Congress
recently enacted the Medical Device User Fee and Modernization
Act of 2002, which included several significant amendments to
the prior law governing medical devices. Additionally, the FDA
made significant changes to its GMP regulations in 1996 and may
make changes to other regulations as well. The Company cannot
predict what impact, if any, such changes might have on its
business; however, such changes could have a material impact on
the Company and its business, financial condition and operating
results.




Anti-Kickback Statute

Pursuant to 42 U.S.C. Section 1320a-7b(b)
(the Anti-Kickback Statute), the knowing and willful
offer or receipt of any remuneration, directly or indirectly, in
cash or in kind, in exchange for or which is intended to induce
the purchase, lease or order of any good, facility, item or
service for which payment may be made in whole or in part under
a federal healthcare program, including Medicare and Medicaid,
is prohibited. A violation of the Anti-Kickback Statute is a
felony, punishable by fine, imprisonment or exclusion from the
Medicare and Medicaid or other applicable federal healthcare
programs. The Anti-Kickback Statute has been interpreted broadly
by courts and administrative bodies. Certain regulations
promulgated under the Anti-Kickback Statute (i.e., 42 C.F.R.
Section 1001.952(j)) provide that prohibited remuneration
under the Anti-Kickback Statute does not include any payment by
a vendor of goods to a group purchasing organization, as defined
in the regulations, if certain standards are met. The Company
believes that the group purchasing organizations with which the
Company has purchasing agreements comply in all material
respects with such standards. As noted in Legal
Proceedings below, in August 2002, the Company received a
subpoena from the Office of Inspector General of the Department
of Health and Human Services requesting documents relating to
the Companys agreement with a group purchasing
organization. The Company has produced documents responsive to
the subpoena. The Company also believes that its business
practices comply in all material respects with the Anti-Kickback
Statute. There can be no assurance, however, that the government
will not use a broad interpretation of such statute that could
materially and adversely affect the Companys operations.




Healthcare Reform

In recent years, several comprehensive healthcare
reform proposals were introduced in the United States Congress.
The intent of the proposals was, generally, to expand healthcare
coverage for the uninsured and reduce the growth of total
healthcare expenditures. While none of the proposals were
adopted, healthcare reform may again be addressed by the current
United States Congress. Certain states have made significant
changes to their Medicaid programs and have adopted various
measures to expand coverage and limit costs.

Implementation of government healthcare reform
and other efforts to control costs may limit the price of, or
the level at which reimbursement is provided for, the
Companys products. In addition, healthcare reform may
accelerate the growing trend toward involvement by hospital
administrators, purchasing managers and buying groups in
purchasing decisions. This trend would likely include increased
emphasis on the cost-effectiveness of any treatment regimen.
These changes also may cause the marketplace in general to place
increased emphasis on the utilization of minimally invasive
surgical procedures and the delivery of more cost-effective
medical therapies. Regardless of which additional reform
proposals, if any, are ultimately adopted, the trend toward cost
controls and the requirements of more efficient utilization of
medical therapies and procedures will continue and accelerate.
The Company is unable at this time to predict whether any such
additional healthcare initiatives will be enacted, the final
form such reforms will take or when such reforms would be
implemented.

The Companys products are purchased
principally by hospitals, hospital networks and hospital buying
groups. During the past several years, the major third-party
payors of hospital services (Medicare, Medicaid, private
healthcare indemnity insurance and managed care plans) have
substantially revised their payment methodologies to contain
healthcare costs. These cost pressures are leading to increased
emphasis on the price and cost-effectiveness of any treatment
regimen and medical device. In addition, third-party payors,
such as governmental programs, private indemnity insurance and
managed care plans which are billed by hospitals for

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such healthcare services, are increasingly
negotiating the prices charged for medical products and services
and may deny reimbursement if they determine that a device was
not used in accordance with cost-effective treatment methods as
determined by the payor, was experimental or was used for an
unapproved application. There can be no assurance that in the
future, hospital purchasing decisions or third party
reimbursement levels will not adversely affect the profitability
of the Companys products.





Insurance

The Company maintains insurance in such amounts
and against such risks as it deems prudent, although no
assurance can be given that such insurance will be sufficient
under all circumstances to protect us against significant claims
for damages. The occurrence of a significant event not fully
insured could materially and adversely affect the Companys
business, financial condition and results of operations.
Moreover, no assurance can be given that the Company will be
able to maintain adequate insurance in the future at
commercially reasonable rates or on acceptable terms.




Patents, Trademarks, Licenses and Proprietary
Rights

The Company believes that patents and other
proprietary rights are important to its business. The Company
also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop
and maintain the Companys competitive position.

The Company currently owns United States patents
and patent applications, as well as foreign patents and
applications, which relate to aspects of the technology used in
certain of the Companys products, including the
LifePort® family of vascular access ports, the Vortex®
vascular access ports, the Infuse-a-Cath® family of central
venous catheters and the Bayonet locking system used in the
LifePort® and in the Vortex® port families of
products. The Company also is a party to license agreements with
third parties pursuant to which the Company has obtained, for
varying terms, the right to develop, make, use and/or sell
products that are covered under such license agreements in
consideration for royalty payments. The Companys products
subject to such license agreements include the Circle C®
chronic and certain acute catheters, which includes the
LifeJetTM and LifeJetTM F-16 chronic
catheters, and certain products in the development stage. There
can be no assurance that the Company or its licensors have or
will develop or obtain additional rights to products or
processes that are patentable, that patents will issue from any
of the pending patent applications filed by the Company or that
claims allowed will be sufficient to protect any technology that
is licensed to the Company. In addition, no assurances can be
given that any patents issued or licensed to the Company or
other licensing arrangements will not be challenged,
invalidated, infringed or circumvented or that the rights
granted thereunder will provide competitive advantages for the
Companys business or products. In any of such events, the
Companys business, results of financial condition and
operating results could be materially adversely effected.

There has been substantial litigation regarding
patent and other intellectual property rights in the medical
devices industry. Although the Company has not been a party to
any material litigation to enforce intellectual property rights
held by us, or a party to any material litigation seeking to
enforce rights alleged to be held by others, future litigation
may be necessary to protect patents, trade secrets or
know-how owned by the Company or to defend the
Company against claimed infringement of the rights of others and
to determine the scope and validity of the proprietary rights of
the Company and others. The validity and breadth of claims
covered in medical technology patents involve complex legal and
factual questions. Any such litigation could result in
substantial cost to and diversion of effort by the Company.
Adverse determinations in any such litigation could subject the
Company to significant liabilities to third parties, could
require us to seek licenses from third parties and could prevent
the Company from manufacturing, selling or using certain of the
Companys products, any of which could have a material
adverse effect on the Companys business, results of
operations and financial condition. Accordingly, the Company
may, in the future, be subject to legal actions involving patent
and other intellectual property claims.

The Company relies upon trade secrets and
proprietary technology for protection of its confidential and
proprietary information. There can be no assurance that others
will not independently develop substantially

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equivalent proprietary information or techniques
or that third parties will not otherwise gain access to the
Companys trade secrets or disclose such technology.


The Company also relies upon trademarks and trade
names for the development and protection of brand loyalty and
associated goodwill in connection with the Companys
products. The Companys policy is to protect its
trademarks, trade names and associated goodwill by, among other
methods, filing United States and foreign trademark applications
relating to the Companys products and business. The
Company owns numerous United States and foreign trademark
registrations and applications. The Company also relies upon
trademarks and trade names for which the Company does not have
pending trademark applications or existing registrations, but in
which the Company has substantial trademark rights.

The Companys registered and unregistered
trademark rights relate to the majority of the Companys
products, including the Circle C®,
Infuse-a-Port®, Triumph-1®, Infuse-a-Cath®,
LifePort®, Vortex®, VTX®, LifeJetTM,
LifeGuardTM, GenesisTM VTX® and
LifeValve® product lines. There can be no assurance that
any of the Companys registered or unregistered trademarks
or trade names will not be challenged, canceled, infringed or
circumvented, or be declared generic, or be declared infringing
on other third-party marks, or provide any competitive advantage
to the Company.




Environmental Compliance

The Company is subject to various federal, state
and local laws and regulations relating to the protection of the
environment. In the course of its business, the Company is
involved in the handling, storage and disposal of materials
which are classified as hazardous. The Company believes that its
operations comply in all material respects with applicable
environmental laws and regulations. While the Company continues
to make capital and operational expenditures for protection of
the environment, the Company does not anticipate that those
expenditures will have a material adverse effect on the
Companys business, financial condition and operating
results.




Raw Materials

The Company has arrangements with various
suppliers to provide it with the quantity of component parts and
materials necessary to assemble its products. Almost all of the
components and materials used in the Companys assembly
process are available from a number of different suppliers,
although certain components are purchased from a limited number
of sources. While the Company believes that there are
alternative and satisfactory sources for its components and
materials, a sudden disruption in supply from one of the
Companys existing suppliers could adversely affect the
Companys ability to deliver its products in a timely
manner and could adversely affect the Companys operating
results.




Backlog

Delivery lead times for the Companys
products are very short at times and, consequently, the Company
routinely maintains an immaterial amount of order backlog which
is generally filled within 60 days of the order date.
Management currently believes that the Companys backlog is
not a reliable indicator of future financial or operating
performance.




Research and Product Development

The Company presently engages in research and
development activities. The principal focus of the
Companys research and development effort has been to
identify and analyze the needs of vascular surgeons, physicians
and clinicians, and to develop products that address these
needs. The Company views proposals from physicians and other
healthcare professionals as an important source of potential
research and development projects. The Company believes that
those end-users are often in the best position to conceive of
new products and to recommend ways to improve the performance of
existing products. Many of the Companys product
improvements have resulted from collaborative efforts with
physicians and other healthcare professionals or other medical
device manufacturers.

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Research and development expenses accounted for
approximately $125,000 in 2001 (less than 1% of the
Companys net sales), $654,000 in 2002 (3% of the
Companys net sales), and $973,000 in 2003 (3% of the
Companys net sales). The 2001 amount was used primarily to
incorporate the VTX® technology into the Companys
other line of ports, including LifePort® VTX® and
TriumphTM VTX® and to develop the Companys
LifeJetTM chronic dialysis catheter. The 2002 amount
was used primarily to develop the LifeGuardTM safety
needle, the LifeValve® valved central venous catheter and
the LifeJetTM chronic dialysis catheter. The 2003
amount was used primarily in the development of new catheter
technologies and enhancements and improvements to existing
products.




Competition

The markets for the Companys product lines
are highly competitive. The Company faces substantial
competition from a number of other manufacturers and suppliers
of vascular access ports, dialysis and apheresis catheters and
related ancillary products, including companies with more
extensive research and manufacturing capabilities and greater
technical, financial and other resources. In response to
increased concerns about the rising costs of healthcare, United
States hospitals and physicians are placing increasing emphasis
on cost-effectiveness in the selection of products to perform
medical procedures. The Company believes that its products
compete primarily on the basis of: (i) innovative product
design, development and improvement; (ii) customer support;
(iii) brand loyalty; and (iv) price. The
Companys competitors in the vascular access products
business include Bard Access Systems, a division of
C.R. Bard, Inc. (Bard), and Sims, a division of
Smiths Group plc. The Companys competitors in its catheter
products business include Medical Components, Inc., Bard, and
Quinton, a division of Tyco International.




Employees

As of December 31, 2003, the Company had
approximately 150 full-time employees.




Availability of Company Information; Code of
Ethics

The Companys Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and all amendments thereto are
available on the Companys website at
www.hmpvascular.com. In addition, Forms 3, 4 and
5 which are filed by the Companys officers, directors
and other persons or entities required to file such forms are
available on the Companys website. Information contained
in the Companys website is not incorporated by reference
into this report.

Additionally, the Company has adopted a Code of
Business Conduct and Ethics (the Code of Ethics),
applicable to the Companys officers, directors and
employees, which includes the code of ethics applicable to the
Companys senior executive and financial officers. This
Code of Ethics is filed as an exhibit to this Annual Report on
Form 10-K.




Item 2.     Properties

The Companys principal executive and
administrative offices and manufacturing and development center
is located in Manchester, Georgia in a 60,000 square foot
facility. The Company leases the Manchester facility and the
10.5 acre lot on which it is located from the Development
Authority of the City of Manchester pursuant to three operating
leases which expire in 2010 (collectively, the Manchester
Leases) and under which the Company pays monthly lease
payments of approximately $15,800 in the aggregate. The Company
has an option to extend each of the Manchester Leases for an
additional five-year term and an option to purchase the facility
and/or the adjacent lot containing approximately seven acres.
While the Company considers the Manchester facility to be in
good condition and adequate to meet the Companys present
and foreseeable needs, a significant increase in demand or
production could render the Manchester facility inadequate.

The Company owns a 6,400 square foot office
condominium located in Atlanta, Georgia, which the Company
utilizes for administrative offices. The Company considers this
space to be in good condition and adequate to meet the
Companys present and foreseeable administrative office
needs in Atlanta.

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Item 3.     Legal
Proceedings

In May 2002, the Company became aware of a
Complaint for Declaratory Judgment filed in the United States
District Court for the District of Massachusetts by LeMaitre
Vascular, Inc. (LeMaitre) against one of the
Companys former distributors, Cardio Medical Products,
Inc. (Cardio Medical). The Company had a
distributorship agreement with Cardio Medical for the IFM
product line entered into prior to the Companys sale of
the IFM business on March 30, 2001 to LeMaitre. See
Description of Business  Acquisitions and
Divestitures above. Under the IFM Agreement with the
Company, LeMaitre agreed to continue selling the IFM product
line to Cardio Medical as required by the Cardio Medical
distributorship agreement for the remainder of its term through
December 31, 2002, provided LeMaitre received from Cardio
Medical confirmation of the terms of such agreement satisfactory
to LeMaitre. In its suit for Declaratory Judgment, LeMaitre
requested a declaration that the IFM Agreement created no
contractual rights between Cardio Medical and LeMaitre, and that
LeMaitre has no obligation to sell its IFM products to Cardio
Medical. In early June 2002, Cardio Medical answered
LeMaitres complaint, and asserted a counterclaim against
us and LeMaitre for breach of contract. The counterclaim alleged
that the Company breached the distributorship agreement between
Cardio Medical and the Company by (1) failing and refusing
to sell IFM products to Cardio Medical (either directly or
through LeMaitre); and (2) selling or allowing LeMaitre to
sell IFM products directly to customers in the territory granted
exclusively to Cardio Medical. In November 2003, this lawsuit
was settled.

On August 8, 2002, the Company received a
subpoena from the Office of Inspector General of the Department
of Health and Human Services requesting documents relating to
the Companys agreement with a group purchasing
organization. The Company has cooperated fully with the request
and has produced documents responsive to the subpoena.

In November 2002, the Company was served with a
complaint filed in the United States District Court for the
Northern District of Georgia by Chepstow Limited
(Chepstow) against the Company, its Chief Executive
Officer, Marshall B. Hunt, its President, William E.
Peterson, Jr., and members of Mr. Hunts family
and a family limited partnership established by Mr. Hunt
and his wife. Chepstow alleged that it had a judgment on a
promissory note against Mr. Hunt, that it is engaging in
post-judgment collection efforts, and that the defendant parties
in this action had engaged with Mr. Hunt in fraudulent
conveyances of Mr. Hunts assets. Specifically, with
respect to the Company, Chepstow alleged that, in March 2002,
Mr. Hunt transferred 225,000 shares of the
Companys common stock to his family limited partnership,
that such transfer was a fraudulent conveyance under Georgia
law, that the Company assisted in such transfer, and that the
Company engaged in an unlawful conspiracy to hinder, delay or
defraud Chepstow as Mr. Hunts creditor. Chepstow
sought to void such transfers and injunctive relief,
compensatory damages, and punitive damages from the defendants,
including the Company. The Company filed a motion to dismiss the
action against the Company. In July 2003, the court granted the
Companys motion to dismiss and dismissed the lawsuit
against all parties. In August 2003, plaintiff filed a Notice of
Appeal with respect to the courts dismissal and the
Company has filed its brief in connection with such appeal. Oral
arguments were held on the appeal in January 2004. The Company
has entered into an agreement with Chepstow that if the
appellate court should reverse the District Courts
dismissal of the lawsuit as to the Company, the continuation of
the lawsuit in the District Court will be stayed pending Mr.
Hunts satisfaction of Chepstows judgment against
Mr. Hunt and will be dismissed upon Mr. Hunts
satisfaction of such judgment.

The Company also is a party from time to time to
other actions arising in the ordinary course of business which
it deems immaterial. Although the Company believes that it has
defenses to the claims of liability or for damages in the
actions against it, there can be no assurance that additional
lawsuits will not be filed against the Company or the
Companys subsidiaries. Further, there can be no assurance
that the lawsuits will not have a disruptive effect upon the
operations of the Companys business, that the defense of
the lawsuits will not consume the time and attention of the
Companys senior management and its subsidiaries, or that
the resolution of the lawsuits will not have a material adverse
effect on the Companys operating results and financial
condition. The Company intends to vigorously defend or pursue
each of the lawsuits.

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The Company maintains insurance in such amounts
and against such risks as it deems prudent, although no
assurance can be given that such insurance will be sufficient
under all circumstances to protect the Company against
significant claims for damages. The occurrence of a significant
event not fully insured could materially and adversely affect
the Companys business, financial condition and results of
operations. Moreover, no assurance can be given that the Company
will be able to maintain adequate insurance in the future at
commercially reasonable rates or on acceptable terms.






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

There were no matters submitted to shareholders
of the Company for a vote in the fourth quarter of 2003.




PART II






|         |                                                                                 
|-------- | --------------------------------------------------------------------------------
|Item  5. | Market for the Registrants Common
    Stock and Related Security Holder Matters

The Companys common stock trades on The
American Stock Exchange under the symbol HMP. Prior
to November 9, 1999, the Companys common stock traded
on The Nasdaq Stock Market under the symbol HMPS.
The following table sets forth the high and low sales price of
the common stock as reported on The American Stock Exchange for
the periods indicated.

|                   |  |      |      |     |  |   |      | 
|------------------ |  | ---- | ---- | --- |  | - | ---- | 
|Calendar Year 2003 |  | High |      | Low
|                   |  |      |      |    
|First Quarter      |  | $    | 0.60 |     |  | $ | 0.35 | 
|Second Quarter     |  | $    | 0.65 |     |  | $ | 0.37 | 
|Third Quarter      |  | $    | 1.15 |     |  | $ | 0.53 | 
|Fourth Quarter     |  | $    | 2.10 |     |  | $ | 0.77 | 

|                   |  |      |      |     |  |   |      | 
|------------------ |  | ---- | ---- | --- |  | - | ---- | 
|Calendar Year 2002 |  | High |      | Low
|                   |  |      |      |    
|First Quarter      |  | $    | 1.40 |     |  | $ | 0.49 | 
|Second Quarter     |  | $    | 1.30 |     |  | $ | 0.70 | 
|Third Quarter      |  | $    | 1.18 |     |  | $ | 0.60 | 
|Fourth Quarter     |  | $    | 1.00 |     |  | $ | 0.45 | 

As of March 17, 2004, there were 125 record
holders of the Companys common stock. On March 26,
2004, the last reported sales price of the Companys common
stock on The American Stock Exchange was $1.88 per share.

The Company has not paid or declared any cash
dividends on its capital stock since the Companys
inception. The Company currently intends to retain all future
earnings for use in the expansion and operation of its business.
Accordingly, the Company does not anticipate paying cash
dividends on its common stock in the foreseeable future. The
payment of any future dividends will be at the discretion of the
Companys board of directors and will depend upon, among
other things, future earnings, operations, capital requirements,
the Companys general financial condition, contractual
restrictions and general business conditions. The Companys
credit facility with LaSalle and the Note Purchase Agreement
currently prohibit the payment of cash dividends on its capital
stock.




Sales of Unregistered Securities During the
Fourth Quarter of 2003

In the fourth quarter of 2003, the Company issued
an aggregate of 446,177 shares of its common stock in connection
with the exercise of warrants issued in the Recapitalization.
The issuance of these shares of common stock was exempt from
registration under the Securities Act of 1933, as amended (the
Securities Act), pursuant to Section 4(2) of
the Securities Act.

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|         |                        
|-------- | -----------------------
|Item  6. | Selected Financial Data

The following selected financial data of the
Company as of and for each of the five years ended
December 31, 2003 are derived from, and are qualified by
reference to the audited consolidated financial statements,
including the notes thereto, of the Company. The selected
financial data should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated
Financial Statements and related Notes thereto of the Company
included elsewhere in this Form 10-K.

|                                                                                                    |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------ | -
|                                                                                                    |  |                                      
|                                                                                                    |  | Years Ended December 31,             
|                                                                                                    |  |                                      
|                                                                                                    |  | 1999                                  |         | 2000 |  | 2001 |         | 2002 |  | 2003
|                                                                                                    |  |                                       |         |      |  |      |         |      |  |     
|                                                                                                    |  |                                      
|                                                                                                    |  | (In thousands, except per share data)
|Statement of Operations Data                                                                        |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Net Sales                                                                                           |  | $                                     | 32,661  |      |  | $    | 25,717  |      |  | $    | 24,701  |   |  | $ | 21,712  |   |  | $ | 27,975 |  
|Cost of goods sold                                                                                  |  |                                       | 15,092  |      |  |      | 17,467  |      |  |      | 11,410  |   |  |   | 9,343   |   |  |   | 11,248 |  
|                                                                                                    |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Gross Profit                                                                                        |  |                                       | 17,569  |      |  |      | 8,250   |      |  |      | 13,291  |   |  |   | 12,369  |   |  |   | 16,727 |  
|Selling, general and administrative expenses                                                        |  |                                       | 13,781  |      |  |      | 14,030  |      |  |      | 16,043  |   |  |   | 16,110  |   |  |   | 15,096 |  
|Impairment charge                                                                                   |  |                                       |        |      |  |      | 12,086  |      |  |      |        |   |  |   |        |   |  |   |       |  
|                                                                                                    |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Income (loss) from operations                                                                       |  |                                       | 3,788   |      |  |      | (17,866 | )    |  |      | (2,752  | ) |  |   | (3,741  | ) |  |   | (1,631 | )
|Loss on early extinguishment of debt                                                                |  |                                       |        |      |  |      |        |      |  |      |        |   |  |   | (6,641  | ) |  |   |       |  
|Interest expense, net                                                                               |  |                                       | (2,063  | )    |  |      | (2,345  | )    |  |      | (2,208  | ) |  |   | (2,846  | ) |  |   | (2,373 | )
|Other income (expense)                                                                              |  |                                       | 99      |      |  |      | 115     |      |  |      | 68      |   |  |   | (15     | ) |  |   | (45    | )
|                                                                                                    |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Income (loss) before income taxes                                                                   |  |                                       | 1,824   |      |  |      | (20,096 | )    |  |      | (4,892  | ) |  |   | (13,243 | ) |  |   | (787   | )
|Income tax provision (benefit)                                                                      |  |                                       | 820     |      |  |      | (1,006  | )    |  |      |        |   |  |   |         |   |  |   |       |  
|                                                                                                    |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Income (loss) from continuing operations                                                            |  |                                       | 1,004   |      |  |      | (19,090 | )    |  |      | (4,892  | ) |  |   | (13,243 | ) |  |   | (787   | )
|Discontinued operations:                                                                            |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Income (loss) from operations of discontinued
    distribution segment (including gain on disposal) |  |                                       | 661     |      |  |      | (671    | )    |  |      | (231    | ) |  |   | 3,175   |   |  |   |       |  
|Effect of a change in accounting principle
    pursuant to adoption of SFAS 142                     |  |                                       |        |      |  |      |        |      |  |      |        |   |  |   | (16,102 | ) |  |   |       |  
|                                                                                                    |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Net income (loss)                                                                                   |  | $                                     | 1,665   |      |  | $    | (19,761 | )    |  | $    | (5,123  | ) |  | $ | (26,170 | ) |  | $ | (787   | )
|                                                                                                    |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Income (loss) from continuing operations per
    share  basic and diluted                          |  | $                                     | 0.08    |      |  | $    | (1.43   | )    |  | $    | (0.37   | ) |  | $ | (0.64   | ) |  | $ | (.02   | )
|Income (loss) from operations of discontinued
    distribution segment (including gain on disposal) |  |                                       | 0.04    |      |  |      | (0.05   | )    |  |      | (0.01   | ) |  |   | 0.15    |   |  |   |       |  
|Effect of a change in accounting principle
    pursuant to adoption of SFAS 142                     |  |                                       |        |      |  |      |        |      |  |      |        |   |  |   | (0.78   | ) |  |   |       |  
|                                                                                                    |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Net income (loss) per share 
    basic and diluted                                                 |  | $                                     | 0.12    |      |  | $    | (1.48   | )    |  | $    | (0.38   | ) |  | $ | (1.27   | ) |  | $ | (.02   | )
|                                                                                                    |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Weighted average common shares
    outstanding  basic                                              |  |                                       | 13,366  |      |  |      | 13,366  |      |  |      | 13,366  |   |  |   | 20,685  |   |  |   | 36,656 |  
|Weighted average common shares
    outstanding  diluted                                            |  |                                       | 13,373  |      |  |      | 13,366  |      |  |      | 13,366  |   |  |   | 20,685  |   |  |   | 36,656 |  
|Balance Sheet Data (end of year):                                                                   |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Cash and cash equivalents                                                                           |  | $                                     | 1,991   |      |  | $    | 164     |      |  | $    | 2,749   |   |  | $ | 3,712   |   |  | $ | 1,806  |  
|Working capital                                                                                     |  | $                                     | 29,927  |      |  | $    | 15,259  |      |  | $    | (21,359 | ) |  | $ | 9,460   |   |  | $ | 8,801  |  
|Total assets                                                                                        |  | $                                     | 102,397 |      |  | $    | 86,038  |      |  | $    | 71,348  |   |  | $ | 37,190  |   |  | $ | 35,186 |  
|Long-term debt, net of current maturities                                                           |  | $                                     | 44,999  |      |  | $    | 40,598  |      |  | $    | 1,355   |   |  | $ | 18,342  |   |  | $ | 16,999 |  
|Total shareholders equity                                                                           |  | $                                     | 43,069  |      |  | $    | 22,332  |      |  | $    | 18,282  |   |  | $ | 15,330  |   |  | $ | 14,752 |  

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operation

The following discussion of the financial
condition and results of operations of the Company should be
read in conjunction with the Companys audited consolidated
financial statements and the related notes thereto appearing
elsewhere in this Form 10-K.




Cautionary Statement Regarding Forward-Looking
Statements

Certain statements made in this annual 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.

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
facing the Company, and other factors that you may wish to
consider, is contained below in Managements
Discussion and Analysis of Financial Condition and Results of
Operations below and is also contained in this
Form 10-K under the section entitled Risk
Factors and elsewhere and in the Companys filings
from time to time pursuant to the Securities Exchange Act of
1934, as amended (the Exchange Act).




Background

The Company is a specialty medical device company
focused on manufacturing and/or marketing vascular products. The
Companys oncology product lines include implantable
vascular ports, tunneled catheters and stem cell transplant
catheters used primarily in cancer treatment protocols. The
Company has a complete line of acute and chronic dialysis
catheters used for kidney failure patients.

The Company was incorporated and began its
operations in February 1990 as a distributor of medical devices
and began to distribute vascular access devices in 1990. In
November 1992, the Company entered into a collaborative effort
with a leading heart valve manufacturer to design and develop a
new line of vascular access ports for the Company. This new line
of ports, the Triumph-1® line, was introduced in September
1994. The Company continues to market a line of Triumph-1®
vascular access ports and in 2001, it transitioned the
manufacturing of the port line in-house to its current
manufacturing facility. Prior to that transition, since 1996,
certain models in the Triumph-1® line had been manufactured
for us by ACT Medical. In May 1995, the Company began to
distribute the NeoStar Medical line of hemodialysis catheters
and acquired that line in October 1995. In March 1996, the
Company began construction of a 20,000 square foot
manufacturing, distribution and administrative facility in
Manchester, Georgia. The Company began manufacturing the NeoStar
Medical® product line at this facility in October 1996 and
expanded this facility in 1998 and in 2000 to its current
configuration of approximately 60,000 square feet. In July 1997,
the Company acquired the port business of Strato/ Infusaid. The
primary product lines obtained in the Strato/ Infusaid
acquisition included the LifePort® and Infuse-a-Port®
vascular access ports and the Infuse-a-Cath® line of
catheters. In 1998, the Company made additional product
acquisitions, including the Vortex® port, TitanPort
and OmegaPort® lines acquired from Norfolk Medical. In
addition, the Companys acquired the CVS and Stepic Medical
device distribution businesses. Distribution of non-Horizon
medical devices through Stepic during the first nine months of
2002 (through the sale of Stepic in September 2002) comprised
approximately 55.1% of the Companys revenue.

On October 9, 2000, the Company consummated
the acquisition of certain assets used in the manufacture and
sale of medical devices by IFM, a wholly-owned subsidiary of
CryoLife. This acquisition effectively completed its acquisition
of the IFM product line which was acquired in September of 1998.
In addition to the purchase of assets, consisting primarily of
inventory and leasehold improvements, the Company

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also assumed control of IFMs approximately
30,000 square foot manufacturing facility in St. Petersburg,
Florida and the 80 employees there. The IFM business was sold to
Vascutech, Inc. on March 30, 2001, and Vascutech assumed
control of such facility. The consideration for the sale of the
IFM business consisted of cash in the amount of $2,250,500 at
closing, the assumption of approximately $5,600,000 (as of
December 31, 2000) of debt under the Note issued in
connection with the Companys October 2000 acquisition from
IFM and a second installment cash payment of $220,367, payable
six months from the closing date. The second installment payment
was not made, and the Company initiated legal action against the
purchaser. The Company and the purchaser settled this lawsuit in
August 2002.


While the Company has acquired products through
the acquisitions described above, more recently the Company has
developed new products. The Companys VTX® technology,
which was introduced by the Company in 2000, is featured in its
Vortex® port, its new LifePort®VTX® titanium and
plastic ports, and its new TriumphTM VTX®
titanium and plastic ports. VTX® technology refers to the
swirling blood flow produced by a uniquely rounded reservoir
design and tangential outlet, which substantially reduces
thrombosis or the build up of sludge from blood and drug
products in the port reservoir. The square cornered reservoirs
and perpendicular outlets that are common to other vascular
access ports promote the formation of sludge, flush less
efficiently, and provide chaotic blood flow. These conditions,
in turn, cause complications that require additional procedures
at additional cost. The Company introduced its new chronic
hemodialysis catheter, LifeJet, in December 2001 and its
LifeJetTM F-16 in January 2003. The Companys
new safety infusion needle, LifeGuardTM, designed for
use with vascular access ports, was released in June 2002 and
its new central venous catheter, LifeValve®, was released
in October 2002.

On March 15, 2002 the Company entered into a
Co-Promotion Agreement with Medtronic under which the Company
promoted and provided technical advise 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 obligation
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 the consolidated financial statements).

On March 19, 2002, the Company announced the
consummation of the Recapitalization that extinguished all of
the Companys senior debt and warrants held by Bank of
America and substantially reduced the Companys total
outstanding debt.

On September 3, 2002, the Company sold
Stepic to Arrow International, Inc. (Arrow) for
approximately $12.6 million, consisting of $11 million
in cash, $1.1 million placed in escrow and a note
receivable in the amount of $500,000. In addition, the Company
retained assets of approximately $1.1 million in the
transaction. Approximately $7.8 million of the cash
proceeds of the Stepic sale were used to pay down all amounts
outstanding at closing under the Companys revolving senior
credit facility with the Lender. The Company used the remaining
proceeds for working capital purposes. Arrow paid
$1.1 million of the cash purchase price into escrow, which
sum has been distributed to the Company (in an amount equal to
$1,051,317 plus interest of $904) and to Arrow (in an amount
equal to $48,683) in accordance with the terms of the asset
purchase agreement and escrow agreement entered into in
connection with the Stepic sale. Finally, Arrow issued to the
Company a promissory note in the principal amount of $500,000,
which bore interest at an annual rate of 5%. Pursuant to the
terms of this note, $250,000 plus interest of $3,664 was paid to
the Company on December 19, 2002 and the balance of
$250,000 plus interest of $6,199 and was paid to the Company on
March 3, 2003.

On April 15, 2003, the Company entered into
the Second Amendment (the Amendment) to Co-Promotion Agreement
with Medtronic and on April 17, 2003, the Company entered
into the Exclusive Distributor Agreement with Medtronic
(Distributor Agreement). Under the Distributor Agreement, the
Company became the exclusive distributor commencing June 1,
2003 in the United Stated for Medtronics IsoMed®
constant flow infusion system for the delivery of the
chemotherapy agents for use in hepatic arterial infusion therapy
for patients with colorectal and/or liver cancer. The term of
the Distributor Agreement is for three years through
May 31, 2006 with two renewal terms of one year each unless
either party terminates the

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relationship prior to the commencement of either
renewal term. Under the Amendment, the IsoMed® infusion
system was removed from the Co-Promotion Agreement (leaving the
Medtronic SynchroMed® infusion system for the treatment of
malignant pain as the only product under the Co-Promotion
Agreement) and the compensation structure in the Co-Promotion
Agreement was modified.


In September 2003, we launched a new central
venous catheter, the LifeValve® Platinum, and in February
2004, we launched our Vortex® MP port system which is
designed for either chest or peripheral use. The Vortex® MP
port system incorporates a rounded chamber and off-set stem to
promote more efficient flushing, and is small and low in profile.




Critical Accounting Policies

The Companys management believes the
following critical accounting policies, among others, affect the
more significant judgments and estimates used in the preparation
of the Companys consolidated financial statements:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company maintains allowances for doubtful
    accounts, which accounts for estimated losses resulting from the
    inability of the Companys customers to make required
    payments. If the financial condition of the Companys
    customers were to deteriorate, resulting in an impairment of
    their ability to make payments, additional allowances may be
    required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | The Company writes down its inventory for
    estimated obsolescence or unmarketable inventory equal to the
    estimated market value based upon assumptions about future
    demand and market conditions. If actual future demand or market
    conditions are less favorable than those projected by
    management, additional inventory write-downs may be required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | The Company reviews customer contracts to
    determine if all of the requirements for revenue recognition
    have been met prior to recording revenues from sales
    transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The Company estimates allowances for sales
    returns and rebates based on its experiences from historical
    customer returns and rebates. If actual future customer returns
    and rebates are less favorable than those projected by
    management, additional sales allowances may be required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Effective January 1, 2002, the Company
    adopted SFAS No. 142, Goodwill and Other Intangible Assets,
    which supercedes APB No. 17. Upon the adoption of SFAS
    No. 142, the Company recognized an impairment loss of
    approximately $16.1 million related to its distribution
    reporting unit. If economic conditions deteriorate and
    indicators of impairment become present, another adjustment to
    the carrying value of goodwill may be required. On
    January 1, 2002, the Company adopted SFAS No. 144,
    Accounting for the Impairment of Disposal of Long-Lived Assets,
    which supercedes SFAS No. 121. The Company will review
    long-lived assets for impairment under this standard, which does
    not substantially change the guidance in SFAS No. 121. The
    impact of adopting SFAS No. 144 did not have a material
    impact on the Companys financial statements.

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




Related Party Transactions

Certain recent significant related party
transactions are summarized in Description of
Business above. For a more detailed discussion of the
Companys related party transactions, see 
Related-Party Transactions

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in Note 11 of the notes to the Companys
audited consolidated financial statements contained elsewhere
herein.





Results of Operations

The following table sets forth for the periods
indicated certain items contained in the Companys
consolidated statements of operations expressed as a percentage
of net sales:

|                                                                                                    |                                      |                          |       |      |   |      |        |       |   |  |       |      |  
|--------------------------------------------------------------------------------------------------- | ------------------------------------ | ------------------------ | ----- | ---- | - | ---- | ------ | ----- | - |  | ----- | ---- | -
|                                                                                                    |                                      |                         
|                                                                                                    |                                      | Years Ended December 31,
|                                                                                                    |                                      |                         
|                                                                                                    |                                      | 2001                     |       | 2002 |   | 2003
|                                                                                                    |                                      |                          |       |      |   |     
|Net sales                                                                                           |                                      |                          | 100.0 | %    |   |      | 100.0  | %     |   |  | 100.0 | %   
|Cost of goods sold                                                                                  |                                      |                          | 46.2  |      |   |      | 43.0   |       |   |  | 40.2  |     
|                                                                                                    |                                      |                          |       |      |   |      |        |       |   |  |       |     
|Gross profit                                                                                        |                                      |                          | 53.8  |      |   |      | 57.0   |       |   |  | 59.8  |     
|Selling, general and administrative expenses                                                        |                                      |                          | 65.0  |      |   |      | 74.2   |       |   |  | 54.0  |     
|                                                                                                    |                                      |                          |       |      |   |      |        |       |   |  |       |     
|Loss from operations                                                                                |                                      |                          | (11.2 | )    |   |      | (17.2  | )     |   |  | 5.8   |     
|Other income (expense):                                                                             |                                      |                          |       |      |   |      |        |       |   |  |       |     
|                                                                                                    | Loss on early extinguishment of debt |                          |       |     |   |      |        | (30.6 | ) |  |       |     |  
|                                                                                                    | Interest expense, net                |                          |       | (8.9 | ) |      |        | (13.1 | ) |  |       | (8.5 | )
|                                                                                                    | Other income (expense)               |                          |       | .30  |   |      |        |      |   |  |       | (.10 | )
|                                                                                                    |                                      |                          |       |      |   |      |        |       |   |  |       |     
|Loss before income taxes                                                                            |                                      |                          | (19.8 | )    |   |      | (60.9  | )     |   |  | (2.8  | )   
|Loss from continuing operations                                                                     |                                      |                          | (19.8 | )    |   |      | (60.9  | )     |   |  | (2.8  | )   
|Income (loss) from operations of
    discontinued distribution segment (including gain on disposal) |                                      |                          | (0.9  | )    |   |      | 14.6   |       |   |  |      |     
|Effect of a change in accounting principle
    pursuant to adoption of SFAS 142                     |                                      |                          |      |      |   |      | (74.2  | )     |   |  |      |     
|                                                                                                    |                                      |                          |       |      |   |      |        |       |   |  |       |     
|Net loss                                                                                            |                                      |                          | (20.7 | )%   |   |      | (120.5 | )%    |   |  | (2.8  | )%  
|                                                                                                    |                                      |                          |       |      |   |      |        |       |   |  |       |     




Year Ended
December 31, 2003 compared to Year Ended December 31,
2002

Net Sales.Net sales
increased 29% to $27.9 million in 2003 from $21.7 million
in 2002. The increase in sales is primarily attributable to
continued growth in sales from new products introduced in the
second half of 2002, the recent introduction of new products
including the LifeValve® Platinum CVC and recently released
LifeJet F-16 hemodialysis catheter, combined with the
addition of Medtronics IsoMed® HAI product line in
June 2003. In addition, there was overall sales growth resulting
from the Companys direct sales expansion program
implemented in late 2002 in which a larger portion of the
Companys sales is derived from its direct sales force, as
compared to the past, which featured a larger mix of
distributors and direct sales representatives.

Gross Profit.Gross
profit increased 35% to $16.7 million in 2003, from
$12.4 million in 2002. Gross margin increased to 60% in
2003 from 57% in 2001. The increase in gross profit is the
result of increased manufacturing efficiencies, a more favorable
product mix and the increase in net sales derived from the
Companys direct sales force versus the mix of distributor
sales in the previous year.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses (SG&A) decreased to
$15.1 million in 2003 from $16.1 million 2002. The
decrease in SG&A was partially attributable to approximately
$3.0 million of Recapitalization-related expenses incurred
in 2002, which were not recurring in 2003.

Exclusive of Recapitalization-related expenses,
SG&A increased approximately $1.7 million in 2003
compared to 2002. The increase in SG&A was attributable to
increased research and development expenses and increased costs
associated with the direct sales expansion program implemented
in late 2002.

Loss on Early Extinguishment of
Debt.In 2002, the Company recorded a
loss of approximately $6.6 million on extinguishment of its
Bank of America debt as a result of the recapitalization during
the first

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quarter of 2002. The Company originally recorded
this transaction as an extraordinary loss. The Company has
adopted SFAS No. 145 effective as of January 1, 2003
and for the year then ended. As a result, and in accordance with
Statement No. 145 and Accounting Principles Board
Opinion 30 (APB No. 30), the extraordinary
loss on the extinguishment of debt recognized in 2002 is
reclassified from extraordinary items to a component of
other income (expense) in the continuing operations
portion of the Companys Statement of Operations. The
Company has determined that the item reported as extraordinary
requires revision in order to be presented in accordance with
SFAS no. 145 and APB No. 30. The effect of
this revision is to reclassify the extraordinary item to
other income(expense) from continuing operations.


Interest Expense.Interest expense, net of interest income, decreased
approximately $473,000, or 17%, from $2.8 million in 2002
to $2.3 million in 2003. The decrease is primarily the
result of lower outstanding debt in 2003.

Discontinued
Operations.Income from operations of
the Companys discontinued distribution segment (Stepic)
was $3.1 million in 2002. The Company sold Stepic on
September 3, 2002.

Earnings before Interest, Taxes, Depreciation,
and Amortization (EBITDA).EBITDA increased to $3,054,112 for 2003 from $(2,217,461) in
2002 due primarily to increased sales and resulting gross
profits as discussed above, combined with non-recurring
recapitalization expenses experienced in 2002.

EBITDA is a metric which management believes is a
meaningful measurement of operating performance which allows
analysts and investors to compare the performance of the Company
against other competitors in the healthcare industry. EBITDA is
also one of the factors used in determining the Companys
management performance bonuses. The calculation of EBITDA has no
basis in Generally Accepted Accounting Principles
(GAAP) and may not be consistent with calculations
of EBITDA used by other companies. Management believes that net
income (loss) is the most directly comparable financial measure
calculated and presented in accordance with GAAP. The
reconciliation of EBITDA to net income (loss) is set forth below.

Income Taxes.The
Company generated an income tax benefit during 2003 of
approximately $674,000 which was reduced by a valuation
allowance on the Companys deferred tax assets. The
Companys taxable income generated as a result of the
extinguishment of the BofA Credit Facility pursuant to the
Recapitalization during 2002 was fully offset by a net operating
loss carryforward upon which a valuation allowance had
previously been established in 2001. As a result of the
conversion to common stock of debt issued in the
Recapitalization, the Company had a change in control for income
tax purposes. Section 382 of the Code restricts the
utilization of NOL carryforwards and the benefit of certain
built in losses when there has been a change in control as
defined in the tax code. Management is in the process of
determining the tax implications of the change of control. The
Company generated an income tax benefit of approximately
$3.2 million during 2002, which was reduced fully by a
valuation allowance established on the Companys deferred
tax assets generated by the income tax benefit. The income tax
benefit for 2002 consists of the federal and state benefits,
adjusted for certain nondeductible items, reduced by a valuation
allowance on the Companys deferred tax assets.

Goodwill Impairment
Loss.Upon the adoption of
SFAS No. 142 on January 1, 2002, the Company
recognized an impairment loss of approximately
$16.1 million related to its distribution reporting unit.
The Company has identified two reporting units, the
aforementioned manufacturing unit and the distribution unit.
These reporting units are consistent with the Companys
previously identified reportable segments under SFAS
No. 131. In applying the transitional impairment model
prescribed by SFAS 142, the Company used a discounted cash
flow model to determine the fair value of the net assets of each
of the Companys reporting units. Significant assumptions
utilized in the model were revenue growth rates, gross margin
percentages, depreciation and amortization, capital
expenditures, working capital requirements, and the appropriate
discount rate. The fair value of the Companys distribution
reporting units net assets were less than the carrying
value of those net assets; thus, the Company proceeded to
step 2 of the SFAS No. 142 impairment model,
whereby the Company allocated that fair value to the reporting
units tangible and intangible net assets. The Company
utilized various methods to determine the fair value of the
distribution units identifiable intangible assets,
including discounted cash flows, royalty savings method, and the
cost approach. Significant assumptions used in valuing these
intangible assets included price premiums, expected effective
tax rates, the

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discount rate, remaining useful lives of
intangible assets, royalty rates, and residual values. A
comparison of the implied fair value of goodwill, calculated
from the allocation of fair value described above, to the
carrying net book value of goodwill at January 1, 2002
yielded the impairment charge described above. The Company
applied the same methodology to its manufacturing unit and
concluded that the goodwill associated with that reporting unit
was not impaired.







| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2002 compared
    to Year Ended December 31, 2001

Net Sales.Net sales
decreased 12.1% to $21.7 million in 2002 from
$24.7 million in 2001. The decrease in sales is primarily
attributable to the fact that sales of the IFM product line (of
approximately $1.8 million in 2001) are not included in
2002 net sales as the product line was sold on March 30,
2001. In addition, there was a decline in sales to independent
distributors in the twelve months ended December 31, 2002,
due to the Companys program in which a larger portion of
the Companys sales is to be derived from its direct sales
force, as compared to the past, which featured a mix of
distributors and direct sales representatives.

Gross Profit.Gross
profit decreased 6.9% to $12.4 million in 2002, from
$13.3 million in 2001. Gross margin increased to 57% in
2002 from 53.8% in 2001. The decrease in gross profit is the
result of decreased sales, and the increase in gross margin
percentage is the result of favorable manufacturing production
efficiencies and lower distributor rebates as well as a
favorable change in product mix for the twelve months ended
December 31, 2002 compared to 2001.

Selling, General and Administrative
Expenses.SG&A increased slightly
to $16.1 million in 2002 from $16.0 million 2001. The
increase in SG&A was fully attributable to recapitalization
expenses of approximately $3 million incurred as a result
of the Companys recapitalization transaction in March
2002. Exclusive of the recapitalization expenses, SG&A
decreased approximately $2.9 million in 2002 from 2001.
This decrease is the result of lower turnaround expenses,
including consulting fees, PR campaign fees and employment
severances, as well as lower amortization expenses in 2002
resulting from the Companys adoption of SFAS 142 (see
Notes 2 and 5 to the Companys audited consolidated
financial statements included elsewhere herein). In addition,
the decrease resulted from the Companys cost reduction
program implemented in 2002, which included lower salaries,
travel and marketing expenses in 2002. SG&A expenses
increased as a percentage of net sales to 74.2% in 2002 from 65%
in 2001 due to decreased sales as well as the recapitalization
expenses in 2002 from 2001.

Extraordinary Loss.In 2002, the Company recorded an extraordinary loss of
approximately $6.6 million on the extinguishment of its
Bank of America debt as a result of the recapitalization
transaction during the first quarter of 2002. The Company
originally recorded this transaction as an extraordinary loss.
The Company has adopted SFAS No. 145 effective as of
January 1, 2003 and for the year then ended. As a result,
and in accordance with Statement No. 145 and Accounting
Principles Board Opinion 30
(APB No. 30), the extraordinary loss on
the extinguishment of debt recognized in 2002 is reclassified
from extraordinary items to a component of other income
(expense) in the continuing operations portion of the
Companys Statement of Operations. The Company has
determined that the item reported as extraordinary requires
revision in order to be presented in accordance with
SFAS no. 145 and APB No. 30. The effect of
this revision is to reclassify the extraordinary item to
other income(expense) from continuing operations.

Interest Expense.Interest expense, net of interest income, increased
approximately $638,000 or 28.9% from $2.2 million in 2001
to $2.8 million in 2002. Upon completion of the
Recapitalization in the first quarter of 2002, the Company
increased the amount of debt allocated to the manufacturing
segment. Accordingly, the amount of interest attributable to
this segment has been increased in the twelve months ended
December 31, 2002 over the twelve months ended
December 31, 2001. Interest expense for both periods
attributable to the distribution segment has been reclassified
and is now reported as part of the gain/loss from operations of
discontinued operations. In addition, upon the consummation of
the Recapitalization, the Company incurred increased deferred
loan costs, the amortization of which is recorded as a component
of interest expense. For the twelve months ended
December 31, 2002, the Companys amortization of
deferred loan costs was approximately $220,000 higher than in
the twelve months ended December 31, 2001.

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EBITDA.EBITDA for
2002 was $(2,217,461) compared with $(249,806) for 2001. The
decrease was primarily attributable to recapitalization related
charges incurred in 2002 of approximately $3 million,
offset by the increased gross profit achieved in 2002. The
reconciliation of EBITDA to net income (loss) is set forth
below.

Income Taxes.The
Company generated an income tax benefit of approximately
$3.2 million during the twelve months ended
December 31, 2002 and approximately $2 million during
the twelve months ended December 31, 2001, each of which
was reduced fully by a valuation allowance established on the
Companys deferred tax assets generated by the income tax
benefit. The income tax benefit for both 2002 and 2001 consists
of the federal and state benefits, adjusted for certain
nondeductible items, reduced by a valuation allowance on the
Companys deferred tax assets.

Discontinued
Operations.Income from operations of
the Companys discontinued distribution segment (Stepic)
was $3.2 million for the year ended December 31, 2002
compared to a loss of approximately $231,000 for the year ended
December 31, 2001. The increase in income from operations
of the discontinued segment was due to lower interest and
amortization expenses in 2002 compared to 2001. Additionally, in
connection with the sale of Stepic on September 3, 2002,
the Company recognized a net gain on the sale of approximately
$2.1 million which is included in the income from
discontinued operations in the year ended December 31, 2002.

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

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Reconciliation of EBITDA to Net Income
(loss)

The following presents a reconciliation of EBITDA
to net income (loss) for the three fiscal years ended
December 31, 2003, 2002 and 2001.

|                                                                                |  |             |            |      |  |      |             |   |  |   |            |  
|------------------------------------------------------------------------------- |  | ----------- | ---------- | ---- |  | ---- | ----------- | - |  | - | ---------- | -
|                                                                                |  |            
|                                                                                |  | Years Ended
|                                                                                |  |            
|Reconciliation of EBITDA to Net Income (loss):                                  |  | 2003        |            | 2002 |  | 2001
|                                                                                |  |             |            |      |  |     
|EBITDA                                                                          |  | $           | 3,054,112  |      |  | $    | (2,217,461  | ) |  | $ | (249,806   | )
|Depreciation and Amortization in Cost of Goods
    Sold                         |  |             | (179,206   | )    |  |      | (220,950    | ) |  |   | (338,362   | )
|Depreciation and Amortization in Selling,
    General & Administrative Expenses |  |             | (1,289,679 | )    |  |      | (1,317,829  | ) |  |   | (2,096,344 | )
|Interest expense, net                                                           |  |             | (2,372,619 | )    |  |      | (2,845,894  | ) |  |   | (2,207,431 | )
|Loss on early extinguishment of debt                                            |  |             |           |      |  |      | (6,641,015  | ) |  |   |           |  
|Income (loss) from operations of
    discontinued distribution segment          |  |             |           |      |  |      | 3,174,623   |   |  |   | (230,972   | )
|Effect of a change in accounting principle
    pursuant to adoption of SFAS 142 |  |             |           |      |  |      | (16,101,900 | ) |  |   |           |  
|                                                                                |  |             |            |      |  |      |             |   |  |   |            |  
|Net Income (loss)                                                               |  | $           | (787,392   | )    |  | $    | (26,170,426 | ) |  | $ | (5,122,915 | )
|                                                                                |  |             |            |      |  |      |             |   |  |   |            |  




Quarterly Results

The following tables set forth quarterly
statement of operations data for 2002 and 2003. This quarterly
information is unaudited but has been prepared on a basis
consistent with the Companys audited financial statements
presented elsewhere herein and, in the Companys opinion,
includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the
information for the quarters presented. The operating results
for any quarter are not necessarily indicative of results for
any future period.

|                                             |  |                                       |         |          |  |               |       |              |  |   |       |   |  |   |       |  
|-------------------------------------------- |  | ------------------------------------- | ------- | -------- |  | ------------- | ----- | ------------ |  | - | ----- | - |  | - | ----- | -
|                                             |  |                                      
|                                             |  | Three Months Ended                   
|                                             |  |                                      
|                                             |  | March 31,                             |         | June 30, |  | September 30, |       | December 31,
|                                             |  | 2002                                  |         | 2002     |  | 2002          |       | 2002        
|                                             |  |                                       |         |          |  |               |       |             
|                                             |  |                                      
|                                             |  | (In thousands, except per share data)
|Net Sales                                    |  | $                                     | 4,392   |          |  | $             | 6,194 |              |  | $ | 5,317 |   |  | $ | 5,809 |  
|Cost of goods sold                           |  |                                       | 2,130   |          |  |               | 2,691 |              |  |   | 2,066 |   |  |   | 2,456 |  
|                                             |  |                                       |         |          |  |               |       |              |  |   |       |   |  |   |       |  
|Gross profit                                 |  |                                       | 2,262   |          |  |               | 3,503 |              |  |   | 3,251 |   |  |   | 3,353 |  
|Selling, general and administrative expenses |  |                                       | 5,629   |          |  |               | 3,466 |              |  |   | 3,411 |   |  |   | 3,604 |  
|                                             |  |                                       |         |          |  |               |       |              |  |   |       |   |  |   |       |  
|Income (loss) from operations                |  |                                       | (3,367  | )        |  |               | 37    |              |  |   | (160  | ) |  |   | (251  | )
|Loss on early extinguishment of debt         |  |                                       | (6,641  | )        |  |               |      |              |  |   |      |   |  |   |      |  
|Interest expense, net                        |  |                                       | (637    | )        |  |               | (746  | )            |  |   | (724  | ) |  |   | (739  | )
|Other income (expense)                       |  |                                       | (4      | )        |  |               | (5    | )            |  |   | (1    | ) |  |   | (4    | )
|                                             |  |                                       |         |          |  |               |       |              |  |   |       |   |  |   |       |  
|Loss from continuing operations              |  | $                                     | (10,649 | )        |  | $             | (714  | )            |  | $ | (885  | ) |  | $ | (994  | )

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|                                                                                                                        |  |                                       |         |          |  |               |       |              |  |   |       |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | -------- |  | ------------- | ----- | ------------ |  | - | ----- | - |  | - | ------ | -
|                                                                                                                        |  |                                      
|                                                                                                                        |  | Three Months Ended                   
|                                                                                                                        |  |                                      
|                                                                                                                        |  | March 31,                             |         | June 30, |  | September 30, |       | December 31,
|                                                                                                                        |  | 2002                                  |         | 2002     |  | 2002          |       | 2002        
|                                                                                                                        |  |                                       |         |          |  |               |       |             
|                                                                                                                        |  |                                      
|                                                                                                                        |  | (In thousands, except per share data)
|                                                                                                                        |  |                                       |         |          |  |               |       |              |  |   |       |   |  |   |        |  
|Discontinued operations:                                                                                                |  |                                       |         |          |  |               |       |              |  |   |       |   |  |   |        |  
|Income (loss) from operations of discontinued
    distribution segment (including gain on disposal of
    $2.1 million) |  | $                                     | 31      |          |  | $             | 430   |              |  | $ | 3,829 |   |  | $ | (1,116 | )
|Effect of a change in accounting principle
    pursuant to adoption of SFAS 142                                         |  |                                       | (16,102 | )        |  |               |      |              |  |   |      |   |  |   |       |  
|                                                                                                                        |  |                                       |         |          |  |               |       |              |  |   |       |   |  |   |        |  
|Net income (loss)                                                                                                       |  | $                                     | (26,720 | )        |  | $             | (284  | )            |  | $ | 2,944 |   |  | $ | (2,110 | )
|                                                                                                                        |  |                                       |         |          |  |               |       |              |  |   |       |   |  |   |        |  
|Basic and diluted earnings per share:                                                                                   |  |                                       |         |          |  |               |       |              |  |   |       |   |  |   |        |  
|Loss from continuing operations                                                                                         |  | $                                     | (0.77   | )        |  | $             | (0.04 | )            |  | $ | (0.05 | ) |  | $ | (0.03  | )
|Income (loss) from operations of
    discontinued distribution segment (including gain on disposal of
    $2.1 million) |  |                                       | 0.00    |          |  |               | 0.02  |              |  |   | 0.22  |   |  |   | (0.03  | )
|Effect of a change in accounting principle
    pursuant to adoption of SFAS 142                                         |  |                                       | (1.15   | )        |  |               |      |              |  |   |      |   |  |   |       |  
|                                                                                                                        |  |                                       |         |          |  |               |       |              |  |   |       |   |  |   |        |  
|Net income (loss) per share 
    basic and diluted                                                                     |  | $                                     | (1.92   | )        |  | $             | (0.02 | )            |  | $ | 0.17  |   |  | $ | (0.06  | )
|                                                                                                                        |  |                                       |         |          |  |               |       |              |  |   |       |   |  |   |        |  

|                                             |  |                                       |       |          |  |               |       |              |  |   |       |   |  |   |       |  
|-------------------------------------------- |  | ------------------------------------- | ----- | -------- |  | ------------- | ----- | ------------ |  | - | ----- | - |  | - | ----- | -
|                                             |  |                                      
|                                             |  | Three Months Ended                   
|                                             |  |                                      
|                                             |  | March 31,                             |       | June 30, |  | September 30, |       | December 31,
|                                             |  | 2003                                  |       | 2003     |  | 2003          |       | 2003        
|                                             |  |                                       |       |          |  |               |       |             
|                                             |  |                                      
|                                             |  | (In thousands, except per share data)
|Net Sales                                    |  | $                                     | 6,087 |          |  | $             | 6,619 |              |  | $ | 7,545 |   |  | $ | 7,725 |  
|Cost of goods sold                           |  |                                       | 2,453 |          |  |               | 2,710 |              |  |   | 3,003 |   |  |   | 3,082 |  
|                                             |  |                                       |       |          |  |               |       |              |  |   |       |   |  |   |       |  
|Gross profit                                 |  |                                       | 3,634 |          |  |               | 3,909 |              |  |   | 4,542 |   |  |   | 4,643 |  
|Selling, general and administrative expenses |  |                                       | 3,645 |          |  |               | 3,721 |              |  |   | 3,868 |   |  |   | 3,863 |  
|                                             |  |                                       |       |          |  |               |       |              |  |   |       |   |  |   |       |  
|Income (loss) from operations                |  |                                       | (11   | )        |  |               | 188   |              |  |   | 674   |   |  |   | 780   |  
|Interest expense, net                        |  |                                       | (628  | )        |  |               | (597  | )            |  |   | (589  | ) |  |   | (559  | )
|Other income (expense)                       |  |                                       | (14   | )        |  |               | (10   | )            |  |   | (12   | ) |  |   | (9    | )
|                                             |  |                                       |       |          |  |               |       |              |  |   |       |   |  |   |       |  
|Loss from continuing operations              |  |                                       | (653  | )        |  |               | (419  | )            |  |   | 73    |   |  |   | 212   |  
|                                             |  |                                       |       |          |  |               |       |              |  |   |       |   |  |   |       |  
|Net income (loss)                            |  | $                                     | (653  | )        |  | $             | (419  | )            |  | $ | 73    |   |  | $ | 212   |  
|                                             |  |                                       |       |          |  |               |       |              |  |   |       |   |  |   |       |  
|Basic and diluted earnings per share:        |  |                                       |       |          |  |               |       |              |  |   |       |   |  |   |       |  
|Loss from continuing operations              |  | $                                     | (.02  | )        |  | $             | (.01  | )            |  | $ | .00   |   |  | $ | .01   |  
|                                             |  |                                       |       |          |  |               |       |              |  |   |       |   |  |   |       |  
|Net income (loss) per share  basic          |  | $                                     | (.02  | )        |  | $             | (.01  | )            |  | $ | .00   |   |  | $ | .01   |  
|                                             |  |                                       |       |          |  |               |       |              |  |   |       |   |  |   |       |  
|Net income (loss) per share 
    diluted    |  | $                                     | (.02  | )        |  | $             | (.01  | )            |  | $ | .00   |   |  | $ | .00   |  
|                                             |  |                                       |       |          |  |               |       |              |  |   |       |   |  |   |       |  




Liquidity and Capital Resources

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

Net cash used in operating activities was $4,643
for fiscal 2003 compared with $4.1 million for fiscal 2002
and cash provided of $6.4 million for fiscal 2001. The
decrease in cash used in operations during 2003

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compared to 2002 was primarily attributable to
the Recapitalization-related transaction expenses paid in 2002
and the decrease of inventory during 2003, which were offset by
increases in accounts receivable.


Net cash used in investing activities was
approximately $526,566 for fiscal 2003 compared with cash
provided of $12.3 million for fiscal 2002 and
$2.4 million for fiscal 2001. Cash used in investing
activities in 2003 consisted of capital expenditures and
acquisition of intangibles assets as a result of the
Companys acquisition of a portion of the business of one
of its former independent distributors. The decrease in cash
provided by investing activities during 2003 compared to 2002
was attributable to 2002 proceeds from the disposition of the
Stepic distribution segment and from proceeds from shareholders
note receivables.

Net cash used in financing activities was
$1.4 million for fiscal 2003, compared with
$7.3 million for fiscal year 2002 and $6.2 million for
fiscal 2001. Financing activities in 2003 consisted primarily of
principal payments of long-term debt. Financing activities in
2002 substantially consisted of debt issuance costs paid as part
of the Recapitalization of approximately $1.5 million as well as
net proceeds from the issuance of long-term debt and payment of
debt on the Companys BofA Credit Facility, both pursuant
to the Recapitalization. The decrease in cash used in financing
activities during 2003 compared to 2002 was primarily
attributable to the Recapitalization.

The Companys approximate total scheduled
future payments under contractual obligations and indebtedness
outstanding as of December 31, 2003 are as follows:

|                 |  |      |           |         |  |      |            |      |  |      |         |            |  |       |           |  |  |  |         |  |  |   |         |  |  |   |            | 
|---------------- |  | ---- | --------- | ------- |  | ---- | ---------- | ---- |  | ---- | ------- | ---------- |  | ----- | --------- |  |  |  | ------- |  |  | - | ------- |  |  | - | ---------- | 
|                 |  | 2004 |           | 2005(1) |  | 2006 |            | 2007 |  | 2008 |         | Thereafter |  | Total
|                 |  |      |           |         |  |      |            |      |  |      |         |            |  |      
|Long-Term Debt   |  | $    | 1,396,825 |         |  | $    | 15,629,034 |      |  | $    | 382,693 |            |  | $     | 987,500   |  |  |  |        |  |  |   |        |  |  | $ | 18,396,052 | 
|Operating Leases |  |      | 225,749   |         |  |      | 217,437    |      |  |      | 202,852 |            |  |       | 201,744   |  |  |  | 189,560 |  |  |   | 243,246 |  |  |   | 1,280,588  | 
|                 |  |      |           |         |  |      |            |      |  |      |         |            |  |       |           |  |  |  |         |  |  |   |         |  |  |   |            | 
|Total            |  | $    | 1,622,574 |         |  | $    | 15,846,471 |      |  | $    | 585,545 |            |  | $     | 1,189,244 |  |  |  | 189,560 |  |  | $ | 243,246 |  |  | $ | 19,676,640 | 
|                 |  |      |           |         |  |      |            |      |  |      |         |            |  |       |           |  |  |  |         |  |  |   |         |  |  |   |            | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Long-Term Debt for 2005 does not include the
    amount of $112,693 pursuant to obligations payable to former
    shareholders of Stepic, which is, pursuant to its terms,
    accelerated upon payment of the Convertible Notes. Such amounts
    are currently reflected in the table as coming due subsequent to
    2005. Any borrowings, if at all, under the Revolving Loan
    outstanding at the time the Convertible Notes are paid will also
    be accelerated and payable immediately.

On March 1, 2002, the Company entered into
certain agreements with ComVest Venture Partners, L.P.
(ComVest), an affiliate of Commonwealth Associates
L.P. (Commonwealth) to recapitalize the Company (the
Recapitalization). The Company completed the
Recapitalization on March 16, 2002 and the Forbearance
Agreement between the Company and Bank of America, N.A.
(Bank of America) dated March 30, 2001, as
subsequently amended (the Forbearance Agreement),
was terminated as of March 15, 2002. The Forbearance
Agreement is described below.

The material details of the Recapitalization are
as follows:

On March 19, 2002, the Company completed an
arrangement with ComVest, LaSalle Business Credit, Inc.
(LaSalle), and Medtronic Inc.
(Medtronic) to recapitalize the Company by
extinguishing all of the Companys senior debt and warrants
held by Bank of America and substantially reducing the
Companys total outstanding debt. Pursuant to the
Recapitalization, the Company issued the Convertible Notes in
the amount of $15 million to ComVest, Medtronic and other
investors, assumed a $2 million Junior Note payable to Bank
of America (the Junior Note), and entered into a new
revolving and term loan facility (the LaSalle Credit
Facility) for up to $22 million, of which
approximately $1.6 million was outstanding as of
December 31, 2002. The following is a summary of the key
provisions of the Recapitalization:

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

29



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terminated. The warrants, which had previously
been recorded in additional paid-in-capital at their estimated
fair value at issuance of $260,000, were extinguished at their
estimated fair value on the date of extinguishment of $345,000.
As a result, $345,000 was included as a component of the
extraordinary loss on early extinguishment of debt. As discussed
above, this extraordinary loss was subsequently reclassified to
a component of other income/ expense.


On March 1, 2002, the Company entered into
the Note Purchase Agreement with ComVest, Medtronic and the
Additional Note Purchasers. Under the Note Purchase Agreement,
the Company agreed to issue $15 million of Convertible
Notes. Interest on the Convertible Notes is payable quarterly
beginning in June 2002 and accrues at a rate of 6% per year for
the first six months and 8% per year thereafter until the
Convertible Notes are paid in full and mature on March 16,
2004. The Company issued the Convertible Notes as follows:
$4.4 million to ComVest, $4 million to Medtronic and
$6.6 million to the Additional Note Purchasers.
Additionally, in connection with the Recapitalization, the
Company issued a Convertible Bridge Note (the Bridge
Note) to ComVest. ComVest has converted this note into
3,300,000 shares of the Companys common stock at a
conversion price of $0.01 per share. As a result of such
conversion, the Bridge Note has been extinguished.

On March 15, 2002, the Company and ComVest,
as the holder of the outstanding BofA Note, agreed to reduce the
outstanding principal amount of the BofA Note from
$40.3 million to $22 million. As a result, the Company
recorded a net extraordinary loss on the early extinguishment of
debt of approximately $6.6 million during the first quarter
of 2002. This extraordinary loss was calculated by subtracting
the fair value of the new debt of $42.6 million, which
included the amount outstanding under the LaSalle Credit
Facility ($7.3 million), the Convertible Notes
($33.3 million), and the BofA Junior Note
($2.0 million), from the amount outstanding under the Bank
of America debt of $40.3 million. Also included in the
extraordinary loss were various costs paid to ComVest,
Commonwealth Associates, L.P. and LaSalle, as the lenders, to
effect the Recapitalization of $4.3 million. Included as
components of the additional $4.3 million of transaction
expenses were the following: $570,000 in closing costs and due
diligence fees paid to LaSalle; a warrant to purchase the
Companys common stock issued to LaSalle valued at
approximately $695,000; approximately 2.7 million shares
issued to ComVest valued at approximately $2.3 million;
deferred loan costs from the original BofA debt of approximately
$128,000, and $1.15 million paid to Commonwealth in closing
costs and due diligence fees. Also included in the additional
expenses, but offsetting these amounts are approximately
$130,000 in fees and accrued interest forgiven by Bank of
America and the fair value of the BofA warrant of $345,000 which
was acquired and cancelled by ComVest.

The Company also incurred numerous other costs
that were either expensed as incurred or capitalized as debt
issuance costs. Included in selling, general, and administrative
expenses for fiscal 2002 are approximately $3 million of
expenses related to the Recapitalization. The primary components
of those expenses are $2.4 million in stock compensation
and bonuses to two of the Companys executive officers,
$168,000 in consulting fees, and $428,000 in legal and other
fees. The Company capitalized approximately $1.5 million as
debt issuance costs, consisting primarily of $906,000 in legal
fees, $322,000 of consulting fees, and $222,000 of other
miscellaneous fees paid for services rendered in connection with
the Recapitalization.

In exchange for funding a portion of the
$22 million cash purchase price paid to Bank of America,
ComVest assigned $4 million in principal amount of the BofA
Note to Medtronic and $6.6 million in principal amount of
the BofA Note to the Additional Note Purchasers while retaining
$11.4 million in principal amount of the BofA Note itself.
After such assignments, the Company issued the Convertible Notes
under the Note Purchase Agreement in the aggregate principal
amount of $15 million in exchange for the surrender of
$15 million in principal amount of the BofA Note held by
ComVest, Medtronic and the Additional Note Purchasers. The
remaining $7 million in principal amount of the BofA Note
was repaid with the proceeds of a bridge loan from ComVest to
the Company made on March 15, 2002 (the Bridge
Loan).

The fair value of the Convertible Notes, which
was used in the determination of the extraordinary loss on early
extinguishment of debt was $33.3 million. As this value
represents a substantial premium to the face value of the debt,
the Company recorded the debt at its face value of
$15 million, and recorded the premium of $18.3 million
as an increase to additional paid-in-capital. The Company
determined the fair value of the

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Convertible Notes by considering their two
components, the non-convertible debt of $14,730,000 and the
convertible debt of $270,000. The non-convertible debt
components carrying value of $14,730,000 represents its
fair value because, when considered with the convertible
component, its terms yield a market rate of return. The
convertible components fair value was determined by
multiplying the fair value of the Companys stock by the
number of shares into which this component is convertible. Thus,
27,000,000 shares multiplied by $0.68940 per share equals
$18,613,685. The sum of the non-convertible components
fair value of $14,730,000 and the convertible components
fair value of $18,613,685 equals the total debt
instruments fair value of $33,343,685.


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

Effective October 31, 2003, the Company
entered into an agreement with Medtronic and ComVest,
representing the holders of Convertible Notes, to extend the
maturity date of the Convertible Notes from March 16, 2004
to July 16, 2005.

On March 18, 2002, the Company entered into
the LaSalle Credit Facility pursuant to a loan and security
agreement (the Loan Agreement) with Standard Federal
Bank National Association (SFB), acting by and
through LaSalle, as SFBs agent (collectively the
Lender). Under the Loan Agreement, the Lender
provided a $20 million Revolving Loan and a $2 million
Term Loan. Effective December 23, 2002, in connection with
the December Amendment (as defined below), the revolving loan
limit was reduced to $10 million. The Company used the
proceeds to repay the Bridge Loan and expenses related to the
Recapitalization and will use the remaining proceeds for working
capital and general corporate purposes. Both loan facilities
will bear interest at the LaSalle Bank Prime Rate plus 2%,
subject to an additional 2% that would be added to the interest
rate upon the occurrence of an Event of Default (as discussed
below). As collateral, the Company granted a security interest
in all of the Companys present and future assets, whether
now or hereafter owned, existing, acquired or arising and
wherever now or hereafter located. The Loan Agreement contains
affirmative and negative covenants as well as financial
maintenance covenants (as discussed below).

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | maintaining Tangible Net Worth of $7,500,000 for
    the quarters ending December 31, 2002, March 31, 2003,
    June 30, 2003 and September 30, 2003, and $8,000,000
    for the quarter ending December 31, 2003 and each quarter
    thereafter (Tangible Net Worth is defined as the Companys
    shareholders equity including retained earnings less the
    book value of all intangible assets, prepaid and non-cash items
    arising from the transactions contemplated by the Loan Agreement
    and goodwill impairment charges recorded as a result of
    Statement of Financial Accounting Standards (SFAS)
    No. 142 as determined solely by the Lender on a consistent
    basis plus the amount of any LIFO reserve plus the amount of any
    debt subordinated to the Lender);
|
| |  | maintaining fixed charge coverage (ratio of
    EBITDA to fixed charges) of 0.15 to 1.0 for the fiscal quarter
    ending December 31, 2002, 0.3 to 1.0 for the fiscal
    quarters ending March 31, 2003, June 30, 2003 and
    September 30, 2003, 0.50 to 1.0 for the fiscal quarter
    ending December 31, 2003, 0.75 to 1.0                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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

The December Amendment also established a
$10 million revolving loan limit and provided that,
commencing January 1, 2003, the Company shall pay to the
Lender an annual facility fee of $100,000. As of
December 31, 2003, the Company had $2.821 million
available for borrowing under the revolving portion of the Loan
Agreement. As of December 31, 2003, the Company had
$833,333 in borrowings outstanding under the Term Loan and no
borrowings outstanding under the Revolving Loan. As of
December 31, 2003, the Company believes it was in
compliance with all such covenants set forth in the Loan
Agreement.

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

The Company must repay the Revolving Loan on or
before March 17, 2005, the Termination Date, unless the
Loan Agreement is renewed and the repayment period is extended
through a new Termination Date. The Company must repay the Term
Loan in 36 equal monthly installments of $55,556 commencing
April 2002. The Loan Agreement will automatically renew for
one-year terms unless the Lender demands repayment 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. As
discussed elsewhere in this report, the maturity date of the
Convertible Notes was extended to July 16, 2005. As a result, no
such Termination Event occurred, and no termination election was
made by the Lender.

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 three 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. On
May 1, 2003, we began making a monthly principal payment on
the Junior Note of $22,500. This payment is payable on the first
day of each month until maturity of the Junior Note on
March 15, 2007.

On September 3, 2002, the Company sold
Stepic to Arrow International, Inc. (Arrow) for
approximately $12.6 million, consisting of $11 million
in cash, $1.1 million placed in escrow and a note
receivable in the amount of $500,000. In addition, the Company
retained assets of approximately $1.1 million in the
transaction. Approximately $7.8 million of the cash
proceeds of the Stepic sale were used to pay down all

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amounts outstanding at closing under the
Companys revolving senior credit facility with the Lender.
The Company used the remaining proceeds for working capital
purposes. Arrow paid $1.1 million of the cash purchase
price into escrow, which sum has been distributed to the Company
(in an amount equal to $1,051,317 plus interest of $904) and to
Arrow (in an amount equal to $48,683) in accordance with the
terms of the asset purchase agreement and escrow agreement
entered into in connection with the Stepic sale. Finally, Arrow
issued to the Company a promissory note in the principal amount
of $500,000, which bore interest at an annual rate of 5%.
Pursuant to the terms of this note, $250,000 plus interest of
$3,664 was paid to the Company on December 19, 2002 and the
balance of $250,000 plus interest of $6,199 and was paid to the
Company on March 3, 2003.


As of the date of this filing, the Company has
complied with all of the requirements of the Loan Agreement and
currently does not have any borrowings under the Revolving Loan.
As of December 31, 2003, the Company had borrowing capacity
of approximately $2.821 million under the Loan Agreement.
The Company believes it has available cash resources to meet its
working capital needs through fiscal year 2004.

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

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

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

The Second Amendment also amended the
Termination Events as defined in the Forbearance
Agreement to include the following: (i) the Company fails
to execute and deliver or to cause the Companys CEO,
Marshall B. Hunt and Hunt LLLP to execute and deliver within
10 days from the effective date of the Second Amendment a
pledge to Bank of America of all the stock owned by Hunt and
documentation to amend the current Pledge Agreement between
Hunt, Hunt LLLP and the Company. The pledge documents will be
held in escrow and will be released only in the event that Hunt
interferes with the daily operations of the Company determinable
at the Bank of Americas discretion at any point prior to
January 1, 2005; (ii) the Company fails to engage and
hire within five days from the effective date of the Second
Amendment competent crisis and turn around management and a new
Chief Executive Officer who shall report directly to the
independent members of the Companys Board of Directors;
(iii) the Company fails to provide Bank of America within
five days from the effective date of the Second Amendment a copy
of resolutions confirming Hunts resignation as an officer
and director of the Company and that no further salary or
bonuses shall be paid to Hunt; (iv) the Company fails to
make efforts to refinance the amounts outstanding under the BofA
Credit Facility and fails to provide weekly status reports;
(v) on or before December 15, 2001, the Company fails
to provide Bank of America evidence that the Company has engaged
an investment banking firm to begin

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marketing the sale of the assets of the Company
if the amounts outstanding under the BofA Credit Facility are
not paid off by the Termination Date; or (vi) the Company
fails to execute and deliver to Bank of America within
24 hours of Bank of Americas request a consent order
consenting to the appointment of a receiver in the event of a
Termination Event, as defined.


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

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

The Forbearance Agreement further required
payments of $300,000 each on a short-term bridge loan (the BofA
Bridge Loan) on May 31, 2001, August 31, 2001,
and November 30, 2001. The proceeds of the BofA Bridge Loan
were used to fund a short-term bridge loan to the Companys
CEO, Marshall B. Hunt (the Shareholder Bridge Loan).
All of the installments under the BofA Bridge Loan and the
Shareholder Bridge Loan were paid. The Forbearance Agreement
also provided for a forbearance and restructuring fee of $10,000
plus related expenses and interest at the rate then in effect
plus 6% upon a Termination Event, as defined in the Forbearance
Agreement.

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

The Forbearance Agreement also required the
Company to hire on or before June 30, 2001 a new chief
operating officer, restricted the repayment of principal debt to
junior lien holders, and to either (i) sell the assets of
IFM or (ii) obtain an agreement from the seller of the IFM
product line to defer all payments under the related promissory
note (see below) through the Termination Date (see Note 14 of
the notes to the consolidated financial statements included
herein). The Company hired a Chief Operating Officer in April
2001 who was terminated in June 2001, and the Company did not
hire a replacement. The Company sold the assets of the IFM
product line as of March 30, 2001 (see Note 14 of the notes to
the consolidated financial statements included herein).

On December 15, 2001, the Company entered
into a Third Amendment to the Forbearance Agreement under which
Bank of America consented to the increase in payments of $8,000
per month to certain former shareholders of Stepic Corporation
(Stepic) (see Note 6 of the notes to the
consolidated financial statements included herein).

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

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Recently Issued Accounting Standards

Note 2 of the notes to the audited consolidated
financial statements included elsewhere in this Form 10-K
describes the recently issued accounting standards and, where
applicable, the effects of such standards on the Company.




Impact of Inflation and Foreign Currency
Exchange Fluctuation

The results of the Companys operations for
the periods discussed have not been significantly affected by
inflation or foreign currency fluctuations. The Loan Agreement
costs result primarily from interest and principal and are not
affected by inflation. Further, although the Company often sells
products on an agreed upon price basis, the average time between
the receipt of any order and delivery is generally only a few
days. While the Company has not historically been adversely
affected by increases in the cost of raw materials and
components, certain group purchasing agreements to which the
Company is a party and other agreements with individual
customers limit or restrict the Companys ability to raise
prices without advance written notice or only after certain time
periods have elapsed under the agreements. Thus, future
increases in the cost of raw materials and components could
adversely affect the Companys business, financial
condition and operating results. This could change in situations
in which the Company is producing against a substantial backlog
and may not be able to pass on higher costs to customers. In
addition, interest on substantially all of the Companys
debt is variable and therefore may increase with inflation.

The Company makes all sales to foreign customers
in U.S. dollars. Thus, notwithstanding fluctuation of
foreign currency exchange rates, the Companys profit
margin for any purchase order is not subject to change due to
exchange rate fluctuations after the time the order is placed.




Risk Factors

The risks described below are not the only
ones facing the Company. Additional risks not presently known to
the Company or which the Company currently considers immaterial
also may adversely affect the Company. If any of the following
risks and uncertainties actually occur, the Companys
business, financial condition and operating results could be
materially and adversely affected.



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | The Companys inability to introduce new
    products to the marketplace could adversely impact its operating
    results.

Although the vascular access product industry has
not experienced rapid technological change historically, as the
Companys existing products become more mature, the
importance of developing or acquiring (by purchase or
licensing), manufacturing and introducing new products that
address the needs of its customers will increase. The
development or acquisition of any such products will entail
considerable time and expense, including acquisition or
licensing costs, research and development costs, and the time
and expense required to obtain necessary regulatory approvals,
which approvals are not assured, and any of which could
adversely affect the Companys business, results of
operations or financial condition. There can be no assurance
that such development activities will yield products that can be
commercialized profitably or that any product acquisition can be
consummated on commercially reasonable terms or at all.
Historically, many of the Companys products have been
developed in conjunction with third parties or acquired as a
result of acquisitions consummated by the Company.

Recently, the Company has introduced new products
developed by the Company. The Companys inability to
develop or acquire new products to supplement its existing
product lines could have an adverse impact on the Companys
ability to fully implement its business strategy and further
develop its operations.

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| |                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There can be no assurance that the
    Companys cash flow from operations and cash available from
    external financing will be sufficient to meet its future cash
    flow needs, in which case the Company would need to obtain
    additional financing.

As of December 31, 2003, the Company had
borrowing capacity of approximately $2.8 million under its
credit facility with LaSalle. Any additional financing the
Company undertakes could involve issuances of debt or issuances
of equity securities which would be dilutive to the
Companys shareholders, and any debt facilities could
contain covenants that may affect the Companys operations,
including the Companys ability to make future acquisitions.

Adequate additional funds, whether from the
financial markets or from other sources, may not be available on
a timely basis, on terms acceptable to the Company or at all.
Insufficient funds may cause the Company difficulty in financing
its accounts receivables and inventory and may result in delay
or abandonment of some or all of the Companys product
development, licensing, marketing or research and development
programs or opportunities, which could have a material adverse
effect on the Companys business, financial condition and
operating results.

Additionally, the Company is required to make
periodic interest and principal payments on its outstanding
indebtedness, including the Convertible Notes, the LaSalle
credit facility and the Junior Note. The maturity date of the
Convertible Notes is July 16, 2005. Failure to make any
such required payments may result in an event of default and the
acceleration of all outstanding indebtedness.



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | Certain shareholders of the Company who were
    parties to the Recapitalization have the ability to exercise
    control over the Company.

As of the date of this filing, based in part on a
review of SEC filings, ComVest Venture Partners, L.P., and its
affiliates, collectively own approximately 25.6% of the
Companys outstanding common stock. Additionally, the
holders of the convertible notes have collectively converted
their Convertible Notes into approximately 62% of our
outstanding common stock (as a percentage of the Companys
common stock outstanding on March 15, 2004). Further,
Medtronic has converted its convertible notes into
7.2 million shares of our common stock (representing 16.6%
of our common stock). Finally, Mr. Hunt beneficially owns
approximately 14.2% of the Companys outstanding common
stock as of March 15, 2004. If ComVest and its affiliates
and Medtronic were to act together, they could have the power to
effect the election of all of the members of the Companys
board of directors, the amendment of the Companys Restated
and Amended Articles of Incorporation and the Companys
bylaws, and effect or preclude fundamental corporate
transactions involving the Company, including the acceptance or
rejection of proposals relating to a merger or the acquisition
of the Company by another entity. In addition, until the
Convertible Notes are paid in full, the holders thereof have the
right to approve a sale, merger or consolidation of our company.
Pursuant to the Securityholders Agreement, ComVest and Medtronic
currently have the power to designate five of the Companys
seven directors. Accordingly, these shareholders are able to
exert significant influence over the Company and its operations.



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | The Company is dependent upon key personnel,
    the loss of any of which could materially adversely affect the
    Companys business.

The Companys success is substantially
dependent on the performance, contributions and expertise of its
executive officers and key employees. The Companys recent
success has been significantly dependent on the contributions of
Robert J. Wenzel, the Companys President, Chief Operating
Officer and (as of the date of this report) interim Chief
Executive Officer, who is party to an employment agreement with
the Company which expires on October 31, 2005. The Company
does not maintain key man life insurance on
Mr. Wenzel. The Company is also dependent on its ability to
attract, retain and motivate additional personnel. The loss of
the services of any of the Companys executive officers or
other key employees or the Companys inability to attract,
retain or motivate the necessary personnel could have a material
adverse effect on the Companys business, financial
condition and operating results.

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| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company must maintain its current third
    party manufacturing relationships, and be able to successfully
    establish new relationships, in order for the Companys
    business to be successful.

While the Company believes it has a good
relationship with each third party that manufactures certain
components for the Companys products, there can be no
assurance that such relationships will not deteriorate in the
future. Deterioration in these manufacturing relationships could
cause us to experience interruptions in the Companys
manufacturing and delivery processes and have a material adverse
impact on its business, financial condition and operating
results. Furthermore, when arrangements with these third parties
expire, the Company will have to make other manufacturing
arrangements or manufacture products or product parts at its
facilities. The failure to effectively plan for the expiration
of these agreements could also result in interruption of the
manufacturing and delivery processes for these products and have
a material adverse impact on the Companys business,
financial condition and operating results.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company cannot assure that it will
    successfully complete the development and manufacture of
    products integral to the Companys business.

The Companys success will depend in part on
its ability to manufacture its products in compliance with
international and domestic standards such as ISO 9001, the
FDAs Good Manufacturing Practices, or GMP, regulations and
other applicable licensing and regulatory requirements in
sufficient quantities and on a timely basis, while maintaining
product quality and acceptable manufacturing costs. The Company
has historically outsourced the manufacturing of most of its
product lines to third parties while remaining responsible for
that work but, since 1998 and in subsequent years, has
transitioned the manufacturing of the Companys products to
the Manchester facility. In the fourth quarter of 1996, the
Company transitioned the manufacturing of the Companys
Circle C® and central venous specialty catheter
product lines into the Companys manufacturing facility in
Manchester, Georgia.

During 1998, the Company transitioned the
manufacturing of its LifePort®, Infuse-a-Port® and
Infuse-a-Cath® product lines to the Manchester facility
from a facility in Norwood, Massachusetts. During 1999, the
Company transitioned the manufacturing of the Vortex® port,
TitanPortTM and OmegaPort® product lines to the
Manchester facility from Norfolk Medical. In 2001 and 2002, the
Company transitioned the manufacturing of the Triumph-1®
port line to the Manchester facility from Act Medical as well as
its infusion sets which had previously been manufactured by a
third party. The Company has undergone and expects to continue
to undergo regular GMP inspections in connection with the
manufacture of its products at the Companys facilities.
The Companys success will depend, among other things, on
its ability to efficiently manufacture different products and to
integrate newly developed products with existing products. The
Companys failure to successfully commence the
manufacturing of new products, to maintain or increase
production volumes of new or existing products in a timely or
cost-effective manner or to maintain compliance with ISO 9001,
the CE Mark requirements, GMP regulations or other applicable
licensing or regulatory requirements could have a material
adverse effect on the Companys business, financial
condition and operating results.



| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | The Company relies on third party suppliers,
    the loss of which may interrupt its operations.

The Company purchases raw materials and
components for use in manufacturing its products from many
different suppliers. There can be no assurance that the Company
will be able to maintain its existing supplier relationships or
secure additional suppliers as needed. The loss of a major
supplier, the deterioration of its relationship with a major
supplier, changes by a major supplier in the specifications of
the components used in its products, or the Companys
failure to establish good relationships with major new suppliers
could have a material adverse effect on the Companys
business, financial condition and operating results.



| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | The Company may fail to adequately protect its
    intellectual property and proprietary rights.

The Company believes that its competitive
position and success has depended, in part, on and will continue
to depend on the ability of the Company and its licensors to
obtain patent protection for its products, to defend patents
once obtained, to preserve its trade secrets and to operate
without infringing upon patents and proprietary rights held by
third parties, both in the United States and in foreign
countries. The Companys

37



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policy is to protect its proprietary position by,
among other methods, maintaining United States and foreign
patents and filing United States and foreign patent applications
relating to technology, inventions and improvements that are
important to the development of its business. The Company owns
numerous United States and foreign patents and patent
applications. The Company also is a party to license agreements
with third parties pursuant to which it has obtained, for
varying terms, the right to make, use and/or sell products that
are covered under such license agreements in consideration for
royalty payments. Some of the Companys products are
subject to such license agreements. There can be no assurance
that the Company or its licensors have or will develop or obtain
additional rights to products or processes that are patentable,
that patents will issue from any of the pending patent
applications filed by us or that claims allowed will be
sufficient to protect any technology that is licensed to the
Company. In addition, no assurances can be given that any
patents issued or licensed to the Company or other licensing
arrangements will not be challenged, invalidated, infringed or
circumvented or that the rights granted thereunder will provide
competitive advantages for the Companys business or
products. In such event the Companys business, financial
condition, and operating results could be materially adversely
affected.




| |                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Asserting, defending and maintaining the
    Companys patent rights could be difficult and costly and
    failure to do so may diminish the Companys ability to
    compete effectively and may harm the Companys operating
    results.

A number of medical device companies, physicians
and others have filed patent applications or received patents to
technologies that are similar to technologies owned or licensed
by the Company. There can be no assurance that the Company is
aware of all patents or patent applications that may materially
affect its ability to make, use or sell its products. United
States patent applications are confidential while pending in the
United States Patent and Trademark Office (PTO)
(unless a foreign patent application related to the United
States patent application is also filed, in which event the
United States patent application is published 18 months
after the earliest priority date), and patent applications filed
in foreign countries are often first published six or more
months after filing. Any conflicts resulting from third-party
patent applications and patents could significantly reduce the
coverage of the patents owned or licensed by the Company and
limit its ability of or its licensors ability to obtain
meaningful patent protection. If patents are issued to other
companies that contain competitive or conflicting claims, the
Company may be required to obtain licenses to those patents or
to develop or obtain alternative technology. There can be no
assurance that the Company would not be delayed or prevented
from pursuing the development or commercialization of the
Companys products, which could have a material adverse
effect on the Companys operating results.

There has been substantial litigation regarding
patent and other intellectual property rights in the medical
device industry. Although the Company has not been a party to
any material litigation to enforce any intellectual property
rights held by the Company, or a party to any material
litigation seeking to enforce any rights alleged to be held by
others, future litigation may be necessary to protect patents,
trade secrets, copyrights or know-how owned by the
Company or to defend the Company against claimed infringement of
the rights of others and to determine the scope and validity of
the proprietary rights of the Company and others. The validity
and breadth of claims covered in medical technology patents
involve complex legal and factual questions for which important
legal principles are unresolved. Any such litigation could
result in substantial cost to and diversion of effort by the
Company. Adverse determinations in any such litigation could
subject us to significant liabilities to third parties, could
require the Company to seek licenses from third parties and
could prevent the Company from developing, manufacturing,
selling or using certain of the Companys products, any of
which could have a material adverse effect on its business,
results of operations and financial condition.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company relies in part on confidentiality
    agreements to protect the Companys proprietary
    technologies, and the Company can not assure that these
    agreements will be effective.

The Company relies on trade secrets and
proprietary technology that the Company seeks to protect, in
part, through confidentiality agreements with employees,
consultants and other parties. There can be no assurance that
these agreements will not be breached, that the Company will
have adequate remedies for any

38



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breach, that others will not independently
develop substantially equivalent proprietary information or that
third parties will not otherwise gain access to the
Companys trade secrets.




| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company relies on trademarks and trade
    names for the success of the Companys business, and the
    loss of one or any of these marks or names could materially harm
    the Companys business.

The Company relies upon trademarks and trade
names for the development and protection of brand loyalty and
associated goodwill in connection with the Companys
products. The Companys policy is to protect its
trademarks, trade names and associated goodwill by, among other
methods, filing United States and foreign trademark applications
relating to the Companys products and business. The
Company owns numerous United States and foreign trademark
registrations and applications. The Company also relies upon
trademarks and trade names for which the Company does not have
pending trademark applications or existing registrations, but in
which the Company has substantial trademark rights. The
Companys registered and unregistered trademark rights
relate to the majority of its products. There can be no
assurance that any of the Companys registered or
unregistered trademarks or trade names will not be challenged,
canceled, infringed, circumvented, or be declared generic or
infringing of other third-party marks or provide any competitive
advantage to the Company.



| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is subject to product liability
    claims resulting from the operation of its business, and the
    Company can not assure that it will not incur losses associated
    with such claims.

Because the Companys products are intended
to be used in healthcare settings on patients who are
physiologically unstable and may be seriously or critically ill,
the Companys business exposes the Company to potential
product liability risks which are inherent in the medical device
industry. In addition, many of the medical devices manufactured
and sold by the Company are designed to be implanted in the
human body for extended periods of time. Component failures,
manufacturing flaws, design defects or inadequate disclosure of
product-related risks with respect to these or other products
manufactured or sold by the Company could result in injury to,
or death of, a patient. The occurrence of such a problem could
result in product liability claims and/or a recall of, safety
alert relating to, or other FDA or private civil action
affecting one or more of the Companys products or
responsible officials. The Company maintains product liability
insurance coverage in amounts that the Company deems sufficient
for the Companys business. There can be no assurance,
however, that such coverage will be available with respect to or
sufficient to satisfy all claims made against the Company or
that the Company will be able to obtain insurance in the future
at satisfactory rates or in adequate amounts. Product liability
claims or product recalls in the future, regardless of their
ultimate outcome, could result in costly litigation and could
have a material adverse effect on the Companys business,
results of operations and financial condition.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys sales are concentrated
    among a small number of significant customers, the loss of any
    of which may have a material adverse effect on the
    Companys operating results.

The Companys net sales to its three largest
customers accounted for 19%, 15% and 18% of total sales
(excluding discontinued operations of the Stepic distribution
segment, which was sold in September 2002) during 2001, 2002 and
2003, respectively. The loss of, or significant curtailments of
purchases by, any of the Companys significant customers
could have a material adverse effect on the Companys
business, results of operations and financial condition.



| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys business is subject to
    changes in the regulatory and economic environment in the
    healthcare industry, which could adversely affect the
    Companys business.

The healthcare industry in the United States
continues to experience change. In recent years, several
healthcare reform proposals have been formulated by members of
Congress. In addition, state legislatures periodically consider
healthcare reform proposals. Federal, state and local government
representatives will, in all likelihood, continue to review and
assess alternative healthcare delivery systems and payment
methodologies, and ongoing public debate of these issues can be
expected. Cost containment initiatives, market pressures and
proposed changes in applicable laws and regulations may have a
dramatic effect on pricing or potential

39



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demand for medical devices, the relative costs
associated with doing business and the amount of reimbursement
by both government and third-party payors to persons providing
medical services. In particular, the healthcare industry is
experiencing market-driven reforms from forces within the
industry that are exerting pressure on healthcare companies to
reduce healthcare costs. Managed care and other healthcare
provider organizations have grown substantially in terms of the
percentage of the population in the United States that receives
medical benefits through such organizations and in terms of the
influence and control that they are able to exert over an
increasingly large portion of the healthcare industry. Managed
care organizations are continuing to consolidate and grow,
increasing the ability of these organizations to influence the
practices and pricing involved in the purchase of medical
devices, including certain of the products sold by the Company,
which is expected to exert downward pressure on product margins.
Both short-and long-term cost containment pressures, as well as
the possibility of continued regulatory reform, may have an
adverse impact on the Companys business, results of
operations and financial condition.




| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is subject to government
    regulation in the United States and internationally, which can
    be time consuming and costly to the Companys
    business.

The Companys products and operations are
subject to extensive regulation by numerous governmental
authorities, including, but not limited to, the FDA and state
and foreign governmental authorities. In particular, the Company
must obtain specific clearance or approval from the FDA before
it can market new products or certain modified products in the
United States. The FDA administers the FDC Act. Under the FDC
Act, most medical devices must receive FDA clearance through the
Section 510(k) notification process (510(k)) or
the more lengthy premarket approval (PMA) process
before they can be sold in the United States. To obtain 510(k)
marketing clearance, a company must show that a new product is
substantially equivalent in terms of safety and
effectiveness to a product already legally marketed and which
does not require a PMA. Therefore, it is not always necessary to
prove the actual safety and effectiveness of the new product in
order to obtain 510(k) clearance for such product. To obtain a
PMA, a company must submit extensive data, including clinical
trial data, to prove the safety, effectiveness and clinical
utility of the Companys products. The process of obtaining
such clearances or approvals can be time-consuming and
expensive, and there can be no assurance that all clearances or
approvals sought by the Company will be granted or that FDA
review will not involve delays adversely affecting the marketing
and sale of the Companys products. FDAs quality
system regulations also require companies to adhere to certain
good manufacturing practices requirements, which include
testing, quality control, storage, and documentation procedures.
Compliance with applicable regulatory requirements is monitored
through periodic site inspections by the FDA. In addition, the
Company is required to comply with FDA requirements for labeling
and promotion of the Companys products. The Federal Trade
Commission also regulates most device advertising.

In addition, international regulatory bodies
often establish varying regulations governing product testing
and licensing standards, manufacturing compliance, such as
compliance with ISO 9001 standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations,
duties and tax requirements and pricing and reimbursement
levels. The Companys inability or failure to comply with
the varying regulations or the imposition of new regulations
could restrict the Companys ability to sell its products
internationally and thereby adversely affect the Companys
business, results of operations and financial condition.

Failure to comply with applicable federal, state
or foreign laws or regulations could subject the Company to
enforcement actions, including, but not limited to, product
seizures, injunctions, recalls, possible withdrawal of product
clearances, civil penalties and criminal prosecutions against
the Company or its responsible officials, any one or more of
which could have a material adverse effect on the Companys
business, results of operations and financial condition.
Federal, state and foreign laws and regulations regarding the
manufacture and sale of medical devices are subject to future
changes, as are administrative interpretations of regulatory
requirements. No assurance can be given that such changes will
not have a material adverse effect on the Companys
business, results of operations and financial condition. From
time to time, the Company has received Form FDA-483s and
Warning Letters from the FDA regarding the Companys
compliance with FDA regulations. On September 4, 2002, at
the conclusion of the FDAs inspection of the
Companys facility in Manchester, Georgia, the Company
received a Form FDA-483 letter specifying five items. The
Company

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has responded to such observations and has worked
with the FDA to resolve these observations. There can be no
assurance the Company will not receive additional
Form FDA-483s or Warning Letters in the future or that the
Company will be able to reach an acceptable resolution of the
issues raised in any such letters.




| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | The Companys operations are subject to
    the regulations imposed by the Anti-Kickback Statute.

The Companys operations are subject to the
rules and regulations imposed by the Anti-Kickback Statute. The
Anti-Kickback Statute has been interpreted broadly by some
courts, the Office of Inspector General within the Department of
Health and Human Services, and administrative bodies. A
violation of the Anti-Kickback Statute is a felony, punishable
by fine, imprisonment or exclusion from the Medicare and
Medicaid or other applicable federal healthcare programs.
Despite the fact that there exist certain safe-harbors from
governmental investigation under the Anti-Kickback Statute,
practices that does not fall within a safe harbor may be subject
to challenge by the Department of Health and Human Services and
a violation of the Anti-Kickback Statute may occur even if only
one purpose of a payment arrangement is to induce referrals or
purchases reimbursable by a federal health care program. There
can be no assurance that the Company will not be subject to any
such litigation or additional investigation in the future, which
could be time-consuming and costly to the Company, and divert
managements attention from operating the Companys
business, each or any outcome of which could have a material
adverse effect upon the Companys business and financial
condition.

The
Companys business is dependent upon reimbursement from
government programs, such as Medicare and Medicaid, and the
Company may face limitations on such third-party reimbursement,
which could harm the Companys operating results.

In the United States, the Companys products
are purchased primarily by hospitals and medical clinics, which
then bill various third-party payors, such as Medicare, Medicaid
and other government programs and private insurance plans, for
the healthcare services provided to patients. Government
agencies, private insurers and other payors determine whether to
provide coverage for a particular procedure and reimburse
hospitals for medical treatment at a fixed rate based on the
diagnosis-related group, or DRG, established by the United
States Centers for Medicare and Medicaid Services, or CMS. The
fixed rate of reimbursement is based on the procedure performed
and is unrelated to the specific devices used in that procedure.
If a procedure is not covered by a DRG, payors may deny
reimbursement. In addition, third-party payors may deny
reimbursement if they determine that the device used in a
treatment was unnecessary, inappropriate or not cost-effective,
experimental or used for a non-approved indication.

Reimbursement of procedures implanting the
Companys vascular access ports and catheter products is
currently covered under a DRG. There can be no assurance that
reimbursement for such implantation will continue to be
available, or that future reimbursement policies of third-party
payors will not adversely affect the Companys ability to
sell its products on a profitable basis. Failure by hospitals
and other users of the Companys products to obtain
reimbursement from third-party payors, or changes in government
and private third-party payors policies toward
reimbursement for procedures employing the Companys
products, would have a material adverse effect on the
Companys business, results of operations and financial
condition.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | The Company is subject to intense competition
    which could harm its business.

The medical device industry is highly competitive
and fragmented. The Company currently competes with many
companies in the development, manufacturing and marketing of
vascular access ports, dialysis and apheresis catheters and
related ancillary products. Some of these competitors have
substantially greater capital resources, management resources,
research and development staffs, sales and marketing
organizations and experience in the medical devices industry
than the Company. These competitors may succeed in marketing
their products more effectively, pricing their products more
competitively, or developing technologies and products that are
more effective than those sold or produced by us or that would
render some products offered by the Company noncompetitive.

41



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| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | The Companys business will be harmed if
    demand for its products declines due to a sustained economic
    downturn.

Sales of the products manufactured by the Company
may be adversely impacted by a deterioration in the general
economic conditions in the markets in which the Companys
products are sold. Likewise, a deterioration in general economic
conditions could cause the Companys customers and/or
third-party payors to choose cheaper methods of treatment not
utilizing the Companys products. A decline in the
Companys sales attributable to these factors could have a
material adverse effect on the Companys business, results
of operations and financial condition.



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has implemented anti-takeover
    provisions that could prevent a change in control that could be
    beneficial to the Companys shareholders.

Certain provisions of the Companys articles
of incorporation and bylaws may delay or prevent a takeover
attempt that a shareholder might consider in its best interest.
Among other things, these provisions:



| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | establish certain advance notice procedures for
    shareholder proposals to be considered at shareholders
    meetings;                                                                     
|
| |  | provide that only the Companys board of
    directors or shareholders owning 70% or more of the
    Companys outstanding common stock may call special
    meetings of the shareholders; and
|
| |  | establish supermajority voting requirements with
    respect to the amendment of certain provisions of the
    Companys articles of incorporation and bylaws.                                

In addition, the Companys board of
directors can authorize and issue shares of preferred stock, no
par value, issuable in one or more series, with voting or
conversion rights that could adversely affect the voting or
other rights of holders of the Companys common stock. The
terms of the preferred stock that might be issued could
potentially prohibit the Companys consummation of any
merger, reorganization, sale of all or substantially all of the
Companys assets, liquidation or other extraordinary
corporate transaction without the approval of the holders of the
outstanding shares of such stock. Furthermore, certain
provisions of the Georgia Business Corporation Code may have the
effect of delaying or preventing a change in control of the
Company.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | 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
an annual rate of prime plus 2%, plus an additional 2% upon the
occurrence of an event of default thereunder. As of
December 31, 2003, the Company had no borrowings
outstanding under the revolving portion of the LaSalle credit
facility, and $833,333 outstanding under the term loan portion
of the LaSalle credit facility. If market rates were to increase
immediately and uniformly by 10% from levels as of
December 31, 2003, the additional interest expense would be
considered immaterial to the Companys consolidated
financial position, cash flows, and operating results.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

The Companys Consolidated Financial
Statements appear beginning at page F-1 of this
Form 10-K.






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

On November 12, 2002, the Company notified
the firm of PricewaterhouseCoopers LLP that it would be
dismissed effective November 14, 2002. Effective
November 15, 2002, the Company appointed Grant Thornton LLP
as its independent public accountants to replace the firm of
PricewaterhouseCoopers LLP. The decision to dismiss
PricewaterhouseCoopers LLP and to retain Grant Thornton LLP as
the Companys independent public accountants was made by
the Audit Committee of the Board of Directors of the Company,
and then concurred in and approved by the Executive Committee of
the Board of Directors. Further information is contained in the
Companys Form 8-K filed with the Securities and
Exchange Commission (the Commission) on
November 14, 2002 and is incorporated herein by reference.

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|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

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

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




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Information with respect to directors and
executive officers of the Company is incorporated herein by
reference to the information under the captions Management
of the Company  Directors Standing for Election
and Executive Officers and Key Employees in the
Companys Proxy Statement for the 2004 Annual Meeting of
Shareholders. Information with respect to compliance with
Section 16(a) of the Exchange Act is incorporated by
reference to the information under the caption
Section 16(a) Beneficial Ownership Reporting
Compliance in the Companys Proxy Statement for the
2004 Annual Meeting of Stockholders.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Information with respect to executive
compensation is incorporated herein by reference to the
information under the captions Management of the
Company Summary Compensation Table,
Employment Agreements, Compensation Committee
Interlocks and Insider Participation, Option Grants
in Last Fiscal Year and Option Exercises and Values
for Fiscal 2003 in the Companys Proxy Statement for
the 2004 Annual Meeting of Shareholders.






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

Information with respect to security ownership of
certain beneficial owners and management is incorporated herein
by reference to the tabulation under the caption Security
Ownership of Certain Beneficial Owners and Management in
the Companys Proxy Statement for the 2004 Annual Meeting
of Shareholders.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Information with respect to certain relationships
and related transactions is incorporated herein by reference to
the information under the caption Certain Relationships
and Related Transactions in the Companys Proxy
Statement for the 2004 Annual Meeting of Shareholders.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Information with respect to the fees paid to the
Companys independent accountants for the prior two fiscal
years is incorporated herein by reference to the information
under the caption Audit Fees and Other Fees in the
Companys Proxy Statement for the 2004 Annual Meeting of
Shareholders.

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|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) Financial Statements, Schedules and
Exhibits



| |    |                     
| | -- | --------------------
| | 1. | Financial Statements

|                                  |                                                                                                                         |  |  |     | 
|--------------------------------- | ----------------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Consolidated Financial Statements |                                                                                                                         |  |  |    
|                                  | Report of Independent Certified Public Accountants                                                                      |  |  | F-1 | 
|                                  | Report of Independent Accountants                                                                                       |  |  | F-2 | 
|                                  | Consolidated Balance Sheets as of
    December 31, 2002 and 2003                                                        |  |  | F-3 | 
|                                  | Consolidated Statements of Operations for the
    Years Ended December 31, 2001, 2002 and 2003                          |  |  | F-4 | 
|                                  | Consolidated Statements of Changes in
    Shareholders Equity for the Years Ended December 31,
    2001, 2002 and 2003 |  |  | F-5 | 
|                                  | Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2001, 2002 and 2003                          |  |  | F-6 | 
|                                  | Notes to Consolidated Financial Statements                                                                              |  |  | F-7 | 

2. Financial Statement Schedules

|                                                                                   |  |  |      | 
|---------------------------------------------------------------------------------- |  |  | ---- | 
|Report of Independent Certified Public
    Accountants on Schedule                 |  |  | F-37 | 
|Report of Independent Accountants on Consolidated
    Financial Statement Schedule |  |  | F-38 | 
|Schedule II  Valuation and
    Qualifying Accounts                                |  |  | F-39 | 

3. Exhibits

Included as exhibits are the items listed on the
Exhibit Index below.

|        |      |  |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                            
|------- | ---- |  |  | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |  |                        
|Number  |      |  |  | Description of Exhibits
|        |      |  |  |                        
|        | 3.1  |  |  |                        |  | Amended and Restated Articles of Incorporation of
    the Company, as amended to date, filed as Exhibit 3.1 to
    the Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2002 and incorporated herein by
    reference.                                                                                                                   
|        | 3.2  |  |  |                        |  | Amended and Restated Bylaws of the Company, as
    amended to date, filed as Exhibit 3.2 to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2002 and incorporated herein by
    reference.                                                                                                                                      
|        | 4.1  |  |  |                        |  | See Articles 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 |  |  |                        |  | Promissory Note dated September 28, 1995
    made by Roy C. Mallady, Jr. to the order of the Company in
    the principal amount of $77,612.43, as amended by Amendment to
    Promissory Note dated September 28, 1996, filed as
    Exhibit 10.3 to the Registrants Form S-1 dated
    April 14, 1998 (SEC File No. 333-46349) and
    incorporated herein by reference.
|        | 10.2 |  |  |                        |  | Promissory note dated October 12, 1995 made by
    Roy C. Mallady, Jr. to the order of the Company in the
    principal amount of $35,000.00, as amended by Amendment to
    Promissory Note dated October 12, 1996, filed as
    Exhibit 10.6 to the Registrants Form S-1 dated
    April 14, 1998 (SEC File No. 333-46349) and
    incorporated herein by reference.    
|        | 10.3 |  |  |                        |  | Lease Agreement dated as of July 1, 1996
    between The Development Authority of the City of Manchester and
    the Company, filed as Exhibit 10.9 to the Registrants
    Form S-1 dated April 14, 1998 (SEC File
    No. 333-46349) and incorporated herein by reference.                                                                                               

44



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##### Table of Contents



|        |       |  |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | ----- |  |  | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 10.4  |  |  |                        |  | Amendment to Lease Agreement dated
    November 2, 1999 between The Development Authority of the
    City of Manchester and the Company, filed as Exhibit 10.10
    to the Registrants Form 10-K dated March 29,
    2000 (SEC File No. 000-24025) and incorporated herein by
    reference.                                                                                                       
|        | 10.5  |  |  |                        |  | Lease Agreement dated as of August 29, 1997
    between The Development Authority of the City of Manchester and
    the Company, filed as Exhibit 10.10 to the
    Registrants Form S-1 dated April 14, 1998 (SEC
    File No. 333-46349) and incorporated herein by reference.                                                                                                                    
|        | 10.6  |  |  |                        |  | 1998 Stock Incentive Plan, filed as
    Exhibit 10.11 to the Registrants Form S-1 dated
    April 14, 1998 (SEC File No. 333-46349) and
    incorporated herein by reference.                                                                                                                                                                                                                      
|        | 10.7  |  |  |                        |  | Equity Agreement, dated as of February 17,
    1993, by and between CarboMedics, Inc. and the Company, as
    amended, filed as Exhibit 10.23 to the Registrants
    Form S-1 dated April 14, 1998 (SEC File
    No. 333-46349) and incorporated herein by reference.                                                                                                                              
|        | 10.8  |  |  |                        |  | Second Amended License Agreement dated
    January 1, 1995 between Dr. Sakharam D. Mahurkar and
    NeoStar Medical® Technologies, filed as Exhibit 10.26
    to the Registrants Form S-1 dated April 14, 1998
    (SEC File No. 333-46349) and incorporated herein by
    reference.                                                                                                              
|        | 10.9  |  |  |                        |  | License Agreement dated July 1995 between
    Dr. Sakharam D. Mahurkar and Strato®/Infusaid TM Inc.,
    filed as Exhibit 10.27 to the Registrants
    Form S-1 dated April 14, 1998 (SEC File
    No. 333-46349) and incorporated herein by reference.                                                                                                                                            
|        | 10.10 |  |  |                        |  | Additional License Agreement dated
    January 1, 1997 between Dr. Sakharam D. Mahurkar and
    the Company, filed as Exhibit 10.28 to the
    Registrants Form S-1 dated April 14, 1998 (SEC
    File No. 333-46349) and incorporated herein by reference.                                                                                                                                        
|        | 10.11 |  |  |                        |  | Form of Severance and Bonus Agreement between the
    Company and L. Bruce Maloy, filed as Exhibit 10.3 to
    the Registrants Form 10-Q dated November 15,
    1999 (SEC File No. 000-24025) and incorporated herein by
    reference.                                                                                                                                                            
|        | 10.12 |  |  |                        |  | Note Purchase Agreement among the Company,
    ComVest Venture Partners, L.P. and certain Additional Note
    Purchasers dated March 1, 2002, filed as Exhibit 10.1
    to the Registrants 8-K/A, filed on July 3, 2002 (SEC
    File Number 001-15459) and incorporated herein by reference.                                                                                                      
|        | 10.13 |  |  |                        |  | 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, dated April 16, 2002 (SEC
    File Number 001-15459) and incorporated herein by reference.
|        | 10.14 |  |  |                        |  | 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.                            
|        | 10.15 |  |  |                        |  | 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, dated April 16, 2002 (SEC
    File Number 001-15459) and incorporated herein by reference.                                                         
|        | 10.16 |  |  |                        |  | 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, dated
    April 16, 2002 (SEC File Number 001-15459) and
    incorporated herein by reference.                                                                        
|        | 10.17 |  |  |                        |  | 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, dated April 16, 2002 (SEC
    File Number 001-15459) and incorporated herein by reference.                                                     
|        | 10.18 |  |  |                        |  | 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, dated April 16, 2002 (SEC File
    Number 001-15459) and incorporated herein by reference.     

45



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##### Table of Contents



|        |       |  |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- | ----- |  |  | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 10.19 |  |  |                        |  | 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, dated April 16, 2002 (SEC
    File Number 001-15459) and incorporated herein by reference.                                                                                                                                                                                                   
|        | 10.20 |  |  |                        |  | 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, dated April 16, 2002 (SEC
    File Number 001-15459) and incorporated herein by reference.                                                                                                                                    
|        | 10.21 |  |  |                        |  | 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
    Registrant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.
|        | 10.22 |  |  |                        |  | 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
    Registrant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, dated April 16, 2002
    (SEC File Number 001-15459) and incorporated herein by
    reference.
|        | 10.23 |  |  |                        |  | 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, dated
    April 16, 2002 (SEC File Number 001-15459) and
    incorporated herein by reference.                                                                                                                                                                                                                                           
|        | 10.24 |  |  |                        |  | 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 Registrant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, dated
    April 16, 2002 (SEC File Number 001-15459) and
    incorporated herein by reference.                                                                                                      
|        | 10.25 |  |  |                        |  | 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 Registrant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, dated
    April 16, 2002 (SEC File Number 001-15459) and
    incorporated herein by reference.                                                                                                      
|        | 10.26 |  |  |                        |  | 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, dated
    April 16, 2002 (SEC File Number 001-15459) and
    incorporated herein by reference.                                                                                                                                                                                                                                   
|        | 10.27 |  |  |                        |  | 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
    Registrant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, dated April 16, 2002 (SEC File
    Number 001-15459) and incorporated herein by reference.                                                                                              
|        | 10.28 |  |  |                        |  | Co-Promotion 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, dated
    April 16, 2002 (SEC File Number 001-15459) and
    incorporated herein by reference.                                                                                                                                                                                                                                          
|        | 10.29 |  |  |                        |  | 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, dated
    April 16, 2002 (SEC File Number 001-15459) and
    incorporated herein by reference.                                                                                                                                                                                                                                          
|        | 10.30 |  |  |                        |  | Employment Agreement between the Company and
    Robert J. Wenzel, dated May 8, 2002 (incorporated by
    reference to Exhibit 10.1 to the Registrants
    Form 10-Q for the three months ended June 30, 2002).                                                                                                                                                                                                                                                                                                                                      

46



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|        |       |  |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                            
|------- | ----- |  |  | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 10.31 |  |  |                        |  | Amendment No. 1 to Note Purchase Agreement,
    dated as of June 10, 2002, by and among the Company,
    ComVest Venture Partners, L.P. and the Additional Note
    Purchasers (incorporated by reference to Exhibit 10.2 to
    the Registrants Form 10-Q for the three months ended
    June 30, 2002).                                                                 
|        | 10.32 |  |  |                        |  | Amendment No. 2 to Note Purchase Agreement,
    dated as of July 29, 2002, by and among the Company,
    ComVest Venture Partners, L.P. and the Additional Note
    Purchasers (incorporated by reference to Exhibit 10.3 to
    the Registrants Form 10-Q for the three months ended
    June 30, 2002).                                                                 
|        | 10.33 |  |  |                        |  | Asset Purchase Agreement, dated as of
    August 23, 2002, by and among Stepic Corporation, the
    Company, and Arrow International, Inc. (incorporated by
    reference to Exhibit 2.1 to the Registrants Current
    Report on Form 8-K, filed with the Commission on
    September 10, 2002).                                                                         
|        | 10.34 |  |  |                        |  | Letter Agreement among the Company, ComVest
    Venture Partners, L.P. and Medtronic, Inc., dated
    August 30, 2002 (incorporated by reference to
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K, filed with the Commission on September 10,
    2002).                                                                                             
|        | 10.35 |  |  |                        |  | Amendment to Employment Agreement between the
    Company and William E. Peterson, Jr., dated
    September 16, 2002. (incorporated by reference to
    Exhibit 10.1 to the Registrants Quarterly Report on
    Form 10-Q dated November 14, 2002).                                                                                                                       
|        | 10.36 |  |  |                        |  | Common Stock Purchase Warrant, dated as of
    September 26, 2002, by and between the Company and Epoch
    Financial Group, Inc. (incorporated by reference to
    Exhibit 10.2 to the Registrants Quarterly Report on
    Form 10-Q dated November 14, 2002).                                                                                                           
|        | 10.37 |  |  |                        |  | Common Stock Purchase Warrant, dated as of
    September 26, 2002, by and between the Company and
    Lippert/Heilshorn & Associates, Inc. (incorporated by
    reference to Exhibit 10.3 to the Registrants
    Quarterly Report on Form 10-Q dated November 14, 2002).                                                                                                  
|        | 10.38 |  |  |                        |  | First Amendment to Loan and Security Agreement,
    entered into as of December 23, 2002, by and between the
    Company and Standard Federal Bank National Association acting by
    and through LaSalle Business Credit, Inc., as its agent
    (incorporated by reference to Exhibit 10.41 to the
    Registrants Annual Report on Form 10-K dated
    March 28, 2003).
|        | 10.39 |  |  |                        |  | Amendment to Employment Agreement, dated
    November 15, 2002, between the Company and Marshall B. Hunt
    (incorporated by reference to Exhibit 10.42 to the
    Registrants Annual Report on Form 10-K dated
    March 28, 2003).                                                                                                                                     
|        | 10.40 |  |  |                        |  | Amendment to Option Agreement, dated
    November 15, 2002, between the Company and Marshall B. Hunt
    (incorporated by reference to Exhibit 10.43 to the
    Registrants Annual Report on Form 10-K dated
    March 28, 2003).                                                                                                                                         
|        | 10.41 |  |  |                        |  | Amendment to Employment Agreement, dated
    November 12, 2002, between the Company and Robert J. Wenzel
    (incorporated by reference to Exhibit 10.44 to the
    Registrants Annual Report on Form 10-K dated
    March 28, 2003).                                                                                                                                     
|        | 10.42 |  |  |                        |  | Amendment to Employment Agreement, dated
    March 7, 2003, between the Company and William E.
    Peterson Jr. (incorporated by reference to
    Exhibit 10.45 to the Registrants Annual Report on
    Form 10-K dated March 28, 2003).                                                                                                                                  
|        | 10.43 |  |  |                        |  | Option Agreement, dated February 25, 2003
    between the Company and Marshall B. Hunt (incorporated by
    reference to Exhibit 10.46 to the Registrants Annual
    Report on Form 10-K dated March 28, 2003).                                                                                                                                                           
|        | 10.44 |  |  |                        |  | Option Agreement, dated February 25, 2003
    between the Company and William E. Peterson, Jr.
    (incorporated by reference to Exhibit 10.47 to the
    Registrants Annual Report on Form 10-K dated
    March 28, 2003).                                                                                                                                               
|        | 10.45 |  |  |                        |  | Lease Agreement, entered into as of
    December 15, 2000, by and between The Development Authority
    of the City of Manchester and the Company (incorporated by
    reference to Exhibit 10.48 to the Registrants Annual
    Report on Form 10-K dated March 28, 2003).                                                                                                
|        | 10.46 |  |  |                        |  | Second Amendment to Co-Promotion Agreement, dated
    April 15, 2003, between the Company and Medtronic, Inc.
    (incorporated by reference to Exhibit 10.1 of the
    Registrants Quarterly Report filed on From 10-Q dated
    August 14, 2003).                                                                                                                       

47



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##### Table of Contents



|        |        |  |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                 
|------- | ------ |  |  | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |  |  |                        
|Number  |        |  |  | Description of Exhibits
|        |        |  |  |                        
|        | 10.47  |  |  |                        |  | Exclusive Distribution Agreement, dated
    April 15, 2003, between the Company and Medtronic, Inc.
    (incorporated by reference to Exhibit 10.2 of the
    Registrants Quarterly Report filed on Form 10-Q dated
    August 14, 2003).                                                                                                                      
|        | 10.48  |  |  |                        |  | Amendment to Employment Agreement, dated
    June 17, 2003, between the Company and William E. Peterson
    (incorporated by reference to Exhibit 10.3 of the
    Registrants Quarterly Report filed on Form 10-Q dated
    August 14, 2003).                                                                                                                  
|        | 10.49  |  |  |                        |  | Amendment to Employment Agreement, dated
    June 21, 2003, between the Company and Robert R. Singer
    (incorporated by reference to Exhibit 10.4 of the
    Registrants Quarterly Report filed on Form 10-Q dated
    August 14, 2003).                                                                                                                     
|        | 10.50  |  |  |                        |  | Common Stock Purchase Warrant between
    Lippert/Heilshorn & Associates, Inc., dated
    June 30, 2003 (incorporated by reference to
    Exhibit 10.5 of the Registrants Quarterly Report
    filed on Form 10-Q dated August 14, 2003).                                                                                                                      
|        | 10.51  |  |  |                        |  | Amendment to Promissory Note, dated July 15,
    2003, between the Company and Roy C. Mallady, Jr.
    (incorporated by reference to Exhibit 10.6 of the
    Registrants Quarterly Report filed on Form 10-Q dated
    August 14, 2003).                                                                                                                       
|        | 10.52  |  |  |                        |  | Amendment to Promissory Noted, dated
    July 15, 2003, between the Company and Roy C.
    Mallady, Jr. (incorporated by reference to
    Exhibit 10.7 of the Registrants Quarterly Report
    filed on Form 10-Q dated August 14, 2003).                                                                                                                      
|        | 10.53  |  |  |                        |  | Amendment No. 1 to Note Purchase Agreement,
    dated October 21, 2003, by and among the Company, ComVest
    Venture Partners, L.P., Medtronic, Inc., and certain Additional
    Note Purchasers (incorporated by reference to Exhibit 10.1
    of the Registrants Current Report filed on Form 8-K
    dated November 12, 2003).                             
|        | 10.54  |  |  |                        |  | Amended and Restated Securityholders Agreement,
    dated October 21, 2003, by and among the Company, ComVest
    Venture Partners, L.P., Medtronic, Inc., Standard Federal Bank
    National Association and Marshall B. Hunt (incorporated by
    reference to Exhibit 10.2 of the Registrants Current
    Report filed on Form 8-K dated November 12, 2003).
|        | 10.55  |  |  |                        |  | Amendment to Employment Agreement, dated
    October 21, 2003, between the Company and Marshall B. Hunt
    (incorporated by reference to Exhibit 10.3 of the
    Registrants Current Report filed on Form 8-K dated
    November 12, 2003).                                                                                                                   
|        | 10.56  |  |  |                        |  | Amendment to Employment Agreement, dated
    October 21, 2003, between the Company and Robert Wenzel
    (incorporated by reference to Exhibit 10.4 of the
    Registrants Current Report filed on Form 8-K dated
    November 12, 2003).                                                                                                                      
|        | 10.57  |  |  |                        |  | Stock Option Agreement, dated October 21,
    2003, between the Company and Marshall Hunt (incorporated by
    reference to Exhibit 10.5 of the Registrants Current
    Report filed on Form 8-K dated November 12, 2003).                                                                                                                                     
|        | 10.58  |  |  |                        |  | Stock Option Agreement, dated October 21,
    2003, between the Company and Robert Wenzel (incorporated by
    reference to Exhibit 10.6 of the Registrants Current
    Report filed on Form 8-K dated November 12, 2003).                                                                                                                                     
|        | 10.59* |  |  |                        |  | Separation Agreement, by and between the Company
    and Marshall B. Hunt, dated January 14, 2004.                                                                                                                                                                                                                                                              
|        | 10.60* |  |  |                        |  | Amendment to Employment Agreement between the
    Company and Robert J. Wenzel, dated February 25, 2004.                                                                                                                                                                                                                                                        
|        | 10.61* |  |  |                        |  | Form of Bonus Agreement dated November 1,
    2003, between the Company and Robert Singer, L. Bruce Maloy
    and Elaine Swygert.                                                                                                                                                                                                                               
|        | 14.1*  |  |  |                        |  | Code of Conduct and Ethics                                                                                                                                                                                                                                                                                                                                      
|        | 16.1   |  |  |                        |  | Letter of PricewaterhouseCoopers LLP regarding
    change in certifying accountant (incorporated by reference to
    Exhibit 16.1 to the Registrants Current Report on
    Form 8-K dated November 12, 2002).                                                                                                                                                  
|        | 21.1   |  |  |                        |  | Subsidiaries of the Company (incorporated by
    reference to Exhibit 21.1 to the Companys Annual
    Report on Form 10-K for the year ended December 31,
    2002).                                                                                                                                                                                           

48



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##### Table of Contents



|        |       |  |  |                         |  |                                                                                                                                                                                      
|------- | ----- |  |  | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 23.1* |  |  |                        |  | Consent of Grant Thornton LLP                                                                                                                                                        
|        | 23.2* |  |  |                        |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                
|        | 31.1* |  |  |                        |  | Certification of the Chief Executive Officer of
    the Company pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.                                                       
|        | 31.2* |  |  |                        |  | Certification of the Principal Financial Officer
    of the Company pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                   
|        | 32.1* |  |  |                        |  | Certification of the Chief Executive Officer of
    the Company pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.    
|        | 32.2* |  |  |                        |  | Certification of the Principal Financial Officer
    of the Company pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.



---



|  |                
|- | ---------------
|* | Filed herewith.

(b) Reports on Form 8-K



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company filed Current Reports on
    Form 8-K on November 12, 2003 (relating to, among
    other things, amendments to the Note Purchase Agreement and the
    Securityholders Agreement) and December 2, 2003 (with
    respect to Selected Financial Data of the Company), and the
    Company furnished a Current Report on Form 8-K on
    October 30, 2003, relating the initial release of its
    results of operations for the third quarter of fiscal 2003.

49



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##### Table of Contents






SIGNATURES

Pursuant to requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the
30th day of March, 2004.



| |                                                   
| | --------------------------------------------------
| | HORIZON MEDICAL PRODUCTS, INC.                    
|
| | /s/ ROBERT J. WENZEL                              
| |                                                   
| | Robert J. Wenzel                                  
| | President, Chief Operating Officer and
    Interim
| | Chief Executive Officer                           
| | (Principal Executive Officer)                     

KNOW ALL MEN BY THESE PRESENT, that this report
has been signed by the following persons in the capacities
indicated on the dates indicated on March 30, 2004.

|                                     |  |                                                                                                                           |  | 
|------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------- |  | 
|                                     |  |                                                                                                                          
|Signature                            |  | Title                                                                                                                    
|                                     |  |                                                                                                                          
|                                    
|/s/ ROBERT J. WENZELRobert J. Wenzel |  | President, Chief Operating Officer and Interim
    Chief Executive Officer (Principal Executive Officer) and
    Director
|                                    
|                                    
|/s/ ELAINE SWYGERTElaine Swygert     |  | Corporate Controller (Principal Financial
    Officer
    and Principal Accounting Officer)                              
|                                    
|/s/ HAROLD BLUEHarold Blue           |  | Director                                                                                                                 
|                                    
|/s/ JAMES BRANDSJames Brands         |  | Director                                                                                                                 
|                                    
|/s/ MARSHALL B. HUNTMarshall B. Hunt |  | Director                                                                                                                 
|                                    
|/s/ DAVID KUDavid Ku                 |  | Director                                                                                                                 
|                                    
|/s/ ROBERT PRIDDYRobert Priddy       |  | Director                                                                                                                 
|                                    
|/s/ ROBERT D. TUCKERRobert D. Tucker |  | Director                                                                                                                 

50



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##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS

To the Board of Directors

Horizon Medical Products, Inc.


We have audited the accompanying consolidated
balance sheets of Horizon Medical Products, Inc. (a Georgia
corporation) and subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of operations,
stockholders equity, and cash flows for the years ended
December 31, 2003 and 2002. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Horizon Medical Products,
Inc. and subsidiaries as of December 31, 2003 and 2002, and
the results of their operations and their cash flows for the
years ended December 31, 2003 and 2002 in conformity with
accounting principles generally accepted in the United States of
America.

As discussed in Note 2 to the consolidated
financial statements, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142) on January 1,
2002.

/s/ Grant Thornton LLP

Atlanta, Georgia


February 13, 2004


F-1



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Horizon Medical Products, Inc.:

In our opinion, the consolidated statements of
operations, changes in shareholders equity, and cash flows
for the year ended December 31, 2001 present fairly, in all
material respects, the results of operations and cash flows of
Horizon Medical Products, Inc. and its subsidiaries (the
Company) for the year ended December 31, 2001, in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

Our original opinion dated February 26,
2002, except for Notes 6, 9, 12 and 17 to the consolidated
financial statements included in the Companys
December 31, 2001 Form 10-K as to which the date was
April 15, 2002, contained a paragraph referring to the
Companys senior loan agreement which required compliance
with certain financial covenants, the compliance with which
could not be objectively determined. This matter raised
substantial doubt about the Companys ability to continue
as a going concern. As described in Note 18 to the consolidated
financial statements included in the Companys
December 31, 2001 Form 10-K, the Company sold its
distribution segment on September 3, 2002. The Company used
$7.8 million of the proceeds to pay off the revolving
portion of the indebtedness under the senior loan agreement.
This event alleviates the substantial doubt regarding the
Companys ability to continue as a going concern.
Accordingly, the paragraph referred to above has been removed.

/s/ PricewaterhouseCoopers LLP

Birmingham, Alabama


February 26, 2002, except for Notes 6,
9, 12 and 17


to the consolidated
financial statements included


in the
Companys December 31, 2001 Form 10-K,


as to which the
date is April 15, 2002 and Note 18,


to the consolidated
financial statements included


in the
Companys December 31, 2001 Form 10-K,


as to which the
date is September 9, 2002


F-2



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2002


|                                                      |                                                                                                                                                                                            |                            |   |             |            |  |   |             |            | 
|----------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | - | ----------- | ---------- |  | - | ----------- | ---------- | 
|                                                      |                                                                                                                                                                                            | 2003                       |   | 2002       
|                                                      |                                                                                                                                                                                            |                            |   |            
|ASSETS                                               
|Current Assets:                                       |                                                                                                                                                                                            |                            |   |             |            |  |   |            
|                                                      | Cash and cash equivalents                                                                                                                                                                  |                            | $ | 1,806,444   |            |  | $ | 3,711,514   |           
|                                                      | Accounts receivable  trade (net of
    allowance for doubtful accounts of $473,006 and $433,956 as of
    December 31, 2003 and 2002, respectively)                                       |                            |   | 4,523,643   |            |  |   | 3,037,974   |           
|                                                      | Inventory, net                                                                                                                                                                             |                            |   | 5,551,794   |            |  |   | 5,607,965   |           
|                                                      | Prepaid expenses and other current assets                                                                                                                                                  |                            |   | 264,249     |            |  |   | 515,077     |           
|                                                      |                                                                                                                                                                                            |                            |   |             |            |  |   |            
|                                                      |                                                                                                                                                                                            | Total Current Assets       |   |             | 12,146,130 |  |   |             | 12,872,530 | 
|                                                      | Property and equipment, net                                                                                                                                                                |                            |   | 2,040,313   |            |  |   | 2,199,307   |           
|                                                      | Goodwill, net                                                                                                                                                                              |                            |   | 15,650,356  |            |  |   | 15,650,356  |           
|                                                      | Intangible assets, net                                                                                                                                                                     |                            |   | 5,343,403   |            |  |   | 6,361,844   |           
|                                                      | Other assets                                                                                                                                                                               |                            |   | 6,229       |            |  |   | 106,088     |           
|                                                      |                                                                                                                                                                                            |                            |   |             |            |  |   |            
|                                                      |                                                                                                                                                                                            | Total Assets               |   | $           | 35,186,431 |  |   | $           | 37,190,125 | 
|                                                      |                                                                                                                                                                                            |                            |   |             |            |  |   |            
|LIABILITIES AND SHAREHOLDERS
    EQUITY             
|Current liabilities:                                  |                                                                                                                                                                                            |                            |   |             |            |  |   |            
|                                                      | Accounts payable  trade                                                                                                                                                                   |                            | $ | 1,042,897   |            |  | $ | 807,146     |           
|                                                      | Accrued salaries and commissions                                                                                                                                                           |                            |   | 558,484     |            |  |   | 279,346     |           
|                                                      | Accrued interest                                                                                                                                                                           |                            |   | 81,233      |            |  |   | 122,645     |           
|                                                      | Other accrued expenses                                                                                                                                                                     |                            |   | 265,791     |            |  |   | 651,199     |           
|                                                      | Current portion of long-term debt                                                                                                                                                          |                            |   | 1,396,824   |            |  |   | 1,552,782   |           
|                                                      |                                                                                                                                                                                            |                            |   |             |            |  |   |            
|                                                      |                                                                                                                                                                                            | Total current liabilities  |   |             | 3,345,229  |  |   |             | 3,413,118  | 
|                                                      | Long-term debt, net of current portion                                                                                                                                                     |                            |   | 16,999,228  |            |  |   | 18,341,903  |           
|                                                      | Other liabilities                                                                                                                                                                          |                            |   | 90,166      |            |  |   | 104,963     |           
|                                                      |                                                                                                                                                                                            |                            |   |             |            |  |   |            
|                                                      |                                                                                                                                                                                            | Total Liabilities          |   |             | 20,434,623 |  |   |             | 21,859,984 | 
|                                                      |                                                                                                                                                                                            |                            |   |             |            |  |   |            
|Commitments and contingent liabilities
    (Notes 12) |                                                                                                                                                                                            |                            |   |             |            |  |   |            
|Shareholders Equity:                                 |                                                                                                                                                                                            |                            |   |             |            |  |   |            
|                                                      | Preferred stock, no par value; 5,000,000 shares
    authorized, none issued and outstanding                                                                                                |                            |   |             |            |  |   |             |           
|                                                      | Common stock, $.001 par value per share;
    100,000,000 shares authorized, 43,855,253 and 33,415,876 shares
    issued and outstanding as of December 31, 2003 and 2002,
    respectively |                            |   | 43,855      |            |  |   | 33,416      |           
|                                                      | Additional paid in capital                                                                                                                                                                 |                            |   | 74,953,722  |            |  |   | 74,839,389  |           
|                                                      | Shareholders note receivable                                                                                                                                                              |                            |   | (86,544     | )          |  |   | (170,831    | )         
|                                                      | Accumulated deficit                                                                                                                                                                        |                            |   | (60,159,225 | )          |  |   | (59,371,833 | )         
|                                                      |                                                                                                                                                                                            |                            |   |             |            |  |   |            
|                                                      |                                                                                                                                                                                            | Total shareholders equity |   |             | 14,751,808 |  |   |             | 15,330,141 | 
|                                                      |                                                                                                                                                                                            |                            |   |             |            |  |   |            
|                                                      | Total liabilities & shareholders
    equity                                                                                                                                               |                            | $ | 35,186,431  |            |  | $ | 37,190,125  |           
|                                                      |                                                                                                                                                                                            |                            |   |             |            |  |   |            

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

F-3



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

For the Years Ended December 31, 2003,
2002, and 2001


|                                                                                                    |                                                                                                     |                                 |            |            |            |      |             |            |             |   |            |            |            |  
|--------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | ------------------------------- | ---------- | ---------- | ---------- | ---- | ----------- | ---------- | ----------- | - | ---------- | ---------- | ---------- | -
|                                                                                                    |                                                                                                     | 2003                            |            | 2002       |            | 2001
|                                                                                                    |                                                                                                     |                                 |            |            |            |     
|Net sales                                                                                           |                                                                                                     | $                               | 27,975,452 |            |            | $    | 21,711,644  |            |             | $ | 24,700,813 |           
|Cost of good sold                                                                                   |                                                                                                     |                                 | 11,248,026 |            |            |      | 9,343,068   |            |             |   | 11,409,825 |           
|                                                                                                    |                                                                                                     |                                 |            |            |            |      |             |            |             |   |            |           
|                                                                                                    |                                                                                                     | Gross profit                    |            |            | 16,727,426 |      |             |            | 12,368,576  |   |            |            | 13,290,988 |  
|Selling, general and administrative expenses                                                        |                                                                                                     |                                 | 15,096,929 |            |            |      | 16,109,932  |            |             |   | 16,043,275 |           
|                                                                                                    |                                                                                                     |                                 |            |            |            |      |             |            |             |   |            |           
|                                                                                                    |                                                                                                     | Income (loss) from operations   |            |            | 1,630,497  |      |             |            | (3,741,356  | ) |            |            | (2,752,287 | )
|Other income (expense):                                                                             |                                                                                                     |                                 |            |            |            |      |             |            |             |   |            |           
|                                                                                                    | Loss on early extinguishment of debt                                                                |                                 |            |           |            |      |             | (6,641,015 | )           |   |            |           |           
|                                                                                                    | Interest expense, net                                                                               |                                 |            | (2,372,619 | )          |      |             | (2,845,894 | )           |   |            | (2,207,431 | )         
|                                                                                                    | Other (expense) income                                                                              |                                 |            | (45,270    | )          |      |             | (14,884    | )           |   |            | 67,775     |           
|                                                                                                    |                                                                                                     |                                 |            |            |            |      |             |            |             |   |            |           
|                                                                                                    |                                                                                                     |                                 | (2,417,889 | )          |            |      | (9,501,793  | )          |             |   | (2,139,656 | )         
|                                                                                                    |                                                                                                     |                                 |            |            |            |      |             |            |             |   |            |           
|                                                                                                    |                                                                                                     | Loss before income taxes        |            |            | (787,392   | )    |             |            | (13,243,149 | ) |            |            | (4,891,943 | )
|Income tax provision (benefit)                                                                      |                                                                                                     |                                 |           |            |            |      |            |            |             |   |           |           
|                                                                                                    |                                                                                                     |                                 |            |            |            |      |             |            |             |   |            |           
|                                                                                                    |                                                                                                     | Loss from continuing operations |            |            | (787,392   | )    |             |            | (13,243,149 | ) |            |            | (4,891,943 | )
|Discontinued operations:                                                                            |                                                                                                     |                                 |            |            |            |      |             |            |             |   |            |           
|                                                                                                    | Income (loss) from operations of discontinued
    distribution segment (including gain on disposal) |                                 |            |           |            |      |             | 3,174,623  |             |   |            | (230,972   | )         
|Effect of a change in accounting principle
    pursuant to SFAS 142                                 |                                                                                                     |                                 |           |            |            |      | (16,101,900 | )          |             |   |           |           
|                                                                                                    |                                                                                                     |                                 |            |            |            |      |             |            |             |   |            |           
|                                                                                                    |                                                                                                     | Net Loss                        |            | $          | (787,392   | )    |             | $          | (26,170,426 | ) |            | $          | (5,122,915 | )
|                                                                                                    |                                                                                                     |                                 |            |            |            |      |             |            |             |   |            |           
|Loss from continuing operations per
    share  basic and diluted                                   |                                                                                                     | $                               | (0.02      | )          |            | $    | (0.64       | )          |             | $ | (0.37      | )         
|Income (loss) from operations of discontinued
    distribution segment (including gain on disposal) |                                                                                                     |                                 |           |            |            |      | 0.15        |            |             |   | (0.02      | )         
|Effect of a change in accounting principle
    pursuant to SFAS 142                                 |                                                                                                     |                                 |           |            |            |      | (0.78       | )          |             |   |           |           
|                                                                                                    |                                                                                                     |                                 |            |            |            |      |             |            |             |   |            |           
|Net loss per share  basic and diluted                                                              |                                                                                                     | $                               | (0.02      | )          |            | $    | (1.27       | )          |             | $ | (0.38      | )         
|                                                                                                    |                                                                                                     |                                 |            |            |            |      |             |            |             |   |            |           
|Weighted average common shares
    outstanding  basic                                              |                                                                                                     |                                 | 36,655,934 |            |            |      | 20,684,670  |            |             |   | 13,366,278 |           
|                                                                                                    |                                                                                                     |                                 |            |            |            |      |             |            |             |   |            |           
|Weighted average common shares
    outstanding  diluted                                            |                                                                                                     |                                 | 36,655,934 |            |            |      | 20,684,670  |            |             |   | 13,366,278 |           
|                                                                                                    |                                                                                                     |                                 |            |            |            |      |             |            |             |   |            |           

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

F-4



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY

For the Years Ended December 31, 2003,
2002, and 2001


|                                                   |  |           |            |        |  |                 |        |              |  |             |            |       |  |   |            |   |  |   |             |   |  |   |             |  
|-------------------------------------------------- |  | --------- | ---------- | ------ |  | --------------- | ------ | ------------ |  | ----------- | ---------- | ----- |  | - | ---------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                   |  |           |            |        |  |                 |        | Shareholders |  |             |            |      
|                                                   |  | Number of |            | Common |  | Additional      |        | Notes        |  | Accumulated |            |      
|                                                   |  | Shares    |            | Stock  |  | Paid in Capital |        | Receivable   |  | Deficit     |            | Total
|                                                   |  |           |            |        |  |                 |        |              |  |             |            |      
|Balance, December 31, 2000                         |  |           | 13,366,278 |        |  | $               | 13,366 |              |  | $           | 51,826,125 |       |  | $ | (1,428,939 | ) |  | $ | (28,078,492 | ) |  | $ | 22,332,060  |  
|Net decrease in shareholders notes
    receivable |  |           |            |        |  |                 |        |              |  |             |            |       |  |   | 812,999    |   |  |   |             |   |  |   | 812,999     |  
|Issuance of warrant (Note 6)                       |  |           |            |        |  |                 |        |              |  |             | 260,000    |       |  |   |            |   |  |   |             |   |  |   | 260,000     |  
|Net loss                                           |  |           |            |        |  |                 |        |              |  |             |            |       |  |   |            |   |  |   | (5,122,915  | ) |  |   | (5,122,915  | )
|                                                   |  |           |            |        |  |                 |        |              |  |             |            |       |  |   |            |   |  |   |             |   |  |   |             |  
|Balance December 31, 2001                          |  |           | 13,366,278 |        |  |                 | 13,366 |              |  |             | 52,086,125 |       |  |   | (615,940   | ) |  |   | (33,201,407 | ) |  |   | 18,282,144  |  
|Issuance of common stock (Note 6)                  |  |           | 19,995,398 |        |  |                 | 19,996 |              |  |             | 22,218,589 |       |  |   |            |   |  |   |             |   |  |   | 22,238,585  |  
|Exercise of stock options                          |  |           | 54,200     |        |  |                 | 54     |              |  |             | 24,536     |       |  |   |            |   |  |   |             |   |  |   | 24,590      |  
|Net decrease in shareholders notes
    receivable |  |           |            |        |  |                 |        |              |  |             |            |       |  |   | 445,109    |   |  |   |             |   |  |   | 445,109     |  
|Issuance of warrants (Note 6)                      |  |           |            |        |  |                 |        |              |  |             | 770,139    |       |  |   |            |   |  |   |             |   |  |   | 770,139     |  
|Termination of warrant (Note 6)                    |  |           |            |        |  |                 |        |              |  |             | (260,000   | )     |  |   |            |   |  |   |             |   |  |   | (260,000    | )
|Net loss                                           |  |           |            |        |  |                 |        |              |  |             |            |       |  |   |            |   |  |   | (26,170,426 | ) |  |   | (26,170,426 | )
|                                                   |  |           |            |        |  |                 |        |              |  |             |            |       |  |   |            |   |  |   |             |   |  |   |             |  
|Balance at December 31, 2002                       |  |           | 33,415,876 |        |  |                 | 33,416 |              |  |             | 74,839,389 |       |  |   | (170,831   | ) |  |   | (59,371,833 | ) |  |   | 15,330,141  |  
|Conversion of debt holders (Note 6)                |  |           | 9,950,000  |        |  |                 | 9,950  |              |  |             | 89,550     |       |  |   |            |   |  |   |             |   |  |   | 99,500      |  
|Net decrease in shareholders notes
    receivable |  |           |            |        |  |                 |        |              |  |             |            |       |  |   | 84,287     |   |  |   |             |   |  |   | 84,287      |  
|Exercise of warrants (Note 6)                      |  |           | 446,177    |        |  |                 | 446    |              |  |             | (446       | )     |  |   |            |   |  |   |             |   |  |   | 0           |  
|Exercise of stock options                          |  |           | 43,200     |        |  |                 | 43     |              |  |             | 25,229     |       |  |   |            |   |  |   |             |   |  |   | 25,272      |  
|Net loss                                           |  |           |            |        |  |                 |        |              |  |             |            |       |  |   |            |   |  |   | (787,392    | ) |  |   | (787,392    | )
|                                                   |  |           |            |        |  |                 |        |              |  |             |            |       |  |   |            |   |  |   |             |   |  |   |             |  
|Balance at December 31, 2003                       |  |           | 43,855,253 |        |  | $               | 43,855 |              |  | $           | 74,953,722 |       |  | $ | (86,544    | ) |  | $ | (60,159,225 | ) |  | $ | 14,751,808  |  
|                                                   |  |           |            |        |  |                 |        |              |  |             |            |       |  |   |            |   |  |   |             |   |  |   |             |  

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

F-5



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                             |                                                                                               |                                                                   |                                        |                                                          |           |            |            |             |            |            |            |             |           |           |            |  
|-------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | -------------------------------------- | -------------------------------------------------------- | --------- | ---------- | ---------- | ----------- | ---------- | ---------- | ---------- | ----------- | --------- | --------- | ---------- | -
|                                             |                                                                                               | 2003                                                              |                                        | 2002                                                     |           | 2001      
|                                             |                                                                                               |                                                                   |                                        |                                                          |           |           
|Cash flows from operating activities:        |                                                                                               |                                                                   |                                        |                                                          |           |            |            |             |            |            |            |            
|                                             | Net loss                                                                                      |                                                                   | $                                      | (787,392                                                 | )         |            | $          | (26,170,426 | )          |            | $          | (5,122,915  | )        
|                                             | Adjustments to reconcile net loss to net cash
    (used in) provided by operating activities: |                                                                   |                                        |                                                          |           |            |            |             |            |            |            |             |          
|                                             |                                                                                               | Provision for doubtful accounts                                   |                                        |                                                          |           |            |            |             |            |            |            |             | 554,962   |          
|                                             |                                                                                               | Depreciation expense                                              |                                        |                                                          | 624,128   |            |            |             | 731,525    |            |            |             | 883,510   |          
|                                             |                                                                                               | Amortization of intangibles                                       |                                        |                                                          | 1,405,851 |            |            |             | 1,518,588  |            |            |             | 2,706,905 |          
|                                             |                                                                                               | Amortization of discount                                          |                                        |                                                          |           |            |            |             |            |            |            |             | 41,370    |          
|                                             |                                                                                               | Non-cash increase in notes receivable 
    shareholders          |                                        |                                                          |           |            |            |             |            |            |            |             | (87,001   | )        
|                                             |                                                                                               | Non-cash compensation charge                                      |                                        |                                                          |           |            |            |             | 1,555,468  |            |            |             |           |          
|                                             |                                                                                               | Impairment charge                                                 |                                        |                                                          |           |            |            |             | 16,101,900 |            |            |             |           |          
|                                             |                                                                                               | Loss on extinguishment of debt                                    |                                        |                                                          |           |            |            |             | 5,443,515  |            |            |             |           |          
|                                             |                                                                                               | Gain on disposition of distribution segment                       |                                        |                                                          |           |            |            |             | (2,953,100 | )          |            |             |           |          
|                                             |                                                                                               | Loss on sale of property and equipment                            |                                        |                                                          |           |            |            |             | 3,071      |            |            |             |           |          
|                                             |                                                                                               | (Increase) decrease in operating assets and
    liabilities, net: |                                        |                                                          |           |            |            |             |            |            |            |             |           |          
|                                             |                                                                                               |                                                                   | Accounts receivable, trade             |                                                          |           | (1,485,669 | )          |             |            | 411,574    |            |             |           | 3,845,754 |           
|                                             |                                                                                               |                                                                   | Inventories                            |                                                          |           | 56,171     |            |             |            | 1,099,985  |            |             |           | 1,604,540 |           
|                                             |                                                                                               |                                                                   | Prepaid expenses and other assets      |                                                          |           | 108,997    |            |             |            | 151,746    |            |             |           | 391,745   |           
|                                             |                                                                                               |                                                                   | Income tax receivable                  |                                                          |           | (55,725    | )          |             |            |            |            |             |           | 1,903,802 |           
|                                             |                                                                                               |                                                                   | Accounts payable, trade                |                                                          |           | 235,750    |            |             |            | (951,086   | )          |             |           | 193,336   |           
|                                             |                                                                                               |                                                                   | Accrued expenses and other liabilities |                                                          |           | (106,754   | )          |             |            | (1,013,456 | )          |             |           | (557,102  | )         
|                                             |                                                                                               |                                                                   |                                        |                                                          |           |            |            |             |            |            |            |            
|                                             |                                                                                               |                                                                   |                                        | Net cash (used in) provided by operating
    activities  |           |            | (4,643     | )           |            |            | (4,070,696 | )           |           |           | 6,358,906  |  
|                                             |                                                                                               |                                                                   |                                        |                                                          |           |            |            |             |            |            |            |            
|Cash flows from investing activities:        |                                                                                               |                                                                   |                                        |                                                          |           |            |            |             |            |            |            |            
|                                             | Capital expenditures                                                                          |                                                                   |                                        | (465,134                                                 | )         |            |            | (343,123    | )          |            |            | (283,109    | )        
|                                             | Acquisition of intangible assets                                                              |                                                                   |                                        | (387,409                                                 | )         |            |            | (134,568    | )          |            |            |             |          
|                                             | Cash proceeds from sale of IFM                                                                |                                                                   |                                        |                                                          |           |            |            |             |            |            |            | 2,250,500   |          
|                                             | Proceeds from disposition of distribution segment                                             |                                                                   |                                        | 241,690                                                  |           |            |            | 12,307,722  |            |            |            |             |          
|                                             | Payment of short-term bridge loan by shareholder                                              |                                                                   |                                        |                                                          |           |            |            |             |            |            |            | 474,390     |          
|                                             | Proceeds from shareholders notes receivable                                                   |                                                                   |                                        | 84,287                                                   |           |            |            | 445,109     |            |            |            |             |          
|                                             | Proceeds from sale of property and equipment                                                  |                                                                   |                                        |                                                          |           |            |            | 17,488      |            |            |            |             |          
|                                             |                                                                                               |                                                                   |                                        |                                                          |           |            |            |             |            |            |            |            
|                                             |                                                                                               |                                                                   |                                        | Net cash (used in) provided by investing
    activities  |           |            | (526,566   | )           |            |            | 12,292,628 |             |           |           | 2,441,781  |  
|                                             |                                                                                               |                                                                   |                                        |                                                          |           |            |            |             |            |            |            |            
|Cash flows from financing activities:        |                                                                                               |                                                                   |                                        |                                                          |           |            |            |             |            |            |            |            
|                                             | Proceeds from issuance of long term debt                                                      |                                                                   |                                        | 467,678                                                  |           |            |            | 68,626,877  |            |            |            | 63,729,884  |          
|                                             | Principal payments on long term debt                                                          |                                                                   |                                        | (1,866,811                                               | )         |            |            | (74,284,686 | )          |            |            | (69,507,247 | )        
|                                             | Change in restricted cash                                                                     |                                                                   |                                        |                                                          |           |            |            | 24,271      |            |            |            | 349,427     |          
|                                             | Debt issuance costs                                                                           |                                                                   |                                        |                                                          |           |            |            | (1,650,087  | )          |            |            | (179,214    | )        
|                                             | Exercise of stock options                                                                     |                                                                   |                                        | 25,272                                                   |           |            |            | 24,590      |            |            |            |             |          
|                                             | Change in cash overdraft                                                                      |                                                                   |                                        |                                                          |           |            |            |             |            |            |            | (609,176    | )        
|                                             |                                                                                               |                                                                   |                                        |                                                          |           |            |            |             |            |            |            |            
|                                             |                                                                                               |                                                                   |                                        | Net cash used in financing activities                    |           |            | (1,373,861 | )           |            |            | (7,259,035 | )           |           |           | (6,216,326 | )
|                                             |                                                                                               |                                                                   |                                        |                                                          |           |            |            |             |            |            |            |            
|                                             |                                                                                               |                                                                   |                                        | Net (decrease) increase in cash and cash
    equivalents |           |            | (1,905,070 | )           |            |            | 962,897    |             |           |           | 2,584,361  |  
|Cash and cash equivalents, beginning of year |                                                                                               |                                                                   | 3,711,514                              |                                                          |           |            | 2,748,617  |             |            |            | 164,256    |            
|                                             |                                                                                               |                                                                   |                                        |                                                          |           |            |            |             |            |            |            |            
|Cash and cash equivalents, end of year       |                                                                                               | $                                                                 | 1,806,444                              |                                                          |           | $          | 3,711,514  |             |            | $          | 2,748,617  |            
|                                             |                                                                                               |                                                                   |                                        |                                                          |           |            |            |             |            |            |            |            



---

See Note 13 for additional supplemental
disclosures of cash flow information.

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

F-6



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

For The Years Ended December 31, 2003,
2002, And 2001


1. Description of Business

Horizon Medical Products, Inc. (including its
subsidiaries, the Company), headquartered in
Manchester, Georgia, is a specialty medical device company
focused on manufacturing and marketing vascular access products.
The Companys oncology product lines include implantable
ports, tunneled central venous catheters, and stem cell
transplant catheters used primarily in cancer treatment
protocols. The Company has a complete line of acute and chronic
dialysis catheters used for kidney failure patients.

2. Summary of Significant Accounting
Policies

Following is a summary of significant accounting
policies utilized in the consolidated financial statements which
were prepared in accordance with accounting principles generally
accepted in the United States of America.

Principles of
Consolidation.The consolidated
financial statements and notes thereto include the accounts of
the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.

Revenue Recognition.Revenue from product sales is recognized upon shipment to
customers, as the Company generally has no significant post
delivery obligations, the product price is fixed and
determinable, collection of the resulting receivable is
probable, and product returns are reasonably estimable.
Provisions for discounts, rebates to customers, returns and
other adjustments are made in the period the related sales are
recorded.

The Company has reviewed the requirements of
Staff Accounting Bulletin (SAB) 101, Revenue
Recognition in Financial Statements, as amended, and
SAB 104, Revenue Recognition, and believes that its
existing accounting policies are consistent with the guidance
provided in the SABs.

Cash and Cash
Equivalents.The Company considers all
highly liquid investments with an original maturity of three
months or less at the time of purchase to be cash equivalents.

Restricted Cash.As
a result of the sweep arrangement related to the Companys
lockbox, the Companys right to withdraw, transfer or pay
funds from the lockbox has been terminated. Accordingly, the
lockbox balance is recorded as restricted cash. As of
December 31, 2003 and 2002, restricted cash amounted to
$7,353 and $55,043, respectively.

Allowance for Doubtful
Accounts.The Company maintains an
allowance for doubtful accounts based upon the expected
collectibility of the accounts receivable. When amounts are
determined to be uncollectible, they will be charged to
operations.

Inventories.Raw
materials, work in process, purchased finished goods, and
manufactured finished goods are stated at the lower of cost or
market using the first-in, first-out method for determining
costs. Standard cost, which approximates actual cost, is used to
value work in process and manufactured finished goods. Standard
cost includes direct labor, raw materials, and manufacturing
overhead.

Property and
Equipment.Property and equipment are
carried at cost, less accumulated depreciation. Expenditures for
repairs and maintenance are charged to expense as incurred;
betterments that materially prolong the lives of the assets are
capitalized. The cost of assets retired or otherwise disposed of
and the related accumulated depreciation are removed from the
accounts, and the related gain or loss on such dispositions is
recognized currently. Depreciation is calculated using the
straight-line method or double declining balance method over the
estimated useful lives of the property and equipment. The lives
of the assets range from five to seven years for equipment, five
to ten years for improvements, and primarily 31.5 years for
buildings. Property and equipment acquired under capital lease
agreements are carried at cost less accumulated

F-7



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

depreciation. These assets are depreciated in a
manner consistent with the Companys depreciation policy
for purchased assets.

Goodwill and Other Intangible
Assets.Goodwill, the excess of
purchase price over the fair value of net assets acquired in
purchase transactions, was previously being amortized on a
straight-line basis over periods ranging from 15 to
30 years. Amounts paid or accrued for non-compete and
consulting agreements are amortized using the straight-line
method over the term of the agreements. Patents are amortized on
a straight-line basis over the remaining lives of the related
patents at the date of acquisition, which range from 12 to
15 years. Debt issuance costs are amortized using the
straight-line method, which approximates the effective interest
method, over the estimated term of the related debt issues.

Effective January 1, 2002, the Company
adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 supercedes APB No. 17
and requires that: 1) goodwill and indefinite lived
intangible assets will no longer be amortized; 2) goodwill
will be tested for impairment at least annually at the reporting
unit level; 3) intangible assets deemed to have an
indefinite life will be tested for impairment at least annually;
and 4) the amortization period of intangible assets with
finite lives will no longer be limited to forty years. Upon the
adoption of SFAS No. 142 on January 1, 2002, the
Company recognized an estimated impairment loss of approximately
$16.1 million related to its distribution reporting unit.
In addition, the Company ceased amortization of its goodwill.
The Companys goodwill amortization was approximately
$1.3 million during the year ended December 31, 2001.
See Note 5 for the Companys expected future
amortization charges after adoption of SFAS No. 142.

Long-Lived Assets.The Company evaluates long-lived assets and certain identifiable
intangibles held and used for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. This evaluation is based on
undiscounted future projected cash flows of the asset or asset
group. If an impairment exists, the amount of such impairment is
calculated based on the estimated fair value of the assets. Fair
value is generally determined by discounting future projected
cash flows of the asset or asset group under review.

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

Research and
Development.Research and development
costs are charged to expense as incurred and were approximately
$973,000, $654,000 and $125,200 during the years ended
December 31, 2003, 2002 and 2001.

Advertising.Advertising costs are expensed when incurred. Advertising
expense was $478,172, $431,074, and $340,393 for the years
ending December 31, 2003, 2002 and 2001, respectively.

Income Taxes.The
Company accounts for income taxes under SFAS No. 109,
Accounting for Income Taxes, which requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the
consolidated financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based
on the differences between the tax bases of assets and
liabilities and their financial reporting amounts at each
year-end.

The amounts recognized are based on enacted tax
rates in effect in the years in which the differences are
expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more
likely than not expected to be realized.

F-8



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Stock-Based
Compensation.SFAS No. 123,
Accounting for Stock-Based Compensation, encourages, but does
not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The
Company has elected to account for its stock-based compensation
plans using the intrinsic value method prescribed by
APB No. 25, Accounting for Stock Issued to Employees.
Under the provisions of APB No. 25, compensation cost
for stock options issued to employees is measured as the excess,
if any, of the quoted market price of the Companys common
stock at the date of grant over the amount an employee must pay
to acquire the stock.

Stock based transactions with persons or entities
other than employees are measured at fair value and are reported
as expense or an exchange of assets, as appropriate, under the
provisions of SFAS No. 123.

The Company applies APB No. 25 and
related interpretations in accounting for the Incentive Plan.
Accordingly, no compensation expense has been recognized by the
Company for fixed stock option awards under the Incentive Plan.
Had compensation expense for options granted under the
Companys Incentive Plan and outside of the Companys
Incentive Plan been determined based on the fair value at the
grant dates consistent with the method of
SFAS No. 123, the Companys net loss and net loss
per share would have been increased to the pro forma amounts
indicated below:

|                                        |             |      |   |            |   |      |   |             |   |  |   |            |  
|--------------------------------------- | ----------- | ---- | - | ---------- | - | ---- | - | ----------- | - |  | - | ---------- | -
|                                        |             | 2003 |   | 2002       |   | 2001
|                                        |             |      |   |            |   |     
|Net loss:                               |             |      |   |            |   |      |   |             |   |  |   |           
|                                        | As reported |      | $ | (787,392   | ) |      | $ | (26,170,426 | ) |  | $ | (5,122,915 | )
|                                        | Pro forma   |      | $ | (2,470,644 | ) |      | $ | (27,082,192 | ) |  | $ | (5,509,142 | )
|Net loss per share  basic and diluted: |             |      |   |            |   |      |   |             |   |  |   |           
|                                        | As reported |      | $ | (.02       | ) |      | $ | (1.27       | ) |  | $ | (.38       | )
|                                        | Pro forma   |      | $ | (.07       | ) |      | $ | (1.31       | ) |  | $ | (.41       | )

The pro forma amounts reflected above are not
representative of the effects on reported net income (loss) in
future years because, in general, the options granted have
different vesting periods and additional awards may be made each
year.

The Company elected to use the Black-Scholes
pricing model to calculate the fair values of the options
awarded, which are included in the pro forma results above. The
following weighted average assumptions were used to derive the
fair values:

|                        |  |      |              |      |  |      |              |   |  |   |              |  
|----------------------- |  | ---- | ------------ | ---- |  | ---- | ------------ | - |  | - | ------------ | -
|                        |  | 2003 |              | 2002 |  | 2001
|                        |  |      |              |      |  |     
|Dividend yield          |  | $    | 0            |      |  | $    | 0            |   |  | $ | 0            |  
|Expected life (years)   |  |      | 5            |      |  |      | 5            |   |  |   | 5            |  
|Expected volatility     |  |      | 108.4        | %    |  |      | 150.28       | % |  |   | 112.20       | %
|Risk free interest rate |  |      | 2.97% - 4.01 | %    |  |      | 2.14% - 5.17 | % |  |   | 2.32% - 4.51 | %

Derivative Financial
Instruments.Effective January 1,
2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities.
SFAS No. 133, as amended, requires all derivatives to
be measured at fair value and recognized as either assets or
liabilities on the balance sheet. Changes in such fair value are
required to be recognized immediately in net income to the
extent the derivatives are not effective as hedges. The Company
does not hold derivative instruments or engage in hedging
activities.

Financial
Instruments.The carrying amounts
reported in the consolidated balance sheets for cash and cash
equivalents, accounts receivable, and accounts payable
approximate fair value because of the immediate

F-9



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

or short-term maturity of these financial
instruments. The carrying amounts reported for the long-term
debt approximates fair value because primarily all of the
underlying instruments are at variable interest rates which
reprice frequently.

Earnings Per Share.The calculation of basic earnings per share only takes into
consideration income (loss) available to common
shareholders and the weighted average of shares outstanding
during the period, while diluted earnings per share takes into
effect the impact of all additional common shares that would
have been outstanding if all potential common shares related to
options, warrants, and convertible securities had been issued,
as long as their effect is dilutive.

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

Reclassifications.Certain reclassifications have been made to the previous
years consolidated financial statements in order to make
them comparable to the current years presentation. These
reclassifications had no impact on previously reported
shareholders equity, net income (loss) or cash flows
(used in) provided by operating activities.

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

In September 2002, the FASB issued SFAS
No. 146, Accounting for Costs Associated with Exit or
Disposal. SFAS No. 146 eliminates the definition and
requirements for recognition of exit costs in EITF Issue
No. 94-3. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized and
measured initially at fair value only when the liability is
incurred. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The
impact of adopting SFAS 146 did not have a material effect on
the Companys financial statements.

On December 31, 2002, the FASB issued FAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. This
Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of
transition for companies that voluntary change to the
fair-value-based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures
in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the
effect of the method used on reported results. There was no
material effect from adoption of this pronouncement.

F-10



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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



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



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



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

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



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

There was no material effect from adoption of
this pronouncement.

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



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



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | a fixed monetary amount known at inception;                                                                                         
|
| |  | variations in something other than the
    issuers shares, such as the price of gold multiplied by a
    fixed notional amount; and

F-11



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | variations inversely related to changes in the
    value of the issuers shares, such as a written put option
    that can be net share settled

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

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

In November 2002, the FASB issued Interpretation
No. 45 (FIN 45), Guarantors Accounting
and disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including
residual value guarantees issued in conjunction with operating
lease agreements. It also clarifies that at the time a company
issues a guarantee, we must recognize an initial liability for
the fair value of the obligation it assumes under that guarantee
and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement
provisions apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim
or annual periods ending after December 15, 2002. The
Company adopted FIN 45 and it had no impact on the financial
position or results of operations as the Company has no
guarantees.

In January 2003, the Financial Accounting
Standards Board, (FASB) issued Interpretation
No. 46 (FIN 46), Consolidation of Variable
Interest Entities. This interpretation is now effective for
fiscal years or interim periods ending after December 15,
2003. FIN 46 addresses accounting for, and disclosure of,
variable interest entities. FIN 46 requires the disclosure of
the nature, purpose and exposure of any loss related to our
involvement with variable interest entities. The Company adopted
the provisions of FIN 46 and it did not have any effect on the
Companys financial position or results of operations as
the Company had no Variable Interest Entities.

3. Inventories

A summary of inventories as of December 31
is as follows:

|                        |  |      |            |      |  |   |            |  
|----------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                        |  | 2003 |            | 2002
|                        |  |      |            |     
|Raw materials           |  | $    | 3,351,601  |      |  | $ | 3,273,806  |  
|Work in process         |  |      | 507,305    |      |  |   | 347,622    |  
|Finished goods          |  |      | 3,734,431  |      |  |   | 4,517,675  |  
|                        |  |      |            |      |  |   |            |  
|                        |  |      | 7,593,337  |      |  |   | 8,139,103  |  
|Less inventory reserves |  |      | (2,041,543 | )    |  |   | (2,531,138 | )
|                        |  |      |            |      |  |   |            |  
|                        |  | $    | 5,551,794  |      |  | $ | 5,607,965  |  
|                        |  |      |            |      |  |   |            |  

F-12



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

4. Property and Equipment

A summary of property and equipment as of
December 31 is as follows:

|                              |  |      |            |      |  |   |            |  
|----------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                              |  | 2003 |            | 2002
|                              |  |      |            |     
|Building and improvements     |  | $    | 1,932,211  |      |  | $ | 1,911,728  |  
|Office equipment              |  |      | 2,281,993  |      |  |   | 2,017,458  |  
|Plant equipment               |  |      | 2,050,660  |      |  |   | 1,871,587  |  
|Transportation equipment      |  |      | 131,560    |      |  |   | 131,560    |  
|                              |  |      |            |      |  |   |            |  
|                              |  |      | 6,396,424  |      |  |   | 5,932,333  |  
|Less accumulated depreciation |  |      | (4,356,111 | )    |  |   | (3,733,026 | )
|                              |  |      |            |      |  |   |            |  
|                              |  | $    | 2,040,313  |      |  | $ | 2,199,307  |  
|                              |  |      |            |      |  |   |            |  

As of December 31, 2003 and 2002, the
Company had capitalized computer software costs of approximately
$32,823 and $22,000, respectively. Depreciation expense
associated with capitalized computer software costs was
approximately $51,854, $50,000 and $39,300, respectively, during
the three years ended December 31, 2003, 2002 and 2001.

Depreciation expense related to property and
equipment amounted to $624,128, $731,525, and $883,510 for the
years ended December 31, 2003, 2002, and 2001 respectively.

5. Intangible Assets

The Company adopted SFAS No. 142
Goodwill and Other Intangible Assets effective
January 1, 2002. SFAS No. 142 requires that:
(1) goodwill and indefinite lived intangible assets will no
longer be amortized; (2) goodwill will be tested for
impairment at least annually at the reporting unit level;
(3) intangible assets deemed to have an indefinite life
will be tested for impairment at least annually; and
(4) the amortization period of intangible assets with
finite lives will no longer be limited to forty years. Upon the
adoption of SFAS No. 142, the Company recorded an
impairment loss of $16.1 million with respect to its
distribution business.

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

|                             |  |                                               |            |           |  |             |       |   |  |   |       |  
|---------------------------- |  | --------------------------------------------- | ---------- | --------- |  | ----------- | ----- | - |  | - | ----- | -
|                             |  |                                              
|                             |  | For the Twelve Months Ended December 31, 2001
|                             |  |                                              
|                             |  | Net Loss                                      |            | Basic EPS |  | Diluted EPS
|                             |  |                                               |            |           |  |            
|Reported                     |  | $                                             | (5,122,915 | )         |  | $           | (0.38 | ) |  | $ | (0.38 | )
|Add: amortization adjustment |  |                                               | 1,299,248  |           |  |             | 0.10  |   |  |   | 0.10  |  
|                             |  |                                               |            |           |  |             |       |   |  |   |       |  
|Adjusted                     |  | $                                             | (3,823,667 | )         |  | $           | (0.28 | ) |  | $ | (0.28 | )
|                             |  |                                               |            |           |  |             |       |   |  |   |       |  

A summary of intangible assets as of
December 31 is as follows:

|                                    |          |      |   |            |  |  |   |            | 
|----------------------------------- | -------- | ---- | - | ---------- |  |  | - | ---------- | 
|                                    |          | 2003 |   | 2002      
|                                    |          |      |   |           
|Indefinite lived intangible assets: |          |      |   |            |  |  |   |           
|                                    | Goodwill |      | $ | 15,650,356 |  |  | $ | 15,650,356 | 
|                                    |          |      |   |            |  |  |   |           

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                |                                       |                |   |              |            |     |   |                |            |              |   |           |           |  |   |           |            |  |   |            |            |   |   |           |           | 
|------------------------------- | ------------------------------------- | -------------- | - | ------------ | ---------- | --- | - | -------------- | ---------- | ------------ | - | --------- | --------- |  | - | --------- | ---------- |  | - | ---------- | ---------- | - | - | --------- | --------- | 
|                                |                                       |                |   |             
|                                |                                       | 2003           |   | 2002        
|                                |                                       |                |   |             
|                                |                                       | Gross Carrying |   | Accumulated  |            |     |   | Gross Carrying |            | Accumulated  |   |          
|                                |                                       | Amount         |   | Amortization |            | Net |   | Amount         |            | Amortization |   | Net      
|                                |                                       |                |   |              |            |     |   |                |            |              |   |          
|Finite lived intangible assets: |                                       |                |   |              |            |     |   |                |            |              |   |           |           |  |   |           |            |  |   |            |            |   |   |          
|                                | Patents                               |                | $ | 8,218,000    |            |     | $ | (3,472,787     | )          |              | $ | 4,745,213 |           |  | $ | 8,218,000 |            |  | $ | (2,873,070 | )          |   | $ | 5,344,930 |          
|                                | Non-compete and consulting agreements |                |   | 2,308,727    |            |     |   | (2,220,820     | )          |              |   | 87,907    |           |  |   | 2,165,592 |            |  |   | (2,076,171 | )          |   |   | 89,421    |          
|                                | Debt issuance costs                   |                |   | 1,751,227    |            |     |   | (1,341,664     | )          |              |   | 409,563   |           |  |   | 1,650,087 |            |  |   | (780,567   | )          |   |   | 869,520   |          
|                                | Other                                 |                |   | 212,702      |            |     |   | (111,982       | )          |              |   | 100,720   |           |  |   | 69,568    |            |  |   | (11,595    | )          |   |   | 57,973    |          
|                                |                                       |                |   |              |            |     |   |                |            |              |   |           |           |  |   |           |            |  |   |            |            |   |   |          
|                                |                                       | Total          |   | $            | 12,490,656 |     |   | $              | (7,147,253 | )            |   | $         | 5,343,403 |  |   | $         | 12,103,247 |  |   | $          | (5,741,403 | ) |   | $         | 6,361,844 | 
|                                |                                       |                |   |              |            |     |   |                |            |              |   |           |           |  |   |           |            |  |   |            |            |   |   |          

As discussed in Note 2, the Company adopted
SFAS No. 142 on January 1, 2002. The expected
amortization expense for each of the five succeeding fiscal
years ended December 31 is as follows:

|           |  |   |           | 
|---------- |  | - | --------- | 
|2004       |  | $ | 1,113,129 | 
|2005       |  |   | 684,509   | 
|2006       |  |   | 599,724   | 
|2007       |  |   | 599,724   | 
|2008       |  |   | 569,162   | 
|Thereafter |  |   | 1,777,155 | 
|           |  |   |           | 
|           |  | $ | 5,343,403 | 
|           |  |   |           | 

There were no changes in the net carrying amount
of goodwill during the twelve months ended December 31,
2003.

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

6. Long-Term Debt

As of December 31, long-term debt consists
of the following:

|                                                                                                                                                                                                                                                                                                                                                                                                            |  |      |            |      |  |   |            | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                            |  | 2003 |            | 2002
|                                                                                                                                                                                                                                                                                                                                                                                                            |  |      |            |     
|LaSalle Credit Facility                                                                                                                                                                                                                                                                                                                                                                                     |  | $    | 833,333    |      |  | $ | 1,627,757  | 
|Convertible notes payable, bearing interest at a
    rate of 6% per annum for the first six months through
    September 16, 2002 and 8% per annum thereafter, interest
    payable quarterly beginning in June 2002 until paid in full and
    maturing on July 16, 2005                                                                                                                                   |  |      | 14,763,000 |      |  |   | 14,862,500 | 
|BofA junior promissory note payable, bearing
    interest at a rate of 6% per annum, payable monthly beginning
    April 2002 and maturing on March 15, 2007, and principal
    payments of $22,500 beginning on May 1, 2003 until
    maturity, with a balloon payment due at maturity                                                                                                                     |  |      | 1,797,500  |      |  |   | 2,000,000  | 
|Notes payable for the second and third additional
    Stepic purchase payments, bearing interest at a fixed rate of
    8%, interest and principal payable as described in Note 12                                                                                                                                                                                                                          |  |      | 937,748    |      |  |   | 1,303,482  | 
|Miscellaneous notes payable, bearing interest at
    fixed rates ranging from .90% to 8.56%, requiring monthly
    payments of principal and interest, and maturing at various
    dates through June 2004                                                                                                                                                                                                  |  |      | 57,788     |      |  |   | 79,060     | 
|Miscellaneous capital lease obligations for
    office equipment, requiring monthly payments ranging from $208
    to $1,362, bearing interest at rates ranging from 7.9% to
    23.17%, and maturing at various dates through 2005. These
    obligations are collateralized by equipment with a net book
    value of approximately $7,469 and $18,071 as of
    December 31, 2003 and 2002, respectively |  |      | 6,683      |      |  |   | 21,886     | 
|                                                                                                                                                                                                                                                                                                                                                                                                            |  |      |            |      |  |   |            | 
|                                                                                                                                                                                                                                                                                                                                                                                                            |  |      | 18,396,052 |      |  |   | 19,894,685 | 
|Less current portion                                                                                                                                                                                                                                                                                                                                                                                        |  |      | 1,396,824  |      |  |   | 1,552,782  | 
|                                                                                                                                                                                                                                                                                                                                                                                                            |  |      |            |      |  |   |            | 
|                                                                                                                                                                                                                                                                                                                                                                                                            |  | $    | 16,999,228 |      |  | $ | 18,341,903 | 
|                                                                                                                                                                                                                                                                                                                                                                                                            |  |      |            |      |  |   |            | 

On March 1, 2002, the Company entered into
certain agreements with ComVest Venture Partners, L.P.
(ComVest), an affiliate of Commonwealth Associates
L.P. (Commonwealth) to recapitalize the Company (the
Recapitalization). The Company completed the
Recapitalization on March 16, 2002 and the Forbearance
Agreement between the Company and Bank of America, N.A.
(Bank of America) dated March 30, 2001, as
subsequently amended (the Forbearance Agreement),
was terminated as of March 15, 2002. The Forbearance
Agreement is described below.

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

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

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

On March 1, 2002, the Company entered into a
Note Purchase Agreement (the Note Purchase
Agreement) with ComVest, Medtronic, Inc.
(Medtronic), and 26 individual and entity Additional
Note Purchasers (collectively, the Additional Note
Purchasers). Under the Note Purchase Agreement, the
Company agreed to issue $15 million of Senior Subordinated
Convertible Notes (the Convertible Notes). 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. As
discussed elsewhere in this report, on October 21, 2003,
the maturity date of the Convertible Notes was extended to
July 16, 2005.

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

Also, if the Company defaults under the Note
Purchase Agreement, it will be in default under the Loan
Agreement with LaSalle (as described below) pursuant to the
cross-default provisions contained therein. At December 31,
2003, the aggregate amount of indebtedness which would be
subject to acceleration under the Note Purchase Agreement, the
Companys credit facility with LaSalle (as described below)
and the Junior Note (as described below), causing the same to
become immediately due and payable, was approximately
$2.6 million. The holders of the Convertible Notes have
converted in the aggregate a total of $270,000 of the
Convertible Notes into 27,000,000 shares of the Companys
common stock at a conversion price of $0.01 per share. An
aggregate principal amount of $14,763,000 of Convertible Notes
remains outstanding as of December 31, 2003. This
27,000,000 shares also includes 3,300,000 shares which were
issued to ComVest upon conversion of the Bridge Note (as
described below).

In connection with the Recapitalization, the
Company issued a Convertible Bridge Note (the Bridge
Note) to ComVest. ComVest converted this Bridge Note into
3,300,000 shares of the Companys common stock at a
conversion price of $0.01 per share in 2002. As a result of such
conversion, the Bridge Note has been extinguished.

The Company may prepay the Convertible Notes,
subject to no prepayment penalty on or before March 16,
2003, a prepayment penalty of 5% between March 17, 2003 and
March 16, 2004, and no prepayment penalty through the
maturity date of the Convertible Notes (July 16, 2005). On
March 15, 2002, the Company and ComVest, as the holder of
an outstanding Bank of America Note (the Bank of America
Note), agreed to reduce the outstanding principal amount
of the Bank of America Note from $40.3 million to
$22 million. As a result, the Company recorded an
extraordinary loss on extinguishment of debt of approximately
$6.6 million during the first quarter of 2002. In exchange
for funding a portion of the $22 million cash purchase
price paid to Bank of America, ComVest assigned $4 million
in principal amount of the Bank of America Note to Medtronic and
$6.6 million in principal amount of the Bank of America
Note to the Additional Note Purchasers while retaining
$11.4 million in principal amount of the Bank of America
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
Bank of America Note held by ComVest, Medtronic and the
Additional Note Purchasers. The remaining $7 million in
principal amount of the Bank of America Note was repaid with the
proceeds of a Bridge Loan from ComVest (the Bridge
Loan).

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

On March 15, 2002, the Company and ComVest,
as the holder of the outstanding BofA Note, agreed to reduce the
outstanding principal amount of the BofA Note from
$40.3 million to $22 million. As a result, the Company
recorded a net extraordinary loss on the early extinguishment of
debt of approximately $6.6 million during the first quarter
of 2002. This extraordinary loss was calculated by subtracting
the fair value of the new debt of $42.6 million, which
included the amount outstanding under the LaSalle Credit
Facility ($7.3 million), the Convertible Notes
($33.3 million), and the BofA Junior Note
($2.0 million), from the amount outstanding under the Bank
of America debt of $40.3 million. Also included in the
extraordinary loss were various costs paid to ComVest,
Commonwealth Associates, L.P. and LaSalle, as the lenders, to
effect the Recapitalization of $4.3 million. Included as
components of the additional $4.3 million of transaction
expenses were the following: $570,000 in closing costs and due
diligence fees paid to LaSalle; a warrant to purchase the
Companys common stock issued to LaSalle valued at
approximately $695,000; approximately 2.7 million shares
issued to ComVest valued at approximately $2.3 million;
deferred loan costs from the original BofA debt of approximately
$128,000, and $1.15 million paid to Commonwealth in closing
costs and due diligence fees. Also included in the additional
expenses, but offsetting these amounts are approximately
$130,000 in fees and accrued interest forgiven by Bank of
America and the fair value of the BofA warrant of $345,000 which
was acquired and cancelled by ComVest.

The Company also incurred numerous other costs
that were either expensed as incurred or capitalized as debt
issuance costs. Included in selling, general, and administrative
expenses for fiscal 2002 are approximately $3 million of
expenses related to the Recapitalization. The primary components
of those expenses are $2.4 million in stock compensation
and bonuses to two of the Companys executive officers,
$168,000 in consulting fees, and $428,000 in legal and other
fees. The Company capitalized approximately $1.5 million as
debt issuance costs, consisting primarily of $906,000 in legal
fees, $322,000 of consulting fees, and $222,000 of other
miscellaneous fees paid for services rendered in connection with
the Recapitalization.

In exchange for funding a portion of the
$22 million cash purchase price paid to Bank of America,
ComVest assigned $4 million in principal amount of the BofA
Note to Medtronic and $6.6 million in principal amount of
the BofA Note to the Additional Note Purchasers while retaining
$11.4 million in principal amount of the BofA Note itself.
After such assignments, the Company issued the Convertible Notes
under the Note Purchase Agreement in the aggregate principal
amount of $15 million in exchange for the surrender of
$15 million in principal amount of the BofA Note held by
ComVest, Medtronic and the Additional Note Purchasers. The
remaining $7 million in principal amount of the BofA Note
was repaid with the proceeds of a bridge loan from ComVest to
the Company made on March 15, 2002 (the Bridge
Loan).

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

The Company determined the fair value of its
stock in a multiple-step process. First, the Company computed
its assumed fair value of $13,762,977 at the date of the
transaction by multiplying outstanding shares of 16,311,676 by
the then current market price per share of $0.84375, which
resulted in a fair value of the Company prior to any conversion
of the convertible portion of the Convertible Notes. The Company
then

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

On March 18, 2002, the Company entered into
the LaSalle Credit Facility pursuant to a loan and security
agreement (the Loan Agreement) with Standard Federal
Bank National Association (SFB), acting by and
through LaSalle, as SFBs agent (collectively the
Lender). Under the Loan Agreement, the Lender
provided a $20 million Revolving Loan and a $2 million
Term Loan (the Term Loan). Effective
December 23, 2002, the revolving loan limit was reduced to
$10 million. The Company used the proceeds to repay the
Bridge Loan, expenses related to the Recapitalization and for
working capital and general corporate purposes. Both loan
facilities will bear interest at the LaSalle Bank Prime Rate
plus 2%, subject to an additional 2% that would be added to the
interest rate upon the occurrence of an Event of Default (as
discussed below).

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

The Loan Agreement contains affirmative and
negative covenants. The affirmative covenants require the
Company to, among other things, maintain accurate and complete
records, notify the Lender of major business changes, comply
with relevant laws, maintain proper permits, conduct relevant
inspections and audits, maintain adequate insurance with the
Lender named as loss payee, keep collateral in good condition,
use proceeds only for business purposes, pay required taxes,
maintain all intellectual property, maintain a checking account
with LaSalle, hire a Chief Operating Officer with experience in
the medical products industry within 90 days of the date of
the Loan Agreement, grant the Lender the right to conduct
appraisals of the collateral on a biannual basis, and deliver a
survey of the property located at the Companys offices on
Northside Parkway in Atlanta, Georgia within 60 days of the
date of the Loan Agreement. The Company satisfied the
above-described covenants relating to the hiring of the Chief
Operating Officer and delivery of a property survey in a timely
fashion.

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | maintaining Tangible Net Worth of $7,500,000 for
    the quarters ending December 31, 2002, March 31, 2003,
    June 30, 2003 and September 30, 2003, and $8,000,000
    for the quarter ending December 31, 2003 and each quarter
    thereafter (Tangible Net Worth is defined as the Companys
    shareholders equity including retained earnings less the
    book value of all intangible assets, prepaid and non-cash items
    arising from the transactions contemplated by the Loan Agreement
    and goodwill impairment

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

The December Amendment also established a
$10 million revolving loan limit and provided that,
commencing January 1, 2003, the Company shall pay to the
Lender an annual facility fee of $100,000. As of
December 31, 2003, the Company had $2.8 million
available for borrowing under the revolving portion of the Loan
Agreement. As of December 31, 2002, the Company had
$2.1 million available for borrowing under the revolving
portion of the Loan Agreement. As of December 31, 2003, the
Company had $833,333 in borrowings outstanding under the Term
Loan and no borrowings outstanding under the revolving loan. As
of December 31, 2002, the Company had $1.5 million in
borrowings outstanding under the Term Loan and approximately
$128,000 in borrowings outstanding under the revolving loan. As
of December 31, 2003, the Company believes it was in
compliance with all such covenants set forth in the Loan
Agreement.

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

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 Term Loan is due 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 the Companys
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 (30) days past the date of

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

the original term (March 16, 2004) or any
applicable renewal term. As discussed elsewhere in this report,
the maturity date of the Convertible Notes was extended to
July 16, 2005. As a result, no such Termination Event
occurred, and no termination election was made by the Lender.

Pursuant to the LaSalle credit facility, the
Company 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 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.

During the fourth quarter of 2003, an assignee of
SFB exercised in full one of these warrants in a cashless
exercise, purchasing an aggregate of 446,177 shares of the
Companys common stock. Warrants to purchase up to an
aggregate of 299,448 shares of the Companys common stock
remain outstanding.

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 monthly principal payment of
$22,500 is due.

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

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

On October 15, 2001, the Company entered
into the Second Amendment to the Forbearance Agreement (the
Second Amendment) amending 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 a 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 occurrence of 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

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

shall report directly to the independent members
of the Companys Board of Directors; (iii) the Company
fails to provide Bank of America within five days from the
effective date of the Second Amendment a copy of resolutions
confirming Hunts resignation as an officer and director of
the Company and that no further salary or bonuses shall be paid
to Hunt; (iv) the Company fails to make efforts to
refinance the amounts outstanding under the BofA Credit Facility
and fails to provide weekly status reports; (v) on or
before December 15, 2001, the Company fails to provide Bank
of America evidence that the Company has engaged an investment
banking firm to begin marketing the sale of the assets of the
Company if the amounts outstanding under the BofA Credit
Facility are not paid off by the Termination Date; or
(vi) the Company fails to execute and deliver to Bank of
America within 24 hours of Bank of Americas request a
consent order consenting to the appointment of a receiver in the
event of a Termination Event, as defined.

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

The Forbearance Agreement provided for the
payment of Excess Cash Flow, as defined in the BofA Credit
Facility, on the ninetieth day following the last day of each
fiscal year. There was no Excess Cash Flow payment required for
fiscal year 2001. In addition, the Forbearance Agreement
required an additional principal payment in the amount of the
greater of $150,000 or the gross proceeds payable to the Company
in connection with the Companys sale of the Ideas for
Medicine business (IFM) (see Note 14).

The Forbearance Agreement further required
payments of $300,000 each on a short-term bridge loan (the BofA
Bridge Loan) on May 31, 2001, August 31, 2001,
and November 30, 2001. The proceeds of the BofA Bridge Loan
were used to fund a short-term bridge loan to the Companys
CEO, Marshall B. Hunt (the Shareholder Bridge Loan).
All of the installments under the BofA Bridge Loan and the
Shareholder Bridge Loan were paid.

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

The Forbearance Agreement also required the
Company to hire on or before June 30, 2001 a new chief
operating officer, restricted the repayment of principal debt to
junior lien holders, and to either (i) sell the assets of
IFM or (ii) obtain an agreement from the seller of the IFM
product line to defer all payments under the related promissory
note (see below) through the Termination Date (see Note 14). In
compliance with this Forbearance Agreement, the Company hired a
Chief Operating Officer in April 2001 who was terminated in June
2001, and sold the assets of the IFM product line as of March
30, 2001 (see Note 14). In May 2002, the Company hired Robert J.
Wenzel as its Chief Operating Officer.

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).

In January 2002, the Company entered into a
Fourth Amendment to the Forbearance Agreement with Bank of
America, pursuant to which Bank of America agreed to extend the
Forbearance Period until March 15, 2002 (the
Expiration Date) in order for the Company to
consider its strategic alternatives. On March 15, 2002, the
BofA Credit Facility was assigned from Bank of America to
ComVeSt. On March 16,

F-21



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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).

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

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

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

Future maturities of long-term debt outstanding
as of December 31, 2003 are as follows:

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2004       |  | $ | 1,396,825  | 
|2005       |  |   | 15,629,034 | 
|2006       |  |   | 382,693    | 
|2007       |  |   | 987,500    | 
|2008       |  |   | 0          | 
|Thereafter |  |   | 0          | 
|           |  |   |            | 
|           |  | $ | 18,396,052 | 
|           |  |   |            | 

F-22



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

7. Income Taxes

The components of the income tax provision
(benefit) consist of the following for the years ended
December 31:

|                                 |         |      |          |      |  |      |            |   |  |   |            |   | 
|-------------------------------- | ------- | ---- | -------- | ---- |  | ---- | ---------- | - |  | - | ---------- | - | 
|                                 |         | 2003 |          | 2002 |  | 2001
|                                 |         |      |          |      |  |     
|Current:                         |         |      |          |      |  |      |            |   |  |   |            |  
|                                 | Federal |      | $        | 0    |  |      | $          | 0 |  |   | $          | 0 | 
|                                 | State   |      |          | 0    |  |      |            | 0 |  |   |            | 0 | 
|Deferred tax provision (benefit) |         |      | (674,275 | )    |  |      | (3,239,840 | ) |  | $ | (2,001,393 | )
|                                 |         |      |          |      |  |      |            |   |  |   |            |  
|                                 |         |      | (674,275 | )    |  |      | (3,239,840 | ) |  |   | (2,001,393 | )
|Change in valuation allowance    |         |      | 674,275  |      |  |      | 3,239,840  |   |  |   | 2,001,393  |  
|                                 |         |      |          |      |  |      |            |   |  |   |            |  
|                                 |         | $    | 0        |      |  | $    | 0          |   |  | $ | 0          |  
|                                 |         |      |          |      |  |      |            |   |  |   |            |  

Deferred tax assets and liabilities as of
December 31, 2003 and 2002 are comprised of the following:

|                                                |                                             |                         |             |           |   |  |             |           |   | 
|----------------------------------------------- | ------------------------------------------- | ----------------------- | ----------- | --------- | - |  | ----------- | --------- | - | 
|                                                |                                             | 2003                    |             | 2002     
|                                                |                                             |                         |             |          
|Gross deferred tax assets:                      |                                             |                         |             |           |   |  |             |          
|                                                | Allowance for doubtful accounts and returns |                         |             | 189,202   |   |  | $           | 184,431   |  
|                                                | Estimated accruals                          |                         |             | 57,066    |   |  |             | 0         |  
|                                                | Inventory and inventory reserve             |                         |             | 834,233   |   |  |             | 1,135,572 |  
|                                                | Basis differences of intangible assets      |                         |             | 2,135,124 |   |  |             | 3,584,867 |  
|                                                | Basis differences of property and equipment |                         |             | 144,241   |   |  |             | 178,883   |  
|                                                | State net operating losses                  |                         |             | 1,659,250 |   |  |             | 1,963,644 |  
|                                                | Federal net operating loss                  |                         |             | 7,933,732 |   |  |             | 6,385,894 |  
|                                                |                                             |                         |             |           |   |  |             |          
|Gross deferred tax assets                       |                                             |                         | 12,952,848  |           |   |  | 13,433,291  |          
|Gross deferred tax liabilities:                 |                                             |                         |             |           |   |  |             |          
|                                                | Basis differences of intangible assets      |                         |             | (790,813  | ) |  |             | (596,981  | )
|                                                |                                             |                         |             |           |   |  |             |          
|Gross deferred tax liabilities                  |                                             |                         | (790,813    | )         |   |  | (596,981    | )        
|                                                |                                             |                         |             |           |   |  |             |          
|Valuation allowance for net deferred tax assets |                                             |                         | (12,162,035 | )         |   |  | (12,836,310 | )        
|                                                |                                             |                         |             |           |   |  |             |          
|                                                |                                             | Net deferred tax assets |             | $         | 0 |  |             | $         | 0 | 
|                                                |                                             |                         |             |           |   |  |             |          

The Company has net operating losses
(NOL) for federal and state income tax reporting
purposes of approximately $23,300,000. These NOLs have
expiration dates through fiscal year 2023. As a result of the
conversion of debt to common shares during 2002, the Company had
a change in control under Section 382 of the Internal
Revenue Code of 1986, as amended, for income tax purposes. As a
result there may be a substantial limitation on the future
utilization of loss carryforwards. Management is in the process
of determining the tax implications of the change of control.

A valuation allowance has been recorded against
all deferred tax assets as of December 31, 2003 and 2002 as
the Company believes that it is more likely than not that the
net deferred tax assets will not be realized.

F-23



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The provision (benefit) for income taxes
differs from the amount which would be computed by applying the
federal statutory rate of 34% to the loss before income taxes as
indicated below:

|                                                                        |  |      |          |      |  |      |            |   |  |   |            |  
|----------------------------------------------------------------------- |  | ---- | -------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                        |  | 2003 |          | 2002 |  | 2001
|                                                                        |  |      |          |      |  |     
|Income tax provision (benefit) at statutory
    federal income tax rate |  | $    | (267,713 | )    |  | $    | (8,897,945 | ) |  | $ | (1,741,791 | )
|Increase (decrease) resulting from:                                     |  |      |          |      |  |      |            |   |  |   |            |  
|Permanent differences relating to operations                            |  |      | 47,564   |      |  |      | 0          |   |  |   | 0          |  
|State income taxes                                                      |  |      | (38,850  | )    |  |      | (2,224,486 | ) |  |   | (436,788   | )
|Non-deductible amortization of goodwill                                 |  |      | 0        |      |  |      | 0          |   |  |   | 136,048    |  
|Permanent differences relating to recapitalization                      |  |      | 0        |      |  |      | 7,649,441  |   |  |   | 0          |  
|Change in rate assumption                                               |  |      | 940,872  |      |  |      | 0          |   |  |   | 0          |  
|Change in valuation allowance                                           |  |      | (674,275 | )    |  |      | 3,239,840  |   |  |   | 2,001,393  |  
|Other                                                                   |  |      | (7,598   | )    |  |      | 233,150    |   |  |   | 41,138     |  
|                                                                        |  |      |          |      |  |      |            |   |  |   |            |  
|Income tax provision (benefit)                                          |  | $    | 0        |      |  | $    | 0          |   |  | $ | 0          |  
|                                                                        |  |      |          |      |  |      |            |   |  |   |            |  

As of December 31, 2003, the Company changed
the estimated effect of tax rates of deferred tax items from
42.5% to 40%. The effect of the change of this estimated rate
resulted in the lowering of deferred tax assets by $940,872,
prior to the valuation allowance.

8. Preferred Stock

The Company has 5,000,000 shares of preferred
stock authorized for issuance. The preferences, powers, and
rights of the preferred stock are to be determined by the
Companys Board of Directors. None of these shares is
issued and outstanding.

9. Stock-Based Compensation

During 1998, the Companys Board of
Directors approved the Stock Incentive Plan for key employees
and outside directors (the Incentive Plan) which
provides for the grant of incentive stock options, restricted
stock, stock appreciation rights, or a combination thereof. The
Compensation Committee was responsible for reviewing and
approving the compensation arrangements for the Companys
executive officers and for administering the Companys 1998
Stock Incentive Plan until the Recapitalization was consummated
on March 16, 2002, at which point, after authorization of
the Board of Directors of the Company, the Executive Committee
assumed responsibility for such administration until
October 21, 2003, when the Executive Committee was
terminated as a result of the Amended and Restated
Securityholders Agreement, dated October 21, 2003, among
ComVest, Medtronic, LaSalle Business Credit, and Marshall B.
Hunt. The Compensation Committee reassumed responsibility for
administering the Incentive Plan at such time. Only
non-incentive stock options may be granted to outside directors
under the Incentive Plan. Under the Incentive Plan, as amended,
6,000,000 shares of the Companys common stock have been
reserved for issuance. Options under the Incentive Plan provide
for the purchase of the Companys common stock at not less
than the fair market value on the date the option is granted.

F-24



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Transactions under the Incentive Plan are
summarized as follows:

|                                       |           |           |           |                 |   |          |                 |                 |  |   |       |       | 
|-------------------------------------- | --------- | --------- | --------- | --------------- | - | -------- | --------------- | --------------- |  | - | ----- | ----- | 
|                                       |           |           |           |                 |   | Weighted
|                                       |           |           |           |                 |   | Average 
|                                       |           | Number of |           | Range of        |   | Exercise
|                                       |           | Options   |           | Exercise Prices |   | Price   
|                                       |           |           |           |                 |   |         
|Options outstanding December 31, 2000  |           |           | 701,325   |                 |   | $        | 0.440 - $15.500 |                 |  | $ | 3.557 |      
|                                       | Granted   |           |           | 471,595         |   |          | $               | 0.450 - $ 1.090 |  |   | $     | 0.866 | 
|                                       | Forfeited |           |           | (398,650        | ) |          | $               | 0.440 - $14.625 |  |   | $     | 2.409 | 
|                                       |           |           |           |                 |   |          |                 |                 |  |   |       |      
|Options outstanding, December 31, 2001 |           |           | 774,270   |                 |   | $        | 0.440 - $15.500 |                 |  | $ | 2.507 |      
|                                       | Granted   |           |           | 3,563,867       |   |          | $               | 0.700 - $ 1.180 |  |   | $     | 0.834 | 
|                                       | Exercised |           |           | (54,200         | ) |          | $               | 0.440 - $ 0.500 |  |   | $     | 0.455 | 
|                                       | Forfeited |           |           | (251,737        | ) |          | $               | 0.440 - $15.500 |  |   | $     | 1.670 | 
|                                       |           |           |           |                 |   |          |                 |                 |  |   |       |      
|Options outstanding, December 31, 2002 |           |           | 4,032,200 |                 |   |          |                 |                 |  |   |       |      
|                                       | Granted   |           |           | 1,744,667       |   |          | $               | 0.350 - $ 1.82  |  |   | $     | 0.833 | 
|                                       | Exercised |           |           | (43,200         | ) |          | $               | 0.440 - $ 0.71  |  |   | $     | 0.585 | 
|                                       | Forfeited |           |           | (1,204,450      | ) |          | $               | 0.440 - $14.62  |  |   | $     | 1.125 | 
|                                       |           |           |           |                 |   |          |                 |                 |  |   |       |      
|Options outstanding, December 31, 2003 |           |           | 4,529,217 |                 |   |          |                 |                 |  |   |       |      
|                                       |           |           |           |                 |   |          |                 |                 |  |   |       |      

The weighted average fair value of options
granted during the three years ended December 31, 2003,
2002 and 2001 was $0.96, $0.76, and $0.54, respectively.

F-25



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table summarizes information about
options outstanding under the Companys 1998 Stock
Incentive Plan as of December 31, 2003.

OPTIONS OUTSTANDING

|               |  |             |           |                            |  |             |      |  |  |  |         | 
|-------------- |  | ----------- | --------- | -------------------------- |  | ----------- | ---- |  |  |  | ------- | 
|               |  | Number      |           | Weighted Average           |  | Number     
|Exercise Price |  | Outstanding |           | Remaining Contractual Life |  | Exercisable
|               |  |             |           |                            |  |            
|$ 0.350        |  |             | 60,000    |                            |  |             | 9.26 |  |  |  | 35,000  | 
|$ 0.430        |  |             | 31,500    |                            |  |             | 9.10 |  |  |  | 20,000  | 
|$ 0.440        |  |             | 205,000   |                            |  |             | 6.95 |  |  |  | 205,000 | 
|$ 0.450        |  |             | 25,700    |                            |  |             | 7.90 |  |  |  | 25,700  | 
|$ 0.500        |  |             | 2,500     |                            |  |             | 9.38 |  |  |  | 0       | 
|$ 0.540        |  |             | 6,000     |                            |  |             | 9.37 |  |  |  | 0       | 
|$ 0.570        |  |             | 35,000    |                            |  |             | 9.43 |  |  |  | 17,500  | 
|$ 0.580        |  |             | 241,900   |                            |  |             | 9.42 |  |  |  | 0       | 
|$ 0.590        |  |             | 10,000    |                            |  |             | 9.46 |  |  |  | 0       | 
|$ 0.700        |  |             | 42,500    |                            |  |             | 8.04 |  |  |  | 42,500  | 
|$ 0.710        |  |             | 293,900   |                            |  |             | 8.05 |  |  |  | 293,900 | 
|$ 0.740        |  |             | 981,450   |                            |  |             | 8.87 |  |  |  | 70,945  | 
|$ 0.750        |  |             | 84,667    |                            |  |             | 9.63 |  |  |  | 46,667  | 
|$ 0.800        |  |             | 1,000     |                            |  |             | 7.09 |  |  |  | 1,000   | 
|$ 0.800        |  |             | 45,000    |                            |  |             | 8.20 |  |  |  | 45,000  | 
|$ 0.800        |  |             | 12,000    |                            |  |             | 8.85 |  |  |  | 12,000  | 
|$ 0.810        |  |             | 5,000     |                            |  |             | 9.72 |  |  |  | 0       | 
|$ 0.814        |  |             | 368,550   |                            |  |             | 8.87 |  |  |  | 122,850 | 
|$ 0.850        |  |             | 65,000    |                            |  |             | 8.21 |  |  |  | 48,267  | 
|$ 0.890        |  |             | 7,000     |                            |  |             | 9.58 |  |  |  | 0       | 
|$ 0.900        |  |             | 20,000    |                            |  |             | 7.78 |  |  |  | 20,000  | 
|$ 0.900        |  |             | 150,000   |                            |  |             | 8.31 |  |  |  | 150,000 | 
|$ 0.910        |  |             | 1,192,500 |                            |  |             | 9.81 |  |  |  | 40,000  | 
|$ 0.950        |  |             | 250,000   |                            |  |             | 8.35 |  |  |  | 150,000 | 
|$ 0.975        |  |             | 3,500     |                            |  |             | 8.70 |  |  |  | 1,750   | 
|$ 0.985        |  |             | 97,700    |                            |  |             | 8.74 |  |  |  | 97,700  | 
|$ 1.000        |  |             | 10,000    |                            |  |             | 8.68 |  |  |  | 2,500   | 
|$ 1.050        |  |             | 80,000    |                            |  |             | 7.42 |  |  |  | 80,000  | 
|$ 1.090        |  |             | 30,000    |                            |  |             | 8.36 |  |  |  | 15,000  | 
|$ 1.100        |  |             | 42,000    |                            |  |             | 8.47 |  |  |  | 42,000  | 
|$ 1.180        |  |             | 8,000     |                            |  |             | 8.34 |  |  |  | 6,500   | 
|$ 1.820        |  |             | 40,000    |                            |  |             | 9.83 |  |  |  | 20,000  | 
|$ 3.375        |  |             | 6,000     |                            |  |             | 5.92 |  |  |  | 6,000   | 
|$ 4.063        |  |             | 5,000     |                            |  |             | 5.67 |  |  |  | 5,000   | 
|$ 6.250        |  |             | 2,650     |                            |  |             | 5.14 |  |  |  | 2,650   | 
|$ 7.000        |  |             | 8,000     |                            |  |             | 5.04 |  |  |  | 8,000   | 
|$13.750        |  |             | 3,700     |                            |  |             | 4.58 |  |  |  | 3,700   | 
|$14.500        |  |             | 55,400    |                            |  |             | 4.67 |  |  |  | 55,400  | 

F-26



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|               |  |             |           |                            |  |             |      |  |  |  |           | 
|-------------- |  | ----------- | --------- | -------------------------- |  | ----------- | ---- |  |  |  | --------- | 
|               |  | Number      |           | Weighted Average           |  | Number     
|Exercise Price |  | Outstanding |           | Remaining Contractual Life |  | Exercisable
|               |  |             |           |                            |  |            
|$14.625        |  |             | 1,100     |                            |  |             | 4.67 |  |  |  | 1,100     | 
|               |  |             |           |                            |  |             |      |  |  |  |           | 
|               |  |             | 4,529,217 |                            |  |             |      |  |  |  | 1,693,629 | 
|               |  |             |           |                            |  |             |      |  |  |  |           | 

On March 16, 2002, all of the Companys
then outstanding options became immediately vested under the
terms of the Incentive Plan as a result of the Recapitalization.
In addition, the Company granted options, but not under the
Incentive Plan, in connection with the Recapitalization (as
described in Note 6 and below).

In connection with the Recapitalization, in 2002,
the Companys former CEO and former President were granted
options to purchase 3,500,000 shares and 1,000,000 shares,
respectively, of the Companys common stock at the exercise
price of $0.45 per share. The former Presidents options
and 2,500,000 shares of the former CEOs options are vested
and exercisable immediately and have terms of ten years. The
former CEOs options for 1,000,000 shares were contingent;
options for 500,000 shares became vested in January 2004 and the
remaining options expired. At the date of grant of these
options, the share market value was $0.84, which resulted in a
compensation expense of approximately $1.4 million and is
recorded in the Companys Consolidated Statement of
Operations for the year ended December 31, 2002. These
options were considered in the Companys compensation
expense in the 2002 pro forma calculation above. See
Note 18 (Subsequent Events) to these financial
statements.

10. Earnings (Loss) Per Share

A summary of the calculation of basic and diluted
earnings per share (EPS) for the years ended
December 31, 2003, 2002, and 2001 is as follows:

|                        |  |                                      |          |               |  |            |            |  |  |   |      |  
|----------------------- |  | ------------------------------------ | -------- | ------------- |  | ---------- | ---------- |  |  | - | ---- | -
|                        |  |                                     
|                        |  | For the Year Ended December 31, 2003
|                        |  |                                     
|                        |  | Net Loss                             |          | Shares        |  | Per Shares
|                        |  | (Numerator)                          |          | (Denominator) |  | Amount    
|                        |  |                                      |          |               |  |           
|EPS  basic and diluted |  | $                                    | (787,392 | )             |  |            | 36,655,394 |  |  | $ | (.02 | )
|                        |  |                                      |          |               |  |            |            |  |  |   |      |  

|                        |  |                                      |             |               |  |            |            |  |  |   |       |  
|----------------------- |  | ------------------------------------ | ----------- | ------------- |  | ---------- | ---------- |  |  | - | ----- | -
|                        |  |                                     
|                        |  | For the Year Ended December 31, 2002
|                        |  |                                     
|                        |  | Net Loss                             |             | Shares        |  | Per Shares
|                        |  | (Numerator)                          |             | (Denominator) |  | Amount    
|                        |  |                                      |             |               |  |           
|EPS  basic and diluted |  | $                                    | (26,170,426 | )             |  |            | 20,684,670 |  |  | $ | (1.27 | )
|                        |  |                                      |             |               |  |            |            |  |  |   |       |  

|                        |  |                                      |            |               |  |            |            |  |  |   |      |  
|----------------------- |  | ------------------------------------ | ---------- | ------------- |  | ---------- | ---------- |  |  | - | ---- | -
|                        |  |                                     
|                        |  | For the Year Ended December 31, 2001
|                        |  |                                     
|                        |  | Net Loss                             |            | Shares        |  | Per Shares
|                        |  | (Numerator)                          |            | (Denominator) |  | Amount    
|                        |  |                                      |            |               |  |           
|EPS  basic and diluted |  | $                                    | (5,122,915 | )             |  |            | 13,366,278 |  |  | $ | (.38 | )
|                        |  |                                      |            |               |  |            |            |  |  |   |      |  

Options to purchase 8,529,217 shares of common
stock and warrants to purchase 424,448 shares of common stock
were outstanding as of December 31, 2003 but were not
included in the computation of the 2003 diluted EPS because the
effect would be anti-dilutive. The options have exercise prices
ranging from $0.35 to $14.63 and expire between 2008 and 2013.
Warrants to purchase 299,448 shares of common stock have an
exercise price of $0.01 and expire in 2012. Warrants to purchase
25,000 shares of common stock have an exercise price of $1.22
and expire in 2011. Warrants to purchase 50,000 shares of common
stock have an exercise price of $0.93 and expire in 2005.
Warrants to purchase 50,000 shares of common stock have an
exercise price of $0.69 and expire in 2006.

Options to purchase 7,532,200 shares of common
stock and warrants to purchase 823,619 shares of common stock
were outstanding as of December 31, 2002 but were not
included in the computation of the

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

2002 diluted EPS because the effect would be
anti-dilutive. The options have exercise prices ranging from
$.44 to $14.63 and expire between 2008 and 2012. Warrants to
purchase 748,619 shares of common stock have an exercise price
of $.01 per share and expire in 2012. Warrants to purchase
25,000 shares of common stock have an exercise price of $1.22
and expire in 2011. Warrants to purchase 50,000 shares of common
stock have an exercise price of $0.93 and expire in 2005.

11. Related-Party Transactions

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

Harold Blue, who was appointed to the
Companys Board of Directors in March 2003, serves as the
President of Commonwealth Associates Group Holdings, LLC
(CAGH). ComVest is an affiliated entity of CAGH. In
connection with the Recapitalization, in March 2002, the Company
issued Convertible Notes to ComVest in the principal amount
equal to $4,400,000. During fiscal 2002 and fiscal 2003, the
Company paid an aggregate of $225,777 and $348,127 in interest
to ComVest on the Convertible Notes issued to ComVest. In
connection with and prior to the Recapitalization, the Company
entered into an advisory agreement with Commonwealth Associates,
L.P., an affiliate of ComVest and CAGH, under which Commonwealth
Associates, L.P. received 2,645,398 shares of the Companys
common stock (a value equal to $2,248,588, based on the closing
price of the Companys common stock on March 15, 2002,
the date immediately prior to the closing date of the
Recapitalization) and a cash fee of $750,000. Pursuant to the
terms of this advisory agreement, Commonwealth Associates, L.P.,
provided the Company with financial consulting advice in
developing a strategy for restructuring the Companys in
connection with the Recapitalization. The advisory agreement did
not provide for ongoing services to be rendered after the
Recapitalization.

The Company had unsecured loans to the former
CEO, the former President of the Company, and a former Vice
Chairman of the Board of the Company in the form of notes
receivable in the principal amount of $112,613 and $337,837,
plus accrued interest receivable of $58,218 and $168,800 as of
December 31, 2002 and 2001, respectively. The notes
required 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
former CEO and the former President in full settlement of their
outstanding balances, which included accrued interest. In July
2003, the notes payable by the former Vice Chairman of the Board
were amended and consolidated, to extend payment terms through
June 15, 2004, with payments to be made in equal monthly
installments of $14,647. The notes payable by the former Vice
Chairman of the Board remain outstanding, with a balance at
December 31, 2003 of $86,543, in compliance with the
amended agreement.

As discussed in Note 6, on June 6, 2000, the
Company obtained the $900,000 BofA Bridge Loan, which was used
to fund the Shareholder Bridge Loan to the Companys former
CEO. The former CEOs obligations under the Shareholder
Bridge Loan were collateralized by the pledge of 2,813,943
shares of the Companys common stock owned beneficially by
the former CEO. The Companys obligations under the BofA
Bridge Loan were collateralized by the pledge of the former
CEOs shares to BofA and by the collateral previously
pledged by the Company to BofA under the Companys
then-existing credit facility with BofA. The Shareholder Bridge
Loan required interest at either the Index Rate or adjusted
LIBOR, as defined in the

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Shareholder Bridge Loan, plus 4.5% as elected by
the former CEO. As of December 31, 2000, the interest rate
was based on the Index Rate with a resulting rate of
approximately 11.32%. The Shareholder Bridge Loan and related
accrued interest were recorded as contra-equity in the
consolidated balance sheets and were due on August 30, 2000
but not paid. As a result, the Company was unable to pay the
amount due under the BofA Bridge Loan, thereby causing the
Company to default under the BofA Bridge Loan and the BofA
Credit Facility (see Note 6). During 2001, the former CEO
paid the Shareholder Bridge Loan obligation of $900,000 as
described in Note 6. Accrued interest of $109,303 under the
Shareholder Bridge Loan was paid to the Company by the former
CEO in June 2002.

The former CEO and the former President of the
Company each owned a 50% interest in the capital stock of HP
Aviation, Inc., an entity that provided the use of an airplane
to the Company. During the year ended December 31, 2001,
the Company paid HP Aviation, Inc. approximately $58,500 for use
of the airplane. There were no payments made during 2002 or
2003. The agreement was terminated in 2001. In addition, the
former CEO and the former President of the Company each owned a
50% interest in real estate property that is used by the Company
for various management and sales related functions. The Company
did not incur any expense for use of this real estate property
payable to officers during 2003. During the years ended
December 31, 2002 and 2001, the Company incurred expenses
of $7,000 and $10,550, respectively, payable to these officers
for the Companys use of the real estate property.

The Company had an arrangement with the former
CEO regarding the Companys use of a boat that was
previously owned by the CEO (the Marine Reimbursement
Arrangement). Under the Marine Reimbursement Arrangement,
the Company and its employees, agents and guests used the boat
for purposes of management meetings, sales meetings, and
entertainment of guests. During the year ended 2001 the Company
reimbursed the former CEO approximately $8,600 for the use of
the boat. The Marine Reimbursement Arrangement was terminated in
2001.

The development of the Companys Manchester,
Georgia facility was financed with approximately $705,000 in
proceeds of an industrial development revenue bond issued by the
Manchester Development Authority for the benefit of the Company.
In connection with, and as a condition to such bond financing,
the Company entered into an operating lease with the Manchester
Development Authority. All payments due on the bonds have been
and continue to be guaranteed, jointly and severally, by the
former majority shareholders of the Company and Cardiac Medical,
Inc., an entity related by common ownership by certain officers
and shareholders.

The Company had entered into a Consulting and
Services Agreement with Healthcare Alliance (the Alliance
Agreement), an affiliate of one of the Companys
former directors. The Alliance Agreement provided for
(i) the payment to Healthcare Alliance of an annual
consulting fee of $36,000; (ii) the payment to Healthcare
Alliance of an annual performance incentive fee equal to 5% of
any annual sales increase achieved by the Company resulting from
Healthcare Alliances efforts; and (iii) the grant of
options to purchase up to 1% of the Companys outstanding
common stock. The options vested and became exercisable by
Healthcare Alliance only if it procured group purchasing
agreements with certain Group Purchasing Organizations
(GPOs), and the Company achieved certain levels of
incremental sales revenue under its agreement with the
particular GPO (at an exercise price equal to the closing stock
price of the Companys common stock on the effective date
of the purchasing agreement). The Company incurred expense of
$36,000 related to the annual consulting fee under the Alliance
Agreement during the year ended December 31, 2001. The
Company also reimbursed Healthcare Alliance for expenses
incurred of approximately $1,100 during the year ended
December 31, 2001. The Alliance Agreement expired on
December 31, 2001. In addition, there were no incentive fee
amounts earned during the year ended December 31, 2001 and
there were no grants of Company stock options during year ended
December 31, 2001 related to provision (iii) above of
the Alliance Agreement.

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In addition, the Company granted an option to
Healthcare Alliance for the purchase of 45,000 shares of common
stock of the Company. Such options vested and became exercisable
by Healthcare Alliance only if the Company achieved certain
amounts of incremental sales revenue under the Companys
group purchasing agreement with Premier, (the Premier
Agreement  see below). The exercise price for
these shares was the closing stock price of the Companys
common stock on the day that the options vest. The options were
exercisable for a period of five years upon vesting. None of the
45,000 options had vested as of December 31, 2001 and the
Alliance Agreement expired on December 31, 2001.

An affiliate of one of the former Directors of
the Company provided consulting services to the Company with
respect to financial and certain related matters, including the
Recapitalization. During the three years ended December 31,
2003, 2002 and 2001, the Company incurred fees of approximately
$66,000, $320,000 and $484,000, respectively, in consideration
for such services.

12. Commitments and Contingent
Liabilities

The Company leases certain of its facilities and
certain equipment under operating lease agreements expiring in
various years through 2010. Rent expense under various operating
leases was approximately $233,000, $320,000 and $399,000 during
the three years ended December 31, 2003, 2002, and 2001,
respectively. These amounts include approximately $83,000,
$106,000 for the 2002 and 2001 fiscal years, respectively,
related to the Companys distribution segment which has
been reclassed to discontinued operations in the Companys
Statement of Operations for the years ended December 31,
2002 and 2001. As of December 31, 2003, the approximate
minimum future rental payments under noncancelable operating
leases having remaining terms in excess of one year are as
follows:

|           |  |   |           | 
|---------- |  | - | --------- | 
|2004       |  | $ | 225,749   | 
|2005       |  |   | 217,437   | 
|2006       |  |   | 202,852   | 
|2007       |  |   | 201,744   | 
|2008       |  |   | 189,560   | 
|Thereafter |  |   | 243,246   | 
|           |  |   |           | 
|           |  | $ | 1,280,588 | 
|           |  |   |           | 

From time to time, the Company is a party to
legal actions arising in the ordinary course of business which
it deems immaterial. Although the Company believes that it has
defenses to the claims of liability or for damages in the
actions against it, there can be no assurance that additional
lawsuits will not be filed against the Company or the
Companys subsidiaries. Further, there can be no assurance
that the lawsuits will not have a disruptive effect upon the
operations of the Companys business, that the defense of
the lawsuits will not consume the time and attention of the
Companys senior management and its subsidiaries, or that
the resolution of the lawsuits will not have a material adverse
effect on the Companys operating results and financial
condition. The Company intends to defend or pursue each of the
lawsuits vigorously. The Company is also subject to numerous
federal, state and local environmental laws and regulations.
Management believes that the Company is in material compliance
with such laws and regulations and that potential environmental
liabilities, if any, are not material to the consolidated
financial statements.

The Company is party to license agreements with
an individual (the Licensor) for the right to
manufacture and sell dual lumen fistula needles, dual lumen
over-the-needle catheters, dual lumen chronic and acute
catheters, and other products covered by the Licensors
patents or derived from the Licensors confidential
information. Payments under the agreement vary, depending upon
the purchaser, and range from 9% to 15% of the Companys
net sales of such licensed products. Such payments shall
continue until the expiration date of each corresponding
licensed patent right covering each product under the agreement.

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Payments under these license agreements totaled
approximately $231,733, $214,400 and $234,000 during three years
ended December 31, 2003, 2002 and 2001, respectively.

The Company has entered into various distribution
agreements under which the Company has guaranteed certain gross
margin percentages to its distributors. During 2003, these
agreements were amended to eliminate the guaranteed margins. As
a result of these guarantees, the Company has accrued
approximately $0 and $282,000 as of December 31, 2003 and
2002, respectively, related to amounts to be rebated to the
various distributors.

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

Effective October 15, 1998, the Company
completed the purchase of the outstanding stock of Stepic for
$8 million in cash and contingent payments of up to
$12 million over a three-year period based upon the
successful achievement of certain specified future earnings
targets of Stepic. The Company determined that $7.2 million
of this contingent payment was probable of payment and recorded
that amount at the acquisition date. All additional payments
made have been accounted for as additional costs of acquired
assets and amortized over the remaining lives of the assets.

During 2001, the Company recorded additional
purchase price payable to the previous Stepic shareholders of
approximately $667,000, representing the Companys
additional earned contingent payments for the anniversary year
ending October 31, 2001, as required by the purchase
agreement (the Purchase Agreement). The Company
recorded approximately $439,000 related to the 2001 contingent
payment during the year ended December 31, 2000, which was
included in accrued expenses as of December 31, 2000.

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 replaced the Settlement
Agreement. 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.

In May 2002, the Company became aware of a
Complaint for Declaratory Judgment filed in the United States
District Court for the District of Massachusetts by LeMaitre
against one of the Companys former distributors, Cardio
Medical Products, Inc. (Cardio Medical). The Company
had a distributorship agreement with Cardio Medical for the IFM
product line entered into prior to the Companys sale of
the IFM business on March 30, 2001 to LeMaitre. See
Description of Business  Acquisitions and
Divestitures above. Under the IFM Agreement with the
Company, LeMaitre agreed to continue selling the IFM product
line to Cardio Medical as required by the Cardio Medical
distributorship agreement for the remainder of its term through
December 31, 2002, provided LeMaitre received from Cardio
Medical confirmation of the terms

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

of such agreement satisfactory to LeMaitre. In
its suit for Declaratory Judgment, LeMaitre requested a
declaration that the IFM Agreement created no contractual rights
between Cardio Medical and LeMaitre, and that LeMaitre has no
obligation to sell its IFM products to Cardio Medical. In early
June, 2002, Cardio Medical answered LeMaitres complaint,
and asserted a counterclaim against the Company and LeMaitre for
breach of contract. The counterclaim alleged that the Company
breached the distributorship agreement between Cardio Medical
and the Company by (1) failing and refusing to sell IFM
products to Cardio Medical (either directly or through
LeMaitre); and (2) selling or allowing LeMaitre to sell IFM
products directly to customers in the territory granted
exclusively to Cardio Medical. The Company has responded to the
counterclaim and has denied liability for Cardio Medicals
damages. This lawsuit was settled in November 2003.

In November 2002, the Company was served with a
complaint filed in the United States District Court for the
Northern District of Georgia by Chepstow Limited
(Chepstow) against the Company, its then Chief
Executive Officer, Marshall B. Hunt, its President, William E.
Peterson, Jr., and members of Mr. Hunts family
and a family limited partnership established by Mr. Hunt
and his wife. Chepstow alleges that it has a judgment on a
promissory note against Mr. Hunt, that it is engaging in
post-judgment collection efforts, and that the defendant parties
in this action have engaged with Mr. Hunt in fraudulent
conveyances of Mr. Hunts assets. Specifically, with
respect to the Company, Chepstow alleges that, in March 2002,
Mr. Hunt transferred 225,000 shares of the
Companys common stock to his family limited partnership,
that such transfer was a fraudulent conveyance under Georgia
law, that the Company assisted in such transfer, and that the
Company engaged in an unlawful conspiracy to hinder, delay or
defraud Chepstow as Mr. Hunts creditor. Chepstow
seeks to void such transfers and injunctive relief, compensatory
damages, and punitive damages from the defendants, including the
Company. The Company filed a motion to dismiss the action
against the Company. In July 2003, the court granted the
Companys motion to dismiss and dismissed the lawsuit
against all parties. In August 2003, plaintiff filed a Notice of
Appeal with respect to the courts dismissal and the
Company has filed its brief in connection with such appeal. Oral
arguments were held on the appeal in January 2004. The Company
has entered into an agreement with Chepstow that if the
appellate court should reverse the District Courts
dismissal of the lawsuit as to the Company, the continuation of
the lawsuit in the District Court will be stayed pending
Mr. Hunts satisfaction of Chepstows judgment
against Mr. Hunt and will be dismissed upon
Mr. Hunts satisfaction of such judgment.

As described in Note 6, 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 6 herein for
a more detailed discussion of the Events of Default thereunder.

On March 15, 2002, the Company entered into
a Co-Promotion Agreement with Medtronic under which the Company
is promoting and providing technical advice for Medtronics
implantable drug delivery systems which are used for the
treatment of hepatic arterial infusion and malignant pain, which
agreement was amended in April 2003. 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 6).

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

13. Supplemental Disclosure of Cash Flow
Information

The following represent noncash financing
activities for the years ended December 31:

|                                                                   |  |      |         |      |  |      |          |   |  |   |         | 
|------------------------------------------------------------------ |  | ---- | ------- | ---- |  | ---- | -------- | - |  | - | ------- | 
|                                                                   |  | 2003 |         | 2002 |  | 2001
|                                                                   |  |      |         |      |  |     
|Short-term debt issued for certain prepaid
    insurance coverages |  | $    | 464,540 |      |  | $    | 598,916  |   |  | $ | 358,573 | 
|Notes issued for purchase of equipment                             |  |      | 3,138   |      |  |      |         |   |  |   |        | 
|Notes issued for additional Stepic purchase
    payment            |  |      |        |      |  |      |         |   |  |   | 227,695 | 
|Increase in notes receivable 
    shareholders                    |  |      |        |      |  |      |         |   |  |   | 87,001  | 
|Noncash payment of short-term bridge loan by the
    CEO           |  |      |        |      |  |      |         |   |  |   | 425,610 | 
|Conversion of convertible notes to common stock                    |  |      | 99,500  |      |  |      | 170,500  |   |  |   |        | 
|Insurance of warrants                                              |  |      |        |      |  |      | 770,139  |   |  |   | 260,000 | 
|Termination of warrant                                             |  |      |        |      |  |      | (260,000 | ) |  |   |        | 

Interest paid was $1,758,444, $2,451,670 and
$4,619,108 for the years ended December 31, 2003, 2002 and
2001. Taxes paid, net of refunds received, were $81,511,
$28,553, and $51,818 for the years ended December 31, 2003,
2002, and 2001.

14. Impairment Charge and 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, 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 to be received as part of the Second
Installment. In addition to the purchase of certain assets, the
buyer 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 on September 30, 2001. 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
December 31, 2001, the Company had fully reserved the
amount due from the purchaser of approximately $220,000. This
lawsuit was settled by the parties in July 2002, with no
payments due to or due from the Company.

15. Segment Information and Major
Customers

Through September 3, 2002, the Company
operated under two reportable segments, manufacturing and
distribution. The manufacturing segment includes products
manufactured by the Company, as well as products manufactured by
third parties on behalf of the Company. The Company sold its
distribution business on September 3, 2002 and currently
operates under only the manufacturing segment. As a result of
the sale, the results of operations of the distribution segment
have been reclassed and are included in discontinued operations
on the Companys Statement of Operations for the years
ended December 31, 2002 and 2001.

The accounting policies of the segments are the
same as those described in the Summary of Significant
Accounting Policies (see Note 2) to the extent that
such policies affect the reported segment information. The
Company evaluates the performance of its segments based on gross
profit; therefore, selling, general, and

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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), gross profit
(which include intersegment gross profit) and identifiable
assets (which include intersegment receivables) of the
Companys segments as of December 31, 2001 and for the
year ended December 31, 2001.

|              |  |       |            |              |  |        |            |  |  |   |            | 
|------------- |  | ----- | ---------- | ------------ |  | ------ | ---------- |  |  | - | ---------- | 
|              |  |      
|              |  | 2001 
|              |  |      
|              |  |       |            | Identifiable
|              |  | Sales |            | Gross Profit |  | Assets
|              |  |       |            |              |  |       
|Manufacturing |  | $     | 24,700,813 |              |  | $      | 13,290,988 |  |  | $ | 35,768,752 | 
|              |  |       |            |              |  |        |            |  |  |   |            | 
|Distribution  |  |       | 36,410,217 |              |  |        | 6,987,362  |  |  |   | 35,633,080 | 
|              |  |       |            |              |  |        |            |  |  |   |            | 
|              |  | $     | 61,111,030 |              |  | $      | 20,278,350 |  |  | $ | 71,401,832 | 
|              |  |       |            |              |  |        |            |  |  |   |            | 

A reconciliation of total segment sales to total
consolidated sales and of total segment gross profit to total
consolidated gross profit of the Company for the year ended
December 31, 2001 is as follows:

|                                         |                           |      |            |            | 
|---------------------------------------- | ------------------------- | ---- | ---------- | ---------- | 
|                                         |                           | 2001
|                                         |                           |     
|Total segment sales                      |                           | $    | 61,111,030 |           
|Elimination of intersegment sales        |                           |      | (2,044,241 | )         
|                                         |                           |      |            |           
|                                         | Consolidated sales        |      | $          | 59,066,789 | 
|                                         |                           |      |            |           
|Total segment gross profit               |                           | $    | 20,278,350 |           
|Elimination of intersegment gross profit |                           |      | 41,852     |           
|                                         |                           |      |            |           
|                                         | Consolidated gross profit |      | $          | 20,320,202 | 
|                                         |                           |      |            |           

A reconciliation of total segment assets to total
consolidated assets of the Company as of December 31, 2001
is as follows:

|                                        |                     |      |            |            | 
|--------------------------------------- | ------------------- | ---- | ---------- | ---------- | 
|                                        |                     | 2001
|                                        |                     |     
|Total segment assets                    |                     | $    | 71,401,832 |           
|Elimination of intersegment receivables |                     |      | (54,292    | )         
|                                        |                     |      |            |           
|                                        | Consolidated assets |      | $          | 71,347,540 | 
|                                        |                     |      |            |           

The Companys operations are located in the
United States, except for a sales office in Belgium. Thus,
substantially all of the Companys assets are located
domestically. Sales information (excluding discontinued
operations of the distribution segment) by geographic area for
the three years ended December 31, 2003, 2002 and 2001 is
as follows:

|              |                        |      |            |            |  |      |            |            |  |   |            |            | 
|------------- | ---------------------- | ---- | ---------- | ---------- |  | ---- | ---------- | ---------- |  | - | ---------- | ---------- | 
|              |                        | 2003 |            | 2002       |  | 2001
|              |                        |      |            |            |  |     
|United States |                        | $    | 26,214,017 |            |  | $    | 19,963,446 |            |  | $ | 22,833,286 |           
|Foreign       |                        |      | 1,761,435  |            |  |      | 1,748,198  |            |  |   | 1,867,527  |           
|              |                        |      |            |            |  |      |            |            |  |   |            |           
|              | Consolidated net sales |      | $          | 27,975,452 |  |      | $          | 21,711,644 |  |   | $          | 24,700,813 | 
|              |                        |      |            |            |  |      |            |            |  |   |            |           

No single country outside of the United States is
significant to the Companys revenues. Sales to the
Companys three largest customers collectively amounted to
approximately 18%, 15%, and 19% of total sales (excluding
discontinued operations of the distribution segment) during the
three years ended December 31, 2003, 2002 and 2001,
respectively. The revenues of the Companys distribution
segment have been reclassed to discontinued operations in the
Companys Statement of Operations for the years ended
December 31, 2002,

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

and 2001. As of December 31, 2003 and 2002,
39% and 36%, respectively, of the consolidated accounts
receivable balance consisted of amounts due from the
Companys three largest customers.

The table below presents net sales by major
product category (excluding discontinued operations of the
distribution segment) for the years ended December 31,
2003, 2002 and 2001:

|                 |                 |      |            |            |  |      |            |            |  |   |            |            | 
|---------------- | --------------- | ---- | ---------- | ---------- |  | ---- | ---------- | ---------- |  | - | ---------- | ---------- | 
|                 |                 | 2003 |            | 2002       |  | 2001
|                 |                 |      |            |            |  |     
|Ports            |                 | $    | 18,857,150 |            |  | $    | 16,877,656 |            |  | $ | 18,499,707 |           
|Port accessories |                 |      | 3,500,499  |            |  |      | 1,825,940  |            |  |   | 1,960,611  |           
|Catheters        |                 |      | 3,562,942  |            |  |      | 2,887,644  |            |  |   | 2,958,445  |           
|Pumps            |                 |      | 1,618,343  |            |  |      | 0          |            |  |   | 0          |           
|All other        |                 |      | 436,518    |            |  |      | 120,404    |            |  |   | 1,282,050  |           
|                 |                 |      |            |            |  |      |            |            |  |   |            |           
|                 | Total net sales |      | $          | 27,975,452 |  |      | $          | 21,711,644 |  |   | $          | 24,700,813 | 
|                 |                 |      |            |            |  |      |            |            |  |   |            |           

16. Defined Contribution Benefit
Plan

The Company maintains a 401(k) profit sharing
plan (the Plan) that covers essentially all of the
Companys employees. Employees are eligible to participate
in the Plan after completing one year of service and attaining
the age of 21. Participants in the Plan can contribute up to 15%
of their annual salary during the plan year. The Companys
contributions to the Plan, which are based principally on a
percentage of the participants annual base salary, are
discretionary and determined on an annual basis by the Board of
Directors. The Company made no contributions to the Plan during
the years ended December 31, 2003, 2002 and 2001.



|    |                             
|--- | ----------------------------
|17. | Sale of Distribution Segment

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

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

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

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Net sales and income (loss) from the discontinued
operations of the distribution reporting unit are as follows:

|                                                  |  |      |            |      |  |   |            |  
|------------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                                  |  | 2002 |            | 2001
|                                                  |  |      |            |     
|Net sales                                         |  | $    | 21,987,450 |      |  | $ | 36,410,217 |  
|Net income (loss) from discontinued operations(1) |  |      | 3,174,623  |      |  |   | (230,972   | )



---



|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(1) | For fiscal 2002, this number includes the gain on
    the sale of Stepic, the Companys distribution segment.

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

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

Goodwill of $16.1 million for the Stepic
distribution segment was written off in the first quarter of
2002 as part of the Companys adoption of SFAS No. 142
(Note 2).

18. Subsequent Events

Effective January 16, 2004, Marshall B. Hunt
resigned as Chief Executive Officer of the Company. For all
severance amounts payable to Mr. Hunt under the Separation
Agreement between Mr. Hunt and the Company, the
Companys expense will be recognized in 2004 and will be
paid over sixteen months through April 30, 2005.

Effective January 31, 2004, the Employment
Agreement between the Company and William E. Peterson, Jr.,
former President of the Company, expired. For all severance
amounts payable to Mr. Peterson under his Employment
Agreement, the Companys expense will be recognized in 2004
and will be paid through January 2005.

Robert J. Wenzel, the Companys President
and Chief Operating Officer, was appointed Interim Chief
Executive Officer. L. Bruce Maloy was appointed Corporate
Secretary.

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##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS ON SCHEDULE

To the Board of Directors

Horizon Medical Products, Inc.


In connection with our audit of the consolidated
financial statements of Horizon Medical Products, Inc. and
subsidiaries referred to in our report dated February 14,
2004 which is included in the annual report to security holders
and incorporated by reference in Part II of this form, we
have also audited Schedule II for the years ended
December 31, 2003 and 2002. In our opinion, this schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.

/s/ Grant Thornton LLP

Atlanta, Georgia


February 13, 2004


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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS ON
CONSOLIDATED FINANCIAL

STATEMENT SCHEDULE


To the Board of Directors and Shareholders

Horizon Medical Products, Inc. and
Subsidiaries


Our audit of the December 31, 2001
consolidated financial statements included in the Horizon
Medical Products, Inc. December 31, 2001
Form 10-K referred to in our report dated February 26,
2002, except for Notes 6, 9, 12 and 17 as to which the date
is April 15, 2002 and Note 18 as to which the date is
September 9, 2002, appearing in this Annual Report on
Form 10-K of Horizon Medical Products, Inc., and
Subsidiaries also included an audit of the consolidated
financial statement schedule as of December 31, 2001, and
for the year ended December 31, 2001 listed in
Item 15(a)(2) of this Form 10-K. In our opinion, this
consolidated financial statement schedule presents fairly, in
all material respects, the information set forth therein when
read in conjunction with the related consolidated financial
statements.

/s/ PricewaterhouseCoopers, LLP

Birmingham, Alabama


September 9, 2002


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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES

SCHEDULE
II.     VALUATION AND QUALIFYING
ACCOUNTS

For the Years Ended December 31, 2001,
2002, and 2003

|                                               |  |           |            |         |  |              |           |               |  |         |          |   |  |   |           |  |  |   |            | 
|---------------------------------------------- |  | --------- | ---------- | ------- |  | ------------ | --------- | ------------- |  | ------- | -------- | - |  | - | --------- |  |  | - | ---------- | 
|                                               |  |           |            |         |  | Additions to |           |               |  |        
|                                               |  | Beginning |            | Charged |  | Costs and    |           |               |  | Ending 
|                                               |  | Balance   |            | Expense |  | Other(1)     |           | Deductions(2) |  | Balance
|                                               |  |           |            |         |  |              |           |               |  |        
|Year ended December 31, 2001:                  |  |           |            |         |  |              |           |               |  |         |          |   |  |   |           |  |  |   |            | 
|Allowance for returns and doubtful accounts    |  | $         | 2,224,822  |         |  | $            | 554,962   |               |  | $       | (688,931 | ) |  | $ | 1,174,360 |  |  | $ | 916,493    | 
|Inventory reserve                              |  | $         | 4,805,397  |         |  | $            | 195,623   |               |  |         |          |   |  | $ | 1,546,259 |  |  | $ | 3,454,761  | 
|Valuation allowance for deferred tax assets(3) |  | $         | 7,595,077  |         |  | $            | 2,001,393 |               |  |         |          |   |  |   |           |  |  | $ | 9,596,470  | 
|Year ended December 31, 2002:                  |  |           |            |         |  |              |           |               |  |         |          |   |  |   |           |  |  |   |            | 
|Allowance for returns and doubtful accounts    |  | $         | 916,493    |         |  | $            | 204,000   |               |  |         |          |   |  | $ | 686,537   |  |  | $ | 433,956    | 
|Inventory reserve                              |  | $         | 3,454,761  |         |  | $            | 1,460     |               |  |         |          |   |  | $ | 925,083   |  |  | $ | 2,531,138  | 
|Valuation allowance for deferred tax assets(3) |  | $         | 9,596,470  |         |  | $            | 3,239,840 |               |  |         |          |   |  |   |           |  |  | $ | 12,836,310 | 
|Year ended December 31, 2003:                  |  |           |            |         |  |              |           |               |  |         |          |   |  |   |           |  |  |   |            | 
|Allowance for returns and doubtful accounts    |  | $         | 433,956    |         |  | $            | 173,000   |               |  |         |          |   |  | $ | 133,950   |  |  | $ | 473,006    | 
|Inventory reserve                              |  | $         | 2,531,138  |         |  |              |           |               |  |         |          |   |  | $ | 489,595   |  |  | $ | 2,041,543  | 
|Valuation allowance for deferred tax assets(3) |  | $         | 12,836,310 |         |  |              |           |               |  |         |          |   |  | $ | 674,275   |  |  | $ | 12,162,035 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Other consists of reclassifications made to the
    previous years consolidated financial statements in order
    to make them comparable to the current presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(2) | 2002 deductions consist of amounts deducted
    resulting from the sale of the Companys distribution
    segment (Stepic).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(3) | The balances of the deferred income tax valuation
    reserve, $9,596,470 as of December 31, 2001 and
    January 1, 2002 and $12,836,310 as of December 31,
    2002 and January 1, 2003, have been revised from the
    previously reported balances of $2,001,393 and $3,239,840,
    respectively, in order to correct typographical errors in the
    2001 and 2002 schedules. Accordingly, the amounts previously
    reported in the Charged Expense column for the years
    ended December 31, 2001 and 2002 have also been revised.
    The amount previously reported as a Deduction in
    2001 of $5,593,684 has been revised to be reported as a
    Charged Expense of $2,001,393, and the amount
    previously reported as a Charged Expense in 2002 of
    $1,238,447 has been revised to an expense of $3,239,840.

F-39