##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION


WASHINGTON, D.C. 20549




---

FORM 10-K

(Mark One)



| |     |                                                                                         
| | --- | ----------------------------------------------------------------------------------------
| | [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|
| |     | For the financial year ended December 31,
    2002                                      

OR



| |      |                                                                                             
| | ---- | --------------------------------------------------------------------------------------------
| | [  ] | 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

Horizon Medical Products, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                                     |  |                                                   
|---------------------------------------------------------------------------------------------------- |  | --------------------------------------------------
|Georgia(State or other jurisdiction of
    incorporation or organization)                            |  | 58-1882343(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 x     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 x

The aggregate market value of the voting stock
held by non-affiliates of the Registrant was $7,786,602 on
June 28, 2002, based on the closing sale price of such
stock on The American Stock Exchange.

The number of shares outstanding of the
Registrants Common Stock, $.001 par value, as of
March 16, 2003 was 36,165,876.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Items 10, 11, 12
and 13 of Part III is incorporated by reference from the
proxy statement of the Company for the 2003 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 2003 Annual Meeting of Shareholders will be held
on or about May 13, 2003.









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TABLE OF CONTENTS



|                                              |                                                                                              |  |  |  |  |  |  | 
|--------------------------------------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                       
|                                              | Item 1. Description of Business                                                             
|                                              | Item 2. Properties                                                                          
|                                              | Item 3. Legal Proceedings                                                                   
|                                              | Item 4. Submission of Matters to a Vote of Security Holders                                 
|PART II                                      
|                                              | Item 5. Market for the Registrants Common Stock and Related Security Holder Matters        
|                                              | Item 6. Selected Financial Data                                                             
|                                              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation
|                                              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                         
|                                              | Item 8. Financial Statements and Supplementary Data                                         
|                                              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|PART III                                     
|                                              | Item 10. Directors and Executive Officers of the Registrant                                 
|                                              | Item 11. Executive Compensation                                                             
|                                              | Item 12. Security Ownership of Certain Beneficial Owners and Management                     
|                                              | Item 13. Certain Relationships and Related Transactions                                     
|                                              | Item 14. Controls and Procedures                                                            
|                                              | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                    
|SIGNATURES                                   
|EX-10.41 FIRST AMENDMENT TO LOAN AGREEMENT   
|EX-10.42 AMENDMENT TO EMPLOYMENT AGREEMENT   
|EX-10.43 AMENDMENT TO OPTION AGREEMENT       
|EX-10.44 AMENDMENT TO EMPLOYMENT AGREEMENT   
|EX-10.45 AMENDMENT TO EMPLOYMENT AGREEMENT   
|EX-10.46 OPTION AGREEMENT                    
|EX-10.47 OPTION AGREEMENT                    
|EX-10.48 LEASE AGREEMENT                     
|EX-21.1 SUBSIDIARIES OF THE COMPANY          
|EX-23.1 CONSENT OF GRANT THORNTON LLP        
|EX-23.2 CONSENT OF PRICEWATERHOUSECOOPERS LLP
|EX-99.1 SECTION 906 CERTIFICATION OF THE CEO 
|EX-99.2 SECTION 906 CERTIFICATION OF THE CFO 



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##### Table of Contents



TABLE OF CONTENTS

|                                       |  |                                                                                           |     |      |    | 
|-------------------------------------- |  | ----------------------------------------------------------------------------------------- | --- | ---- | -- | 
|                                       |  |                                                                                           |     | Page
|                                       |  |                                                                                           |     |     
|PART I                                
|1.                                     |  | Description of Business                                                                   |     |      | 1  | 
|2.                                     |  | Properties                                                                                |     |      | 19 | 
|3.                                     |  | Legal Proceedings                                                                         |     |      | 19 | 
|4.                                     |  | Submission of Matters to a Vote of Security
    Holders                                   |     |      | 20 | 
|PART II                               
|5.                                     |  | Market for the Registrants Common Stock and
    Related Security Holder Matters          |     |      | 20 | 
|6.                                     |  | Selected Financial Data                                                                   |     |      | 21 | 
|7.                                     |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |     |      | 23 | 
|8.                                     |  | Financial Statements and Supplementary Data                                               |     |      | 45 | 
|9.                                     |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |     |      | 45 | 
|PART III                              
|10.                                    |  | Directors and Executive Officers of the Registrant                                        |     |      | 45 | 
|11.                                    |  | Executive Compensation                                                                    |     |      | 45 | 
|12.                                    |  | Security Ownership of Certain Beneficial Owners
    and Management                        |     |      | 45 | 
|13.                                    |  | Certain Relationships and Related Transactions                                            |     |      | 45 | 
|14.                                    |  | Controls and Procedures                                                                   |     |      | 45 | 
|15.                                    |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |     |      | 46 | 
|SIGNATURES                             |  |                                                                                           | 51  |     
|Financial Statements of the Registrant |  |                                                                                           | F-1 |     

i



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##### Table of Contents






PART I




Item 1.     Description
of Business

Horizon Medical Products, Inc. (including its
subsidiaries, we or the Company),
headquartered in Manchester, Georgia, is a specialty medical
device company focused on manufacturing and/or 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.

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 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®, TitanPort 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. Through September 2002,
at which time the Company divested the Stepic business,
distribution of medical devices through Stepic during the first
nine months of 2002 comprised approximately 55.1% of the
Companys revenue. 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 Triumph 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 LifeJet
F-16 in January 2003. The Companys new safety infusion
needle, LifeGuard, designed for use with vascular access
ports, was released in June 2002 and its new central venous
catheter, LifeValve, was released in October 2002.

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Recapitalization

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

|                        |  |                                      |  |                             
|----------------------- |  | ------------------------------------ |  | ----------------------------
|Craig Krumwiede         |  | RMC Capital, LLC                     |  | Tahoe Partners              
|Mark Reichenbaum        |  | SJ Warner Charitable Remainder Trust |  | Winfield Capital Corporation
|Siam Partners II        |  | Scott Prince                         |  | Robert Priddy               
|Porter Partners         |  | Daniel Och                           |  | Joan Misher                 
|Douglas Levine          |  | Jacob Safier                         |  | Highview Ventures LLC       
|Harvard Investments     |  | Harvard Developments                 |  | Fountainhead Holdings, Ltd. 
|Flynn Corporation       |  | Gerald Cramer                        |  | David Chazen                
|Chased Congregation     |  | Carol Hill Trust                     |  | Ben Joseph Partners         
|E&M Real Property Trust |  | Dolphin Offshore Partners, LP        |  |                             

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;                                                             
|
| |  | 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;                                                                         
|
| |  | transactions with affiliates outside of the
    ordinary course of business; 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 Securityholders Agreement (the
Securityholders Agreement) or the Co-Promotion
Agreement with Medtronic (as described below), breach of any
covenant which remains uncured for 15 days, bankruptcy, a
change of control and failure to obtain shareholder approval of
certain proposals related to the Recapitalization at the
Companys 2002 annual meeting of shareholders (the
Annual Meeting) within 195 of the closing date of
March 16, 2002. On September 17, 2002, at the Annual
Meeting, the Companys shareholders approved all such
proposals relating to the Recapitalization. Generally, upon an
Event of Default, the holders of a majority of the aggregate
principal amount of Convertible Notes outstanding may declare
the unpaid principal and interest on the Notes immediately due
and payable. Additionally, Medtronic may, upon a breach of
covenants concerning the Co-Promotion Agreement or the
Convertible

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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,
2002, the aggregate amount of indebtedness which would be
subject to acceleration under the Note Purchase Agreement, the
Companys credit facility with LaSalle (as described below)
and the Junior Note (as described below), causing the same to
become immediately due and payable, was approximately $18.5
million. The holders of the Convertible Notes have the right to
convert in the aggregate a total of $270,000 of the Convertible
Notes into shares of the Companys common stock at a
conversion price of $0.01 per share for a total of
27,000,000 shares, subject to a downward adjustment upon
repayment of all or a portion of the amounts due, as described
below. If this $270,000 is converted, the Company will still be
obligated to repay, in the aggregate, $14,730,000 to the holders
of the Convertible Notes. As of March 16, 2003, 19,800,000
shares of the Companys common stock had been issued to
holders of the Convertible Notes upon conversion thereof.

This 27,000,000 shares also includes up to
3,300,000 shares which were issued to ComVest upon
conversion of the Bridge Note (as described below). Under the
conversion terms, if the principal amount of the Additional
Notes, together with all interest due, were paid in full on or
before 30 days following March 16, 2002, the Closing
Date for the transaction, then the maximum aggregate number of
shares of common stock that all the Convertible Notes may be
converted into is 22,500,000. The Additional Notes were not
repaid by April 15, 2002 and have not been repaid as of the
date of this report.

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The terms of the applicable conversion periods
and conversion amounts for the Convertible Notes are as follows:

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



---



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

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

The Company may prepay the Convertible Notes,
subject to no prepayment penalty within the first
12 months, with a prepayment penalty of 5% between months
12 to 15, and a prepayment penalty of 10% between months 15 to
24. On March 15, 2002, the Company and ComVest, as the
holder of an outstanding Bank of America Note (the 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

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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).


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 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 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 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, including

5



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removing a covenant that required that the
Company maintain Minimum Availability (as defined therein) under
the Loan Agreement of $4 million. These covenants include,
but are not limited to, the following:




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

The December Amendment also established a
$10 million revolving loan limit and provided that,
commencing January 1, 2003, the Company shall pay to the
Lender an annual facility fee of $100,000. As of
December 31, 2002, the Company had $2.1 million
available for borrowing under the revolving portion of the Loan
Agreement. 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, 2002, 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.

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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.

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, payable monthly beginning April 2002, and
matures on March 15, 2007. Beginning on May 1, 2003, a
principal payment on the Junior Note of $22,500 is payable on
the first day of each month until maturity of the Junior Note.
As of December 31, 2002, the Junior Note was subordinated
to approximately $1.628 million of senior indebtedness,
representing the indebtedness as of such date under the Loan
Agreement. The Junior Note ranks pari passuwith 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 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 us 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.

Pursuant to the Securityholders Agreement,
ComVest and Medtronic have been granted the following:



| |   |                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;                                                                                                                              
|
| |  | the right of first refusal to participate in any
    sale of Messrs. Hunts and/or Petersons shares of
    common stock to third parties upon the same terms and conditions;                                                                                          
|
| |  | the co-sale right of first refusal to participate
    in sales of shares of common stock by Messrs. Hunt and/or
    Peterson; and                                                                                                                                      
|
| |  | the bring-along right to require
    Messrs. Hunt and Peterson to sell the same percentage of
    shares of common stock as the holders of the rights propose to
    sell in the event that the rights holders propose to sell 51% or
    more of their common stock.

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | granting ComVest the right to designate one
    ComVest director and two additional independent directors;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | requiring that certain actions of the
    Companys board of directors include the affirmative vote
    of the ComVest director (including the acquisition of or change
    of control of the Company, the sale of all or any material
    portion of the Companys assets, the liquidation,
    dissolution or winding up of the Company, the provision of any
    loan to or the ownership of any stock by the Company in an
    unaffiliated corporation, the guarantee of indebtedness outside
    of the ordinary course of business, the declaration of dividends
    other than in common stock, the amendment of the Companys
    articles of incorporation or bylaws, and the issuance of stock
    options);
|
| |  | requiring us to establish and maintain an
    Executive Committee of the Companys Board of Directors
    (the Executive Committee) consisting of the ComVest
    director as Chairman, one of the independent directors
    designated by ComVest, and Mr. Hunt; and                                                                                                                                                                                                                                                                                                                                                                                                                                                

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| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | requiring that the Executive Committee approve
    certain actions.

Failure to comply with the Securityholders
Agreement is considered an Event of Default under the Note
Purchase Agreement.

On March 15, 2002, the Company entered into
a Co-Promotion Agreement with Medtronic (the Co-Promotion
Agreement) under which the Company promotes and provides
technical advice for Medtronics implantable drug delivery
systems which are used for the treatment of hepatic arterial
infusion and malignant pain. After basic sales training was
completed, sales representatives of the Company and of its
distributors have commenced promoting the sale of such systems,
are identifying appropriate patients for such systems, and,
after additional training, will provide assistance in the
implantation and refill procedure for such systems, for which
identification and assistance the Company is being compensated
by Medtronic. Such compensation is as follows: (i) $150 for
identification of each appropriate patient by the Companys
sales representative, (ii) where such appropriate patient
subsequently receives an implant of either infusion system
supporting such patient with hepatic arterial infusion therapy
or malignant pain therapy, $1,000 for the first implant with
respect to each sales representative and $600 for each implant,
and (iii) $100 per implant or refill procedure during which
the Companys sales representative provides such
assistance. An appropriate patient is a patient selected for a
therapy, that is either (i) indicated for chronic
intravascular infusion of floxuridine for the treatment
primarily of metastatic cancer or (ii) indicated for
malignant intractable pain in patients with lung, breast,
prostate, or colorectal cancer. Certain procedures, tests, or
screening trials must have been completed for such patients. 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, 2002, this would total approximately
$18.5 million as subject to repayment. 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.

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 grants 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 grants 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.

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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.

Acquisitions and Divestitures

Vascular Access
Products

IFM.On May 19,
1998, the Company acquired the vascular access port product line
of IFM, a wholly owned subsidiary of CryoLife, Inc., for
approximately $100,000 in cash and a promissory note in the
amount of $482,110, which has been paid. 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 June 22, 1999, IFM notified the Company
that the Company was in breach of the Manufacturing Agreement in
several respects, including non-payment of invoices from IFM to
the Company within 45 days after invoice date, the
Companys failure to provide a production schedule at the
end of the first six months of the terms of the Manufacturing
Agreement and on a monthly basis thereafter, the Companys
failure to provide packaging and labeling, and non-payment of
interest related to past due invoices.

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 Agreement was terminated, and the Company has no
further obligation, after October 9, 2000, to purchase
products from IFM. With such termination, the above-described
defaults were resolved. For a more detailed description of the
October 2000 acquisition by the Company, see the Companys
Form 8-K filed on October 24, 2000.

In consideration for the October 2000
acquisition, the Company agreed to pay IFM approximately
$6.0 million. Such purchase price was payable pursuant to a
promissory note (the Note) in 22 equal monthly
installments of principal and interest of $140,000 and a
$1 million payment upon the earlier of April 3, 2001,
or the closing of an equity financing, as described in the
October 2000 asset purchase agreement. The Note consisted of a
portion, equal to approximately $3.9 million, which bears
interest at 9% per year, and a non-interest bearing portion of
approximately $2.1 million. If the $1 million payment
under the Note were not made when due, and no other defaults
existed under the Note, then $1 million of the non-interest
bearing portion of the Note would be forgiven. In addition, at
such time as the principal balance has been paid down to
$1.145 million and assuming that there have been no
defaults under the Note, the remainder of the Note would have
been forgiven, and the Note canceled.

In the fourth quarter of 2000, the Company
recorded an impairment charge of $12.1 million to write
down the long-lived assets of IFM, primarily goodwill and
patents, to the fair value of its future cash flow.

On March 30, 2001, the Company completed the
sale of the IFM business. The consideration for the sale of the
IFM business consisted of cash in the amount of $2,250,500 at
closing, assumption of approximately $5,600,000 (as of
December 31, 2000) of debt under the Note issued in
connection with our 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 in a timely fashion, and in September 2001, the

9



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Company filed a complaint for declaratory
judgment and breach of contract against the purchaser. The
Company and IFM settled this lawsuit in August 2002.


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 has used a portion
of, and is using 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. (See
Note 18 of the notes to the Companys audited
consolidated financial statements contained elsewhere herein for
further discussion on the sale of Stepic).

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

Description of Business by Industry
Segment

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

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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 part size. The Companys 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 as chemotherapy
agents, antibiotics or analgesics) and frequent blood samplings.
Port sales totaled $17.9 million, $18.5 million and
$16.9 million for fiscal 2000, 2001 and 2002, 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®, TriumphTMVTX® and
Genesis VTX®; (ii) LifePort®;
(iii) Triumph-1®; (iv) Infuse-a-Port®;
(v) OmegaPort®; and (vi) TitanPort.

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
$3.8 million, $2.9 million and $2.9 million for
fiscal 2000, 2001 and 2002, respectively.

The Companys catheters include the
following families of products: (i) Circle C® chronic
and acute hemodialysis catheters, including the new
LifeJetTM and LifeJetTM F-16 chronic
hemodialysis catheters; (ii) Pheres-Flow® triple lumen
catheters; and (iii) peripherally inserted central venous
catheters. 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 focuses primarily on vascular
and general 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. The Company also has 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

11



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seen great success in selling its new and
differentiated technologies to the end users regardless of GPO
affiliation.


In March 1998 the Company entered into a
purchasing agreement with Premier Purchasing Partners, L.P.
(Premier), a national purchasing group that includes
over 1,800 owned, leased, managed and affiliated members. In
February 1999, the Company extended the term of the Premier
Agreement to February 28, 2004 and added the following
products to the agreement: vascular access ports, port
introducers and Huber needles. Pursuant to the agreement, the
Company was an approved vendor for the hospitals participating
in Premiers purchasing program. Premier was entitled to
receive an administrative fee of 2% on gross sales of the
Companys products to its members. In connection with the
execution of the purchasing agreement, the Company issued to
Premier a warrant to purchase 500,000 shares of the
Companys stock for $14.50 per share which vests as and
only if certain specific sales goals in the warrant were met.
The right to purchase shares of common stock under the warrant
vested annually in increments of 100,000 shares only upon the
achievement of certain specified minimum annual sales and/or
minimum cumulative sales of the Companys products to
participating Premier shareholders. During the first three years
under the warrant term (ending June 30, 2001), there was no
vesting under the warrant. In September 2001, Premier terminated
its agreement with the Company. As a result, the warrant was
terminated effective with the termination date of the agreement.

On January 1, 1999, the Company amended its
Consulting and Services Agreement with Healthcare Alliance,
Inc., an affiliate of one of the Companys directors (the
Alliance Agreement). 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 that results
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 GPOs, and the Company
achieved amounts of incremental sales revenue under its
agreement with the particular GPO (at an exercise price of the
closing stock price of the Companys common stock on the
effective date of the purchasing agreement). In addition, under
the amended agreement, the Company granted an option to
Healthcare Alliance for the purchase of 45,000 shares of the
Companys common stock. 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
exercise price for these options was the closing stock price of
the Companys common stock on the day that the options
vested. The options were exercisable for a period of five years
upon vesting. The Alliance Agreement expired on
December 31, 2001, and none of the options had vested.

The Company is currently a party to group
purchasing agreements with AmeriNet Inc. and MedAssets HSCA
(formerly Health Services Corporation of America
(HSCA)), 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 MedAssets HSCA agreement serves
approximately 1,000 hospitals, provides for a term of through
September 30, 2002 and covers the Companys products
in its 2000 product catalog. The Company anticipates discussions
in the near future with MedAssets HSCA concerning a new
agreement and an updated product coverage under such agreement.
The Company pays administrative fees on all sales through
certain of these purchasing agreements. During fiscal 2002, the
Company generated approximately $2.34 million in sales on which
administrative fees were paid.

The Company has entered into a Co-Promotion
Agreement with Medtronic under which the Company is promoting
and providing technical assistance for Medtronics
implantable drug delivery systems which are used for the
treatment of hepatic arterial infusion and malignant pain. After
basic sales training, sales representatives of the Company and
its distributors are promoting the sale of such systems,
identifying appropriate patients for such systems, and after
additional training, will provide assistance in the implantation
and refill procedure for such systems, for which identification
and assistance the Company is being compensated by Medtronic.

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| |                     
| | --------------------
| | 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.

For the nine months ended September 30,
2002, Stepic generated approximately 62.8% of its sales through
distribution of products of three major manufacturers: Arrow
International, Ballard Medical, and Pall Biomedical. Arrow sales
totaled $13.0 million, $13.5 million and
$9.7 million for fiscal 2000, fiscal 2001 and the nine
months ended September 30, 2002, respectively; Ballard
sales totaled $6.6 million, $6.1 million and
$3.8 million in fiscal 2000, fiscal 2001 and the nine
months ended September 30, 2002, respectively; Pall sales
totaled $6.6 million, $5.3 million and $334,000 in fiscal
2000, fiscal 2001 and the nine months ended September 30,
2002, respectively. Stepic is among the top distributors in the
country for each of these manufacturers. As described above, 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, 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.



| |              
| | -------------
| | Manufacturing

At the Companys Manchester, Georgia
facility, the Company manufactures its complete line of ports;
infusion sets; and Circle C® hemodialysis catheters,
Pheres-Flow® 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 LifeValveTM 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. 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.



| |             
| | ------------
| | Distribution

As noted above, the Company sold substantially
all of the assets of Stepic, the Companys medical
distribution business, in September 2002.

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

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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 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. 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.

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
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.

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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, 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 recently
completed an inspection of the Companys Manchester,
Georgia facility and in September 2002 issued a
Form FDA-483 specifying five observations as a result of
its inspections. The Company has implemented corrective
procedures in response to such observations and has forwarded
its written response to the observations to the FDA.

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 FDA certifying that the product
to be exported meets certain criteria and FDA issues a
certificate to facilitate device export.

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.

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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 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 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.

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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 numerous United States
patents and patent applications, as well as numerous 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® acute and chronic catheters,
which includes the LifeJet and LifeJet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 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

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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®, Pheres-Flow®, Vortex®, VTX®,
LifeJet, LifeGuard, GenesisTM VTX®
and LifeValveTM 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 ad
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.

Research and development expenses accounted for
approximately $125,000 in 2001 (less than 1% of the
Companys net sales) and $381,000 in 2002 (2% of the
Companys net sales). The Company did not incur material
research and development expenses during 2000. The 2001 amount
was used primarily to incorporate the VTX® technology into
the Companys other line of ports, including
LifePort®VTX® and TriumphTMVTX® and to
develop the Companys LifeJetTM chronic dialysis
catheter. The 2002 amount was used primarily to develop the
LifeGuardTM safety needle, the LifeValveTM
valved central venous catheter and the LifeJetTM
chronic dialysis catheter.

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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, 2002, the Company had
approximately 143 full-time employees.

Availability of Company Information

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.
Information contained in the Companys website is not
incorporated by reference into this report.




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.




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

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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. The
suit is in the discovery phase, and the Company is contesting
the matter vigorously. At this time it is not possible for the
Company to evaluate the likelihood of an unfavorable outcome or
to estimate whether the ultimate result will have a material
adverse effect on the Companys operations.


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 is cooperating fully with the request
and has produced documents responsive to the subpoena.

On September 4, 2002, the Company received
from the FDA a Form FDA-483 specifying five observations. The
Company has responded to such observations. See Government
Regulation above.

In November 2002, the Company was served with a
complaint filed in the United States District Court for the
Northern District of Georgia by Chepstow Limited
(Chepstow) against the Company, its Chief Executive
Officer, Marshall B. Hunt, its President, William E.
Peterson, Jr., and members of Mr. Hunts family and a
family limited partnership established by Mr. Hunt and his
wife. Chepstow alleges that it has a judgment on a promissory
note against Mr. Hunt, that it is engaging in post-judgment
collection efforts, and that the defendant parties in this
action have engaged with Mr. Hunt in fraudulent conveyances
of Mr. Hunts assets. Specifically, with respect to
the Company, Chepstow alleges that, in March 2002,
Mr. Hunt transferred 225,000 shares of the Companys
common stock to his family limited partnership, that such
transfer was a fraudulent conveyance under Georgia law, that the
Company assisted in such transfer, and that the Company engaged
in an unlawful conspiracy to hinder, delay or defraud Chepstow
as Mr. Hunts creditor. Chepstow seeks to void such
transfers and injunctive relief, compensatory damages, and
punitive damages from the defendants, including the Company. The
Company is vigorously contesting such matter and in January 2003
filed a motion to dismiss the action against the Company. At
this time, it is not possible for the Company to evaluate the
likelihood of an unfavorable outcome or to estimate whether the
ultimate result will have a material adverse effect on the
Companys operations.

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.

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.

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|         |                                                        
|-------- | -------------------------------------------------------
|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 2002.




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 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 | 

|                   |  |      |        |     |  |  |       | 
|------------------ |  | ---- | ------ | --- |  |  | ----- | 
|Calendar Year 2001 |  | High |        | Low
|                   |  |      |        |    
|First Quarter      |  |      | $1.125 |     |  |  | $0.25 | 
|Second Quarter     |  |      | $1.84  |     |  |  | $0.50 | 
|Third Quarter      |  |      | $1.59  |     |  |  | $0.84 | 
|Fourth Quarter     |  |      | $1.05  |     |  |  | $0.44 | 

As of March 15, 2003, there were 122 record
holders of the Companys common stock. On March 27,
2003, the last reported sales price of the common stock on The
American Stock Exchange was $0.36 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 2002

In the fourth quarter of 2002, the Company issued
an aggregate of 17,050,000 shares of its common stock in
connection with 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.
See Notes 6 and 17 of the notes to the Companys
audited consolidated financial statements contained herein.






|         |                        
|-------- | -----------------------
|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, 2002 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

21



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##### Table of Contents



and the Consolidated Financial Statements and
related Notes thereto of the Company included elsewhere in this
Form 10-K.


|                                                                                                    |                                          |                                       |         |      |       |      |         |       |       |      |         |         |         |   |         |        |        |   |         |        |         |  
|--------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------------------------------------- | ------- | ---- | ----- | ---- | ------- | ----- | ----- | ---- | ------- | ------- | ------- | - | ------- | ------ | ------ | - | ------- | ------ | ------- | -
|                                                                                                    |                                          |                                      
|                                                                                                    |                                          | Years Ended December 31,             
|                                                                                                    |                                          |                                      
|                                                                                                    |                                          | 1998                                  |         | 1999 |       | 2000 |         | 2001  |       | 2002
|                                                                                                    |                                          |                                       |         |      |       |      |         |       |       |     
|                                                                                                    |                                          |                                      
|                                                                                                    |                                          | (In thousands, except per share data)
|Statement of Operations Data:                                                                       |                                          |                                       |         |      |       |      |         |       |       |      |         |         |         |   |         |        |        |   |         |       
|Net sales                                                                                           |                                          | $                                     | 30,141  |      |       | $    | 32,661  |       |       | $    | 25,717  |         |         | $ | 24,701  |        |        | $ | 21,712  |       
|Cost of goods sold                                                                                  |                                          |                                       | 13,731  |      |       |      | 15,092  |       |       |      | 17,467  |         |         |   | 11,410  |        |        |   | 9,343   |       
|                                                                                                    |                                          |                                       |         |      |       |      |         |       |       |      |         |         |         |   |         |        |        |   |         |       
|Gross profit                                                                                        |                                          |                                       | 16,410  |      |       |      | 17,569  |       |       |      | 8,250   |         |         |   | 13,291  |        |        |   | 12,369  |       
|Selling, general and administrative expenses                                                        |                                          |                                       | 11,783  |      |       |      | 13,781  |       |       |      | 14,030  |         |         |   | 16,043  |        |        |   | 16,110  |       
|Impairment charge                                                                                   |                                          |                                       |        |      |       |      |        |       |       |      | 12,086  |         |         |   |        |        |        |   |        |       
|                                                                                                    |                                          |                                       |         |      |       |      |         |       |       |      |         |         |         |   |         |        |        |   |         |       
|Income (loss) from operations                                                                       |                                          |                                       | 4,627   |      |       |      | 3,788   |       |       |      | (17,866 | )       |         |   | (2,752  | )      |        |   | (3,741  | )     
|Interest expense, net                                                                               |                                          |                                       | (3,103  | )    |       |      | (2,063  | )     |       |      | (2,345  | )       |         |   | (2,208  | )      |        |   | (2,846  | )     
|Other income (expense)                                                                              |                                          |                                       | 46      |      |       |      | 99      |       |       |      | 115     |         |         |   | 68      |        |        |   | (15     | )     
|                                                                                                    |                                          |                                       |         |      |       |      |         |       |       |      |         |         |         |   |         |        |        |   |         |       
|Income (loss) before income taxes                                                                   |                                          |                                       | 1,570   |      |       |      | 1,824   |       |       |      | (20,096 | )       |         |   | (4,892  | )      |        |   | (6,602  | )     
|Income tax provision (benefit)                                                                      |                                          |                                       | 962     |      |       |      | 820     |       |       |      | (1,006  | )       |         |   |        |        |        |   |        |       
|                                                                                                    |                                          |                                       |         |      |       |      |         |       |       |      |         |         |         |   |         |        |        |   |         |       
|                                                                                                    | Income (loss) from continuing operations |                                       |         | 608  |       |      |         | 1,004 |       |      |         | (19,090 | )       |   |         | (4,892 | )      |   |         | (6,602 | )      
|Discontinued operations:                                                                            |                                          |                                       |         |      |       |      |         |       |       |      |         |         |         |   |         |        |        |   |         |       
|Income (loss) from operations of
    discontinued distribution segment (including gain on disposal) |                                          |                                       | 423     |      |       |      | 661     |       |       |      | (671    | )       |         |   | (231    | )      |        |   | 3,175   |       
|Extraordinary loss on early extinguishments of
    debt, net                                        |                                          |                                       | (83     | )    |       |      |        |       |       |      |        |         |         |   |        |        |        |   | (6,641  | )     
|                                                                                                    |                                          |                                       |         |      |       |      |         |       |       |      |         |         |         |   |         |        |        |   |         |       
|Extraordinary gain on early extinguishment of put
    feature                                       |                                          |                                       | 1,100   |      |       |      |        |       |       |      |        |         |         |   |        |        |        |   |        |       
|Effect of a change in accounting principle
    pursuant to adoption of SFAS 142.                    |                                          |                                       |        |      |       |      |        |       |       |      |        |         |         |   |        |        |        |   | (16,102 | )     
|                                                                                                    |                                          |                                       |         |      |       |      |         |       |       |      |         |         |         |   |         |        |        |   |         |       
|                                                                                                    |                                          | Net income (loss)                     |         | $    | 2,048 |      |         | $     | 1,665 |      |         | $       | (19,761 | ) |         | $      | (5,123 | ) |         | $      | (26,170 | )
|                                                                                                    |                                          |                                       |         |      |       |      |         |       |       |      |         |         |         |   |         |        |        |   |         |       
|Net income (loss) per share from continuing
    operations  basic and diluted                      |                                          | $                                     | 0.05    |      |       | $    | 0.08    |       |       | $    | (1.43   | )       |         | $ | (0.37   | )      |        | $ | (0.32   | )     
|Income (loss) from operations of
    discontinued distribution segment (including gain on disposal) |                                          |                                       | 0.03    |      |       |      | 0.04    |       |       |      | (0.05   | )       |         |   | (0.01   | )      |        |   | 0.15    |       
|Extraordinary loss on extinguishments of debt                                                       |                                          |                                       | (0.01   | )    |       |      |        |       |       |      |        |         |         |   |        |        |        |   | (0.32   | )     
|Extraordinary gain on extinguishment of put
    feature                                             |                                          |                                       | 0.10    |      |       |      |        |       |       |      |        |         |         |   |        |        |        |   |        |       
|Effect of a change in accounting principle
    pursuant to adoption of SFAS 142.                    |                                          |                                       |        |      |       |      |        |       |       |      |        |         |         |   |        |        |        |   | (0.78   | )     
|                                                                                                    |                                          |                                       |         |      |       |      |         |       |       |      |         |         |         |   |         |        |        |   |         |       
|Net income (loss) per share 
    basic and diluted                                                 |                                          | $                                     | 0.17    |      |       | $    | 0.12    |       |       | $    | (1.48   | )       |         | $ | (0.38   | )      |        | $ | (1.27   | )     
|                                                                                                    |                                          |                                       |         |      |       |      |         |       |       |      |         |         |         |   |         |        |        |   |         |       
|Weighted average common shares
    outstanding  basic                                              |                                          |                                       | 12,187  |      |       |      | 13,366  |       |       |      | 13366   |         |         |   | 13,366  |        |        |   | 20,685  |       
|Weighted average common shares
    outstanding  diluted                                            |                                          |                                       | 12,412  |      |       |      | 13,373  |       |       |      | 13,366  |         |         |   | 13,366  |        |        |   | 20,685  |       
|Balance Sheet Data (end of year):                                                                   |                                          |                                       |         |      |       |      |         |       |       |      |         |         |         |   |         |        |        |   |         |       
|Cash and cash equivalents                                                                           |                                          | $                                     | 6,232   |      |       | $    | 1,991   |       |       | $    | 164     |         |         | $ | 2,749   |        |        | $ | 3,712   |       
|Working capital                                                                                     |                                          | $                                     | 28,767  |      |       | $    | 29,927  |       |       | $    | 15,259  |         |         | $ | (21,359 | )      |        | $ | 9,460   |       
|Total assets                                                                                        |                                          | $                                     | 104,637 |      |       | $    | 102,397 |       |       | $    | 86,038  |         |         | $ | 71,348  |        |        | $ | 37,190  |       
|Long-term debt, net of current maturities                                                           |                                          | $                                     | 47,074  |      |       | $    | 44,999  |       |       | $    | 40,598  |         |         | $ | 1,355   |        |        | $ | 18,342  |       
|Total shareholders equity                                                                           |                                          | $                                     | 41,431  |      |       | $    | 43,069  |       |       | $    | 22,332  |         |         | $ | 18,282  |        |        | $ | 15,330  |       

22



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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. Such risks and uncertainties
include, among others, the possible inadequacy of the
Companys cash flow from operations and cash available from
external financing, the possibility of a breach of covenants in
the Companys senior credit facility, the satisfaction of
which cannot be objectively determined, the Companys
limited manufacturing experience, the inability to efficiently
manufacture different products, the possible failure to
successfully commence the manufacturing of new products, the
possible failure to maintain or increase production volumes of
new or existing products in a timely or cost-effective manner,
the possible failure to maintain compliance with applicable
regulatory requirements, the dependence on patents, trademarks,
licenses and proprietary rights, the Companys potential
exposure to product liability, the inability to introduce new
products, the Companys reliance on a few large customers,
the Companys dependence on key personnel, the fact that
the Company is subject to control by certain shareholders,
pricing pressure related to healthcare reform and managed care
and other healthcare provider organizations, the possible
failure to comply with applicable federal, state or foreign laws
or regulations, limitations on third-party reimbursement, the
highly competitive and fragmented nature of the medical devices
industry, deterioration in general economic conditions and the
Companys ability to pay its indebtedness. Management
believes that these forward-looking statements are reasonable.
However, you should not place undue reliance on such statements.
These statements are based on current expectations and speak
only as of the date of such statements. The Company undertakes
no obligation to publicly update or revise any forward-looking
statement, whether as a result of future events, new information
or otherwise. Additional information concerning the risks and
uncertainties listed above, and other factors that you may wish
to consider, is contained in Managements Discussion
and Analysis of Financial Condition and Results of
Operations 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

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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, TitanPortTM 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 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, LifeJetTM, in December 2001
and its LifeJetTMF-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, LifeValveTM, was released in October 2002.

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 has used a portion
of, and is using 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. (See
Note 18 of the notes to the Companys

24



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##### Table of Contents



audited consolidated financial statements
contained elsewhere herein for further discussion on the sale of
Stepic).


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

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 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.

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 Certain
Relationships and Related Transactions and Note 11 of
the notes to the Companys audited consolidated financial
statements contained elsewhere herein.

25



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##### Table of Contents



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,
|                                                                                                    |                        |                         
|                                                                                                    |                        | 2000                     |       | 2001 |   | 2002
|                                                                                                    |                        |                          |       |      |   |     
|Net sales                                                                                           |                        |                          | 100.0 | %    |   |      | 100.0 | %    |   |  | 100.0  | %    
|Cost of goods sold                                                                                  |                        |                          | 67.9  |      |   |      | 46.2  |      |   |  | 43.0   |      
|                                                                                                    |                        |                          |       |      |   |      |       |      |   |  |        |      
|Gross profit                                                                                        |                        |                          | 32.1  |      |   |      | 53.8  |      |   |  | 57.0   |      
|Selling, general and administrative expenses                                                        |                        |                          | 54.6  |      |   |      | 65.0  |      |   |  | 74.2   |      
|Impairment charge                                                                                   |                        |                          | 47.0  |      |   |      |      |      |   |  |       |      
|                                                                                                    |                        |                          |       |      |   |      |       |      |   |  |        |      
|Loss from operations                                                                                |                        |                          | (69.5 | )    |   |      | (11.1 | )    |   |  | (17.2  | )    
|                                                                                                    |                        |                          |       |      |   |      |       |      |   |  |        |      
|Other income (expense):                                                                             |                        |                          |       |      |   |      |       |      |   |  |        |      
|                                                                                                    | Interest expense, net  |                          |       | (9.1 | ) |      |       | (8.9 | ) |  |        | (13.1 | )
|                                                                                                    | Other income (expense) |                          |       |     |   |      |       |     |   |  |        |      |  
|                                                                                                    |                        |                          |       |      |   |      |       |      |   |  |        |      
|Loss before income taxes                                                                            |                        |                          | (78.1 | )    |   |      | (19.8 | )    |   |  | (30.4  | )    
|Income tax benefit                                                                                  |                        |                          | 3.9   |      |   |      |      |      |   |  |       |      
|                                                                                                    |                        |                          |       |      |   |      |       |      |   |  |        |      
|Loss from continuing operations                                                                     |                        |                          | (74.2 | )    |   |      | (19.8 | )    |   |  | (30.4  | )    
|Income (loss) from operations of
    discontinued distribution segment (including gain on disposal) |                        |                          | (2.6  | )    |   |      | (0.1  | )    |   |  | 14.6   |      
|Extraordinary loss on extinguishment of debt                                                        |                        |                          |      |      |   |      |      |      |   |  | (30.6  | )    
|Effect of a change in accounting principle
    pursuant to adoption of SFAS 142                     |                        |                          |      |      |   |      |      |      |   |  | (74.2  | )    
|                                                                                                    |                        |                          |       |      |   |      |       |      |   |  |        |      
|Net loss                                                                                            |                        |                          | (76.8 | )%   |   |      | (20.7 | )%   |   |  | (120.5 | )%   
|                                                                                                    |                        |                          |       |      |   |      |       |      |   |  |        |      



| |                                                                          
| | -------------------------------------------------------------------------
| | 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.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.

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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.

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.

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.

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.



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2001 compared
    to Year Ended December 31, 2000

Net Sales.Net sales
decreased 4% to $24.7 million in 2001 from
$25.7 million in 2000. The decrease in sales resulted from
the sale of the IFM product line as well as the discontinuance
of the Possis Perma-Seal

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graft product line early in the first quarter of
2001. The decrease was partially offset by an increase in port
sales and lower distributor rebates in 2001 compared to 2000.


Gross Profit.Gross
profit increased 61.1% to $13.3 million in 2001, from
$8.2 million in 2000. Gross margin increased to 53.8% in
2001, from 32.1% in 2000. The increase in gross profit was
primarily attributable to the 2000 year-end inventory and other
adjustments of approximately $5.2 million that were made in
connection with managements decisions in the fourth
quarter of 2000 to deal with changing business conditions. In
addition, improved gross margin percentage was due to higher
average selling prices in 2001 and lower distributor rebates
compared to 2001.

Selling, General and Administrative
Expenses.SG&A increased
approximately $2 million or 14.4% in 2001 as compared to
2000. The increase in SG&A was primarily the result of the
restructuring charges in 2001 which consisted of new product
launch costs, turnaround and other consulting fees, employment
severances, PR campaign fees and bad debt expense recorded on
the amounts outstanding from Vascutech. The increase in SG&A
was partially offset by reduced expenses, including salaries,
travel, legal and amortization expense. SG&A expenses
increased as a percentage of net sales to 65% in 2001 from 54.6%
in 2000 due to increased expenses and decreased sales.

Impairment Charge.During the fourth quarter of 2000, the Company recorded a
$12.1 million impairment charge related to the intangible
assets of the Companys IFM product line. This charge
writes the IFM long-lived assets down to the fair value of
managements expected cash flows.

Interest Expense.Interest expense, net of interest income, decreased
approximately $138,000 or 5.9% from $2.3 million in 2000 to
$2.2 million in 2001. The decrease is due to a decrease in
interest rates as well as lower debt outstanding during 2001 of
approximately $41.9 million at the end of 2001 versus
approximately $52 million outstanding at the end of 2000.
The reduction in debt was the result of proceeds generated from
the sale of the IFM business, payments under the Forbearance
Agreement with Bank of America as well as payments under the
Working Capital Loan pursuant to the sweep arrangement with Bank
of America. Interest expense allocated to the distribution
segment was $2.4 million in 2001 compared with
$3 million in 2000 and both have been reclassed to
discontinued operations in the Companys Statement of
Operations for 2001 and 2000.

Income Taxes.During
the year ended December 31, 2001, the Company generated an
income tax benefit of approximately $2 million which was
reduced fully by a valuation allowance established on the
Companys deferred tax assets generated by the income tax
benefit. During the year ended December 31, 2000, the
Company recorded an income tax benefit of approximately
$1 million. The income tax benefit for both years consists
of the federal and state benefits, adjusted for certain
nondeductible items, reduced by a valuation allowance on the
Companys deferred tax assets. The valuation allowance is
deemed necessary due to uncertainties indicated by the
Companys taxable loss in both 2001 and 2000 and forecasted
taxable loss for 2002. The resulting $1 million benefit in
2000 represents the refunds available from net operating loss
carrybacks offset by the valuation allowance on deferred items
arising in previous years.

Discontinued
operations.Loss from operations of
the Companys discontinued distribution segment (Stepic)
was approximately $231,000 in 2001 compared with approximately
$671,000 in 2000. The decrease in loss from operations of the
discontinued segment primarily resulted from lower interest
expenses in 2001 compared to 2000.

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Quarterly Results

The following tables set forth quarterly
statement of operations data for 2001 and 2002. 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,
|                                                                       |  | 2001                                  |       | 2001     |  | 2001          |        | 2001        
|                                                                       |  |                                       |       |          |  |               |        |             
|                                                                       |  |                                      
|                                                                       |  | (In thousands, except per share data)
|Net sales                                                              |  | $                                     | 7,286 |          |  | $             | 6,312  |              |  | $ | 5,564  |   |  | $ | 5,539  |  
|Cost of goods sold                                                     |  |                                       | 3,327 |          |  |               | 2,825  |              |  |   | 2,822  |   |  |   | 2,436  |  
|                                                                       |  |                                       |       |          |  |               |        |              |  |   |        |   |  |   |        |  
|Gross profit                                                           |  |                                       | 3,959 |          |  |               | 3,487  |              |  |   | 2,742  |   |  |   | 3,103  |  
|Selling, general and administrative expenses                           |  |                                       | 3,841 |          |  |               | 4,247  |              |  |   | 3,858  |   |  |   | 4,097  |  
|                                                                       |  |                                       |       |          |  |               |        |              |  |   |        |   |  |   |        |  
|Income (loss) from operations                                          |  |                                       | 118   |          |  |               | (760   | )            |  |   | (1,116 | ) |  |   | (994   | )
|                                                                       |  |                                       |       |          |  |               |        |              |  |   |        |   |  |   |        |  
|Interest expense, net                                                  |  |                                       | (670  | )        |  |               | (593   | )            |  |   | (496   | ) |  |   | (448   | )
|Other income (expense)                                                 |  |                                       | 29    |          |  |               | 20     |              |  |   | 19     |   |  |   | (1     | )
|                                                                       |  |                                       |       |          |  |               |        |              |  |   |        |   |  |   |        |  
|Loss from continuing operations                                        |  |                                       | (523  | )        |  |               | (1,333 | )            |  |   | (1,593 | ) |  |   | (1,443 | )
|Discontinued operations:                                               |  |                                       |       |          |  |               |        |              |  |   |        |   |  |   |        |  
|Income (loss) from operations of
    discontinued distribution segment |  |                                       | 89    |          |  |               | (8     | )            |  |   | (237   | ) |  |   | (75    | )
|                                                                       |  |                                       |       |          |  |               |        |              |  |   |        |   |  |   |        |  
|Net loss                                                               |  | $                                     | (434  | )        |  | $             | (1,341 | )            |  | $ | (1,830 | ) |  | $ | (1,518 | )
|                                                                       |  |                                       |       |          |  |               |        |              |  |   |        |   |  |   |        |  
|Basic and diluted earnings per share:                                  |  |                                       |       |          |  |               |        |              |  |   |        |   |  |   |        |  
|Loss from continuing operations                                        |  | $                                     | (0.04 | )        |  | $             | (0.10  | )            |  | $ | (0.12  | ) |  | $ | (0.11  | )
|Income (loss) from operations of
    discontinued distribution segment |  |                                       | 0.01  |          |  |               |       |              |  |   | (0.02  | ) |  |   | (0.01  | )
|                                                                       |  |                                       |       |          |  |               |        |              |  |   |        |   |  |   |        |  
|Net loss per share  basic and diluted                                 |  | $                                     | (0.03 | )        |  | $             | (0.10  | )            |  | $ | (0.14  | ) |  | $ | (0.11  | )
|                                                                       |  |                                       |       |          |  |               |        |              |  |   |        |   |  |   |        |  

|                                             |  |                                       |        |          |  |               |       |              |  |   |       |   |  |   |       |  
|-------------------------------------------- |  | ------------------------------------- | ------ | -------- |  | ------------- | ----- | ------------ |  | - | ----- | - |  | - | ----- | -
|                                             |  |                                      
|                                             |  | 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  | )
|                                             |  |                                       |        |          |  |               |       |              |  |   |       |   |  |   |       |  
|Interest expense, net                        |  |                                       | (637   | )        |  |               | (746  | )            |  |   | (724  | ) |  |   | (739  | )
|Other income (expense)                       |  |                                       | (4     | )        |  |               | (5    | )            |  |   | (1    | ) |  |   | (4    | )
|                                             |  |                                       |        |          |  |               |       |              |  |   |       |   |  |   |       |  
|Loss from continuing operations              |  |                                       | (4,008 | )        |  |               | (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 | )
|Extraordinary loss on extinguishment of debt                                                                            |  |                                       | (6,641  | )        |  |               |      |              |  |   |      |   |  |   |       |  
|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                                                                                         |  | $                                     | (0.29   | )        |  | $             | (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  | )
|Extraordinary loss on extinguishment of debt                                                                            |  |                                       | (0.48   | )        |  |               |      |              |  |   |      |   |  |   |       |  
|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  | )
|                                                                                                                        |  |                                       |         |          |  |               |       |              |  |   |       |   |  |   |        |  

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) provided by operating
activities was ($4.1 million) for fiscal 2002 compared with
$6.4 million for fiscal 2001 and $4.9 million in
fiscal 2000. The increase in cash used in operations during 2002
compared to 2001 was primarily attributable to the
recapitalization expenses paid in 2002, as well as the increased
loss from operations in 2002 from 2001 (see above description in
Results of Operations). In addition, there were
higher reductions in accounts payable and accrued expenses in
2002 compared with 2001 as well as decreased reductions in
accounts receivable and inventory levels in 2002 compared with
2001. The increase in cash provided by operations during 2001
over 2000 was substantially the result of income tax refunds
received due to net operating loss carrybacks as well as lower
income taxes paid during 2001 compared to 2000.

Net cash provided by (used in) investing
activities was approximately $12.3 million for fiscal 2002
compared with $2.4 million for fiscal 2001 and
($1.3 million) for fiscal 2000. Cash provided by investing
activities in 2002 consisted primarily of cash proceeds from the
sale of Stepic of approximately $12.3 million and also cash
proceeds from the Companys Chief Executive Officer and
President for payment of their shareholder notes outstanding.
Cash provided by investing activities in 2001 consisted of cash
proceeds from the sale of IFM of approximately $2.3 million
and the payment of approximately $474,000 from the
Companys Chief Executive Officer for the Shareholder
Bridge Loan. Cash used in investing activities during 2002, 2001
and 2000 consisted primarily of capital expenditures for the
Companys facilities. In addition, cash used in investing
activities for 2000 consisted of a short-term bridge loan issued
to the Companys CEO.

Net cash used in financing activities was
$7.3 million for fiscal 2002, compared with
$6.2 million for fiscal 2001 and $5.4 million for
fiscal 2000. Financing activities in 2002 substantially
consisted of debt issuance costs

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paid as part of the Recapitalization of
approximately $1.5 million as well as net proceeds from the
issuance of long-term debt and payment of debt on the
Companys BofA Credit Facility, both pursuant to the
Recapitalization. In addition, 2002 financing activities
included borrowings from and repayments of its Revolving Loan
under the LaSalle Loan Agreement and the utilization of cash
proceeds from the sale of Stepic to pay down all amounts then
outstanding under its Revolving Loan under its LaSalle Credit
Facility of approximately $7.8 million. In both 2001 and
2000, financing activities primarily consisted of principal
payments on outstanding debt attributable to depository funds
applied against the working capital loan under the
Companys BofA Credit Facility pursuant to the
Companys sweep arrangement with Bank of America. In
addition, 2001 financing activities consisted of a principal
payment of its BofA Credit Facility of approximately
$2.3 million from the proceeds of the sale of IFM. See Note
6 of the notes to the Companys audited consolidated
financial statements included herein.


The Companys approximate total scheduled
future payments under contractual obligations and indebtedness
outstanding as of December 31, 2002 are as follows:

|                 |  |      |           |         |  |      |            |      |  |      |           |            |  |       |         |  |  |   |         |  |  |   |           |  |  |   |            | 
|---------------- |  | ---- | --------- | ------- |  | ---- | ---------- | ---- |  | ---- | --------- | ---------- |  | ----- | ------- |  |  | - | ------- |  |  | - | --------- |  |  | - | ---------- | 
|                 |  | 2003 |           | 2004(1) |  | 2005 |            | 2006 |  | 2007 |           | Thereafter |  | Total
|                 |  |      |           |         |  |      |            |      |  |      |           |            |  |      
|Long-Term Debt   |  | $    | 1,552,782 |         |  | $    | 16,106,079 |      |  | $    | 865,631   |            |  | $     | 382,693 |  |  | $ | 270,000 |  |  | $ | 717,500   |  |  | $ | 19,894,685 | 
|Operating Leases |  |      | 229,500   |         |  |      | 222,600    |      |  |      | 217,300   |            |  |       | 202,900 |  |  |   | 201,700 |  |  |   | 432,800   |  |  |   | 1,506,800  | 
|                 |  |      |           |         |  |      |            |      |  |      |           |            |  |       |         |  |  |   |         |  |  |   |           |  |  |   |            | 
|Total            |  | $    | 1,782,282 |         |  | $    | 16,628,679 |      |  | $    | 1,082,931 |            |  | $     | 585,593 |  |  | $ | 471,700 |  |  | $ | 1,150,300 |  |  | $ | 21,401,485 | 
|                 |  |      |           |         |  |      |            |      |  |      |           |            |  |       |         |  |  |   |         |  |  |   |           |  |  |   |            | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Long-Term Debt for 2004 does not include
    (i) the amount of $167,000 (based on amounts outstanding as
    of December 31, 2002) pursuant to the Loan Agreement and
    (ii) the amount of $542,000 pursuant to obligations payable
    to former shareholders of Stepic, both of which amounts are,
    pursuant to their terms, accelerated upon payment of the
    Convertible Notes. Such amounts are currently reflected in the
    table as coming due subsequent to 2004. 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 Convertible Notes
(Convertible Notes) in the amount of $15 million to
ComVest, Medtronic and other investors, assumed a
$2 million Junior Note payable to Bank of America (the
Junior Note), and entered into a new revolving and
term loan facility (the LaSalle Credit Facility) for
up to $22 million, of which approximately $1.6 million was
outstanding as of December 31, 2002. The following is a
summary of the key provisions of the Recapitalization:

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

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ment of $345,000. As a result, $345,000 was
included as a component of the extraordinary loss on early
extinguishment of debt.


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

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

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

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

The fair value of the Convertible Notes, which
was used in the determination of the extraordinary loss on early
extinguishment of debt was $33.3 million. As this value
represents a substantial premium to the face value of the debt,
the Company recorded the debt at its face value of
$15 million, and recorded the premium of $18.3 million
as an increase to additional paid-in-capital. The Company
determined the fair value of the Convertible Notes by
considering their two components, the non-convertible debt of
$14,730,000 and the convertible debt of $270,000. The
non-convertible debt components carrying value of
$14,730,000 represents its fair value because, when considered
with the convertible component, its terms yield a market rate of
return.

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The convertible components fair value was
determined by multiplying the fair value of the Companys
stock by the number of shares into which this component is
convertible. Thus, 27,000,000 shares multiplied by $0.68940 per
share equals $18,613,685. The sum of the non-convertible
components fair value of $14,730,000 and the convertible
components fair value of $18,613,685 equals the total debt
instruments fair value of $33,343,685.


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

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

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



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

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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, 2002, the Company had $2.1 million
available for borrowing under the revolving portion of the Loan
Agreement. 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, 2002, 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.

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.
Beginning on May 1, 2003, a principal payment on the Junior
Note of $22,500 is payable on the first day of each month until
maturity of the Junior Note.

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

Approximately $7.8 million of the cash
proceeds of the Stepic sale were used to pay down all amounts
outstanding at closing under the Companys revolving senior
credit facility with the Lender. The Company has used a portion
of, and is using 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. (See
Note 18 of the notes to the Companys

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audited consolidated financial statements
contained elsewhere herein for further discussion on the sale of
Stepic).


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

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, 2002, the Company had borrowing capacity
of approximately $2.1 million under the Loan Agreement. The
Company believes it has available cash resources to meet its
working capital needs through fiscal year 2003. As stated above,
the Convertible Notes mature in March 2004. Prior to such time,
the Company will explore all alternatives available to it to
repay the Convertible Notes including but not limited to,
refinancing the Convertible Notes or undertaking issuances of
debt or equity securities of the Company.

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

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

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

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

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paid to Hunt; (iv) the Company fails to make
efforts to refinance the amounts outstanding under the BofA
Credit Facility and fails to provide weekly status reports;
(v) on or before December 15, 2001, the Company fails
to provide Bank of America evidence that the Company has engaged
an investment banking firm to begin marketing the sale of the
assets of the Company if the amounts outstanding under the BofA
Credit Facility are not paid off by the Termination Date; or
(vi) the Company fails to execute and deliver to Bank of
America within 24 hours of Bank of Americas request a
consent order consenting to the appointment of a receiver in the
event of a Termination Event, as defined.


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

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

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

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

The Forbearance Agreement also required the
Company to hire on or before June 30, 2001 a new chief
operating officer, restricted the repayment of principal debt to
junior lien holders, and to either (i) sell the assets of
IFM or (ii) obtain an agreement from the seller of the IFM
product line to defer all payments under the related promissory
note (see below) through the Termination Date (see Note 14
of the notes to the consolidated financial statements included
herein). The Company hired a Chief Operating 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,

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Medtronic and the Additional Note Purchasers. On
March 18, 2002, the Company entered into the LaSalle credit
facility.


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.



| |                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2002, the Company had
borrowing capacity of approximately $2.1 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. Failure to make any such
required payments may result in an event of default and the
acceleration of all outstanding indebtedness.

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| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | 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, 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 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.



| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has limited manufacturing
    experience and it can not 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 Pheres-Flow® 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,
TitanPort 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 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 the arrangements with these third
parties expire, the Company will have to make other
manufacturing arrangements or manufacture products or product
parts

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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 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 policy is to protect its
proprietary position by, among other methods, 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. Many
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

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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 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 potentially 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. In September
1999, the Company initiated a voluntary product recall of the
Companys dialysis and central venous catheter kit product
lines due to small pinholes in the product

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packaging. Although the recall covers products
manufactured since 1994, product returns through
December 31, 2002 were approximately 15,300 units. No
product complaints have been received to date for either
pinholes in the packaging or infection of the implant site that
could be attributed to the packaging being contaminated. In
2001, the recall was terminated by the FDA.




| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys executive officers and
    directors, together with parties to the Recapitalization, will
    have the ability to exercise control over the Company.

As of the date of this filing, ComVest Venture
Partners, L.P. and affiliated entities thereof, collectively own
approximately 31.1% of the Companys outstanding common
stock. Additionally, the Additional Note Purchasers have
collectively converted their Convertible Notes into
approximately 27.4% of the Companys outstanding common
stock (as a percentage of common stock outstanding on the date
of this filing). Further, Medtronic has the right to convert a
portion of its unconverted Convertible Notes into up to
7.2 million additional shares of the Companys common
stock (representing 16.6% of the Companys common stock
after, and as if, giving effect to such conversion) subject to
the terms and conditions contained therein. Messrs. Hunt
and Peterson, both officers and directors of the Company,
collectively own approximately 18.6% of the Companys
outstanding common stock as of the date of this filing. If
certain of ComVest, Medtronic, the Additional Note Purchasers
and/or Messrs. Hunt and Peterson were to act together, they
would have the power to elect all of the members of the
Companys board of directors, amend 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. Accordingly, these
shareholders are able to exert significant influence over the
Company.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 15%, 19% and 15% of total sales
(excluding discontinued operations of the Stepic distribution
segment, which was sold in September 2002) during 2000, 2001 and
2002, 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 cash flows will be
    adversely affected by its recent sale of Stepic.

On September 3, 2002, the Company sold
substantially all of the assets of Stepic, its distribution
division. For the fiscal year ended December 31, 2001, the
Companys distribution division accounted for 57.0% of its
total sales and 33.9% of its gross profit, and for the nine
months ended September 30, 2002, the Companys distribution
division accounted for 55.1% of its total sales and 29.1% of its
gross profit. The Company anticipates that its sale of Stepic
will substantially reduce its cash flow from its historical
level for the foreseeable future. The Company cannot assure that
in the future its cash flow from operations will be sufficient
to allow the Company to fully execute on the Companys
strategic plan, including research and development related to
new products. This loss of cash flow may materially adversely
affect the Companys liquidity, financial condition and
results of 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 success
to date has been significantly dependent on the contributions of
Marshall B. Hunt, the Companys Chairman and Chief
Executive Officer, William E. Peterson, Jr., the
Companys President, and Robert J. Wenzel, the
Companys Chief Operating Officer each of whom is party to
an employment agreement with the Company and, with respect to
Messrs. Hunt and Peterson, on whom the Company maintains key man
life insurance in the amount of $1 million. The employment
agreements for Mr. Hunt, Mr. Peterson and
Mr. Wenzel expire on April 1, 2004, December 31,

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2003 and December 31, 2003, respectively.
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.




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

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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 a Form FDA-483 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 has responded to such observations. The Company 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 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

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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.



| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | 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, 2002, the Company had approximately
$1.628 million outstanding under the LaSalle credit
facility. If market rates were to increase immediately and
uniformly by 10% from levels as of December 31, 2002, the
additional interest expense would be considered immaterial to
the Companys consolidated financial position, cash flows,
and operating results.

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

The Companys Consolidated Financial
Statements are 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.




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 2003 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
2003 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 2002 in the Companys Proxy Statement for
the 2003 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 2003 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 2003 Annual Meeting of Shareholders.






|          |                        
|--------- | -----------------------
|Item  14. | 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

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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.






|          |                                                                    
|--------- | -------------------------------------------------------------------
|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, 2001 and 2002                                         |  |  | F-3 | 
|                                  | Consolidated Statements of Operations for the
    Years Ended December 31, 2000, 2001 and 2002           |  |  | F-4 | 
|                                  | Consolidated Statements of Shareholders
    Equity for the Years Ended December 31, 2000, 2001 and 2002 |  |  | F-5 | 
|                                  | Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2000, 2001 and 2002           |  |  | F-6 | 
|                                  | Notes to Consolidated Financial Statements                                                               |  |  | F-7 | 



| |    |                              
| | -- | -----------------------------
| | 2. | Financial Statement Schedules

|                                                                                   |  |  |      | 
|---------------------------------------------------------------------------------- |  |  | ---- | 
|Report of Independent Certified Public
    Accountants on Schedule                 |  |  | F-45 | 
|Report of Independent Accountants on Consolidated
    Financial Statement Schedule |  |  | F-46 | 
|Schedule II  Valuation and
    Qualifying Accounts                                |  |  | F-47 | 

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.                                                                                                                                                                                                                                                                                     
|        | 3.2  |  |  |                        |  | Amended and Restated Bylaws of the Company, as
    amended to date.                                                                                                                                                                                                                                                                                                        
|        | 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.

46



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##### Table of Contents



|        |       |  |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | ----- |  |  | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 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.                                                                                                                        
|        | 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  |  |  |                        |  | Horizon Plastic Ports: Term Sheet dated
    March 18, 1997, filed as Exhibit 10.22 to the
    Registrants Form S-1 dated April 14, 1998 (SEC
    File No. 333-46349) and incorporated herein by reference.                                                                                                                                                                                         
|        | 10.8  |  |  |                        |  | 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.                                                                                                                              
|        | 10.9  |  |  |                        |  | 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.                                                                                                              
|        | 10.10 |  |  |                        |  | License Agreement dated July 1995 between
    Dr. Sakharam D. Mahurkar and Strato®/ InfusaidTMInc., 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.                                                                                                                                                 
|        | 10.11 |  |  |                        |  | 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.                                                                                                                                        
|        | 10.12 |  |  |                        |  | Form of Severance and Bonus Agreement between the
    Company and each of L. Bruce Maloy and Julie F. Lancaster, 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.                                                                                                                             
|        | 10.13 |  |  |                        |  | Agreement dated December 22, 1998 between
    Marshall B. Hunt and William E. Peterson, Jr. and the Company,
    filed as Exhibit 10.44 to the Registrants Form 10-K
    dated March 29, 2000 (SEC File No. 000-24025) and
    incorporated herein by reference.                                                                                                                                   
|        | 10.14 |  |  |                        |  | 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.                                                                                                      
|        | 10.15 |  |  |                        |  | 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.
|        | 10.16 |  |  |                        |  | 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.                                
|        | 10.17 |  |  |                        |  | 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.                                                         

47



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##### Table of Contents



|        |       |  |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- | ----- |  |  | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 10.18 |  |  |                        |  | 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.                                                                                                                                                                                                                      
|        | 10.19 |  |  |                        |  | 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.                                                                                                                                                                                                   
|        | 10.20 |  |  |                        |  | 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.                                                                                                                                                   
|        | 10.21 |  |  |                        |  | 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.                                                                                                                                                                                               
|        | 10.22 |  |  |                        |  | 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.                                                                                                                                
|        | 10.23 |  |  |                        |  | 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.
|        | 10.24 |  |  |                        |  | 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.
|        | 10.25 |  |  |                        |  | 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.                                                                                                                                                                                                                                       
|        | 10.26 |  |  |                        |  | 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.                                                                                                  
|        | 10.27 |  |  |                        |  | 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.                                                                                                  
|        | 10.28 |  |  |                        |  | 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.                                                                                                                                                                                                                               

48



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##### Table of Contents



|        |        |  |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | ------ |  |  | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |  |  |                        
|Number  |        |  |  | Description of Exhibits
|        |        |  |  |                        
|        | 10.29  |  |  |                        |  | 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.
|        | 10.30  |  |  |                        |  | 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.                                                                                                                                            
|        | 10.31  |  |  |                        |  | 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.                                                                                                                                                
|        | 10.32  |  |  |                        |  | 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).                                                                                                                                                                                                                                        
|        | 10.33  |  |  |                        |  | 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).                                                                                                                                              
|        | 10.34  |  |  |                        |  | 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).                                                                                                                                              
|        | 10.35  |  |  |                        |  | 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).                                                                                                                                                      
|        | 10.36  |  |  |                        |  | 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).                                                                                                                                                                          
|        | 10.37  |  |  |                        |  | Employment Letter between the Registrant and
    George L. Cavagnaro, effective September 1, 2002
    (incorporated by reference to Exhibit 10.2 to the
    Registrants Current Report on Form 8-K, filed with
    the Commission on September 10, 2002).                                                                                                                                                                                              
|        | 10.38  |  |  |                        |  | 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).                                                                                                                                                                                                    
|        | 10.39  |  |  |                        |  | 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).                                                                                                                                                                                        
|        | 10.40  |  |  |                        |  | 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).                                                                                                                                                                               
|        | 10.41* |  |  |                        |  | 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.                                                                                                                                                                                                          
|        | 10.42* |  |  |                        |  | Amendment to Employment Agreement, dated
    November 15, 2002, between the Company and Marshall B. Hunt.                                                                                                                                                                                                                                                                                                                                               
|        | 10.43* |  |  |                        |  | Amendment to Option Agreement, dated
    November 15, 2002, between the Company and Marshall B. Hunt.                                                                                                                                                                                                                                                                                                                                                   
|        | 10.44* |  |  |                        |  | Amendment to Employment Agreement, dated
    November 12, 2002, between the Company and Robert J. Wenzel.                                                                                                                                                                                                                                                                                                                                               
|        | 10.45* |  |  |                        |  | Amendment to Employment Agreement, dated
    March 7, 2003, between the Company and William E. Peterson,
    Jr.                                                                                                                                                                                                                                                                                                                                        
|        | 10.46* |  |  |                        |  | Option Agreement, dated February 25, 2003
    between the Company and Marshall B. Hunt.                                                                                                                                                                                                                                                                                                                                                                 

49



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##### Table of Contents



|        |        |  |  |                         |  |                                                                                                                                                                                                               
|------- | ------ |  |  | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |  |  |                        
|Number  |        |  |  | Description of Exhibits
|        |        |  |  |                        
|        | 10.47* |  |  |                        |  | Option Agreement, dated February 25, 2003
    between the Company and William E. Peterson, Jr.                                                                                                                
|        | 10.48* |  |  |                        |  | Lease Agreement, entered into as of
    December 15, 2000, by and between The Development Authority
    of the City of Manchester and the Company.                                                            
|        | 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.                                                                                                                                                                                  
|        | 23.1*  |  |  |                        |  | Consent of Grant Thornton LLP                                                                                                                                                                                 
|        | 23.2*  |  |  |                        |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                         
|        | 99.1*  |  |  |                        |  | Certification of the Chief Executive Officer of
    the Company pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                 
|        | 99.2*  |  |  |                        |  | Certification of the Principal Financial Officer
    of the Company pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.                         



---



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

(b) Reports on Form 8-K



| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company filed a Current Report on
    Form 8-K on November 14, 2002, relating to the
    dismissal of its independent auditors and the appointment of new
    independent public accountants.

50



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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 28th
day of March, 2003.



| |                               
| | ------------------------------
| | HORIZON MEDICAL PRODUCTS, INC.
| | (Registrant)                  



| |     |                     
| | --- | --------------------
| | By: | /s/ MARSHALL B. HUNT

| |                                                      
| | -----------------------------------------------------
| |                                                      
| | Marshall B. Hunt                                     
| | Chairman of the Board and 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 28, 2003.

|                                                     |  |                                                                                    
|---------------------------------------------------- |  | -----------------------------------------------------------------------------------
|Signature                                            |  | Title                                                                              
|                                                     |  |                                                                                    
|/s/ MARSHALL B. HUNTMarshall B. Hunt                 |  | Chairman of the Board and Chief Executive Officer
    (Principal Executive Officer)
|/s/ WILLIAM E. PETERSON, JR.William E. Peterson, Jr. |  | President and Director                                                             
|/s/ JULIE F. LANCASTERJulie F. Lancaster             |  | Vice President  Finance (Principal
    Financial and Principal Accounting Officer)
|H. Ross Arnold III                                   |  | Director                                                                           
|Harold Blue                                          |  | Director                                                                           
|/s/ ROBERT J. SIMMONSRobert J. Simmons               |  | Director                                                                           
|/s/ ROBERT D. TUCKERRobert D. Tucker                 |  | Director                                                                           
|/s/ A. GORDON TUNSTALLA. Gordon Tunstall             |  | Director                                                                           

51



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##### Table of Contents



CERTIFICATION OF THE CHIEF EXECUTIVE
OFFICER



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | I, Marshall B. Hunt, Chairman of the Board and
    Chief Executive Officer of Horizon Medical Products, Inc. (the
    registrant), certify that:                                                                                                                                                                                             
|
| | 1. I have reviewed this annual report on
    Form 10-K of the registrant for the annual period ended
    December 31, 2002;                                                                                                                                                                                                                    
|
| | 2. Based on my knowledge, this annual report
    does not contain any untrue statement of a material fact or omit
    to state a material fact necessary to make the statements made,
    in light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    annual report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this annual
    report;                   
|
| | 4. The other certifying officers of the
    registrant and I:                                                                                                                                                                                                                                                                                  



| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) are responsible for establishing and
    maintaining disclosure controls and procedures for
    the registrant;                                                                                          
|
| | (b) have designed such disclosure controls
    and procedures to ensure that material information is made known
    to them, particularly during the period in which the periodic
    report is being prepared;
|
| | (c) have evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of the report;
    and                                
|
| | (d) have presented in the report their
    conclusions about the effectiveness of the disclosure controls
    and procedures based on the required evaluation as of that date;                                 



| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The other certifying officers of the
    registrant and I have disclosed to the registrants
    auditors and to the audit committee of the board of directors:



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



| |                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The other certifying officers of the
    registrant and I have indicated in the report whether there were
    significant changes in internal controls or in other factors
    that could significantly affect internal controls subsequent to
    the date of their evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                          
| | -------------------------
| | /s/ MARSHALL B. HUNT     
| |                          
| | Marshall B. Hunt         
| | Chairman of the Board and
| | Chief Executive Officer  

Date: March 28, 2003

52



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##### Table of Contents



CERTIFICATION OF THE PRINCIPAL FINANCIAL
OFFICER

I, Julie F. Lancaster, Vice President 
Finance and principal financial officer of Horizon Medical
Products, Inc. (the registrant), certify that:



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on
    Form 10-K of the registrant for the annual period ended
    December 31, 2002;                                                                                                                                                                                                                    
|
| | 2. Based on my knowledge, this annual report
    does not contain any untrue statement of a material fact or omit
    to state a material fact necessary to make the statements made,
    in light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    annual report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this annual
    report;                   
|
| | 4. The other certifying officers of the
    registrant and I:                                                                                                                                                                                                                                                                                  



| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) are responsible for establishing and
    maintaining disclosure controls and procedures for
    the registrant;                                                                                          
|
| | (b) have designed such disclosure controls
    and procedures to ensure that material information is made known
    to them, particularly during the period in which the periodic
    report is being prepared;
|
| | (c) have evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of the report;
    and                                
|
| | (d) have presented in the report their
    conclusions about the effectiveness of the disclosure controls
    and procedures based on the required evaluation as of that date;                                 



| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The other certifying officers of the
    registrant and I have disclosed to the registrants
    auditors and to the audit committee of the board of directors:



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



| |                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The other certifying officers of the
    registrant and I have indicated in the report whether there were
    significant changes in internal controls or in other factors
    that could significantly affect internal controls subsequent to
    the date of their evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                              
| | -----------------------------
| | /s/ JULIE F. LANCASTER       
| |                              
| | Julie F. Lancaster           
| | Vice President  Finance     
| | (Principal Financial Officer)

Date: March 28, 2003

53



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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 sheet of Horizon Medical Products, Inc. (a Georgia
corporation) and subsidiaries as of December 31, 2002, and
the related consolidated statements of operations,
stockholders equity, and cash flows for the year then
ended. 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 in accordance with
auditing standards generally accepted in the United States of
America. Those standards 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. 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 audit
provides 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, 2002, and the
results of their operations and their cash flows for the year
then ended 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 7, 2003


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 balance sheet as
of December 31, 2001 and the related consolidated
statements of operations, changes in shareholders equity,
and cash flows for each of the two years in the period ended
December 31, 2001 present fairly, in all material respects,
the financial position, results of operations and cash flows of
Horizon Medical Products, Inc. and its subsidiaries (the
Company) at December 31, 2001 and for each of the two years
in the period 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 audits. We
conducted our audits 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 audits provide a reasonable
basis for our opinion.

Our original opinion dated February 26,
2002, except for Notes 6, 9, 12 and 17 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, 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


as to which the
date is April 15, 2002


and Note 18,
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, 2002 and 2001


|                                                                                                                                                                                                          |                                                                                                                                                      |                                            |             |           |            |  |             |            |            | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | --------- | ---------- |  | ----------- | ---------- | ---------- | 
|                                                                                                                                                                                                          |                                                                                                                                                      | 2002                                       |             | 2001     
|                                                                                                                                                                                                          |                                                                                                                                                      |                                            |             |          
|ASSETS                                                                                                                                                                                                   
|Current assets:                                                                                                                                                                                           |                                                                                                                                                      |                                            |             |           |            |  |             |           
|                                                                                                                                                                                                          | Cash and cash equivalents                                                                                                                            |                                            | $           | 3,711,514 |            |  | $           | 2,748,617  |           
|                                                                                                                                                                                                          | Restricted cash                                                                                                                                      |                                            |             |           |            |  |             | 24,271     |           
|                                                                                                                                                                                                          | Accounts receivable  trade (net of
    allowance for doubtful accounts of $433,956 and $916,493 as of
    December 31, 2002 and 2001, respectively) |                                            |             | 3,037,974 |            |  |             | 10,052,052 |           
|                                                                                                                                                                                                          | Inventories                                                                                                                                          |                                            |             | 5,607,965 |            |  |             | 15,836,795 |           
|                                                                                                                                                                                                          | Prepaid expenses and other current assets                                                                                                            |                                            |             | 515,077   |            |  |             | 1,570,223  |           
|                                                                                                                                                                                                          |                                                                                                                                                      |                                            |             |           |            |  |             |           
|                                                                                                                                                                                                          |                                                                                                                                                      | Total current assets                       |             |           | 12,872,530 |  |             |            | 30,231,958 | 
|Property and equipment, net                                                                                                                                                                               |                                                                                                                                                      |                                            | 2,199,307   |           |            |  | 2,723,896   |           
|Goodwill, net                                                                                                                                                                                             |                                                                                                                                                      |                                            | 15,650,356  |           |            |  | 31,752,259  |           
|Intangible assets, net                                                                                                                                                                                    |                                                                                                                                                      |                                            | 6,361,844   |           |            |  | 6,477,380   |           
|Other assets                                                                                                                                                                                              |                                                                                                                                                      |                                            | 106,088     |           |            |  | 162,047     |           
|                                                                                                                                                                                                          |                                                                                                                                                      |                                            |             |           |            |  |             |           
|                                                                                                                                                                                                          |                                                                                                                                                      | Total assets                               |             | $         | 37,190,125 |  |             | $          | 71,347,540 | 
|                                                                                                                                                                                                          |                                                                                                                                                      |                                            |             |           |            |  |             |           
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                                                                                                 
|Current liabilities:                                                                                                                                                                                      |                                                                                                                                                      |                                            |             |           |            |  |             |           
|                                                                                                                                                                                                          | Accounts payable  trade                                                                                                                             |                                            | $           | 807,146   |            |  | $           | 9,090,686  |           
|                                                                                                                                                                                                          | Accrued salaries and commissions                                                                                                                     |                                            |             | 279,346   |            |  |             | 341,788    |           
|                                                                                                                                                                                                          | Accrued interest                                                                                                                                     |                                            |             | 122,645   |            |  |             | 256,106    |           
|                                                                                                                                                                                                          | Other accrued expenses                                                                                                                               |                                            |             | 651,199   |            |  |             | 1,317,193  |           
|                                                                                                                                                                                                          | Current portion of long-term debt                                                                                                                    |                                            |             | 1,552,782 |            |  |             | 40,585,159 |           
|                                                                                                                                                                                                          |                                                                                                                                                      |                                            |             |           |            |  |             |           
|                                                                                                                                                                                                          |                                                                                                                                                      | Total current liabilities                  |             |           | 3,413,118  |  |             |            | 51,590,932 | 
|Long-term debt, net of current portion                                                                                                                                                                    |                                                                                                                                                      |                                            | 18,341,903  |           |            |  | 1,354,703   |           
|Other liabilities                                                                                                                                                                                         |                                                                                                                                                      |                                            | 104,963     |           |            |  | 119,761     |           
|                                                                                                                                                                                                          |                                                                                                                                                      |                                            |             |           |            |  |             |           
|                                                                                                                                                                                                          |                                                                                                                                                      | Total liabilities                          |             |           | 21,859,984 |  |             |            | 53,065,396 | 
|                                                                                                                                                                                                          |                                                                                                                                                      |                                            |             |           |            |  |             |           
|Commitments and contingent liabilities
    (Notes 11, 12, and 14)                                                                                                                                         |                                                                                                                                                      |                                            |             |           |            |  |             |           
|Shareholders equity:                                                                                                                                                                                     |                                                                                                                                                      |                                            |             |           |            |  |             |           
|Preferred stock, no par value; 5,000,000 shares
    authorized, none issued and outstanding                                                                                                               |                                                                                                                                                      |                                            |             |           |            |  |             |           
|Common stock, $.001 par value per share;
    100,000,000 shares and 50,000,000 authorized, 33,415,876 and
    13,366,278 shares issued and outstanding as of December 31,
    2002 and 2001, respectively |                                                                                                                                                      |                                            | 33,416      |           |            |  | 13,366      |           
|Additional paid-in capital                                                                                                                                                                                |                                                                                                                                                      |                                            | 74,839,389  |           |            |  | 52,086,125  |           
|Shareholders notes receivable                                                                                                                                                                            |                                                                                                                                                      |                                            | (170,831    | )         |            |  | (615,940    | )         
|Accumulated deficit                                                                                                                                                                                       |                                                                                                                                                      |                                            | (59,371,833 | )         |            |  | (33,201,407 | )         
|                                                                                                                                                                                                          |                                                                                                                                                      |                                            |             |           |            |  |             |           
|                                                                                                                                                                                                          |                                                                                                                                                      | Total shareholders equity                 |             |           | 15,330,141 |  |             |            | 18,282,144 | 
|                                                                                                                                                                                                          |                                                                                                                                                      |                                            |             |           |            |  |             |           
|                                                                                                                                                                                                          |                                                                                                                                                      | Total liabilities and shareholders equity |             | $         | 37,190,125 |  |             | $          | 71,347,540 | 
|                                                                                                                                                                                                          |                                                                                                                                                      |                                            |             |           |            |  |             |           

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, 2002, 2001,
and 2000


|                                                                                                                    |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   |            |            |             |  
|------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ---------- | ----------- | ----------- | ---- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ----------- | -
|                                                                                                                    |                                                                                                                                 | 2002                            |            | 2001        |             | 2000
|                                                                                                                    |                                                                                                                                 |                                 |            |             |             |     
|Net sales                                                                                                           |                                                                                                                                 | $                               | 21,711,644 |             |             | $    | 24,700,813 |            |            | $ | 25,717,073 |           
|Cost of goods sold                                                                                                  |                                                                                                                                 |                                 | 9,343,068  |             |             |      | 11,409,825 |            |            |   | 17,467,058 |           
|                                                                                                                    |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   |            |           
|                                                                                                                    |                                                                                                                                 | Gross profit                    |            |             | 12,368,576  |      |            |            | 13,290,988 |   |            |            | 8,250,015   |  
|Selling, general and administrative expenses                                                                        |                                                                                                                                 |                                 | 16,109,932 |             |             |      | 16,043,275 |            |            |   | 14,029,692 |           
|Impairment charge (Note 14)                                                                                         |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   | 12,086,334 |           
|                                                                                                                    |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   |            |           
|                                                                                                                    |                                                                                                                                 | Loss from operations            |            |             | (3,741,356  | )    |            |            | (2,752,287 | ) |            |            | (17,866,011 | )
|                                                                                                                    |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   |            |           
|Other income (expense):                                                                                             |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   |            |           
|                                                                                                                    | Interest expense, net                                                                                                           |                                 |            | (2,845,894  | )           |      |            | (2,207,431 | )          |   |            | (2,345,139 | )          
|                                                                                                                    | Other income (expense)                                                                                                          |                                 |            | (14,884     | )           |      |            | 67,775     |            |   |            | 115,553    |            
|                                                                                                                    |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   |            |           
|                                                                                                                    |                                                                                                                                 |                                 | (2,860,778 | )           |             |      | (2,139,656 | )          |            |   | (2,229,586 | )         
|                                                                                                                    |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   |            |           
|                                                                                                                    |                                                                                                                                 | Loss before income taxes        |            |             | (6,602,134  | )    |            |            | (4,891,943 | ) |            |            | (20,095,597 | )
|Income tax benefit                                                                                                  |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   | 1,005,842  |           
|                                                                                                                    |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   |            |           
|                                                                                                                    |                                                                                                                                 | Loss from continuing operations |            |             | (6,602,134  | )    |            |            | (4,891,943 | ) |            |            | (19,089,755 | )
|Discontinued operations:                                                                                            |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   |            |           
|                                                                                                                    | Income (loss) from operations of discontinued
    distribution segment (including gain on disposal of $2,116,444)
    (Note 18) |                                 |            | 3,174,623   |             |      |            | (230,972   | )          |   |            | (670,823   | )          
|                                                                                                                    | Extraordinary loss on extinguishment of debt                                                                                    |                                 |            | (6,641,015  | )           |      |            |            |            |   |            |            |            
|                                                                                                                    | Effect of a change in accounting principle
    pursuant to adoption of SFAS 142 (Notes 2 and 5)                                 |                                 |            | (16,101,900 | )           |      |            |            |            |   |            |            |            
|                                                                                                                    |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   |            |           
|                                                                                                                    |                                                                                                                                 | Net loss                        |            | $           | (26,170,426 | )    |            | $          | (5,122,915 | ) |            | $          | (19,760,578 | )
|                                                                                                                    |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   |            |           
|Loss from continuing operations per
    share  basic and diluted                                                   |                                                                                                                                 | $                               | (0.32      | )           |             | $    | (0.37      | )          |            | $ | (1.43      | )         
|Income (loss) from operations of
    discontinued distribution segment (including gain of $2,116,444)
    (Note 18) |                                                                                                                                 | $                               | 0.15       |             |             | $    | (0.02      | )          |            | $ | (0.05      | )         
|Extraordinary loss on extinguishment of debt                                                                        |                                                                                                                                 | $                               | (0.32      | )           |             | $    |            |            |            | $ |            |           
|Effect of a change in accounting principle
    pursuant to adoption of SFAS 142 (Notes 2 and 5)                     |                                                                                                                                 | $                               | (0.78      | )           |             | $    |            |            |            | $ |            |           
|                                                                                                                    |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   |            |           
|Net loss per share  basic and diluted                                                                              |                                                                                                                                 | $                               | (1.27      | )           |             | $    | (0.38      | )          |            | $ | (1.48      | )         
|                                                                                                                    |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   |            |           
|Weighted average common shares
    outstanding  basic                                                              |                                                                                                                                 |                                 | 20,684,670 |             |             |      | 13,366,278 |            |            |   | 13,366,278 |           
|                                                                                                                    |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   |            |           
|Weighted average common shares
    outstanding  diluted                                                            |                                                                                                                                 |                                 | 20,684,670 |             |             |      | 13,366,278 |            |            |   | 13,366,278 |           
|                                                                                                                    |                                                                                                                                 |                                 |            |             |             |      |            |            |            |   |            |           

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

F-4



---



##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY

For the Years Ended December 31, 2002, 2001,
and 2000


|                                                   |  |           |            |        |  |            |        |              |  |             |            |       |  |   |            |   |  |   |             |   |  |   |             |  
|-------------------------------------------------- |  | --------- | ---------- | ------ |  | ---------- | ------ | ------------ |  | ----------- | ---------- | ----- |  | - | ---------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                   |  |           |            |        |  | Additional |        | Shareholders |  |             |            |      
|                                                   |  | Number of |            | Common |  | Paid-in    |        | Notes        |  | Accumulated |            |      
|                                                   |  | Shares    |            | Stock  |  | Capital    |        | Receivable   |  | Deficit     |            | Total
|                                                   |  |           |            |        |  |            |        |              |  |             |            |      
|Balance, December 31, 1999                         |  |           | 13,366,278 |        |  | $          | 13,366 |              |  | $           | 51,826,125 |       |  | $ | (452,581   | ) |  | $ | (8,317,914  | ) |  | $ | 43,068,996  |  
|Net increase in shareholders notes
    receivable |  |           |            |        |  |            |        |              |  |             |            |       |  |   | (976,358   | ) |  |   |             |   |  |   | (976,358    | )
|Net loss                                           |  |           |            |        |  |            |        |              |  |             |            |       |  |   |            |   |  |   | (19,760,578 | ) |  |   | (19,760,578 | )
|                                                   |  |           |            |        |  |            |        |              |  |             |            |       |  |   |            |   |  |   |             |   |  |   |             |  
|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 (Notes 6 and 17)          |  |           | 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 (Notes 6 and 17)            |  |           |            |        |  |            |        |              |  |             | (260,000   | )     |  |   |            |   |  |   |             |   |  |   | (260,000    | )
|Net loss                                           |  |           |            |        |  |            |        |              |  |             |            |       |  |   |            |   |  |   | (26,170,426 | ) |  |   | (26,170,426 | )
|                                                   |  |           |            |        |  |            |        |              |  |             |            |       |  |   |            |   |  |   |             |   |  |   |             |  
|Balance, December 31, 2002                         |  |           | 33,415,876 |        |  | $          | 33,416 |              |  | $           | 74,839,389 |       |  | $ | (170,831   | ) |  | $ | (59,371,833 | ) |  | $ | 15,330,141  |  
|                                                   |  |           |            |        |  |            |        |              |  |             |            |       |  |   |            |   |  |   |             |   |  |   |             |  

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

F-5



---



##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

For the Years Ended December 31, 2002,
2001, and 2000


|                                                                                              |                                                  |                                                          |                                        |                                                          |            |            |            |             |           |           |            |             |            |           |            |  
|--------------------------------------------------------------------------------------------- | ------------------------------------------------ | -------------------------------------------------------- | -------------------------------------- | -------------------------------------------------------- | ---------- | ---------- | ---------- | ----------- | --------- | --------- | ---------- | ----------- | ---------- | --------- | ---------- | -
|                                                                                              |                                                  | 2002                                                     |                                        | 2001                                                     |            | 2000      
|                                                                                              |                                                  |                                                          |                                        |                                                          |            |           
|Cash flows from operating activities:                                                         |                                                  |                                                          |                                        |                                                          |            |            |            |             |           |           |            |            
|                                                                                              | Net loss                                         |                                                          | $                                      | (26,170,426                                              | )          |            | $          | (5,122,915  | )         |           | $          | (19,760,578 | )         
|Adjustments to reconcile net loss to net cash
    (used in) provided by operating activities: |                                                  |                                                          |                                        |                                                          |            |            |            |             |           |           |            |            
|                                                                                              |                                                  | Provision for doubtful accounts                          |                                        |                                                          |            |            |            |             | 554,962   |           |            |             | 1,341,951  |          
|                                                                                              |                                                  | Loss on disposal of fixed assets                         |                                        |                                                          | 3,071      |            |            |             |           |           |            |             | 83,850     |          
|                                                                                              |                                                  | Depreciation expense                                     |                                        |                                                          | 731,525    |            |            |             | 883,510   |           |            |             | 902,086    |          
|                                                                                              |                                                  | Amortization expense                                     |                                        |                                                          | 1,518,588  |            |            |             | 2,706,905 |           |            |             | 2,870,373  |          
|                                                                                              |                                                  | Amortization of discount                                 |                                        |                                                          |            |            |            |             | 41,370    |           |            |             | 40,460     |          
|                                                                                              |                                                  | Non-cash compensation charge                             |                                        |                                                          | 1,555,468  |            |            |             |           |           |            |             |            |          
|                                                                                              |                                                  | Impairment charge                                        |                                        |                                                          | 16,101,900 |            |            |             |           |           |            |             | 12,086,334 |          
|                                                                                              |                                                  | Loss on extinguishment of debt                           |                                        |                                                          | 5,443,515  |            |            |             |           |           |            |             |            |          
|                                                                                              |                                                  | Gain on disposition of distribution segment              |                                        |                                                          | (2,953,100 | )          |            |             |           |           |            |             |            |          
|                                                                                              |                                                  | Deferred income taxes, net change                        |                                        |                                                          |            |            |            |             |           |           |            |             | 339,360    |          
|                                                                                              |                                                  | Non-cash increase in notes receivable 
    shareholders |                                        |                                                          |            |            |            |             | (87,001   | )         |            |             | (76,358    | )        
|                                                                                              |                                                  | Changes in operating assets and liabilities, net         |                                        |                                                          |            |            |            |             |           |           |            |             |            |          
|                                                                                              |                                                  |                                                          | Accounts receivable  trade            |                                                          |            | 411,574    |            |             |           | 3,845,754 |            |             |            | 2,985,667 |           
|                                                                                              |                                                  |                                                          | Inventories                            |                                                          |            | 1,099,985  |            |             |           | 1,604,540 |            |             |            | 1,956,662 |           
|                                                                                              |                                                  |                                                          | Prepaid expenses and other assets      |                                                          |            | 151,746    |            |             |           | 391,745   |            |             |            | 71,587    |           
|                                                                                              |                                                  |                                                          | Income tax receivable                  |                                                          |            |            |            |             |           | 1,903,802 |            |             |            | (950,747  | )         
|                                                                                              |                                                  |                                                          | Accounts payable  trade               |                                                          |            | (951,086   | )          |             |           | 193,336   |            |             |            | 3,035,415 |           
|                                                                                              |                                                  |                                                          | Accrued expenses and other liabilities |                                                          |            | (1,013,456 | )          |             |           | (557,102  | )          |             |            | (68,898   | )         
|                                                                                              |                                                  |                                                          |                                        |                                                          |            |            |            |             |           |           |            |            
|                                                                                              |                                                  |                                                          |                                        | Net cash (used in) provided by operating
    activities  |            |            | (4,070,696 | )           |           |           | 6,358,906  |             |            |           | 4,857,164  |  
|                                                                                              |                                                  |                                                          |                                        |                                                          |            |            |            |             |           |           |            |            
|Cash flows from investing activities:                                                         |                                                  |                                                          |                                        |                                                          |            |            |            |             |           |           |            |            
|                                                                                              | Cash proceeds from sale of IFM                   |                                                          |                                        |                                                          |            |            |            | 2,250,500   |           |           |            |             |           
|                                                                                              | Proceeds from disposal of distribution segment   |                                                          |                                        | 12,307,722                                               |            |            |            |             |           |           |            |             |           
|                                                                                              | Capital expenditures                             |                                                          |                                        | (343,123                                                 | )          |            |            | (283,109    | )         |           |            | (385,297    | )         
|                                                                                              | Short-term bridge loan to shareholder            |                                                          |                                        |                                                          |            |            |            |             |           |           |            | (900,000    | )         
|                                                                                              | Payment of short-term bridge loan by shareholder |                                                          |                                        |                                                          |            |            |            | 474,390     |           |           |            |             |           
|                                                                                              | Proceeds from shareholders notes receivable     |                                                          |                                        | 445,109                                                  |            |            |            |             |           |           |            |             |           
|                                                                                              | Proceeds from sale of property and equipment     |                                                          |                                        | 17,488                                                   |            |            |            |             |           |           |            |             |           
|                                                                                              | Acquisition of intangible assets                 |                                                          |                                        | (134,568                                                 | )          |            |            |             |           |           |            |             |           
|                                                                                              |                                                  |                                                          |                                        |                                                          |            |            |            |             |           |           |            |            
|                                                                                              |                                                  |                                                          |                                        | Net cash provided by (used in) investing
    activities  |            |            | 12,292,628 |             |           |           | 2,441,781  |             |            |           | (1,285,297 | )
|Cash flows from financing activities:                                                         |                                                  |                                                          |                                        |                                                          |            |            |            |             |           |           |            |            
|                                                                                              | Change in restricted cash                        |                                                          |                                        | 24,271                                                   |            |            |            | 349,427     |           |           |            | (373,698    | )         
|                                                                                              | Debt issuance costs                              |                                                          |                                        | (1,650,087                                               | )          |            |            | (179,214    | )         |           |            |             |           
|                                                                                              | Change in cash overdraft                         |                                                          |                                        |                                                          |            |            |            | (609,176    | )         |           |            | 609,176     |           
|                                                                                              | Exercise of stock options                        |                                                          |                                        | 24,590                                                   |            |            |            |             |           |           |            |             |           
|                                                                                              | Proceeds from issuance of long-term debt         |                                                          |                                        | 68,626,877                                               |            |            |            | 63,729,884  |           |           |            | 20,745,642  |           
|                                                                                              | Principal payments on long-term debt             |                                                          |                                        | (74,284,686                                              | )          |            |            | (69,507,247 | )         |           |            | (26,380,158 | )         
|                                                                                              |                                                  |                                                          |                                        |                                                          |            |            |            |             |           |           |            |            
|                                                                                              |                                                  |                                                          |                                        | Net cash used in financing activities                    |            |            | (7,259,035 | )           |           |           | (6,216,326 | )           |            |           | (5,399,038 | )
|                                                                                              |                                                  |                                                          |                                        |                                                          |            |            |            |             |           |           |            |            
|                                                                                              |                                                  |                                                          |                                        | Net increase (decrease) in cash and cash
    equivalents |            |            | 962,897    |             |           |           | 2,584,361  |             |            |           | (1,827,171 | )
|Cash and cash equivalents, beginning of year                                                  |                                                  |                                                          | 2,748,617                              |                                                          |            |            | 164,256    |             |           |           | 1,991,427  |            
|                                                                                              |                                                  |                                                          |                                        |                                                          |            |            |            |             |           |           |            |            
|Cash and cash equivalents, end of year                                                        |                                                  | $                                                        | 3,711,514                              |                                                          |            | $          | 2,748,617  |             |           | $         | 164,256    |            
|                                                                                              |                                                  |                                                          |                                        |                                                          |            |            |            |             |           |           |            |            
|Supplemental disclosure of cash flow information:                                             |                                                  |                                                          |                                        |                                                          |            |            |            |             |           |           |            |            
|Cash paid for interest                                                                        |                                                  | $                                                        | 2,451,670                              |                                                          |            | $          | 4,619,108  |             |           | $         | 4,357,778  |            
|                                                                                              |                                                  |                                                          |                                        |                                                          |            |            |            |             |           |           |            |            
|Cash paid and (received) for taxes, net of
    cash refunds received                          |                                                  | $                                                        | 28,553                                 |                                                          |            | $          | 51,818     |             |           | $         | (241,593   | )          
|                                                                                              |                                                  |                                                          |                                        |                                                          |            |            |            |             |           |           |            |            

See Notes 13, 14 and 18 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, 2002,
2001, And 2000


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

The 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 provided for 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 believes
its existing accounting policies are consistent with the
guidance provided in the SAB.

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.

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, is 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 and $1.7 during the years ended
December 31, 2001 and 2000. See Note 5 for the
Companys expected future amortization charges after
adoption of SFAS No. 142.

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
$381,200 and $125,200 during the years ended December 31,
2002 and 2001. The Company did not incur research and
development costs during the year ended December 31, 2000.

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. An award to employees which requires or
can compel the Company to settle such award in cash (such as
stock appreciation rights) is accounted for as a liability. The
amount of the liability for such an award is measured each
period based on the settlement value with changes in such value
recorded as compensation cost over the service period.

Stock based transactions with 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.

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 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. The standby letters of
credit reflect fair value as a condition of their underlying
purpose and are subject to fees competitively determined in the
marketplace. The fair value of these standby letters of credit
approximates contract values.

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,

F-9



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

clarify meanings, or describe their applicability
under changed conditions. The Company does not believe
SFAS 145 will have a material effect on its financial
statements.

In September 2002, the FASB issued SFAS
No. 146, Accounting for Costs Associated with Exit or
Disposal. SFAS No. 146 eliminates the definition and
requirements for recognition of exit costs in EITF Issue
No. 94-3. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized and
measured initially at fair value only when the liability is
incurred. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The
Company does not believe SFAS 146 will have a material
effect on its 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. The Company does
not believe FAS 148 will have a material effect on its
financial statements.

3. Inventories

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

|                |                         |      |           |            |   |   |            |            |  
|--------------- | ----------------------- | ---- | --------- | ---------- | - | - | ---------- | ---------- | -
|                |                         | 2002 |           | 2001      
|                |                         |      |           |           
|Raw materials   |                         | $    | 3,273,806 |            |   | $ | 3,413,158  |           
|Work in process |                         |      | 347,622   |            |   |   | 1,211,437  |           
|Finished goods  |                         |      | 4,517,675 |            |   |   | 14,666,961 |           
|                |                         |      |           |            |   |   |            |           
|                |                         |      | 8,139,103 |            |   |   | 19,291,556 |           
|                | Less inventory reserves |      |           | (2,531,138 | ) |   |            | (3,454,761 | )
|                |                         |      |           |            |   |   |            |           
|                |                         | $    | 5,607,965 |            |   | $ | 15,836,795 |           
|                |                         |      |           |            |   |   |            |           

4. Property and Equipment

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

|                          |                               |      |           |            |   |   |           |            |  
|------------------------- | ----------------------------- | ---- | --------- | ---------- | - | - | --------- | ---------- | -
|                          |                               | 2002 |           | 2001      
|                          |                               |      |           |           
|Building and improvements |                               | $    | 1,911,728 |            |   | $ | 1,905,826 |           
|Office equipment          |                               |      | 2,017,458 |            |   |   | 2,204,558 |           
|Plant equipment           |                               |      | 1,871,587 |            |   |   | 1,656,908 |           
|Transportation equipment  |                               |      | 131,560   |            |   |   | 131,560   |           
|                          |                               |      |           |            |   |   |           |           
|                          |                               |      | 5,932,333 |            |   |   | 5,898,852 |           
|                          | Less accumulated depreciation |      |           | (3,733,026 | ) |   |           | (3,174,956 | )
|                          |                               |      |           |            |   |   |           |           
|                          |                               | $    | 2,199,307 |            |   | $ | 2,723,896 |           
|                          |                               |      |           |            |   |   |           |           

As of December 31, 2002 and 2001, the
Company had capitalized computer software costs of approximately
$22,000 and $34,000, respectively. Depreciation expense
associated with capitalized computer software costs was
approximately $50,000, $39,300 and $6,600, respectively, during
the three years ended December 31, 2002, 2001 and 2000.

F-10



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 and December 31,
2000 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 | )
|                             |  |                                               |            |           |  |             |       |   |  |   |       |  

|                             |  |                                               |             |           |  |             |       |   |  |   |       |  
|---------------------------- |  | --------------------------------------------- | ----------- | --------- |  | ----------- | ----- | - |  | - | ----- | -
|                             |  |                                              
|                             |  | For the Twelve Months Ended December 31, 2000
|                             |  |                                              
|                             |  | Net Loss                                      |             | Basic EPS |  | Diluted EPS
|                             |  |                                               |             |           |  |            
|Reported                     |  | $                                             | (19,760,578 | )         |  | $           | (1.48 | ) |  | $ | (1.48 | )
|Add: amortization adjustment |  |                                               | 1,741,719   |           |  |             | 0.13  |   |  |   | 0.13  |  
|                             |  |                                               |             |           |  |             |       |   |  |   |       |  
|Adjusted                     |  | $                                             | (18,018,859 | )         |  | $           | (1.35 | ) |  | $ | (1.35 | )
|                             |  |                                               |             |           |  |             |       |   |  |   |       |  

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

|                                    |          |      |   |            |  |  |   |            | 
|----------------------------------- | -------- | ---- | - | ---------- |  |  | - | ---------- | 
|                                    |          | 2002 |   | 2001      
|                                    |          |      |   |           
|Indefinite lived intangible assets: |          |      |   |            |  |  |   |           
|                                    | Goodwill |      | $ | 15,650,356 |  |  | $ | 31,752,259 | 
|                                    |          |      |   |            |  |  |   |           

|                                |                                       |                |   |              |            |     |   |                |            |              |   |           |           |  |   |           |            |  |   |            |            |   |   |           |           | 
|------------------------------- | ------------------------------------- | -------------- | - | ------------ | ---------- | --- | - | -------------- | ---------- | ------------ | - | --------- | --------- |  | - | --------- | ---------- |  | - | ---------- | ---------- | - | - | --------- | --------- | 
|                                |                                       |                |   |             
|                                |                                       | 2002           |   | 2001        
|                                |                                       |                |   |             
|                                |                                       | Gross Carrying |   | Accumulated  |            |     |   | Gross Carrying |            | Accumulated  |   |          
|                                |                                       | Amount         |   | Amortization |            | Net |   | Amount         |            | Amortization |   | Net      
|                                |                                       |                |   |              |            |     |   |                |            |              |   |          
|Finite lived intangible assets: |                                       |                |   |              |            |     |   |                |            |              |   |           |           |  |   |           |            |  |   |           
|                                | Patents                               |                | $ | 8,218,000    |            |     | $ | (2,873,070     | )          |              | $ | 5,344,930 |           |  | $ | 8,218,000 |            |  | $ | (2,273,353 | )          |   | $ | 5,944,647 |          
|                                | Non-compete and consulting agreements |                |   | 2,165,592    |            |     |   | (2,076,171     | )          |              |   | 89,421    |           |  |   | 2,100,592 |            |  |   | (1,853,183 | )          |   |   | 247,409   |          
|                                | Debt issuance costs                   |                |   | 1,650,087    |            |     |   | (780,567       | )          |              |   | 869,520   |           |  |   | 797,073   |            |  |   | (596,387   | )          |   |   | 200,686   |          
|                                | Other                                 |                |   | 69,568       |            |     |   | (11,594        | )          |              |   | 57,974    |           |  |   | 368,253   |            |  |   | (283,615   | )          |   |   | 84,638    |          
|                                |                                       |                |   |              |            |     |   |                |            |              |   |           |           |  |   |           |            |  |   |            |            |   |   |          
|                                |                                       | Total          |   | $            | 12,103,247 |     |   | $              | (5,741,402 | )            |   | $         | 6,361,845 |  |   | $         | 11,483,918 |  |   | $          | (5,006,538 | ) |   | $         | 6,477,380 | 
|                                |                                       |                |   |              |            |     |   |                |            |              |   |           |           |  |   |           |            |  |   |            |            |   |   |          

F-11



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As discussed in Note 2, the Company adopted
SFAS No. 142 on January 1, 2002. The expected
amortization charges related to the finite lived intangible
assets are as follows for the years ended December 31:

|           |  |   |           | 
|---------- |  | - | --------- | 
|2003       |  | $ | 1,274,642 | 
|2004       |  |   | 894,137   | 
|2005       |  |   | 647,308   | 
|2006       |  |   | 599,724   | 
|2007       |  |   | 599,724   | 
|Thereafter |  |   | 2,346,310 | 
|           |  |   |           | 
|           |  | $ | 6,361,845 | 
|           |  |   |           | 

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

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

F-12



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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:

|                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |            |      |  |   |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ---------- | ---- |  | - | ---------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                             |  | 2002 |            | 2001
|                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |            |     
|BofA Credit Facility, including acquisition
    obligations supported by letters of credit                                                                                                                                                                                                                                                                                                                   |  |      |            |      |  | $ | 40,127,913 | 
|LaSalle Credit Facility                                                                                                                                                                                                                                                                                                                                                                                      |  | $    | 1,627,757  |      |  |   |            | 
|Convertible notes payable, bearing interest at a
    rate of 6% per annum for the first six months and 8% per annum
    thereafter, payable quarterly beginning in June 2002 until paid
    in full and maturing on March 16, 2004                                                                                                                                                                           |  |      | 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                                                                                                                                                                  |  |      | 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                                                                                                                                                                                                                           |  |      | 1,303,482  |      |  |   | 1,687,764  | 
|Miscellaneous notes payable, bearing interest at
    fixed rates ranging from .90% to 8.25%, requiring monthly
    payments of principal and interest, and maturing at various
    dates through June 2004                                                                                                                                                                                                   |  |      | 79,060     |      |  |   | 64,800     | 
|Miscellaneous capital lease obligations for
    office equipment, requiring monthly payments ranging from $632
    to $1,362, bearing interest at rates ranging from 7.65% to
    9.25%, and maturing at various dates through 2005. These
    obligations are collateralized by equipment with a net book
    value of approximately $18,071 and $67,800 as of
    December 31, 2002 and 2001, respectively |  |      | 21,886     |      |  |   | 59,385     | 
|                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |            |      |  |   |            | 
|                                                                                                                                                                                                                                                                                                                                                                                                             |  |      | 19,894,685 |      |  |   | 41,939,862 | 
|Less current portion                                                                                                                                                                                                                                                                                                                                                                                         |  |      | 1,552,782  |      |  |   | 40,585,159 | 
|                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |            |      |  |   |            | 
|                                                                                                                                                                                                                                                                                                                                                                                                             |  | $    | 18,341,903 |      |  | $ | 1,354,703  | 
|                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |            |      |  |   |            | 

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.

F-13



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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). Interest
on these Convertible Notes is payable quarterly beginning in
June 2002 and accrues at a rate of 6% per year for the first six
months and 8% per year thereafter until the notes are paid in
full and mature on March 16, 2004. The Company issued the
Convertible Notes as follows: $4.4 million to ComVest,
$4 million to Medtronic and $6.6 million to the
Additional Note Purchasers.

The Events of Default include, but are not
limited to, failure to pay an obligation when due, failure to
comply with obligations under the Securityholders Agreement (the
Securityholders Agreement) or the Co-Promotion
Agreement with Medtronic (as described below), breach of any
covenant which remains uncured for 15 days, bankruptcy, a
change of control and failure to obtain shareholder approval of
certain proposals related to the Recapitalization at the
Companys 2002 annual meeting of shareholders (the
Annual Meeting) within 195 of the closing date of
March 16, 2002. On September 17, 2002, at the Annual
Meeting, the Companys shareholders approved all such
proposals relating to the Recapitalization. Generally, upon an
Event of Default, the holders of a majority of the aggregate
principal amount of Convertible Notes outstanding may declare
the unpaid principal and interest on the Notes immediately due
and payable. Additionally, Medtronic may, upon a breach 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,
2002, the aggregate amount of indebtedness which would be
subject to acceleration under the Note Purchase Agreement, the
Companys credit facility with LaSalle (as described below)
and the Junior Note (as described below), causing the same to
become immediately due and payable, was approximately
$18.5 million. The holders of the Convertible Notes have
the right to convert in the aggregate a total of $270,000 of the
Convertible Notes into shares of the Companys common stock
at a conversion price of $0.01 per share for a total of
27,000,000 shares, subject to a downward adjustment upon
repayment of all or a portion of the amounts due, as described
below. If this $270,000 is converted, the Company will still be
obligated to repay, in the aggregate, $14,730,000 to the holders
of the Convertible Notes. As of March 16, 2003, 19,800,000
shares of the Companys common stock had been issued to
holders of the Convertible Notes upon conversion thereof.

This 27,000,000 shares also includes up to
3,300,000 shares which were issued to ComVest upon conversion of
the Bridge Note (as described below). Under the conversion
terms, if the principal amount of the Additional Notes, together
with all interest due, were paid in full on or before
30 days following March 16, 2002, the Closing Date for the
transaction, then the maximum aggregate number of shares of
common stock that all the Convertible Notes may be converted
into is 22,500,000. The Additional Notes were not repaid by

F-14



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

April 15, 2002 and have not been repaid as of the
date of this report. The terms of the applicable conversion
periods and conversion amounts for the Convertible Notes are as
follows:

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



---



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

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

The Company may prepay the Convertible Notes,
subject to no prepayment penalty within the first
12 months, with a prepayment penalty of 5% between months
12 to 15, and a prepayment penalty of 10% between months 15 to
24. On March 15, 2002, the Company and ComVest, as the
holder of an outstanding Bank of America Note (the 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

F-15



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$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).

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.

F-16



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

On March 18, 2002, the Company entered into
the LaSalle Credit Facility pursuant to a loan and security
agreement (the Loan Agreement) with Standard Federal
Bank National Association (SFB), acting by and
through LaSalle, as SFBs agent (collectively the
Lender). Under the Loan Agreement, the Lender
provided a $20 million Revolving Loan and a $2 million
Term Loan (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 (which has been done), grant the Lender the
right to conduct appraisals of the collateral on a bi-annual
basis, and deliver a survey of the property located at the
Companys offices on Northside Parkway in Atlanta within
60 days of the date of the Loan Agreement (which has been
done). The negative covenants restrict the Companys
ability to, among other things, make any guarantees, incur
additional indebtedness, grant liens on its assets, enter into
business combinations outside the ordinary course of business,
pay dividends, make certain investments or loans, allow its
equipment to become a fixture to real estate or an accession to
personal property, alter its lines of business, settle accounts,
or make other fundamental corporate changes.

F-17



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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



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

The December Amendment also established a
$10 million revolving loan limit and provided that,
commencing January 1, 2003, the Company shall pay to the
Lender an annual facility fee of $100,000. As of
December 31, 2002, the Company had $2.1 million
available for borrowing under the revolving portion of the Loan
Agreement. 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, 2002, 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 Companys management and Executive
Committee has delivered to each of ComVest and Medtronic an
operating plan and budget (including working capital needs)
reflecting its business following the sale of Stepic and a
proposal for the use of proceeds from the sale of Stepic. This
operating plan and budget, together with the use of proceeds,
was approved by ComVest and Medtronic and was subsequently
ratified by the Companys board of directors as required
under the Note Purchase Agreement. In connection with this sale,
the Company received the consent of LaSalle and the requisite
noteholders under the Note Purchase Agreement. (See Note 18 for
further discussion on the sale of Stepic).

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

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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

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

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

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

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

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Rate plus two and one-half percent (2.5%) per
annum; and (iv) required the Company to furnish Bank of
America with certain financial reports.

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

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

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

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.

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

F-20



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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). 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).

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, 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

F-21



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2002 are as follows:

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2003       |  | $ | 1,552,782  | 
|2004       |  |   | 16,106,079 | 
|2005       |  |   | 865,631    | 
|2006       |  |   | 382,693    | 
|2007       |  |   | 270,000    | 
|Thereafter |  |   | 717,500    | 
|           |  |   |            | 
|           |  | $ | 19,894,685 | 
|           |  |   |            | 

7. Income Taxes

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

|                                 |         |      |            |      |  |      |            |   |  |   |            |            |  
|-------------------------------- | ------- | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | ---------- | -
|                                 |         | 2002 |            | 2001 |  | 2000
|                                 |         |      |            |      |  |     
|Current:                         |         |      |            |      |  |      |            |   |  |   |            |           
|                                 | Federal |      | $          | 0    |  |      | $          | 0 |  |   | $          | (1,176,319 | )
|                                 |         |      |            |      |  |      |            |   |  |   |            |           
|                                 | State   |      |            |      |  |      |            |   |  |   |            | (1,176,319 | )
|Deferred tax provision (benefit) |         |      | (3,239,840 | )    |  | $    | (2,001,393 | ) |  |   | (7,170,543 | )         
|                                 |         |      |            |      |  |      |            |   |  |   |            |           
|                                 |         |      | (3,239,840 | )    |  |      | (2,001,393 | ) |  |   | (8,346,863 | )         
|Change in valuation allowance    |         |      | 3,239,840  |      |  |      | 2,001,393  |   |  |   | 7,341,021  |           
|                                 |         |      |            |      |  |      |            |   |  |   |            |           
|                                 |         | $    | 0          |      |  | $    | 0          |   |  | $ | (1,005,842 | )         
|                                 |         |      |            |      |  |      |            |   |  |   |            |           

Deferred tax assets and liabilities as of
December 31, 2002 and 2001 are comprised of the following:

|                                |                                                 |                                |                         |             |          |   |            |            |            |   | 
|------------------------------- | ----------------------------------------------- | ------------------------------ | ----------------------- | ----------- | -------- | - | ---------- | ---------- | ---------- | - | 
|                                |                                                 | 2002                           |                         | 2001       
|                                |                                                 |                                |                         |            
|Gross deferred tax assets:      |                                                 |                                |                         |             |          |   |            |           
|                                | Allowance for doubtful accounts and returns     |                                | $                       | 184,431     |          |   | $          | 385,294    |           
|                                | Inventory and inventory reserve                 |                                |                         | 1,135,572   |          |   |            | 1,681,929  |           
|                                | Basis differences of intangible assets          |                                |                         | 3,584,867   |          |   |            | 1,395,519  |           
|                                | Basis differences of property and equipment     |                                |                         | 178,883     |          |   |            | 132,100    |           
|                                | State net operating losses                      |                                |                         | 1,963,644   |          |   |            | 1,949,036  |           
|                                | Federal net operating loss                      |                                |                         | 6,385,894   |          |   |            | 6,341,362  |           
|                                |                                                 |                                |                         |             |          |   |            |           
|Gross deferred tax assets       |                                                 |                                | 13,433,291              |             |          |   | 11,885,240 |           
|Gross deferred tax liabilities: |                                                 |                                |                         |             |          |   |            |           
|                                | Basis differences of intangible assets          |                                |                         | (596,981    | )        |   |            | (2,288,770 | )         
|                                |                                                 |                                |                         |             |          |   |            |           
|                                |                                                 | Gross deferred tax liabilities |                         |             | (596,981 | ) |            |            | (2,288,770 | )
|                                |                                                 |                                |                         |             |          |   |            |           
|                                | Valuation allowance for net deferred tax assets |                                |                         | (12,836,310 | )        |   |            | (9,596,470 | )         
|                                |                                                 |                                |                         |             |          |   |            |           
|                                |                                                 |                                | Net deferred tax assets |             | $        | 0 |            |            | $          | 0 | 
|                                |                                                 |                                |                         |             |          |   |            |           

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has net operating losses
(NOL) for federal and state income tax reporting
purposes of approximately $18,780,000. These NOLs have
expiration dates through fiscal year 2022. As a result of the
conversion of debt to common shares during the year, the Company
may have 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 whether the conversion triggered a
change in control, and additionally, is calculating the tax
implications of the potential change of control.

A valuation allowance has been recorded against
all deferred tax assets as of December 31, 2002 and 2001 as
the Company believes that it is more likely than not that the
net deferred tax assets will not be realized.

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

|                                                                        |       |      |            |         |  |      |            |        |  |   |            |        | 
|----------------------------------------------------------------------- | ----- | ---- | ---------- | ------- |  | ---- | ---------- | ------ |  | - | ---------- | ------ | 
|                                                                        |       | 2002 |            | 2001    |  | 2000
|                                                                        |       |      |            |         |  |     
|Income tax provision (benefit) at statutory
    federal income tax rate |       | $    | (8,897,945 | )       |  | $    | (1,741,791 | )      |  | $ | (6,900,061 | )     
|Increase (decrease) resulting from:                                     |       |      |            |         |  |      |            |        |  |   |            |       
|                                                                        | Other |      |            | 233,150 |  |      |            | 41,138 |  |   |            | 36,483 | 
|State income taxes                                                      |       |      | (2,224,486 | )       |  |      | (436,788   | )      |  |   | (1,619,335 | )     
|Non-deductible amortization of goodwill                                 |       |      | 0          |         |  |      | 136,048    |        |  |   | 136,050    |       
|Permanent differences relating to recapitalization                      |       |      | 7,649,441  |         |  |      | 0          |        |  |   | 0          |       
|Change in valuation allowance                                           |       |      | 3,239,840  |         |  |      | 2,001,393  |        |  |   | 7,341,021  |       
|                                                                        |       |      |            |         |  |      |            |        |  |   |            |       
|Income tax provision (benefit)                                          |       | $    | 0          |         |  | $    | 0          |        |  | $ | (1,005,842 | )     
|                                                                        |       |      |            |         |  |      |            |        |  |   |            |       

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. Only
non-incentive stock options may be granted to outside directors
under the Incentive Plan. Under the Incentive Plan, as amended,
1,400,000 shares of the Companys common stock have been
reserved for issuance. In March 2002, the Board of Directors of
the Company approved an increase in the number of shares
authorized and reserved for issuance under the Incentive Plan to
6,000,000, which increase was approved by the shareholders at
the Companys 2002 Annual Meeting of Shareholders held on
September 17, 2002. 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.

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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, 1999 |           |           | 361,275   |                 |   |          | $1.875 -  $15.500 |                   |  | $ | 9.14  |      
|                                       | Granted   |           |           | 456,000         |   |          |                   | $0.440 -  $ 2.125 |  |   | $     | 0.637 | 
|                                       | Forfeited |           |           | (115,950        | ) |          |                   | $1.875 -  $14.625 |  |   | $     | 9.473 | 
|                                       |           |           |           |                 |   |          |                   |                   |  |   |       |      
|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 |                 |   |          | $0.440 -  $14.625 |                   |  | $ | 1.108 |      
|                                       |           |           |           |                 |   |          |                   |                   |  |   |       |      

The weighted average fair value of options
granted during the three years ended December 31, 2002,
2001 and 2000 was $0.76, $0.54 and $3.63, respectively.

F-24



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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 as of December 31, 2002.

OPTIONS OUTSTANDING

|               |  |             |           |                            |  |             |      |  |  |  |           | 
|-------------- |  | ----------- | --------- | -------------------------- |  | ----------- | ---- |  |  |  | --------- | 
|               |  | Number      |           | Weighted Average           |  | Number     
|Exercise Price |  | Outstanding |           | Remaining Contractual Life |  | Exercisable
|               |  |             |           |                            |  |            
|$ 0.440        |  |             | 240,000   |                            |  |             | 7.95 |  |  |  | 240,000   | 
|$ 0.450        |  |             | 38,800    |                            |  |             | 8.90 |  |  |  | 38,800    | 
|$ 0.700        |  |             | 46,500    |                            |  |             | 9.04 |  |  |  | 46,500    | 
|$ 0.710        |  |             | 332,700   |                            |  |             | 9.05 |  |  |  | 332,700   | 
|$ 0.740        |  |             | 981,450   |                            |  |             | 9.87 |  |  |  |           | 
|$ 0.800        |  |             | 2,000     |                            |  |             | 8.09 |  |  |  | 2,000     | 
|$ 0.800        |  |             | 70,000    |                            |  |             | 9.20 |  |  |  | 70,000    | 
|$ 0.800        |  |             | 12,000    |                            |  |             | 9.85 |  |  |  | 12,000    | 
|$ 0.814        |  |             | 368,550   |                            |  |             | 9.87 |  |  |  |           | 
|$ 0.850        |  |             | 65,000    |                            |  |             | 9.21 |  |  |  | 36,800    | 
|$ 0.900        |  |             | 20,000    |                            |  |             | 8.78 |  |  |  | 20,000    | 
|$ 0.900        |  |             | 1,000,000 |                            |  |             | 9.31 |  |  |  | 112,500   | 
|$ 0.910        |  |             | 50,000    |                            |  |             | 9.67 |  |  |  |           | 
|$ 0.950        |  |             | 250,000   |                            |  |             | 9.35 |  |  |  | 100,000   | 
|$ 0.975        |  |             | 4,000     |                            |  |             | 9.70 |  |  |  |           | 
|$ 0.985        |  |             | 157,700   |                            |  |             | 9.74 |  |  |  | 20,000    | 
|$ 1.000        |  |             | 40,000    |                            |  |             | 9.68 |  |  |  |           | 
|$ 1.050        |  |             | 120,000   |                            |  |             | 8.42 |  |  |  | 120,000   | 
|$ 1.090        |  |             | 30,000    |                            |  |             | 9.36 |  |  |  |           | 
|$ 1.100        |  |             | 60,000    |                            |  |             | 9.47 |  |  |  | 60,000    | 
|$ 1.180        |  |             | 8,000     |                            |  |             | 9.34 |  |  |  | 5,000     | 
|$ 1.938        |  |             | 25,000    |                            |  |             | 7.30 |  |  |  | 25,000    | 
|$ 3.375        |  |             | 12,000    |                            |  |             | 6.92 |  |  |  | 12,000    | 
|$ 4.063        |  |             | 11,500    |                            |  |             | 6.67 |  |  |  | 11,500    | 
|$ 6.250        |  |             | 2,900     |                            |  |             | 6.14 |  |  |  | 2,900     | 
|$ 7.000        |  |             | 10,000    |                            |  |             | 6.04 |  |  |  | 10,000    | 
|$13.750        |  |             | 5,300     |                            |  |             | 5.58 |  |  |  | 5,300     | 
|$14.500        |  |             | 67,600    |                            |  |             | 5.67 |  |  |  | 67,600    | 
|$14.625        |  |             | 1,200     |                            |  |             | 5.67 |  |  |  | 1,200     | 
|               |  |             |           |                            |  |             |      |  |  |  |           | 
|               |  |             | 4,032,200 |                            |  |             |      |  |  |  | 1,351,800 | 
|               |  |             |           |                            |  |             |      |  |  |  |           | 

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

F-25



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

consistent with the method of SFAS No. 123,
the Companys net loss and net loss per share would have
been reduced (increased) to the pro forma amounts indicated
below:

|                                        |             |      |   |             |   |      |   |            |   |  |   |             |  
|--------------------------------------- | ----------- | ---- | - | ----------- | - | ---- | - | ---------- | - |  | - | ----------- | -
|                                        |             | 2002 |   | 2001        |   | 2000
|                                        |             |      |   |             |   |     
|Net loss:                               |             |      |   |             |   |      |   |            |   |  |   |            
|                                        | As reported |      | $ | (26,170,426 | ) |      | $ | (5,122,915 | ) |  | $ | (19,760,578 | )
|                                        | Pro forma   |      | $ | (27,082,192 | ) |      | $ | (5,509,142 | ) |  | $ | (20,148,569 | )
|Net loss per share  basic and diluted: |             |      |   |             |   |      |   |            |   |  |   |            
|                                        | As reported |      | $ | (1.27       | ) |      | $ | (.38       | ) |  | $ | (1.48       | )
|                                        | Pro forma   |      | $ | (1.31       | ) |      | $ | (.41       | ) |  | $ | (1.51       | )

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:

|                        |  |      |              |      |  |      |              |   |  |  |                |  
|----------------------- |  | ---- | ------------ | ---- |  | ---- | ------------ | - |  |  | -------------- | -
|                        |  | 2002 |              | 2001 |  | 2000
|                        |  |      |              |      |  |     
|Dividend yield          |  |      | 0            | %    |  |      | 0            | % |  |  | 0              | %
|Expected life (years)   |  |      | 5            |      |  |      | 5            |   |  |  | 7              |  
|Expected volatility     |  |      | 150.28       | %    |  |      | 112.20       | % |  |  | 107.60         | %
|Risk free interest rate |  |      | 2.14% - 5.17 | %    |  |      | 2.32% - 4.51 |   |  |  | % 5.28% - 6.30 | %

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 additional 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 CEO and 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 Presidents options and 2,500,000 shares of
the CEOs options are vested and exercisable immediately
and have terms of ten years. The CEOs options for
1,000,000 shares are contingent and vest upon the occurrence of
certain events. 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.

10.     Earnings
(Loss) Per Share

A summary of the calculation of basic and diluted
earnings per share (EPS) for the years ended
December 31, 2002, 2001, and 2000 is as follows:

|                        |  |                                      |             |               |  |            |            |  |  |   |       |  
|----------------------- |  | ------------------------------------ | ----------- | ------------- |  | ---------- | ---------- |  |  | - | ----- | -
|                        |  |                                     
|                        |  | 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 | )
|                        |  |                                      |             |               |  |            |            |  |  |   |       |  

F-26



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                        |  |                                      |            |               |  |            |            |  |  |   |      |  
|----------------------- |  | ------------------------------------ | ---------- | ------------- |  | ---------- | ---------- |  |  | - | ---- | -
|                        |  |                                     
|                        |  | 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 | )
|                        |  |                                      |            |               |  |            |            |  |  |   |      |  

|                        |  |                                      |             |               |  |            |            |  |  |   |       |  
|----------------------- |  | ------------------------------------ | ----------- | ------------- |  | ---------- | ---------- |  |  | - | ----- | -
|                        |  |                                     
|                        |  | For the Year Ended December 31, 2000
|                        |  |                                     
|                        |  | Net Loss                             |             | Shares        |  | Per Shares
|                        |  | (Numerator)                          |             | (Denominator) |  | Amount    
|                        |  |                                      |             |               |  |           
|EPS  basic and diluted |  | $                                    | (19,760,578 | )             |  |            | 13,366,278 |  |  | $ | (1.48 | )
|                        |  |                                      |             |               |  |            |            |  |  |   |       |  

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 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.

As discussed in Note 6, the Company issued notes,
a portion of which is convertible into a maximum of 27,000,000
shares of common stock. As of December 31, 2002, there were
8,250,000 shares outstanding as a result of conversion by the
Additional Note purchasers and 8,800,000 shares outstanding as a
result of conversion by ComVest. The remaining convertible
shares are excluded from the computation of the
December 31, 2002 diluted EPS because the effect would be
anti-dilutive.

Options to purchase 774,270 shares of common
stock and warrants to purchase 435,157 shares of common stock
were outstanding as of December 31, 2001 but were not
included in the computation of the 2001 diluted EPS because the
effect would be anti-dilutive. The options have exercise prices
ranging from $0.44 to $15.50 and expire between 2008 and 2011.
The warrants had an exercise price of $.05 per share and
expiration date of June 19, 2004 (see Notes 6
and 17).

Options to purchase 701,325 shares of common
stock and warrants to purchase 500,000 shares of common stock
were outstanding as of December 31, 2000 but were not
included in the computation of the 2000 diluted EPS because the
effect would be anti-dilutive. The options have exercise prices
ranging from $0.44 to $15.50 and expire between 2008 and 2010.
The warrants have an exercise price of $14.50 and expire as
discussed in Note 11.

11. Related-Party Transactions

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

The Company had unsecured loans to the CEO, the
President of the Company, and a former Vice Chairman of the
Board of the Company in the form of notes receivable 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 require annual payments of
interest at 8% beginning on September 28, 1997 and were
amended in September 2001 to extend the maturity date from 2000
to December 31, 2002. The notes and related accrued
interest are recorded as contra-equity in the consolidated
balance sheets. In March of 2002,

F-27



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

approximately $342,000 was paid to the Company by
the CEO and the President in full settlement of their
outstanding balances, which included accrued interest. The loans
payable by the former Vice Chairman of the Board remain
outstanding.

As discussed in Note 6, on June 6,
2000, the Company obtained the BofA Bridge Loan in the principal
amount of $900,000, which was used to fund the Shareholder
Bridge Loan to the Companys CEO. The CEOs
obligations under the Shareholder Bridge Loan were
collateralized by the pledge of 2,813,943 shares of the
Companys common stock owned beneficially by the CEO. The
Companys obligations under the BofA Bridge Loan were
collateralized by the pledge of the CEOs shares to BofA
and by the collateral previously pledged by the Company to BofA
under the Companys then-existing credit facility with
BofA. The Shareholder Bridge Loan required interest at either
the Index Rate or adjusted LIBOR, as defined in the Shareholder
Bridge Loan, plus 4.5% as elected by the CEO. As of
December 31, 2000, the interest rate was based on the Index
Rate with a resulting rate of approximately 11.32%. The
Shareholder Bridge Loan and related accrued interest were
recorded as contra-equity in the consolidated balance sheets and
were due on August 30, 2000 but not paid. As a result, the
Company was unable to pay the amount due under the BofA Bridge
Loan, thereby causing the Company to default under the BofA
Bridge Loan and the BofA Credit Facility (see Note 6).
During 2001, the CEO paid the Shareholder Bridge Loan obligation
of $900,000 as described in Note 6. The accrued interest of
$109,303 under the Shareholder Bridge Loan was paid to the
Company by the CEO in June 2002.

The CEO and the 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 years ended December 31, 2001 and 2000, the
Company paid HP Aviation, Inc. approximately $58,500 and
$104,350, respectively, for use of the airplane. There were no
payments made during 2002. The agreement was terminated in 2001.
In addition, the CEO and the President of the Company each owns
a 50% interest in real estate property that is used by the
Company for various management and sales related functions.
During the three years ended December 31, 2002, 2001 and
2000, the Company incurred expenses of $7,000, $10,550 and
$15,500, respectively, payable to these officers for the
Companys use of the real estate property.

The Company had an arrangement with the 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 years ended 2001 and 2000,
the Company reimbursed the CEO approximately $8,600 and $13,800,
respectively, 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 due to common ownership by certain
officers and shareholders.

The Company has entered into a Consulting and
Services Agreement with Healthcare Alliance (the Alliance
Agreement), an affiliate of one of the Companys
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

F-28



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 years ended
December 31, 2001 and 2000. The Company also reimbursed
Healthcare Alliance for expenses incurred of approximately
$1,100 and $9,900 during the years ended December 31, 2001
and 2000, respectively. The Alliance Agreement expired on
December 31, 2001. In addition, there were no incentive fee
amounts earned during the years ended December 31, 2001 and
2000 and there were no grants of Company stock options during
years ended December 31, 2001 and 2000 related to
provision (iii) above of the Alliance Agreement.

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.

In connection with the Premier Purchasing
Partners, L.P. (Premier) Agreement, the Company
entered into a related warrant agreement with Premier (the
Warrant Agreement) pursuant to which the Company
granted Premier a warrant to acquire up to 500,000 shares of the
Companys common stock for $14.50 per share. The Warrant
Agreement provided for vesting annually in increments of 100,000
only upon the achievement of certain specified minimum annual
sales (the Minimum Annual Sales Targets) and/or
minimum cumulative sales (the Cumulative Sales
Targets) of the Companys products to participating
Premier hospitals with automatic acceleration in any given year
in the event that both the Minimum Annual Sales Targets and
Cumulative Sales Targets with respect to such year were
achieved. During the life of the Warrant Agreement, there was no
vesting under the warrant. In September 2001, Premier terminated
its agreement with the Company. As a result, the Warrant
Agreement was terminated effective with the termination of the
Premier Agreement. During the years ended December 31, 2001
and 2000, the Company paid administrative fees to Premier of
approximately $98,000 and $89,000, respectively. One of the
Companys board members served as president of Premier
until December 1999.

An affiliate of one of the 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,
2002, 2001 and 2000, the Company incurred fees of approximately
$320,000, $484,000 and $108,000, respectively, in consideration
for such services. As of December 31, 2001, amounts payable
to this affiliate totaled approximately $272,000 related to
these consulting 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 $320,000, $399,000 and $219,000 during
the three years ended December 31, 2002, 2001 and 2000,
respectively. These amounts include approximately $83,000,
$106,000 and $29,000, 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, 2001 and
2000. Approximate minimum

F-29



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

future rental payments under noncancelable
operating leases having remaining terms in excess of one year
are as follows:

|           |  |   |           | 
|---------- |  | - | --------- | 
|2003       |  | $ | 229,500   | 
|2004       |  |   | 222,600   | 
|2005       |  |   | 217,300   | 
|2006       |  |   | 202,900   | 
|2007       |  |   | 201,700   | 
|Thereafter |  |   | 432,800   | 
|           |  |   |           | 
|           |  | $ | 1,506,800 | 
|           |  |   |           | 

The Company also is a party from time to time 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 vigorously defend or pursue
each of the lawsuits. 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.

On October 9, 2000, the Company acquired
certain additional assets from IFM, including inventory of
approximately $3 million, and leasehold improvements and
other fixed assets of approximately $3 million. The Company
also assumed IFMs lease for its manufacturing facility
located in St. Petersburg, Florida. In connection with the
acquisition, a manufacturing agreement between the Company and
IFM was terminated and the Companys breaches thereunder
were resolved. In consideration for the October 2000
acquisition, the Company agreed to pay IFM approximately
$6 million.

On March 30, 2001, the Company and Vascutech
Acquisition, LLC (Vascutech) entered into an asset
purchase agreement (the IFM Agreement) whereby the
Company sold to Vascutech the IFM business and related assets.
Pursuant to the IFM Agreement, the second installment of the
purchase price in the amount of approximately $220,000 (the
Second Installment) was due from Vascutech to the
Company on September 30, 2001. On September 7, 2001,
LeMaitre Vascular, Inc. (formerly known as Vascutech, Inc.)
(LeMaitre) sent a letter to the Company seeking
indemnification under the IFM Agreement in an amount equal to
$800,000 for the Companys alleged breach of its
representations and warranties set forth in the IFM Agreement.
The Company responded to LeMaitre by letter on
September 19, 2001, notifying LeMaitre of the
Companys position that it had not breached the IFM
Agreement and indicating that the Company expected receipt of
the Second Installment on September 30, 2001. On
September 24, 2001, the Company filed a complaint for
Declaratory Judgment and Breach of Contract against LeMaitre and
Vascutech in the Superior Court of Fulton County in the State of
Georgia. The Company requested (i) judgment in the amount
of approximately $220,000, the amount owed to the Company under
the IFM Agreement; and (ii) that the Court declare that the
Company has not breached the representations and warranties in
the IFM Agreement and that its obligations under the IFM
Agreement have been fully satisfied. On November 8, 2001,
LeMaitre filed its Answer to the Complaint, denying both the
breach of contract claim and the grounds for the Companys
request for a declaratory judgment. LeMaitre also filed a
counterclaim against the Company for breach of contract, fraud
and deceit, and punitive damages. LeMaitre seeks in excess of
$800,000 in actual damages. In July 2002, the parties settled
this lawsuit.

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Also in connection with the 1998 acquisition of
IFM, the Company assumed certain license agreements (the
IFM Licensors) for the right to manufacture and sell
certain medical instruments covered by the IFM Licensors
patents or derived from the IFM Licensors confidential
information. Payments under the license agreements totaled
approximately $48,000 and $91,000 during the years ended
December 31, 2001 and 2000, respectively. There were no
payments under the license agreements in 2002. These license
agreements were transferred to Vascutech pursuant to the IFM
Agreement in March 2001.

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.
Payments under these license agreements totaled approximately
$214,400, $234,000 and $382,000 during three years ended
December 31, 2002, 2001 and 2000, respectively.

The Company has entered into various distribution
agreements under which the Company has guaranteed certain gross
margin percentages to its distributors. As a result of these
guarantees, the Company has accrued approximately $282,000 and
$649,000 as of December 31, 2002 and 2001, respectively,
related to amounts to be rebated to the various distributors.

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

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

During 1999, 2000, and 2001, the Company recorded
additional purchase price payable to the previous Stepic
shareholders of approximately $2.1 million, $1.2 million,
and $667,000, respectively, representing the Companys
additional earned contingent payments for the anniversary years
ending October 31, 1999, 2000 and 2001, respectively, as
required by the purchase agreement (the Purchase
Agreement). 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

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of approximately $27,000. The 2001 contingent
payment was due December 15, 2001, and $2.4 million,
which was previously accrued, was paid from proceeds from the
BofA Credit Facility.

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

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 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. The Company has responded to the
counterclaim and has denied liability for Cardio Medicals
damages. The suit is in the discovery phase, and the Company is
contesting the matter vigorously. At this time it is not
possible for the Company to evaluate the likelihood of an
unfavorable outcome or to estimate whether the ultimate result
will have a material adverse effect on the Companys
operations.

In November 2002, the Company was served with a
complaint filed in the United States District Court for the
Northern District of Georgia by Chepstow Limited
(Chepstow) against the Company, its Chief Executive
Officer, Marshall B. Hunt, its President, William E. Peterson,
Jr., and members of Mr. Hunts family and a family
limited partnership established by Mr. Hunt and his wife.
Chepstow alleges that it has a judgment on a promissory note
against Mr. Hunt, that it is engaging in post-judgment
collection efforts, and that the defendant parties in this
action have engaged with Mr. Hunt in fraudulent conveyances
of Mr. Hunts assets. Specifically, with respect to
the Company, Chepstow alleges that, in March 2002, Mr. Hunt
transferred 225,000 shares of the Companys common stock to
his family limited partnership, that such transfer was a
fraudulent conveyance under Georgia law, that the Company
assisted in such transfer, and that the Company engaged in an
unlawful conspiracy to hinder, delay or defraud Chepstow as
Mr. Hunts creditor. Chepstow seeks to void such
transfers and injunctive relief, compensatory damages, and
punitive damages from the defendants, including the Company. The
Company is vigorously contesting such matter and in
January 2003 filed a motion to dismiss the action against
the Company. At this time, it is not possible for the Company to
evaluate the likelihood of an unfavorable outcome or to estimate
whether the ultimate result will have a material adverse effect
on the Companys operations.

Pursuant to the terms of the Note Purchase
Agreement, the holders of the Convertible Notes have the right
to convert in the aggregate a total of $270,000 of the
Convertible Notes into shares of the Companys common stock
at a conversion price of $0.01 per share for a total of
27,000,000 shares, subject to a downward adjustment (see
Note 6). As of December 31, 2002, there were 8,250,000
shares outstanding as a result of conversions by the Additional
Note Purchasers and 8,800,000 shares outstanding as a result of
conversions by ComVest.

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. 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 Notes 6 and 17).

13. Supplemental Disclosure of Cash Flow
Information

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

|                                                                  |  |      |          |      |  |      |         |  |  |   |           | 
|----------------------------------------------------------------- |  | ---- | -------- | ---- |  | ---- | ------- |  |  | - | --------- | 
|                                                                  |  | 2002 |          | 2001 |  | 2000
|                                                                  |  |      |          |      |  |     
|Short-term debt issued for certain prepaid
    insurance coverage |  | $    | 598,916  |      |  | $    | 358,573 |  |  | $ | 135,086   | 
|Increase to goodwill related to purchase price
    allocation     |  |      |          |      |  |      |         |  |  | $ | 438,958   | 
|Notes issued for purchase of equipment                            |  |      |          |      |  |      |         |  |  | $ | 30,347    | 
|Notes issued for additional Stepic purchase
    payment           |  |      |          |      |  | $    | 227,695 |  |  | $ | 1,162,042 | 
|Reduction of long-term debt to settle other
    receivable        |  |      |          |      |  |      |         |  |  | $ | 60,255    | 
|Note issued for IFM purchase (see Note 14)                        |  |      |          |      |  |      |         |  |  | $ | 6,050,054 | 
|Discount recorded on IFM note                                     |  |      |          |      |  |      |         |  |  | $ | 451,840   | 
|Increase in notes receivable  shareholders                       |  |      |          |      |  | $    | 87,001  |  |  | $ | 76,358    | 
|Noncash payment of short-term bridge loan by the
    CEO          |  |      |          |      |  | $    | 425,610 |  |  |   |           | 
|Conversion of convertible notes to common stock                   |  | $    | 170,500  |      |  |      |         |  |  |   |           | 
|Issuance of warrants                                              |  | $    | 770,139  |      |  | $    | 260,000 |  |  |   |           | 
|Termination of warrant                                            |  | $    | (260,000 | )    |  |      |         |  |  |   |           | 

14. Impairment Charge and Sale of
IFM

During the year ended December 31, 2000, the
Company recognized an impairment loss, in accordance with APB
No. 17, on the long-lived assets of IFM. The trends for IFM
indicated that the future discounted cash flows from this
division would be substantially less than its carrying value for
long-lived assets, specifically intangibles comprised of
goodwill and patents. Accordingly, the Company recognized a
non-cash pre-tax charge of $12.1 million during the year
ended December 31, 2000 to write the assets down to their
estimated fair value based on managements estimate of the
expected proceeds to be received upon a 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 which is to be paid 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 from the purchaser on
September 30, 2001. As of December 31, 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

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2002, the Company
has fully reserved the amount due from the purchaser of
approximately $220,000. This lawsuit was settled by the parties
in July 2002.

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, 2001 and 2000.

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 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
years ended December 31, 2001 and 2000.

|              |  |       |            |        |  |               |            |       |  |        |            |  |  |   |            |  |  |   |            | 
|------------- |  | ----- | ---------- | ------ |  | ------------- | ---------- | ----- |  | ------ | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|              |  |       |            |       
|              |  | 2001  |            | 2000  
|              |  |       |            |       
|              |  |       |            | Gross  |  | Indentifiable |            |       |  | Gross 
|              |  | Sales |            | Profit |  | Assets        |            | Sales |  | Profit
|              |  |       |            |        |  |               |            |       |  |       
|Manufacturing |  | $     | 24,700,813 |        |  | $             | 13,290,988 |       |  | $      | 35,768,752 |  |  | $ | 25,717,073 |  |  | $ | 8,250,015  | 
|              |  |       |            |        |  |               |            |       |  |        |            |  |  |   |            |  |  |   |            | 
|Distribution  |  |       | 36,410,217 |        |  |               | 6,987,362  |       |  |        | 35,633,080 |  |  |   | 41,522,035 |  |  |   | 8,561,642  | 
|              |  |       |            |        |  |               |            |       |  |        |            |  |  |   |            |  |  |   |            | 
|              |  | $     | 61,111,030 |        |  | $             | 20,278,350 |       |  | $      | 71,401,832 |  |  | $ | 67,239,108 |  |  | $ | 16,811,657 | 
|              |  |       |            |        |  |               |            |       |  |        |            |  |  |   |            |  |  |   |            | 

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 years ended
December 31, 2001 and 2000 is as follows:

|                                         |                           |      |            |            |  |   |            |            | 
|---------------------------------------- | ------------------------- | ---- | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                         |                           | 2001 |            | 2000      
|                                         |                           |      |            |           
|Total segment sales                      |                           | $    | 61,111,030 |            |  | $ | 67,239,108 |           
|Elimination of intersegment sales        |                           |      | (2,044,241 | )          |  |   | (3,903,869 | )         
|                                         |                           |      |            |            |  |   |            |           
|                                         | Consolidated sales        |      | $          | 59,066,789 |  |   | $          | 63,335,239 | 
|                                         |                           |      |            |            |  |   |            |           
|Total segment gross profit               |                           | $    | 20,278,350 |            |  | $ | 16,811,657 |           
|Elimination of intersegment gross profit |                           |      | 41,852     |            |  |   | (198,530   | )         
|                                         |                           |      |            |            |  |   |            |           
|                                         | Consolidated gross profit |      | $          | 20,320,202 |  |   | $          | 16,613,127 | 
|                                         |                           |      |            |            |  |   |            |           

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2002, 2001 and 2000 is
as follows:

|              |                        |      |            |            |  |      |            |            |  |   |            |            | 
|------------- | ---------------------- | ---- | ---------- | ---------- |  | ---- | ---------- | ---------- |  | - | ---------- | ---------- | 
|              |                        | 2002 |            | 2001       |  | 2000
|              |                        |      |            |            |  |     
|United States |                        | $    | 19,963,446 |            |  | $    | 22,833,286 |            |  | $ | 22,491,077 |           
|Foreign       |                        |      | 1,748,198  |            |  |      | 1,867,527  |            |  |   | 3,225,996  |           
|              |                        |      |            |            |  |      |            |            |  |   |            |           
|              | Consolidated net sales |      | $          | 21,711,644 |  |      | $          | 24,700,813 |  |   | $          | 25,717,073 | 
|              |                        |      |            |            |  |      |            |            |  |   |            |           

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 15%, 19%, and 15% of total sales (excluding
discontinued operations of the distribution segment) during the
three years ended December 31, 2002, 2001 and 2000,
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, 2001 and 2000. As of December 31,
2002 and 2001, 36% and 15%, 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,
2002, 2001 and 2000:

|                 |                 |      |            |            |  |      |            |            |  |   |            |            | 
|---------------- | --------------- | ---- | ---------- | ---------- |  | ---- | ---------- | ---------- |  | - | ---------- | ---------- | 
|                 |                 | 2002 |            | 2001       |  | 2000
|                 |                 |      |            |            |  |     
|Ports            |                 | $    | 16,877,656 |            |  | $    | 18,499,707 |            |  | $ | 17,790,485 |           
|Port accessories |                 |      | 1,825,940  |            |  |      | 1,960,611  |            |  |   | 1,947,108  |           
|Catheters        |                 |      | 2,887,644  |            |  |      | 2,958,445  |            |  |   | 3,415,555  |           
|All other        |                 |      | 120,404    |            |  |      | 1,282,050  |            |  |   | 2,563,925  |           
|                 |                 |      |            |            |  |      |            |            |  |   |            |           
|                 | Total net sales |      | $          | 21,711,644 |  |      | $          | 24,700,813 |  |   | $          | 25,717,073 | 
|                 |                 |      |            |            |  |      |            |            |  |   |            |           

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, 2002, 2001 and 2000.

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

17. Recapitalization

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

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

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

On March 1, 2002, the Company entered into a
Note Purchase Agreement (the Note Purchase
Agreement) with ComVest, Medtronic, Inc.
(Medtronic), and 26 individual and entity Additional
Note Purchasers (collectively, the Additional Note
Purchasers). Under the Note Purchase Agreement, the
Company agreed to issue $15 million of Senior Subordinated
Convertible Notes (the Convertible Notes). Interest
on these Convertible Notes is payable quarterly beginning in
June 2002 and accrues at a rate of 6% per year for the first six
months and 8% per year thereafter until the notes are paid in
full and mature on March 16, 2004. The Company issued the
Convertible Notes as follows: $4.4 million to ComVest,
$4 million to Medtronic and $6.6 million to the
Additional Note Purchasers.

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;                                                             
|
| |  | 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;                                                                         
|
| |  | transactions with affiliates outside of the
    ordinary course of business; and                                                 
|
| |  | prohibitions on the ability to pay dividends.                                                                                    

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Events of Default include, but are not
limited to, failure to pay an obligation when due, failure to
comply with obligations under the Securityholders Agreement (the
Securityholders Agreement) or the Co-Promotion
Agreement with Medtronic (as described below), breach of any
covenant which remains uncured for 15 days, bankruptcy, a
change of control and failure to obtain shareholder approval of
certain proposals related to the Recapitalization at the
Companys 2002 annual meeting of shareholders (the
Annual Meeting) within 195 of the closing date of
March 16, 2002. On September 17, 2002, at the Annual
Meeting, the Companys shareholders approved all such
proposals relating to the Recapitalization. Generally, upon an
Event of Default, the holders of a majority of the aggregate
principal amount of Convertible Notes outstanding may declare
the unpaid principal and interest on the Notes immediately due
and payable. Additionally, Medtronic may, upon a breach 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,
2002, the aggregate amount of indebtedness which would be
subject to acceleration under the Note Purchase Agreement, the
Companys credit facility with LaSalle (as described below)
and the Junior Note (as described below), causing the same to
become immediately due and payable, was approximately
$18.5 million. The holders of the Convertible Notes have
the right to convert in the aggregate a total of $270,000 of the
Convertible Notes into shares of the Companys common stock
at a conversion price of $0.01 per share for a total of
27,000,000 shares, subject to a downward adjustment upon
repayment of all or a portion of the amounts due, as described
below. If this $270,000 is converted, the Company will still be
obligated to repay, in the aggregate, $14,730,000 to the holders
of the Convertible Notes. As of March 16, 2003, 19,800,000
shares of the Companys common stock had been issued to
holders of the Convertible Notes upon conversion thereof.

This 27,000,000 shares also includes up to
3,300,000 shares which were issued to ComVest upon conversion of
the Bridge Note (as described below). Under the conversion
terms, if the principal amount of the Additional Notes, together
with all interest due, were paid in full on or before
30 days following March 16, 2002, the Closing Date for
the transaction, then the maximum aggregate number of shares of
common stock that all the Convertible Notes may be converted
into is 22,500,000. The Additional Notes were not repaid by
April 15, 2002 and have not been repaid as of the date of
this report.

The terms of the applicable conversion periods
and conversion amounts for the Convertible Notes are as follows:

|                                                             |  |                                       |  |                                                                                                                                          
|------------------------------------------------------------ |  | ------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|                                                             |  |                                       |  | Maximum Conversion Amount During                                                                                                         
|                                                             |  |                                       |  | Applicable Period (all shares                                                                                                            
|Note                                                         |  | Applicable Period                     |  | exercisable at $0.01 per share)                                                                                                          
|                                                             |  |                                       |  |                                                                                                                                          
|ComVest Convertible Note ($4.4 million
    principal amount) |  | April 16, 2002 through March 16, 2004 |  | 1.25% of the Outstanding Balance (defined as
    principal plus accrued and unpaid interest under the ComVest
    Convertible Note), plus
|                                                             |  |                                       |  | 0.6% of the amount of principal repaid under the
    Additional Notes on or prior to April 16, 2002*                                     
|                                                             |  | March 16, 2003 through March 16, 2004 |  | An additional 0.25% of the Outstanding Balance                                                                                           

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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



---



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

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

The Company may prepay the Convertible Notes,
subject to no prepayment penalty within the first
12 months, with a prepayment penalty of 5% between months
12 to 15, and a prepayment penalty of 10% between months 15 to
24. On March 15, 2002, the Company and ComVest, as the
holder of an outstanding Bank of America Note (the 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).

F-38



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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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 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 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, including removing a covenant that
required that the Company maintain Minimum Availability (as
defined therein) under the Loan Agreement of $4 million.
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

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The December Amendment also established a
$10 million revolving loan limit and provided that,
commencing January 1, 2003, the Company shall pay to the
Lender an annual facility fee of $100,000. As of
December 31, 2002, the Company had $2.1 million
available for borrowing under the revolving portion of the Loan
Agreement. 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, 2002, 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.

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.

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, payable monthly beginning April 2002, and
matures on March 15, 2007. Beginning on May 1, 2003, a
principal payment on the Junior

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note of $22,500 is payable on the first day of
each month until maturity of the Junior Note. As of
December 31, 2002, the Junior Note was subordinated to
approximately $1.625 million 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 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 us 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.

Pursuant to the Securityholders Agreement,
ComVest and Medtronic have been granted the following:



| |   |                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;                                                                                                                              
|
| |  | the right of first refusal to participate in any
    sale of Messrs. Hunts and/or Petersons shares of
    common stock to third parties upon the same terms and conditions;                                                                                          
|
| |  | the co-sale right of first refusal to participate
    in sales of shares of common stock by Messrs. Hunt and/or
    Peterson; and                                                                                                                                      
|
| |  | the bring-along right to require
    Messrs. Hunt and Peterson to sell the same percentage of
    shares of common stock as the holders of the rights propose to
    sell in the event that the rights holders propose to sell 51% or
    more of their common stock.

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | granting ComVest the right to designate one
    ComVest director and two additional independent directors;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | requiring that certain actions of the
    Companys board of directors include the affirmative vote
    of the ComVest director (including the acquisition of or change
    of control of the Company, the sale of all or any material
    portion of the Companys assets, the liquidation,
    dissolution or winding up of the Company, the provision of any
    loan to or the ownership of any stock by the Company in an
    unaffiliated corporation, the guarantee of indebtedness outside
    of the ordinary course of business, the declaration of dividends
    other than in common stock, the amendment of the Companys
    articles of incorporation or bylaws, and the issuance of stock
    options);
|
| |  | requiring us to establish and maintain an
    Executive Committee of the Companys Board of Directors
    (the Executive Committee) consisting of the ComVest
    director as Chairman, one of the independent directors
    designated by ComVest, and Mr. Hunt; and                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | requiring that the Executive Committee approve
    certain actions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Failure to comply with the Securityholders
Agreement is considered an Event of Default under the Note
Purchase Agreement.

On March 15, 2002, the Company entered into
a Co-Promotion Agreement with Medtronic (the Co-Promotion
Agreement) under which the Company promotes and provides
technical advice for Medtronics implantable drug delivery
systems which are used for the treatment of hepatic arterial
infusion and malignant pain. After basic sales training was
completed, sales representatives of the Company and of its
distributors have commenced promoting the sale of such systems,
are identifying appropriate patients for such systems, and,
after additional training, will provide assistance in the
implantation and refill procedure for such systems, for which
identification and assistance the Company is being compensated
by Medtronic. Such compensation is as follows: (i) $150 for
identification of each appropriate patient by the Companys
sales representative, (ii) where such appropriate patient
subsequently receives an implant of either infusion system
supporting such patient with hepatic arterial infusion therapy
or malignant pain therapy, $1,000 for the first implant with
respect to each sales representative and $600 for each implant,
and (iii) $100 per implant or refill procedure during which
the Companys sales representative provides such
assistance. An appropriate patient is a patient selected for a
therapy, that is either (i) indicated for chronic
intravascular infusion of floxuridine for the treatment
primarily of metastatic cancer or (ii) indicated for
malignant intractable pain in patients with lung, breast,
prostate, or colorectal cancer. Certain procedures, tests, or
screening trials must have been completed for such patients. 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, 2002, this would total approximately
$18.5 million as subject to repayment. 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.

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 grants 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 grants 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 Recapitali-

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

zation. 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.

18. Sale of Distribution
Segment

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

Approximately $7.8 million of the cash
proceeds of the Stepic sale were used to pay down all amounts
outstanding at closing under the Companys revolving senior
credit facility with the Lender. The Company has used a portion
of, and is using 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 has been distributed to the Company
(in an amount equal to $1,051,317 plus interest of $904) and to
Arrow (in an amount equal to $48,683) in accordance with the
terms of the asset purchase agreement and escrow agreement
entered into in connection with the Stepic sale. Finally, Arrow
issued to the Company a promissory note in the principal amount
of $500,000, which bore interest at an annual rate of 5%.
Pursuant to the terms of this note, $250,000 plus interest of
$3,664 was paid to the Company on December 19, 2002 and the
balance of $250,000 plus interest of $6,199 and was paid to the
Company on March 3, 2003.

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

|                                                      |  |      |            |      |  |      |            |   |  |   |            |  
|----------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                      |  | 2002 |            | 2001 |  | 2000
|                                                      |  |      |            |      |  |     
|Net sales                                             |  | $    | 21,987,450 |      |  | $    | 36,410,217 |   |  | $ | 41,522,035 |  
|Net income (loss) from discontinued
    operations(1) |  | $    | 3,174,623  |      |  | $    | (230,972   | ) |  | $ | (670,823   | )



---



|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(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   | 

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##### Table of Contents



HORIZON MEDICAL PRODUCTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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).

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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 7,
2003 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 year ended
December 31, 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 7, 2003


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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 audits of the consolidated financial
statements 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
2000, and for the two years in the period 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, 2000,
2001, and 2002

|                                            |  |           |           |            |  |           |           |               |  |         |          |   |  |   |           |  |  |   |           | 
|------------------------------------------- |  | --------- | --------- | ---------- |  | --------- | --------- | ------------- |  | ------- | -------- | - |  | - | --------- |  |  | - | --------- | 
|                                            |  |           |           |            |  | Additions |           |               |  |        
|                                            |  | Beginning |           | Charged to |  | Costs and |           |               |  | Ending 
|                                            |  | Balance   |           | Expense    |  | Other(1)  |           | Deductions(2) |  | Balance
|                                            |  |           |           |            |  |           |           |               |  |        
|Year ended December 31, 2000:               |  |           |           |            |  |           |           |               |  |         |          |   |  |   |           |  |  |   |           | 
|Allowance for returns and doubtful accounts |  | $         | 1,031,751 |            |  | $         | 1,341,951 |               |  |         |          |   |  | $ | 148,880   |  |  | $ | 2,224,822 | 
|Inventory reserve                           |  | $         | 1,107,760 |            |  | $         | 4,036,592 |               |  |         |          |   |  | $ | 338,955   |  |  | $ | 4,805,397 | 
|Valuation allowance for deferred tax assets |  |           |           |            |  | $         | 7,595,077 |               |  |         |          |   |  |   |           |  |  | $ | 7,595,077 | 
|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 |  | $         | 7,595,077 |            |  |           |           |               |  |         |          |   |  | $ | 5,593,684 |  |  | $ | 2,001,393 | 
|Year ended December 31, 2002:               |  |           |           |            |  |           |           |               |  |         |          |   |  |   |           |  |  |   |           | 
|Allowance for returns and doubtful accounts |  | $         | 916,493   |            |  | $         | 204,000   |               |  |         |          |   |  | $ | 686,538   |  |  | $ | 433,955   | 
|Inventory reserve                           |  | $         | 3,454,761 |            |  | $         | 1,460     |               |  |         |          |   |  |   | 925,083   |  |  | $ | 2,531,138 | 
|Valuation allowance for deferred tax assets |  | $         | 2,001,393 |            |  | $         | 1,238,447 |               |  |         |          |   |  |   |           |  |  | $ | 3,239,840 | 



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|    |                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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). (See Note 18 of the Companys
    consolidated financial statements contained herein.)

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