##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-KSB


|   |  |                                                                                     
|-- |  | ------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT UNDER SECTION 13 or 15(d)
	OF THE SECURITIES
	EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31,
	2001                                        
|  
|or
|  
|o  |  | TRANSITION REPORT UNDER SECTION 13 or 15(d) OF
	THE SECURITIES
	EXCHANGE ACT OF 1934
|  
|   |  | For the Transition Period
	from          to                                         

Commission file number: 001-16781

microHelix, Inc.


(Name of Small Business Issuer in Its
Charter)


|                                                                |  |                                     
|--------------------------------------------------------------- |  | ------------------------------------
|Oregon                                                          |  | 911758621                           
|(State or Other Jurisdiction of Incorporation
	or Organization) |  | (I.R.S. Employer Identification No.)
|16125 SW 72nd Ave.; Portland, Oregon                            |  | 97224                               
|(Address of Principal Executive
	Offices)                       |  | (Zip Code)                          

(Issuers Telephone Number, Including
Area Code):

503/968-1600


Securities registered under Section 12(b)
of the Exchange Act:

|               |                                                                                                                  |                                                  |                                                 
|-------------- | ---------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------------
|Title of Class |                                                                                                                  | Name of each exchange on which registered       
|               |                                                                                                                  |                                                 
|Common
	Stock  |                                                                                                                  | Nasdaq SmallCap Market and Boston Stock Exchange
|               | Class A Warrants to purchase one share of
	Common Stock                                                          |                                                  | Nasdaq SmallCap Market and Boston Stock Exchange
|               | Class B Warrants to purchase one share of
	Common Stock                                                          |                                                  | Nasdaq SmallCap Market and Boston Stock Exchange
|               | Units of one share of Common Stock, one
	Class A
	Warrant                               and
	one Class B Warrant |                                                  | Nasdaq SmallCap Market and Boston Stock Exchange

Securities registered under Section 12(g)
of the Exchange Act:

None


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

Check if no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B is contained in
this form, and no disclosure will 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-KSB, or any amendments to this
Form 10-KSB.    þ

The issuers revenues for its most recent
fiscal year: $6,222,283.

The aggregate market value of the voting and
non-voting common equity held by non-affiliates, as of
March 15, 2002, was approximately $6,275,000 based upon the
last sale price reported for such date on the NASDAQ SmallCap
Market. The aggregate market value of the Class A Warrants
and Class B Warrants as of March 15, 2002, was
approximately $910,000 and $1,349,000, respectively, based upon
the last sale price reported for such date on the NASDAQ
SmallCap Market. For purposes of this disclosure, shares of
Common Stock held by persons who hold more than 5% of the
outstanding shares of Common Stock and shares held by officers
and directors of the registrant have been excluded because such
persons may be deemed to be affiliates. This determination is
not necessarily conclusive.

The number of shares outstanding of each of the
issuers classes of common equity, as of March 15,
2002 was 4,659,886 shares of Common Stock, 3,136,498
Class A Warrants, and 3,136,498 Class B Warrants.

Documents Incorporated by Reference

|                                                                                             |  |                                                          
|-------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------
|Document                                                                                     |  | Part of Form 10-KSB into which Documents are Incorporated
|                                                                                             |  |                                                          
|Portions of Registrants Definitive Proxy
	Statement for 2002 Annual Meeting of Shareholders |  | Items 9, 10, 11 and 12 of Part III                       

Transitional Small Business Disclosure Format
(Check
One):    Yes o         No þ

This Annual Report on Form 10-KSB contains
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements
reflect managements current view and estimates of future
economic and market circumstances, industry conditions, company
performance and financial results. Words such as
expects, anticipates,
intends, plans, believes,
seeks, estimates and variations of such
words and similar expressions are intended to identify such
forward-looking statements. These statements are subject to
risks and uncertainties that could cause the companys
actual future results to differ materially from the results
discussed herein. Factors that might cause such a difference
include, but are not limited to, those discussed elsewhere in
this Annual Report on Form 10-KSB. We do not intend, and
undertake no obligation, to update any such forward-looking
statements to reflect events or circumstances that occur after
the date of this filing.



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TABLE OF CONTENTS



|              |                                                                                                |  |  |  |  |  |  | 
|------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. 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 Companys Common Equity and Related Shareholder Matters                
|              | Item 6. Managements Discussion and Analysis of Financial Conditions and Results of Operations
|              | Item 7. Financial Statements                                                                  
|              | Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  
|PART III     
|              | Item 9. Directors and Executive Officers of the Registrant                                    
|              | Item 10. Executive Compensation                                                               
|              | Item 11. Security Ownership of Certain Beneficial Owners and Management                       
|              | Item 12. Certain Relationships and Related Transactions                                       
|PART IV      
|              | Item 13. Exhibits and Reports on Form 8-K                                                     
|Exhibit 10.26
|Exhibit 10.27
|Exhibit 10.28
|Exhibit 10.29
|Exhibit 10.30
|Exhibit 10.31
|Exhibit 10.32
|Exhibit 10.33
|Exhibit 10.34
|Exhibit 10.35
|Exhibit 10.36



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PART I




Item
1.     Business

Overview

We develop and supply technologically advanced,
customized interconnect systems to the medical device industry.
We commenced business as a research and development company in
1991. In the following years, we established a foundation of
proprietary processes and intellectual property that we
developed or acquired in the areas of fine wire handling,
materials management, micro-interconnect technology and
micro-manufacturing. Building on this foundation, we began to
move from research and development to commercial sales of our
systems to medical device original equipment manufacturers, or
OEMs, in 1998. We now provide interconnect systems to medical
device OEMs in three markets:



| |   |                                                       
| | - | ------------------------------------------------------
| |  | the non-invasive diagnostic ultrasound device
	market;
|
| |  | the minimally invasive device market; and             
|
| |  | the fully implantable device market.                  

Our objective is to be the leading supplier of
customized interconnect systems to OEM customers in these target
markets. To meet this objective, we provide our customers with:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | design assistance in the product development and
	engineering phase for the customers medical devices;
|
| |  | access to difficult-to-find biocompatible
	materials that enable the functions we support; and         
|
| |  | a high-quality, cost-effective manufacturing
	process.                                                 

Our existing and target markets are dominated by
a few large OEMs. The remainder of the market space is filled
generally by smaller, niche companies. We seek to identify key
customers, both large and small, in the early stages of their
product development cycles and provide a customized,
application-specific product for their electronic interconnect
applications. We offer the larger companies a cost-efficient,
reliable and customized system for their devices and we offer
expertise and technology not otherwise available to many of the
smaller companies.

We currently sell systems in commercial
quantities to OEMs of non-invasive diagnostic ultrasound devices
and minimally invasive devices. In addition, we are in
discussions with and, in some cases, have supplied prototype
systems to OEMs in the fully implantable device market that we
expect will lead to our entry into that market.

Our target markets and strategy

Recent advances in medicine and technology have
radically changed many aspects of medical science. Doctors are
now able to assist their patients using non-invasive diagnostic
ultrasound; undertake minimally invasive surgery that shortens
recovery time, reduces medical costs and inflicts substantially
less trauma on the patient than does traditional surgery; and,
if necessary, implant a semi-permanent or permanent medical
device inside the body.

These advances are the result of both an improved
understanding of human biology and advances in medical equipment
technology, particularly in the area of device miniaturization.
The size of a medical device is often limited by the size of the
natural pathways of the human body and the organs into which it
must fit. This means that there is a correspondingly fixed
requirement for miniaturization of the interconnect system that
will transmit the electronic signals between the devices
components.

Technologies we have developed enable us to
design and manufacture interconnect systems for medical devices
that meet these requirements.

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While each of our target markets has different
needs and requirements, we believe that we are well positioned
to provide our OEM customers with electronic interconnect
systems as they attempt to create ever smaller devices capable
of performing increasingly complex functions. We also believe
that the markets for our customers devices will remain
robust for the foreseeable future as an aging population and a
rise in chronic illnesses that affect older people, such as
cardiovascular disease, continue to increase demand for new and
complex medical procedures. Our current backlog, consisting of
firm orders, was $1,505,504 at December 31, 2001.

Non-invasive
diagnostic ultrasound device market

The need of the healthcare industry to control
costs and the desire of patients to minimize the adverse effects
of both disease and its treatment is moving the industry toward
outpatient procedures and reinforcing its traditional focus on
preventative care. Doctors now regularly use ultrasound devices
for initial soft tissue diagnoses because they are non-invasive
and do not involve radiation. This has resulted, among other
things, in a market opportunity for low-cost, high-performance,
non-invasive diagnostic ultrasound devices.

The non-invasive diagnostic ultrasound market has
seen a consolidation in recent years and is a mature, slow
growth market dominated by three major OEMs. The diagnostic
ultrasound imaging marketplace has been affected by recent
decreases in hospital spending, and we do not foresee this
market returning to historical levels in the near future. This
mature market is primarily cost driven. We focus on
just-in-time, foreign manufacturing, currently done in our
Nogales, Mexico facility, to maintain a low-cost production
source.

Minimally
invasive device market

Electrophysiology, or EP, is an emerging sector
in minimally invasive surgery. EP deals with the electrical
functioning of the human body. Minimally invasive surgeries for
EP are accomplished by making a minor incision in the body and
then introducing a guide wire, followed by a biocompatible
hollow tube, or catheter, which travels over the guide wire to
the location where the procedure takes place. The surgical or
diagnostic instruments are either an integral part of the
catheter system or are threaded through the catheter to the
procedure site. Most of the devices used in these procedures are
single-use, disposable items, such as interventional ultrasound,
or IVUS, image-guided catheters. These are known as
smart catheters because, unlike traditional
catheters that only convey drugs or other substances to and from
the body, they include micro-wire and cable inside the catheter
that permit the transmission of data. The assembly connects
sensors at one end of the catheter to the device at the other
end.

A new and potentially high growth segment of the
minimally invasive device market is EP cardiac mapping. This
procedure utilizes smart catheters to map the nerve circuitry of
the heart from inside the beating heart in order to locate the
source of irregular heartbeats. After the source has been
located, the problem area can be selectively altered or cut
using radio frequency, or RF, energy and the patient essentially
cured. These procedures are conducted within hospital catheter
labs and in many cases are single-day outpatient procedures.

The most mature versions of smart catheters are
the image-guided balloon angioplasty catheters. These catheters
are guided through an artery to the point where the artery is
blocked. The balloon attached to the catheter is inflated to
open the artery and clear the blockage. Often, a stent, which is
a tiny mesh device, is then placed to support the artery and
keep it from collapsing or closing again. From 1979 to 1998, the
number of cardiac catheterizations performed in the United
States for diagnosis and treatment purposes increased 332%. In
1998, an estimated 1,290,000 inpatient cardiac catheterizations
were performed, making it the most common medical intervention
in the world. In addition, an estimated 539,000 coronary
angioplasty procedures were performed for the treatment of
atherosclerosis in the United States. This number continues to
rise as researchers, device makers, and interventional
cardiologists perfect the procedures, devices and visualization
tools associated with interventional cardiology.

We expect the industry trend toward minimally
invasive procedures to continue because it has shortened
recovery time, reduced medical costs, and improved the quality
of patients lives compared to the use of

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traditional surgical methods. We believe that
there are a large number of potential applications for smart
catheter technology and that, as a result, there is a potential
for this area of our business to experience substantial growth.
Additionally, because smart catheters are used inside the body
for specific medical procedures, they are
disposable, requiring a new catheter each time the
procedure is performed.


The devices into which our interconnect systems
fit are technology-driven but cost-sensitive. A key requirement
in this emerging market is the ability to miniaturize device
components that are required to operate inside the body, while
retaining the operational accuracy and precision required to
perform more complex and demanding procedures. We have the
capability to manufacture and supply interconnect systems that
meet these market demands by combining our product design
engineering and prototyping capabilities in our Portland
headquarters with foreign, sourced manufacturing.

Fully
implantable device market

In recent years, major advances have been made in
all aspects of medical technology for implantable devices that
are capable of providing controlled electrical stimulation of
precise areas, thereby normalizing and controlling heart and
other organ functions. The ability to miniaturize these complex
devices permits the full implantation of the device in the body,
replacing larger, external devices and increasing patient
mobility. Led by microelectronic packaging advances, fully
implantable left ventricular assist devices, or LVADs, and
neurostimulation devices are promising developments for patients
with cardiac disease and neurological disorders like
Parkinsons disease and epilepsy. We believe that the
foundation of biocompatible material science knowledge and
experience that we have applied to implantable cables and cable
assemblies will be useful to OEMs in the new generation of
devices being developed.

LVADs assist the pumping function of the
hearts left ventricle, its main pumping chamber. Newer
versions of the device are electrically driven by internal
batteries that can be recharged on a regular basis (every few
hours) by means of a non-invasive, wearable battery pack that
transmits power through the skin. LVADs are generally thought of
as a bridge to transplant for patients with end-stage heart
failure. With an estimated 20,000 to 40,000 Americans that would
benefit from a heart transplant each year and only approximately
3,500 donor hearts available worldwide annually, the emerging
strategy conceives of LVADs less as temporary devices to support
a patient until a transplant is available and more as devices
intended to provide long-term, untethered cardiac assistance.
The LVAD market has five major participants, each of which will
vie for the dominant position over the next several years of
clinical trials. Three of these five major companies are
currently our customers.

Neurostimulation devices are implantable medical
devices that extend into certain areas of the brain and can
sense and stimulate these areas. These devices are used to
control epileptic seizures, tremors associated with
Parkinsons disease, and back pains related to spinal cord
injuries. Although there are a variety of medical devices in
development in the neurostimulation market, our primary focus
has been on the OEMs developing pacing-like devices to treat
Parkinsons disease and epilepsy. Medtronic, Inc. controls
the majority of the neurostimulation market. With the exception
of Cyberonics, Inc. and Advanced Neuromodulation Systems, Inc.,
the balance of the market is fragmented in terms of the disease
states being pursued and the devices under development by any
given OEM. We believe our technologies could play an important
role in these areas as well.

We believe that our manufacturing base and
technical expertise present us with a marketing opportunity to
efficiently and cost-effectively develop cable assemblies for
the next generation of cardiac rhythm management devices and the
neurostimulation device markets. We believe our greatest
opportunity for growth in both the LVAD and neurostimulation
device markets lies in our entrance to these markets initially
as a supplier to small, niche companies with innovative ideas.
We can then leverage this expertise to gain access to the larger
OEMs, which may find it advantageous in certain circumstances to
outsource these devices.

Our core competencies

microHelixs technologies and manufacturing
processes have been developed to address the need for ever
smaller and more complex interconnect systems that transmit
data, electrical power or other electronic signals

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between components of the medical device or
directly to an organ or other part of the body. We have
developed core competencies to meet this need in the following
areas:




| |   |                                                 
| | - | ------------------------------------------------
| |  | fine wire handling, extrusion and coating;      
|
| |  | cabling of complex and hybrid wire geometries;  
|
| |  | custom connector design and manufacture;        
|
| |  | micro-interconnect technology terminations;     
|
| |  | micro-flex circuits; and                        
|
| |  | ultraviolet laser micro-machining of electrodes.

Our technology is focused on the complementary
design of all components of sophisticated electronic
interconnect systems so as to optimize the reliability and
functionality of the system as a whole.

We continuously refine our core competencies to
better serve our markets as we develop additional systems for
our customers and, in the case of our laser technologies,
through micro-machining and micro-manufacturing performed on a
contract basis for companies inside and outside the medical
device industry. With funding from government grants, we have
created a foundation technology in biocompatible materials
science related to interconnect systems. As we have moved from
pure research and development into commercial design and
production of our interconnect systems, we have continued to
develop our technology through application-specific development
for OEM customers as well as through more general studies done
pursuant to government grants.

Our products

Non-invasive
diagnostic ultrasound device market

We design and manufacture probe cables for
diagnostic ultrasound devices. The proliferation of applications
for ultrasound imaging has resulted in demand for more and more
accurate ultrasound images and therefore for more and more
complex interconnect systems. Probe cables are the components of
an ultrasound imaging device most subject to damage due to the
dynamic user interface. A typical microHelix probe cable
connects to a transducer, an ultrasound imaging sensor, and
consists of between 64 and 256 micro-coaxial wires.

Reliability and cost are the keys to the success
of ultrasound imaging devices. Long-life probe cables are
important to an OEMs goodwill with users and the medical
ultrasound market presents a demanding environment as these
cables must withstand physical stress from continuous handling
by a radiologist or sonographer. Our micro-coaxial wire and
cable technology is at the core of our design and manufacturing
competency. Although electrical performance and image quality is
important in the design of these cables, the competitive
advantage that distinguishes our systems from those of our
competitors is our cables long-term reliability and
mechanical integrity. In addition, we offer competitive pricing
to OEMs.

We have sold probe cables for diagnostic
ultrasound devices in commercial quantities since 1999 when we
became a global reseller for Alcatel N.A. Cable Systems, a North
American subsidiary of Alcatel Alsthom, a large, multi-national
wire and cable manufacturer based in France. In December 1999,
we acquired certain assets of that subsidiarys value-added
ultrasound cable assembly division that provided us with the
ability to enter the diagnostic ultrasound market as a
manufacturer. We currently have approximately eight diagnostic
ultrasound customers. In 2001, Philips Medical Systems, formerly
Agilent, accounted for approximately 72% of our diagnostic
ultrasound business and the diagnostic ultrasound business as a
whole accounted for 42% of our total sales for 2001. We believe
that this is a relatively mature market that will grow slowly
over time and probably not offer the high growth opportunities
that we expect in our other market sectors.

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Minimally
invasive device market

We are a pioneer in the design, development and
manufacture of minimally invasive smart catheters.
Most of the interconnect systems we currently sell in this
market are used either in IVUS catheters or in EP cardiac
mapping catheters. IVUS catheters are commonly used in therapy
for people suffering from blocked arteries requiring balloon
angioplasty and stent placement.

EP cardiac mapping is an emerging therapy for
atrial fibrillation, or the correction of irregular heart
rhythms. The smart catheters used in EP cardiac mapping contain
intrabody cardiac navigation and localization technology with
image and data processing capabilities that include navigational
elements called micro-coils. The micro-coils provide data to a
computer that locates the catheter tip within millimeters in
three-dimensional space in real time, much like a localized
global positioning system, while the tip is being moved about by
the blood flow in the beating heart. This enables the operators
to determine with great accuracy the location of a problem
within the heart and to return to that location to correct the
problem. We are an innovator in the electronic packaging of the
micro-coil systems imbedded in the flexible tip of these
navigational catheters. Without our enabling technology, many of
these devices might not be feasible at a price that would meet
market demands and medical insurance reimbursement policies.

Our systems and technologies have potential
applications in the minimally invasive device market in devices
used in arthroscopy, interventional neuroradiology, EP cardiac
mapping and ablation, diagnostic ultrasound interventional
imaging, and atrial ablation. We believe that there are many
other minimally invasive niche markets still in development
where our technology and systems can be applied.

We have sold interconnect systems for this market
in commercial quantities since 1999. In 2001, Jomed N.V.
accounted for virtually all of our smart catheter business. As
of December 31, 2001, we had nine customers in the
minimally invasive device market, primarily in the EP segment.
Sales to these customers represented 24% of our total sales for
2001.

Fully
implantable device market

We have developed enabling technology with
applications for the new LVADs and neurostimulation devices. We
are building a technology platform based on micro-cables and
interconnect systems that meets the demands of the environment
inside the human body. Over the past ten years, we have studied
and developed the biocompatible material sciences applicable to
these transmission lines through grants from and contracts with
the National Institutes of Health.

We are using our experience and technology to
collaborate with LVAD OEMs to create fully implantable devices.
These devices consist of a pump, a controller and a power source
such as a battery, connected by implantable cables and
connectors that we manufacture. We have development contracts
with three OEMs to provide interconnect systems for LVADs as
this technology progresses from laboratory to commercial
production and sale.

Our customers in the neurostimulation market are
developing pacing-like devices to treat Parkinsons disease
and epilepsy that require a specialized multi-conductor wire and
cable expertise such as ours. We are working under a development
contract with a major OEM to design, develop and manufacture
prototypes of next generation cables for an application in
neurostimulation that is expected to treat Parkinsons
disease and epilepsy.

At December 31, 2001, we had five customers
in the fully implantable device market. Sales to these customers
accounted for 18% of our total sales for 2001.

Other
Products

Because we have invested in sophisticated
manufacturing equipment to meet our needs in our core product
areas that is not fully utilized for these purposes, we have
also actively marketed our design, engineering, and
manufacturing capabilities to other cable and wire and laser
micromachining customers. Current and prospective customers in
this market include patient monitoring, defense, aerospace, test
and

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measurement, and other commercial opportunities.
This activity accounted for approximately 4% of total sales for
2001.


Major customers

In 2001, sales to our three largest customers,
Philips Medical Systems, Jomed N.V., and World Heart, accounted
for 30%, 19%, and 12%, respectively, of total sales. No other
customer accounted for more than 10% of total sales.

Sales and marketing

Our direct sales force currently consists of our
President and six other employees. This team is supported by our
application and product development engineers.

We rely primarily on direct contact with
potential customers and direct mail advertising to generate
awareness of our capabilities. Sales leads and known industry
targets receive follow-up sales visits. As necessary, our
engineers support and visit customers to promote collaborative
design engineering. We develop and sell our systems to OEMs of
all sizes, including multinational corporations, and we ship our
systems to the locations that they specify.

Our sales cycle generally takes from six to
eighteen months from the initial visit to the first shipment.
Our sales process involves designing our systems into new
medical devices, so the sale of these systems in commercial
quantities is preceded by a pre-production design phase in which
we produce various prototype systems based on the combined input
from our customers engineers and our staff. The extent of
pre-production design activity varies from customer to customer
and from system to system, depending on the degree of
customization required for the particular application and the
level of engineering detail developed by the customer prior to
our involvement. Where there is a significant pre-production
design phase, we generally require a development contract under
which we receive non-recurring revenues to design and produce
prototype systems. There is minimal margin on these types of
contracts and in some cases these contracts are performed on a
cost-recovery basis in anticipation of receiving a volume
manufacturing contract. Our customers medical devices
often must obtain the approval of the FDA and other regulatory
agencies before commercial production can begin. If the device
is approved and we receive a purchase order for our systems, we
begin to manufacture our interconnect system in commercial
quantities. Once we enter into the commercial production stage,
an OEM customer usually offers us a long-term revenue stream,
ordinarily lasting several years. We also expect sales cycles
for new systems to existing customers to be shorter than those
for initial system sales, although the nature of the device and
its application may cause the cycle to remain quite long.

Manufacturing

With the exception of the ultrasound interconnect
systems we assemble in Mexico, we generally design, develop,
manufacture and assemble our interconnect systems in our
facility in Portland, Oregon. At maximum capacity, we believe
the Portland facility is capable of sustaining a level of
production that can support sales up to $20 million on an
annual basis. Whenever possible, we seek to automate our
processes, which generally results in higher yields, more
consistent quality, and lower costs. We have assembled a
carefully selected array of equipment, including laser tools,
for cutting very small and very accurate patterns in a variety
of media. Our lasers produce an extremely precise, well-defined
pattern on micro-miniature geometries. Paths can be cut as
narrow as seven microns wide with a repeatability of 2 microns
on ultra-thin materials. We machine metal foils, piezo electric
composites and many polymers with precision accuracy.

The Portland facility is equipped with a broad
range of production equipment. Our Portland cable plant includes
equipment used in the extrusion, braiding, serving, cabling, and
coating and assembly of interconnect systems. Our custom-built,
ultra-thin wall extrusion line can provide wire insulation
pinhole free below .001 inch. The process is computer monitored
and logged continuously, providing capacitance, overall
thickness and quality information. Ultra-thin, pinhole free
extrusions reduce dimensions for dense cable geometries used in
medical and micro-electronic applications.

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In the developing area of high quality,
thin-film, custom flexible circuits, or micro-flex,
we offer custom coatings and patterned substrates for sensors,
biomedical devices and microelectronics. We do contact mask
alignment on substrates up to 100 mm diameters and use
photolithography and shadow masks for pattern generation.
Applications for this developing technology include medical
ultrasound, IVUS, EP cardiac mapping, neurological brain probes,
smart catheters, in vivo devices, and wearable computers.

Although we purchase the basic machines or their
principal components from commercial sources, we have designed
and engineered a number of critical modifications that enable us
to meet the most demanding applications and customer
requirements. We maintain a fully equipped machine shop in the
Portland facility to support modifications to the equipment as
necessary. The machine shop also provides us with capabilities
to create custom tooling and fixtures to ensure the precision
manufacturing results required by our customers.

We manufacture most of the ultrasound cables used
in our diagnostic ultrasound interconnect systems in our
Portland facility. The cables are sent to our regional office in
Tucson, Arizona where they are paired with the necessary
connector parts and shipped to the modern assembly facility that
we have leased in Nogales, Mexico where the interconnect systems
are assembled. After quality review, the completed assemblies
are returned to our sales fulfillment office in Tucson for final
review and shipment to the customer.

We are currently positioning our manufacturing
system to achieve compliance with the ISO 9001:2000 Quality
Management Standard and expect to apply for ISO registration in
the third quarter of 2002.

Competition

Several other companies, most of which are more
established and larger than we are, manufacture interconnect
systems that offer the customer a competitive alternative in
some applications. These companies include Innovex, Inc.,
InnoMedica, Inc., W.L. Gore & Associates, Inc., Precision
Interconnect Corporation, VEMCO Limited, Tensolite Company and
Medtronic. While we believe that some of our manufacturing
techniques enable us to provide more complex data transmission
within a given space constraint than products offered by these
companies, other factors, such as price, established
relationships and support may influence customer choice where
our particular abilities are not critical. Moreover, other
companies, including those listed above, could develop
technology and manufacturing techniques that would permit them
to offer competitive or superior products across a broad range
of our target applications.

We believe that our most significant current
competition comes from our customers and potential customers
who, for a variety of reasons, may choose to produce
interconnect systems in-house, either by maintaining the
capability to produce fully integrated interconnect systems or
by purchasing components from other suppliers and assembling
them in-house. While we believe that the current trend among
OEMs is towards outsourcing the manufacture of product
components not within their core competency, our ability to sell
to these customers depends on our ability to propose and execute
on a program that is both technologically appropriate and cost
competitive.

Research and development

Our research and development efforts are focused
on building our core competencies as a state-of-the-art
manufacturer of miniaturized, high capacity interconnect
systems. In the initial stages of our development, we received
funding for a substantial portion of our research and
development efforts from government grants. During 2001,
government grants from the National Institutes of Health
accounted for 12% of our total revenues, although we expect the
percentage to decrease in the future as our commercial sales
increase. Each of the two grants currently in effect has less
than one year of funding remaining, with one expiring in March
2002 and the other expiring in July 2002.

Our current grants are from the National
Institute of Neurological Disorders and Stroke and the National
Institute of Mental Health. We are responsible for reporting any
inventions derived or reduced to practice in the performance of
work under the grants. In addition, the grant contracts are
subject to the terms and conditions described in this section as
well as other terms and conditions standard to government
research contracts.

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As a condition to the funding we receive from the
government, the government obtains royalty-free, nonexclusive
rights to the technology we develop using its grants. To date,
to our best knowledge, the government has not utilized any of
these licenses. For interconnect systems we develop for our
commercial customers, we do not grant rights of any kind to any
of our background technology used in the development and
production of the system. The customer, however, generally
obtains exclusive rights to the foreground technology specific
to the interconnect system created for their medical device.

Other research and development efforts have been
funded from the sale of equity and other capital infusions. As
our business has matured, the focus of our efforts has shifted
from basic research and development to the development of
specific systems, either for our customers or in anticipation of
a particular market opportunity. Wherever possible, we seek to
fund these efforts through development contracts with our
customers. We expect, however, that we will be required to
continue to self-fund research and development projects to
maintain the capabilities that we expect our evolving markets to
demand of us.

The following table illustrates the sources and
amounts of research and development expenditures for microHelix
for the periods indicated:

|                  |  |                         |           |      |  |   |           | 
|----------------- |  | ----------------------- | --------- | ---- |  | - | --------- | 
|                  |  |                        
|                  |  | Year Ended December 31,
|                  |  |                        
|Source            |  | 2000                    |           | 2001
|                  |  |                         |           |     
|Government grants |  | $                       | 853,000   |      |  | $ | 761,000   | 
|Customer-funded   |  |                         | 208,000   |      |  |   | 951,000   | 
|Self-funded       |  |                         | 212,000   |      |  |   | 101,000   | 
|                  |  |                         |           |      |  |   |           | 
|Total             |  | $                       | 1,273,000 |      |  | $ | 1,813,000 | 
|                  |  |                         |           |      |  |   |           | 

Patents and intellectual property

We have patents, patent applications and trade
secrets and we use each method of protection in cases where it
is most appropriate. Where appropriate, we file patent
applications and continuations to cover both new and improved
methods of manufacturing electronic interconnect systems and
technologies. Aspects of our technology are protected by seven
U.S. patents. Additionally, 11 U.S. patent applications have
been filed with the United States Patent and Trademark Office.
The patent applications are in various stages of examination.
The subject matter of one of our patents has also been filed as
a Patent Cooperation Treaty International Application claiming
priority from the U.S. patent application. None of the other
applications or patents is the subject of an international or
foreign national application or patent, although some of the
applications have been filed recently enough that an
international or foreign national application could still be
filed claiming priority from the U.S. patent application. The
seven issued patents noted above will expire between 2016 and
2020. Our intellectual property is also protected by trade
secrets and proprietary knowledge.

We currently own one trademark that is listed on
the principal register of the United States Patent and Trademark
Office and we have applied to register microHelix as
a trademark. Our intellectual property also includes common law
trademarks, service marks and trade names.

We have not yet had occasion to enforce any of
our patent or other intellectual property rights. Any decision
to do so will depend on the perceived cost and benefit of the
enforcement effort. While we believe our patents afford some
competitive advantage, such protection is limited by the
resources available to us to identify potential infringements
and to defend our rights against infringement. The extent of the
protection offered by any patent is subject to determinations as
to its scope and validity that would be made only in litigation.
We cannot be sure that our patents will afford meaningful
protection from competition.

We make what we believe are reasonable efforts to
avoid infringing the intellectual property rights of others. We
perform a patentability search prior to applying for a new
patent ourselves and analyze the results of this search with
respect to the possibility of infringement of the patents found.
In addition we make an effort to keep abreast of the general
patent landscape in our areas of concentration. While it is
never our policy to infringe intellectual property rights of
others, we may, despite our efforts, be unaware of the existence
of rights in intellectual property that we incorporate into our
designs or manufacturing processes. We may also

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incorporate intellectual property into our
products based on assurances from our suppliers or customers
that they are licensed to use the intellectual property, and
these assurances may prove to be incorrect. Finally, we may
reach conclusions as to whether a particular design or process
infringes intellectual property rights that is challenged by the
holder of those rights. For all of these reasons, we are subject
to the risk that our designs or processes may be found to
infringe intellectual property rights of others. Any such event
could result in significant liability costs and defense costs
and could have a material adverse effect on product sales.


Company history

The history that has led to the present company
began in 1991 with the formation of BioElectric Corporation, a
grant-funded research company formed to develop cutting edge
manufacturing techniques for implantable medical device
interconnect systems. Between its formation and its acquisition
by the Company in 2000, BioElectric Corporation received
approximately $5 million in grants from the National Institutes
of Health for research and development projects in implantable
medical devices, materials sciences and the related
technologies. microHelix was incorporated in 1996 and organized
in 1997 as microHelix Labs, Inc. to develop and
manufacture cable assemblies for use in the medical device
industry.

In 1999, we changed our name to mHL
Development Company and began a process of restructuring
to become a holding company. In that year, we acquired all of
the stock of Key Tech, Inc., a developer and manufacturer of
microelectronic interconnects for commercial and
military/aerospace markets. In December 1999, we acquired
certain assets of the medical ultrasound division of Alcatel NA
Cable Systems, Inc., the American subsidiary of one of the
largest wire and cable manufacturers in the world, which engaged
primarily in the design and manufacture of cable assemblies for
use in non-invasive ultrasound probes and systems. In connection
with this acquisition, we acquired facilities and employees in
Tucson, Arizona and Nogales, Mexico. In February 2000, we
purchased all of the stock of BioElectric Corporation.

On December 31, 2000, we merged all of our
subsidiaries except BioElectric into the parent corporation. The
practical effect of the mergers and simultaneous transfer to the
Company of all of the employees and substantially all of the
assets of BioElectric has been minimal, as the business of our
former subsidiaries continue to operate as before, only now they
function as specialized divisions of the Company rather than
separate corporate entities owned by it.

Employees

We had 58 full-time employees in the United
States as of December 31, 2001. In our corporate offices
and manufacturing facilities in Portland, Oregon, we had 49
full-time employees and in our regional office in Tucson,
Arizona, we employ seven full-time employees. We also employ
three sales managers, two located in the United States and one
located in Asia. Additionally, we contract with a company in
Mexico that employs 24 people to work at our factory in Nogales,
Mexico. None of our employees are represented by a collective
bargaining agreement, nor have we experienced any work stoppage.
We consider our relationship with our employees to be good.




Item
2.     Properties

We lease 20,000 square feet of office and
manufacturing space at our headquarters in Portland, Oregon
under a lease that expires July 2002. The space includes three
clean rooms suitable for our required applications. We lease
approximately 3,500 square feet of office and warehouse space in
a business park in Tucson, Arizona under a lease that expires
August 2003. We lease 30,000 square feet of manufacturing space
in Nogales, Mexico. The current lease expires in January 2003
and contains renewal options.




Item 3.     Legal
Proceedings

As of March 15, 2002, we are not engaged in
any legal proceedings nor are we aware of any pending or
threatened legal proceedings that, singly or in the aggregate,
will have a material adverse effect on our business, financial
condition or results of operations. From time to time the
Company may become involved in ordinary, routine, or regulatory
legal proceedings incidental to the business of the Company.

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

No matters were submitted to a vote of the
Companys security holders during the fourth quarter of
fiscal year 2001.




PART II




Item 5.     Market
for the Companys Common Equity and Related Shareholder
Matters

On November 16, 2001, the Company completed
its Initial Public Offering, or IPO, selling 2,000,000 Units at
$6.00 per Unit. In December 2001, the Company sold an additional
300,000 Units pursuant to the terms of the over-allotment
agreement related to the IPO.

Our Common Stock is quoted on the NASDAQ SmallCap
Market and the Boston Stock Exchange under the symbol
MHLX AND HLX respectively. As of
March 15, 2002, there were approximately 64 holders of
record of our Common Stock and approximately 600 beneficial
owners of our Common Stock. The closing price of our Common
Stock was $2.09 per share as reported by the NASDAQ SmallCap
Market. Our Class A Warrants are quoted on the NASDAQ
SmallCap Market and the Boston Stock Exchange under the symbol
MHLXW and HLX&L respectively. As of
March 15, 2002 there were approximately 11 Class A
warrantholders of record and the closing price of our
Class A Warrants was $.29 per share as reported by the
NASDAQ SmallCap Market. Our Class B Warrants are quoted on
the NASDAQ SmallCap Market and the Boston Stock Exchange under
the symbol MHLXZ and HLX&Z
respectively. As of March 15, 2002 there were approximately
11 Class B warrantholders of record and the closing price
of our Class B Warrants was $.43 per share as reported by
the NASDAQ SmallCap Market. Our Common Stock, Class A
Warrants, and Class B Warrants began to trade separately on
December 17, 2001.

The table below sets forth for the period
indicated, the representative high and low bid prices for the
common stock, Class A Warrants and Class B Warrants,
respectively, as reported by the Nasdaq SmallCap Market. The
Quotations represent interdealer prices without adjustments for
retail mark-ups, mark-downs or commissions and consequently do
not necessarily reflect actual transactions.

|                                 |  |      |      |     |  |   |      | 
|-------------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|Fiscal 2001                      |  |      |      |    
|Fourth quarter, from November 16 |  | High |      | Low
|                                 |  |      |      |    
|Common stock                     |  | $    | 3.40 |     |  | $ | 3.35 | 
|Class A warrant                  |  | $    | .29  |     |  | $ | .29  | 
|Class B warrant                  |  | $    | .43  |     |  | $ | .43  | 

Holders of shares of Common Stock are entitled to
receive such dividends, if any, as may be declared by the Board
of Directors of the Company out of funds legally available
therefore and, upon the liquidation, dissolution or winding up
of the Company are entitled to share ratably in all net assets
available for distribution to such shareholders. The Company has
never paid any cash dividends. It is anticipated that all
earnings will be retained for working capital purposes. The
Company has no intention to declare cash dividends in the
foreseeable future. Currently, the declaration and payment of
cash dividends is prohibited by the Companys bank
financing agreements. See Item 6 Managements
Discussion and Analysis of Financial Condition and Results of
Operations.

Shareholders of Record

As of March 15, 2002, there were
approximately 64 shareholders of record of the Companys
Common Stock, 11 Class A Warrantholders of record and 11
Class B Warrantholders of record.

Recent Sales of Unregistered
Securities

On January 5, 2001, the Company issued a
warrant to purchase 4,416 shares of Common Stock to Imperial
Bank, as predecessor-in-interest to Comerica Bank, in connection
with the execution of a credit agreement.

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In June 2001, the Company issued convertible
promissory notes to several investors to fund expenses
associated with the IPO and to cover interim operating expenses
pending receipt of the offering proceeds. At the effective date
of the IPO, the principal of, and accrued interest on, the notes
converted to units at the IPO price of the units sold in the
IPO. In connection with the notes, the Company also issued
warrants to purchase units for a price equal to 90% of the IPO
price of the units and which are redeemable by the Company at
any time after March 31, 2003 for $2.80 per warrant. The
warrants are exercisable during a three-year period beginning on
the later of the first anniversary of the effective date of the
IPO and March 31, 2003. Following are the names of each
investor, the number of units into which the notes converted,
and the number of units issuable upon exercise of the warrants
issued in connection with the loan:



| |   |                                 
| | - | --------------------------------
| |  | John L. Crary and Carol M. Ross,

as
trustees of the Crary-Ross Family Trust


17,308
units


Warrants:
26,000 units




| |   |               
| | - | --------------
| |  | John L. Crary,

as
trustee of The John Langdon Crary Trust


25,962
units


Warrants:
39,000 units




| |   |                      
| | - | ---------------------
| |  | Foo Tzeh Shi (Edward)

8,625
units


Warrants:
13,000 units




| |   |                     
| | - | --------------------
| |  | Gordon B. Crary III,

as
trustee of the Gordon B. Crary III Trust


8,635
units


Warrants:
13,000 units




| |   |                     
| | - | --------------------
| |  | J.M. Ek Living Trust

43,249
units


Warrants:
65,000 units


All of the above offerings and sales were made
pursuant to Section 4(2) of the Securities Act of 1933, as
amended (the Securities Act) and are
restricted securities as defined in Rule 144
under the Securities Act. The Company reasonably believed that
each purchaser had such knowledge and experience in financial
and business matters to be capable of evaluating the merits and
risks of the investment, each purchaser represented an intention
to acquire the securities for investment only and not with a
view to distribution thereof and appropriate legends were
affixed to the stock certificates or warrants.

Initial Public Offering

On November 16, 2001, we sold 2,000,000
Units at $6.00 per Unit in our IPO, each Unit consisting of one
share of Common Stock, one Class A Warrant, and one
Class B Warrant. In December 2001, we sold an additional
300,000 Units under the terms of the over-allotment agreement
relating to that IPO. The net proceeds, amounting to
approximately $11,410,000, less repayments of indebtedness of
$3,693,000, are currently invested in various short-term
accounts and will be used for the purchase of additional capital
equipment, expansion of manufacturing capabilities and general
corporate uses.




Item
6.     Managements Discussion
and Analysis of Financial Conditions and Results of
Operations

The following discussion should be read in
conjunction with Item 1: Business and Item 7:
Financial Statements.

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Cautionary Statement

This Annual Report contains forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements reflect
managements current views and estimates of future economic
and market circumstances, industry conditions, company
performance, and financial results. You can identify
forward-looking statements by the use of words such as
may, will, should,
expects, plans, anticipates,
believes, estimates,
predicts, intends,
potential, continue, or the negative of
such terms or other comparable terminology. Forward-looking
statements also include the assumptions underlying or relating
to any of the foregoing matters. These statements are subject to
risks and uncertainties that could cause the Companys
actual future results to differ materially from the results
discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in
this Annual Report on Form 10-KSB, including those below
under the caption Risk Factors. We do not intend,
and we do not undertake any obligation to update any such
forward-looking statements to reflect events or circumstances
occurring after the filing date.

The following discussion and analysis provides
information that we believe is relevant to an assessment and
understanding of our results of operations and financial
condition for the years ended December 31, 2000 and 2001.
The following discussion should be read in conjunction with the
financial statements and related notes appearing elsewhere in
this Annual Report.

Overview

microHelix, formerly mHL Development Company,
was, until December 31, 2000, a holding company that owned
several operating subsidiaries. On December 31, 2000, all
of its subsidiaries were merged with and into, or sold
substantially all of their assets to, microHelix, creating a
single operating company.

We design, manufacture and sell high quality,
complex interconnect systems for use in the medical device
industry. We have developed our core manufacturing technologies
relying heavily on equity infusions and loans from our founder
and on government grants, primarily from the National Institutes
of Health. Since June 1999, we have received several OEM
contracts covering both our ultrasound and minimally invasive
markets. We have shipped products to customers in the fully
implantable device market for development purposes. We expect
sales of commercial products to increase and broaden in scope as
we expand our existing relationships and as we develop new
relationships with OEMs.

A new sales cycle generally begins with a
development contract with our customer. Currently, approximately
15% of our sales are derived from our development contracts. We
usually begin working with our OEM customers to develop a
customized interconnect system appropriate for their new device
in the design stage. Our engineers work cooperatively with a
customers staff to design the medical device and to craft
an interconnect system that best suits the customers needs
for that particular device. Sales from development contracts are
recognized as time and material costs are incurred. Sales from
contracts for the production of prototypes are recognized when
the title passes, which is upon shipment. Upon the completion of
this design and development period, assuming our customers
medical devices obtain all necessary approvals from the FDA and
other regulatory agencies, if we are successful, we may receive
a purchase order for our systems in commercial quantities.

Philips Medical Systems, formerly Agilent
Technologies, Inc., and Jomed N.V. accounted for approximately
15% and 12%, respectively, of our 2000 sales. Three other
customers each accounted for between five percent and nine
percent of sales. During 2001, sales from Philips Medical
Systems and Jomed N.V. increased to 30% and 19%, respectively,
of total sales, while a new customer, World Heart, comprised 12%
of total sales. Three other customers each accounted for four
percent of sales individually. We are currently in discussions
and/or development projects with several customers that have the
potential to become sources of commercial sales.

Sales have increased significantly in the last
two years, reflecting the maturing of our proprietary
manufacturing processes, the acquisition of BioElectric
Corporation, the acquisition of the assets and technology of an
existing ultrasound cable business, and the beginning of
commercial sales for selected

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customers. Sales increased from $4,258,000 in
2000 to $6,222,000 in 2001. Gross margin on sales has decreased
from 19% in 2000 to 3% in 2001. This unfavorable trend in gross
margin from 2000 to 2001 was caused by a change in product mix,
inventory balancing by one of our largest customers, and an
increase in our provision for inventory reserves. In 2001, sales
to the implantable market represented 18% of total sales
compared to less than 5% of total sales in the year 2000. For
most implantable customers, sales are still in the product
development phase. As we fulfill our development engineering
contracts, we have low margins in the initial engineering phase
as we are essentially recovering our costs, followed by higher
margins when we move to shipping products in commercial
quantities. In addition, in May 2001, we made a one-time sale of
product components at no margin of approximately $320,000 to one
of our customers within the ultrasound market in connection with
their inventory balancing requirements. Government grants and
contract revenue decreased from $960,000 in 2000 to $761,000 in
2001 due to the completion of two grants in 2001.


Research and development expense reflects
internally funded activities and does not include grant or
customer funded projects, the cost of which is included in cost
of goods sold. Accordingly, recorded research and development
expense has generally been a minor factor because of our ability
to fund considerable portions of this activity through
government grants and customer contracts. Selling, general and
administrative expenses have increased with the expansion of our
business. We have incurred a net loss on a quarterly basis since
inception. For this reason, we have not incurred any tax
liabilities and, as of December 31, 2001, had accumulated
federal tax loss carryforwards of $8,100,000, all of which are
available to offset future federal income taxes.

Since our organization in 1997, we have funded
deficit operations and working capital needs using approximately
$7,871,000 of common and preferred equity financing and
approximately $5,094,000 in long-term debt. As a result of our
IPO in November 2001 and the issuance of Units per the related
over-allotment option in December 2001, we raised an additional
$11,410,152, net of costs, through the issuance of 2,300,000
Units of common equity. Our working capital at December 31,
2001 was $6,215,737.

Our ability to achieve and sustain profitability
depends not only on our continued growth and expansion but also
on the strength of our customers businesses. The general
economy in the United States has experienced a recent slowdown,
one result of which has been a slowdown in orders from some of
our customers as compared to their original forecasts,
particularly within the ultrasound market. Based on results to
date, current orders and management estimates, we expect sales
for 2002 to be greater than sales during 2001. We anticipate
that by the third quarter, one of our major contracts will move
from the initial engineering phase that has no margin to a
pre-production phase that should produce positive gross margin.
We are also pursuing several opportunities with new customers
but are unable to forecast accurately either the amount or
timing of such sales. Our backlog of firm orders was $1,505,504
at December 31, 2001. Backlog consists of written purchase
orders received from customers, some of which extend over
several months. Other customers only provide purchase orders
covering their next months requirements. Although sales
from this group of customers are anticipated in subsequent
months, it is our policy only to include the value of written
purchase orders received in our backlog.

Our 2002 estimates are subject to uncertainty as
a result of events that we cannot now predict, including
potential order cancellations or delays, technological or other
manufacturing problems or adverse geopolitical conditions. We
cannot assure you that our results will match our expectations.

Critical Accounting Policies and
Estimates

The discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
require us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. We
evaluate our estimates on an on-going basis. We base our
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates
under different assumptions or

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conditions. We believe the following critical
accounting policies and related judgments and estimates affect
the preparation of our consolidated financial statements.


Revenue
Recognition The Company
recognizes revenue from commercial sales of micro cables,
connectors, assemblies and related supplies when title passes,
which is upon shipment. Commercial sales are made F.O.B. point
of shipment. Returns are limited to nonconforming products.

Development contracts are structured on a cost or
cost plus basis. Revenue from development contracts for
non-recurring engineering is recognized using the percentage of
completion method as time and materials costs are incurred.
Revenue from contracts for the production of prototypes is
recognized when the title passes, which is upon shipment.
Prototypes are tested at the Companys facility for
customer specifications prior to shipment.

Revenue on government contracts and grants is
recognized as time and materials costs are incurred using the
percentage of completion method. The government generally
provides grants to perform specific research and is not the
ultimate customer.

Intangible and Other Assetsprimarily represent patent costs that
are amortized using the straight-line method over their
estimated useful lives or 15 years, whichever is shorter,
once the technology is completed and in use. Management
periodically evaluates the recoverability of intangibles based
on current and anticipated income and undiscounted future cash
flows. The recoverability of our intangible asset costs depends
in part, on the development of additional commercial products
from these technologies, the acceptance of such products in the
marketplace, and our ability to generate significant revenues
and cash flows from these products.

Results of operations

The following table presents our historical
operating results for the periods indicated as a percentage of
sales:

|                     |                                     |                          |     |      |     |    |     |    |     |   
|-------------------- | ----------------------------------- | ------------------------ | --- | ---- | --- | -- | --- | -- | --- | --
|                     |                                     |                         
|                     |                                     | Year Ended              
|                     |                                     | December 31,            
|                     |                                     |                         
|                     |                                     | 2000                     |     | 2001
|                     |                                     |                          |     |     
|Sales                |                                     |                          | 100 | %    |     |    | 100 | % 
|Cost of sales        |                                     |                          | 81  |      |     |    | 97  |   
|                     |                                     |                          |     |      |     |    |     |   
|Gross profit         |                                     |                          | 19  |      |     |    | 3   |   
|                     |                                     |                          |     |      |     |    |     |   
|Operating expenses:  |                                     |                          |     |      |     |    |     |   
|                     | Research and development            |                          |     | 5    |     |    |     | 2  |    
|                     | Selling, general and administrative |                          |     | 47   |     |    |     | 36 |    
|                     |                                     |                          |     |      |     |    |     |   
|                     |                                     | Total operating expenses |     |      | 52  |    |     |    | 38  |   
|Loss from operations |                                     |                          | (33 | )    |     |    | (34 | ) 
|Other expense        |                                     |                          | (16 | )    |     |    | (15 | ) 
|                     |                                     |                          |     |      |     |    |     |   
|                     |                                     | Net loss                 |     |      | (49 | )% |     |    | (49 | )%
|                     |                                     |                          |     |      |     |    |     |   



| |                                                                         
| | ------------------------------------------------------------------------
| | Year ended December 31, 2001 compared
	with year ended December 31, 2000

Sales for the year ended December 31, 2001
were $6,222,283 as compared to $4,257,643 for the year ended
December 31, 2000, an increase of $1,964,640 or 46%. Our
sales consist of the wire and cable sales segment, which
includes the ultrasound, minimally invasive, and fully
implantable markets and the government contracts segment. In
2001, sales to the implantable market increased by $1,045,000,
while sales to the ultrasound market increased by $837,000
primarily during the first half of the year. Sales of our
systems to manufacturers of minimally invasive medical devices
also increased by $622,000 in 2001 as increasing commercial
production volumes for two of our key customers in this market
continued. The decrease in government contract sales is a result
of the completion of two grants within 2001, with the remaining
grants expiring in 2002.

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Cost of sales for the year ended
December 31, 2001 was $6,022,486 as compared to $3,428,680
for the year ended December 31, 2000, an increase of
$2,593,806 or 76%. Wire and cable cost of sales increased as a
percentage of wire and cable sales from 89% in 2000 to 102% in
2001. This increase is the result of an increase in the
provision for inventory reserves of $431,000 due to the reduced
forecast in the ultrasound market we experienced during the last
quarter of 2001, coupled with the work performed on a new
long-term development contract on essentially a
cost-reimbursement basis. Another factor that unfavorably
impacted cost of sales included the hiring of additional
personnel in our Portland facility to meet anticipated demand
from new markets. These changes resulted in a decrease in gross
margins from 19% in 2000 to 3% in 2001.

Research and development expenses for the year
ended December 31, 2001 were $1,813,003, as compared to
$1,272,492 in 2000, an increase of $540,511 or 42%. Research and
development expenditures include government grant-funded,
customer-funded, and self-funded, which are included in
government contracts cost of sales, wire and cable cost of
sales, and research and development expenses, respectively. For
the year ending 2001, government grant-funded, customer-funded,
and self-funded research and development expenses were $761,230,
$950,958, and $100,815, respectively, as compared to $852,818,
$208,062, and $211,612, respectively as of December 31,
2000. Government grant expenses have decreased as a result of
two grants being completed during 2001. Additionally,
self-funded expenses have decreased as a result of engineering
resources being used on a new major long-term development
contract during 2001. This development contract has resulted in
an increase of $743,000 of customer-funded expenditures.

Sales and marketing expenses for the year ended
December 31, 2001 were $451,516 as compared to $269,685 in
2000, an increase of $181,831 or 67%. During 2001, we increased
our sales force by three employees, providing support to the
Western United States, Eastern United States, and Asia.

General and administrative expenses for the year
ended December 31, 2001 were $1,787,475, as compared to
$1,748,588 in 2000, an increase of $38,886 or 2%. As a
percentage of sales, the general and administrative expenses
decreased from 41% in 2000 to 29% in 2001, due to the nature of
the expenses.

Other expense, net for the year ended
December 31, 2001 was $907,473 as compared to $666,667 in
2000, an increase of $240,806 or 36%. This increase over the
prior year was primarily due to a one-time non-cash charge
associated with the issuance of the bridge loan warrants of
$162,963 and the write-off of unamortized bank fees of $54,583
that were related to loans that were paid-off with IPO proceeds.
As a result of our IPO in November 2001, we were able to convert
$2,135,000 of our convertible notes payable to equity, and
reduce additional notes payable by $2,500,000. Additionally, we
were able to secure a new line of credit and an equipment loan
with a bank that offered lower interest rates than our previous
financing relationship.

No provision for income taxes has been provided
due to the Companys accumulated net operating losses.

Liquidity and Capital Resources

As of December 31, 2001, we had $7,353,316
in cash and cash equivalents. Operating activities used
$2,421,931 in cash during 2001 and $1,764,559 during the same
period in 2000. This increase primarily resulted from a $437,351
increase in accounts receivable, attributable to sales growth,
coupled with an increase in prepaid expenses of $139,701,
related to the prepayment of D&O insurance premiums.

Capital expenditures for the year ended
December 31, 2001 were $332,959 compared to $191,263 in
2000. The increase of $141,696 or 74% relates primarily to the
purchase of machine shop equipment to support our development
projects and current manufacturing needs, as well as upgrading
and improving our management systems software.

Financing activities provided $10,104,652 in cash
during 2001 and $2,110,578 during 2000. We raised $11,410,152,
net of costs, though an IPO, by issuing 2,000,000 Units of
common equity on November 16, 2001, and an over-allotment
of 300,000 Units on December 9, 2001. On December 17,
2001, each Unit converted to one share of common stock and two
warrants. Upon completion of the offering, we repaid
approximately $1,500,000 of indebtedness for money borrowed,
including $600,000 plus accrued interest owing to Paulson
Investment Company, Inc. and approximately $900,000 plus accrued
interest owing to Comerica Bank. Prior to the IPO, we repaid a
note payable from a single lender in the amount of $467,500,

15



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and subsequent to the offering, we repaid that
same lender a note payable in the amount of $2,500,000. We
restructured our debt financing arrangements following the
offering and have secured a line of credit and an equipment loan
at 5.75% (prime plus 1%) and 6% (prime plus 1.25%),
respectively. As of December 31, 2001, there was $711,000
outstanding on the line of credit, with an additional $1,289,000
available. Interest is paid monthly and the principal due in
full on May 30, 2003.


Immediately prior to our IPO, our President and
Chief Executive Officer converted $450,000 of preferred stock
into 165,585 shares of Common Stock, and exchanged $2,135,315 of
the convertible debt that we owed him for 355,886 Units. These
transactions resulted in our outstanding equity consisting of a
single class of Common Stock, decreased liabilities and
redeemable preferred stock, and increased shareholders
equity in the amount of $2,585,315.

The following table discloses the Companys
contractual cash obligations as of December 31, 2001:

|                                         |  |                        |           |           |  |           |         |           |  |   |           |  |  |   |       | 
|---------------------------------------- |  | ---------------------- | --------- | --------- |  | --------- | ------- | --------- |  | - | --------- |  |  | - | ----- | 
|                                         |  |                       
|                                         |  | Payments Due by Period
|                                         |  |                       
|                                         |  |                        |           | Less than |  |          
|Contractual Obligations                  |  | Total                  |           | 1 Year    |  | 1-3 Years |         | 4-5 Years
|                                         |  |                        |           |           |  |           |         |          
|Operating Leases, net of sublease income |  | $                      | 279,708   |           |  | $         | 211,209 |           |  | $ | 63,233    |  |  | $ | 5,266 | 
|Line of Credit                           |  |                        | 711,000   |           |  |           |         |           |  |   | 711,000   |  |  |   |       | 
|Long-Term Debt                           |  |                        | 750,000   |           |  |           | 250,000 |           |  |   | 500,000   |  |  |   |       | 
|Long-Term Debt to shareholder            |  |                        | 1,325,830 |           |  |           | 325,830 |           |  |   | 1,000,000 |  |  |   |       | 
|                                         |  |                        |           |           |  |           |         |           |  |   |           |  |  |   |       | 
|Total Contractual Cash Obligations       |  | $                      | 3,066,538 |           |  | $         | 787,039 |           |  | $ | 2,274,233 |  |  | $ | 5,266 | 
|                                         |  |                        |           |           |  |           |         |           |  |   |           |  |  |   |       | 

Risk Factors

Following are the key risk factors that have
affected our net sales and net income in the past and could
materially impact our future net sales and net income:

Our business plan is based on assumptions that
could prove to be incorrect, which could mean that we may be
unable to expand as planned and could cause us to invest in
areas that do not result in new sales.

A key element of our business plan involves the
expansion of our product line to serve what we expect to be
growing new markets in the minimally invasive and implantable
device sectors of the medical equipment market. The success of
our plan depends on numerous assumptions that we cannot be sure
are justified. If any of our key assumptions are incorrect, we
could be unable to expand our business as we currently
anticipate and we may make substantial investments in product
development and/or marketing efforts that do not result in new
product sales. Our assumptions include the following:



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | demand for sophisticated interconnect systems in
	the fully implantable and minimally invasive sectors will
	increase rapidly;             
|
| |  | our technology will efficiently address market
	needs as they develop;                                                                     
|
| |  | OEMs with whom we have or may develop
	relationships will be successful in developing their
	technologies and addressing their markets; and
|
| |  | other companies will not develop competing
	technologies that offer substantial technological or economic
	advantages over ours.           

We are unable to predict the amount or timing
of growth in markets where we expect our future revenue growth
to occur, which could result in substantially reduced earnings
or losses.

Our implantable device and minimally invasive
device markets are new and rapidly changing. Many of the medical
devices manufactured by our OEM customers have long development
and governmental approval cycles. We cannot accurately predict
the future characteristics of our markets, including their
ultimate size or the amount of time that will be required to
achieve the growth on which our business plans are based. As a

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result, we may time our own investment of
resources to address these markets in a way that either fails to
meet actual demand or results in expenses that we cannot justify
in light of actual sales volume. A failure to meet actual demand
could put us at a competitive disadvantage, while an investment
in markets that develop more slowly than anticipated could
result in substantially reduced earnings or losses. We cannot
assure you that we will be able to forecast market demand
accurately in time to respond appropriately.


The development of new devices by our
customers is often subject to review by the U.S. Food and Drug
Administration and other regulatory agencies, which means that
new interconnect systems that we develop for our OEM customers
may not be sold in commercial quantities for a long time, if
ever.

Our sales process involves designing our
interconnect systems into new OEM devices. The sale of these
systems in commercial quantities is generally preceded by a
pre-production design phase in which we produce various
prototype systems based on input from a collaboration with the
customers engineering and product design staff. The
OEMs medical devices are subject to regulation and
licensing, usually by the U.S. Food and Drug Administration, or
FDA, and sometimes by comparable foreign regulatory bodies,
which increases the cost and time required for the development,
marketing and sale of these devices. We expect that the sales
cycle for most of our systems will be relatively slow, generally
taking between six and 18 months. We are generally paid a
fee under a development agreement during the design phase but do
not expect such fees to contribute significantly to our
profitability. If these devices are not approved or they are not
successfully brought to market in a timely manner, the failure
to do so will have a direct and adverse impact on our sales.

If our customers products are not
commercially successful, this will directly and adversely impact
sales of our interconnect systems.

We work closely with our customers to design
interconnect systems that each work solely for a particular
device. While we seek to be a supplier to as many customers as
possible in a given market, there are often reasons why we will
be unable to provide systems to more than a single customer in
any given market segment. Demand for our interconnect systems is
substantially dependent on the success of the devices of which
they are a part. Our customers markets are highly
competitive and rapidly changing. If our customers do not
succeed in introducing their devices into their chosen markets,
the failure to do so will have a direct and adverse impact on
our sales.

Our sales may be concentrated with one or more
customers, which could make fluctuations in revenue and earnings
more severe.

Two customers, Philips Medical Systems, formerly
Agilent Technologies, Inc., and Jomed N.V., accounted for
approximately 15% and 12%, respectively, of our 2000 sales. In
2001, revenues from two customers represented $1,852,757 or 30%
and $1,182,809 or 19%, respectively, of our revenues.
Approximately 42% of our total sales were to our diagnostic
ultrasound customers. There are a relatively limited number of
OEMs that make medical devices and an even smaller number of
OEMs that compete in any given device market. The loss of a
significant customer could have a material adverse impact on our
sales and earnings. While we expect the overall size of the
medical device market to expand, it remains possible that
significant penetration of these markets may depend on large
volume sales to a limited number of potential customers.
Concentration in our customer base may make fluctuations in
revenue and earnings more severe and make business planning more
difficult.

We may not be able to develop and introduce
new systems to respond to evolving industry requirements in a
timely manner, which could adversely affect our ability to
compete in our target market.

Technology, both in our markets and in our
customers markets, is undergoing rapid change. To remain
competitive in our existing markets and to emerge as a leader in
new markets, we will have to maintain a

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leadership position in the technologies
supporting those markets. Doing so will require, among other
things, the following:




| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we must accurately predict the evolving needs of
	our customers and develop, in a timely manner, the technology
	required to support those needs;                               
|
| |  | we must provide systems that are not only
	technologically sophisticated but are also available at a price
	within customer tolerances and competitive with comparable
	systems;
|
| |  | we must establish and effectively defend our
	ownership of the intellectual property supporting our
	interconnect systems; and                                                  
|
| |  | we must enter into relationships with other
	companies that have developed complementary technology.                                                                            

We cannot assure you that we will be able to
achieve any of these objectives. Our inability to achieve these
objectives will have a direct and adverse impact on our sales.

We are exposed to the risk of substantial
claims in the event of the failure or malfunction of any of our
interconnect systems.

Because our interconnect systems are used in
medical devices, the consequences of any failure or malfunction
of any of our systems is potentially severe. Failure or
malfunction could cause the device to stop working properly,
which could, in turn, result in injury or death. Because of the
need for miniaturization, our interconnect systems are
manufactured to extremely narrow tolerances at the limit of
current manufacturing technology. Accordingly, a relatively
small error in manufacturing and/or a lapse in quality control
could result in a defective system being installed in a critical
medical device. We maintain insurance against such events but we
cannot assure you that such insurance will continue to be
available to us in the future or that any insurance that we may
obtain will adequately protect us against risk. We currently
maintain product liability insurance of $6 million per
occurrence and $8 million in the aggregate. Even if such a
failure did not result in an immediate cash impact, the failure,
and expected publicity surrounding it, would, in all likelihood,
substantially adversely affect our reputation as a producer of
dependable, high-quality components and could therefore
adversely affect future sales and earnings.

In our intensely competitive markets many of
our potential competitors have resources that we lack, which
could impair our relationships with actual or potential
customers.

Our markets are intensely competitive.
Competition is based on technology, established relationships,
quality of support and price. Several of our competitors have a
longer history of operations and more established relationships
with actual and potential customers than we have. We expect that
the minimally invasive and implantable device markets are likely
to attract intense competition from well-qualified and
well-funded sources. In addition, some of our OEM customers may
choose to manufacture their own interconnect systems or to
purchase them from companies with which they have or intend to
develop strategic relationships. Many of our competitors and
potential competitors have technological and financial resources
and established business relationships that may afford them a
competitive advantage.

Our failure to manage our growth effectively
could have a significant negative impact on our business
operations.

We will need to expand our operations rapidly if
we achieve acceptance of our systems in the minimally invasive
and implantable device markets. Difficulties in managing our
future growth could have a significant negative impact on our
business operations, increase our costs and make it difficult
for us to achieve or maintain profitability. We may not be able
to project accurately the rate or timing of increases in orders
for our systems, or to expand and upgrade our engineering, sales
and manufacturing systems and infrastructure to accommodate
these increases. Our future results of operations will depend on
the ability of our officers and key employees to manage changing
business conditions and to implement and improve our technical,
administrative, financial control and reporting systems in
response to our anticipated rapid growth.

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Our current manufacturing operations in Mexico
and our expected expansion of global manufacturing to include
Asia may subject us to a number of risks which could disrupt the
supply of our systems and adversely impact sales, earnings and
customer relationships.

We currently manufacture interconnect systems for
ultrasound devices in Mexico and, to keep our costs
competitively low, we expect to conduct a substantial part of
the manufacturing of our future systems outside the United
States. Currently, we intend to continue our operations in
Mexico and we expect to expand into Asia. While we expect that
most of the arrangements that we may make with regard to
international manufacturing will be denominated in U.S. dollars,
the conduct of such operations will subject us to foreign
currency risks in the event of large changes in exchange rates.
Foreign manufacturing will subject us to a number of additional
risks, including:



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | changes in trade policy and regulatory
	requirements;                             
|
| |  | uncertain economic conditions in the countries in
	which the manufacturing occurs;
|
| |  | duties, tariffs and other trade barriers and
	restrictions;                       
|
| |  | foreign collection problems; and                                                  
|
| |  | political and transportation risks.                                               

Any of the above factors could disrupt the supply
of systems and adversely impact sales, earnings and customer
relationships.

Recent Accounting Pronouncements

In June 1998, June 1999, and June 2000, the
Financial Accounting Standards Board, or FASB, issued Statement
of Financial Accounting Standards, or SFAS, No. 133,
Accounting for Derivative Instruments and Hedging
Activities, SFAS No. 137, Deferral of the Effective
Date of FASB Statement No. 133, and SFAS No. 138,
Accounting for Certain Derivative Instrument and Certain
Hedging Activities, respectively. These statements establish
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities. They require that an
entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those
instruments at fair value. These statements are effective for
fiscal years beginning after June 15, 2000. We adopted
these statements on January 1, 2001. The adoption of these
statements did not have a material impact on our consolidated
financial statements.

In July 2001, the FASB issued SFAS No. 141,
Business Combinations.This statement discontinues the
use of the pooling of interests method of accounting for
business combinations. The statement is effective for all
business combinations after June 30, 2001. The effects of
this statement did not have a material impact on our
consolidated financial statements.

In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets.This statement
requires discontinuing the amortization of goodwill and other
intangible assets with indefinite useful lives. Instead, these
assets will be tested periodically for impairment and written
down to their fair market values as necessary. This statement is
effective for fiscal years beginning after December 15,
2001. We have completed an evaluation of the effects of this
statement and do not believe it will have a material impact on
the consolidated financial statements.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which is effective January 1, 2002.
SFAS 144 addresses accounting and reporting of long-lived
assets, except goodwill, that are either held and used or
disposed of through sale or other means. The Company is
currently assessing, but has not yet determined the impact of
SFAS 144 on its financial position, results of operations
and cash flows.




Item
7.     Financial
Statements

The Companys Financial Statements and the
Independent Auditors Report thereon are presented in the
following pages.

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INDEX TO FINANCIAL STATEMENTS

|                 |                                                                                                                |      |  |    | 
|---------------- | -------------------------------------------------------------------------------------------------------------- | ---- |  | -- | 
|                 |                                                                                                                | Page
|                 |                                                                                                                |     
|microHelix, Inc. |                                                                                                                |      |  |   
|                 | Independent Auditors Report                                                                                   |      |  | 21 | 
|                 | Consolidated Balance Sheet as of
	December 31, 2001.                                                           |      |  | 22 | 
|                 | Consolidated Statements of Operations for the Two
	Years Ended December 31, 2000 and 2001                      |      |  | 23 | 
|                 | Consolidated Statements of Shareholders
	Equity (Deficit) for the Two Years Ended December 31, 2000
	and 2001 |      |  | 24 | 
|                 | Consolidated Statements of Cash Flows for the Two
	Years Ended December 31, 2000 and 2001                      |      |  | 25 | 
|                 | Notes to Consolidated Financial Statements                                                                     |      |  | 26 | 

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##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders of

microHelix, Inc.


We have audited the accompanying consolidated
balance sheet of microHelix, Inc., (the Company) as
of December 31, 2001, and the related consolidated
statements of operations, shareholders equity (deficit),
and cash flows for each of the two years in the period ended
December 31, 2001. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
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 audits
provide a reasonable basis for our opinion.

In our opinion, such consolidated financial
statements present fairly, in all material respects, the
financial position of the Company at December 31, 2001, and
the results of their operations and their cash flows 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.



| |                          
| | -------------------------
| | /s/ DELOITTE & TOUCHE LLP

Portland, Oregon

February 26, 2002


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MICROHELIX, INC.

CONSOLIDATED BALANCE SHEET

December 31, 2001


|                                                   |                                                                                                           |                             |           |            |            | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | --------------------------- | --------- | ---------- | ---------- | 
|                                                   |                                                                                                           | December 31,               
|                                                   |                                                                                                           | 2001                       
|                                                   |                                                                                                           |                            
|Assets                                            
|Current Assets:                                    |                                                                                                           |                             |           |           
|                                                   | Cash                                                                                                      |                             | $         | 7,353,316  |           
|                                                   | Accounts receivable, net of allowance of $19,517.                                                         |                             |           | 1,048,573  |           
|                                                   | Inventories (Note 3)                                                                                      |                             |           | 880,277    |           
|                                                   | Prepaid expenses                                                                                          |                             |           | 170,566    |           
|                                                   |                                                                                                           |                             |           |           
|                                                   |                                                                                                           | Total current assets        |           |            | 9,452,732  | 
|Property and equipment  net
	(Note 4)             |                                                                                                           |                             | 1,867,830 |           
|Intangible and other assets  net
	(Notes 2 and 5) |                                                                                                           |                             | 4,926,036 |           
|                                                   |                                                                                                           |                             |           |           
|                                                   |                                                                                                           | Total                       |           | $          | 16,246,598 | 
|                                                   |                                                                                                           |                             |           |           
|Liabilities and Shareholders
	Equity             
|Current Liabilities:                               |                                                                                                           |                             |           |           
|                                                   | Accounts payable                                                                                          |                             | $         | 841,771    |           
|                                                   | Accrued interest to shareholder (Note 9)                                                                  |                             |           | 530,546    |           
|                                                   | Accrued liabilities                                                                                       |                             |           | 377,848    |           
|                                                   | Line of credit (Note 6)                                                                                   |                             |           | 711,000    |           
|                                                   | Current portion of notes payable (Note 6)                                                                 |                             |           | 250,000    |           
|                                                   | Current portion of notes payable to shareholder
	(Notes 6 and 9)                                          |                             |           | 325,830    |           
|                                                   | Deferred shareholder compensation (Note 9)                                                                |                             |           | 200,000    |           
|                                                   |                                                                                                           |                             |           |           
|                                                   |                                                                                                           | Total current liabilities   |           |            | 3,236,995  | 
|                                                   |                                                                                                           |                             |           |           
|Long-Term Liabilities:                             |                                                                                                           |                             |           |           
|                                                   | Long-term portion of notes payable (Note 6)                                                               |                             |           | 500,000    |           
|                                                   | Long-term portion of notes payable to shareholder
	(Notes 6 and 9)                                        |                             |           | 1,000,000  |           
|                                                   |                                                                                                           |                             |           |           
|                                                   |                                                                                                           | Total long-term liabilities |           |            | 1,500,000  | 
|                                                   |                                                                                                           |                             |           |           
|                                                   |                                                                                                           | Total liabilities           |           |            | 4,736,995  | 
|                                                   |                                                                                                           |                             |           |           
|Shareholders Equity (Note 8):                     |                                                                                                           |                             |           |           
|                                                   | Common stock, no par value, 5,519,495 shares
	authorized, 4,659,886 issued and outstanding at December 31 |                             |           | 14,179,467 |           
|                                                   | Additional paid-in capital                                                                                |                             |           | 6,485,312  |           
|                                                   | Notes receivable from shareholders for common
	stock (Note 9)                                             |                             |           | (57,940    | )         
|                                                   | Deferred compensation expense (Note 8)                                                                    |                             |           | (84,822    | )         
|                                                   | Accumulated deficit                                                                                       |                             |           | (9,012,414 | )         
|                                                   |                                                                                                           |                             |           |           
|                                                   |                                                                                                           | Total shareholders equity  |           |            | 11,509,603 | 
|                                                   |                                                                                                           |                             |           |           
|                                                   |                                                                                                           | Total                       |           | $          | 16,246,598 | 
|                                                   |                                                                                                           |                             |           |           

See notes to consolidated financial statements.

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MICROHELIX, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

Years Ended December 31, 2000 and
2001


|                                                          |                                 |                          |            |           |           |   |            |           |           |  
|--------------------------------------------------------- | ------------------------------- | ------------------------ | ---------- | --------- | --------- | - | ---------- | --------- | --------- | -
|                                                          |                                 |                         
|                                                          |                                 | Year Ended December 31, 
|                                                          |                                 |                         
|                                                          |                                 | 2000                     |            | 2001     
|                                                          |                                 |                          |            |          
|Sales:                                                    |                                 |                          |            |           |           |   |            |          
|                                                          | Wire and cable                  |                          | $          | 3,297,169 |           |   | $          | 5,461,053 |          
|                                                          | Government contracts            |                          |            | 960,474   |           |   |            | 761,230   |          
|                                                          |                                 |                          |            |           |           |   |            |          
|                                                          |                                 | Total sales              |            |           | 4,257,643 |   |            |           | 6,222,283 |  
|Cost of Sales:                                            |                                 |                          |            |           |           |   |            |          
|                                                          | Wire and cable                  |                          |            | 2,922,117 |           |   |            | 5,550,940 |          
|                                                          | Government contracts            |                          |            | 506,563   |           |   |            | 471,546   |          
|                                                          |                                 |                          |            |           |           |   |            |          
|                                                          |                                 | Total cost of sales      |            |           | 3,428,680 |   |            |           | 6,022,486 |  
|                                                          |                                 |                          |            |           |           |   |            |          
|                                                          |                                 | Gross profit             |            |           | 828,963   |   |            |           | 199,797   |  
|                                                          |                                 |                          |            |           |           |   |            |          
|Operating Expenses:                                       |                                 |                          |            |           |           |   |            |          
|                                                          | Research and development        |                          |            | 211,612   |           |   |            | 100,815   |          
|                                                          | Sales and marketing             |                          |            | 269,685   |           |   |            | 451,516   |          
|                                                          | General and administrative      |                          |            | 1,748,588 |           |   |            | 1,787,475 |          
|                                                          |                                 |                          |            |           |           |   |            |          
|                                                          |                                 | Total operating expenses |            |           | 2,229,885 |   |            |           | 2,339,806 |  
|                                                          |                                 |                          |            |           |           |   |            |          
|Loss from operations                                      |                                 |                          | (1,400,922 | )         |           |   | (2,140,009 | )        
|                                                          |                                 |                          |            |           |           |   |            |          
|Other Income (Expense):                                   |                                 |                          |            |           |           |   |            |          
|                                                          | Interest income                 |                          |            | 2,841     |           |   |            | 17,335    |          
|                                                          | Interest expense                |                          |            | (311,649  | )         |   |            | (758,658  | )        
|                                                          | Interest expense to shareholder |                          |            | (357,859  | )         |   |            | (166,150  | )        
|                                                          |                                 |                          |            |           |           |   |            |          
|                                                          |                                 | Other expense  net      |            |           | (666,667  | ) |            |           | (907,473  | )
|                                                          |                                 |                          |            |           |           |   |            |          
|Net loss                                                  |                                 | $                        | (2,067,589 | )         |           | $ | (3,047,482 | )        
|                                                          |                                 |                          |            |           |           |   |            |          
|Net loss per common share  basic and
	diluted            |                                 | $                        | (1.55      | )         |           | $ | (1.82      | )        
|                                                          |                                 |                          |            |           |           |   |            |          
|Shares used in per share calculation 
	basic and diluted |                                 |                          | 1,331,854  |           |           |   | 1,674,522  |          
|                                                          |                                 |                          |            |           |           |   |            |          

See notes to consolidated financial statements.

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##### Table of Contents



MICROHELIX, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY (DEFICIT)

Years Ended December 31, 2000 and
2001


|                                                       |  |              |           |            |  |         |            |            |  |              |           |         |  |       |         |   |  |   |          |   |  |   |            |   |  |   |            |  
|------------------------------------------------------ |  | ------------ | --------- | ---------- |  | ------- | ---------- | ---------- |  | ------------ | --------- | ------- |  | ----- | ------- | - |  | - | -------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                       |  |              |           |            |  |         |            |            |  |              |           |        
|                                                       |  | Common Stock |           | Additional |  |         |            |            |  |              |           |        
|                                                       |  |              |           | Paid-In    |  | Notes   |            | Deferred   |  | Accumulated  |           |        
|                                                       |  | Shares       |           | Amount     |  | Capital |            | Receivable |  | Compensation |           | Deficit |  | Total
|                                                       |  |              |           |            |  |         |            |            |  |              |           |         |  |      
|Balance, January 1, 2000                               |  |              | 1,310,880 |            |  | $       | 1,581,088  |            |  | $            | 198,068   |         |  | $     | (94,200 | ) |  | $ | (22,502  | ) |  | $ | (3,897,343 | ) |  | $ | (2,234,889 | )
|Issuance of common stock                               |  |              | 402,923   |            |  |         | 3,704,167  |            |  |              |           |         |  |       |         |   |  |   |          |   |  |   |            |   |  |   | 3,704,167  |  
|Grant of stock options                                 |  |              |           |            |  |         |            |            |  |              | 423,925   |         |  |       |         |   |  |   | (182,043 | ) |  |   |            |   |  |   | 241,882    |  
|Amortization of deferred compensation                  |  |              |           |            |  |         |            |            |  |              |           |         |  |       |         |   |  |   | 32,861   |   |  |   |            |   |  |   | 32,861     |  
|Repayment of shareholder notes                         |  |              |           |            |  |         |            |            |  |              |           |         |  |       | 260     |   |  |   |          |   |  |   |            |   |  |   | 260        |  
|Net loss                                               |  |              |           |            |  |         |            |            |  |              |           |         |  |       |         |   |  |   |          |   |  |   | (2,067,589 | ) |  |   | (2,067,589 | )
|                                                       |  |              |           |            |  |         |            |            |  |              |           |         |  |       |         |   |  |   |          |   |  |   |            |   |  |   |            |  
|Balance, December 31, 2000                             |  |              | 1,713,803 |            |  |         | 5,285,255  |            |  |              | 621,993   |         |  |       | (93,940 | ) |  |   | (171,684 | ) |  |   | (5,964,932 | ) |  |   | (323,308   | )
|Conversion of preferred stock                          |  |              | 165,585   |            |  |         | 450,000    |            |  |              |           |         |  |       |         |   |  |   |          |   |  |   |            |   |  |   | 450,000    |  
|Conversion of bridge loans                             |  |              | 103,779   |            |  |         | 371,113    |            |  |              | 251,560   |         |  |       |         |   |  |   |          |   |  |   |            |   |  |   | 622,673    |  
|Conversion of convertible notes payable                |  |              | 355,886   |            |  |         | 1,272,648  |            |  |              | 862,667   |         |  |       |         |   |  |   |          |   |  |   |            |   |  |   | 2,135,315  |  
|Issuance of common stock (net of costs of
	$2,389,848) |  |              | 2,320,833 |            |  |         | 6,800,451  |            |  |              | 4,609,701 |         |  |       |         |   |  |   |          |   |  |   |            |   |  |   | 11,410,152 |  
|Grant of stock options                                 |  |              |           |            |  |         |            |            |  |              | 17,438    |         |  |       |         |   |  |   | (17,438  | ) |  |   |            |   |  |   |            |  
|Cancellation of stock options                          |  |              |           |            |  |         |            |            |  |              | (51,429   | )       |  |       |         |   |  |   | 51,429   |   |  |   |            |   |  |   |            |  
|Grant of stock warrants                                |  |              |           |            |  |         |            |            |  |              | 173,382   |         |  |       |         |   |  |   |          |   |  |   |            |   |  |   | 173,382    |  
|Amortization of deferred compensation                  |  |              |           |            |  |         |            |            |  |              |           |         |  |       |         |   |  |   | 52,871   |   |  |   |            |   |  |   | 52,871     |  
|Repayment of shareholder notes                         |  |              |           |            |  |         |            |            |  |              |           |         |  |       | 36,000  |   |  |   |          |   |  |   |            |   |  |   | 36,000     |  
|Net loss                                               |  |              |           |            |  |         |            |            |  |              |           |         |  |       |         |   |  |   |          |   |  |   | (3,047,482 | ) |  |   | (3,047,482 | )
|                                                       |  |              |           |            |  |         |            |            |  |              |           |         |  |       |         |   |  |   |          |   |  |   |            |   |  |   |            |  
|Balance, December 31, 2001                             |  |              | 4,659,886 |            |  | $       | 14,179,467 |            |  | $            | 6,485,312 |         |  | $     | (57,940 | ) |  | $ | (84,822  | ) |  | $ | (9,012,414 | ) |  | $ | 11,509,603 |  
|                                                       |  |              |           |            |  |         |            |            |  |              |           |         |  |       |         |   |  |   |          |   |  |   |            |   |  |   |            |  

See notes to consolidated financial statements.

24



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##### Table of Contents



MICROHELIX, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

Years Ended December 31, 2000 and
2001


|                                                                           |                                            |                                 |                                                                                                                        |         |          |            |            |         |          |            |  
|-------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ------- | -------- | ---------- | ---------- | ------- | -------- | ---------- | -
|                                                                           |                                            |                                
|                                                                           |                                            | Year Ended December 31,        
|                                                                           |                                            |                                
|                                                                           |                                            | 2000                            |                                                                                                                        | 2001   
|                                                                           |                                            |                                 |                                                                                                                        |        
|Cash Flows from Operating
	Activities:                                     |                                            |                                 |                                                                                                                        |         |          |            |            |        
|Net loss                                                                   |                                            | $                               | (2,067,589                                                                                                             | )       |          | $          | (3,047,482 | )      
|Adjustments to reconcile net loss to cash used in
	operating activities:   |                                            |                                 |                                                                                                                        |         |          |            |            |        
|                                                                           | Depreciation and amortization              |                                 |                                                                                                                        | 363,589 |          |            |            | 467,265 |         
|                                                                           | Stock compensation expense                 |                                 |                                                                                                                        | 329,070 |          |            |            | 52,871  |         
|                                                                           | Amortization of deferred inventory charges |                                 |                                                                                                                        |        |          |            |            | 17,043  |         
|                                                                           | Interest charges on warrants               |                                 |                                                                                                                        |        |          |            |            | 173,382 |         
|                                                                           | Change in:                                 |                                 |                                                                                                                        |         |          |            |            |         |         
|                                                                           |                                            | Accounts receivable, net        |                                                                                                                        |         | (186,509 | )          |            |         | (437,351 | )         
|                                                                           |                                            | Inventories                     |                                                                                                                        |         | (724,630 | )          |            |         | 235,968  |           
|                                                                           |                                            | Due from affiliates             |                                                                                                                        |         | 121,251  |            |            |         | 65,016   |           
|                                                                           |                                            | Prepaid expenses                |                                                                                                                        |         | (8,438   | )          |            |         | (139,701 | )         
|                                                                           |                                            | Intangible and other assets     |                                                                                                                        |         | (103,998 | )          |            |         | 55,562   |           
|                                                                           |                                            | Accounts payable                |                                                                                                                        |         | 298,677  |            |            |         | (54,230  | )         
|                                                                           |                                            | Accrued interest                |                                                                                                                        |         | 72,905   |            |            |         | (78,323  | )         
|                                                                           |                                            | Accrued interest to shareholder |                                                                                                                        |         | 327,130  |            |            |         | 101,508  |           
|                                                                           |                                            | Accrued liabilities             |                                                                                                                        |         | (157,492 | )          |            |         | 187,365  |           
|                                                                           |                                            | Due to affiliates               |                                                                                                                        |         | (28,525  | )          |            |         | (20,824  | )         
|                                                                           |                                            |                                 |                                                                                                                        |         |          |            |            |        
|                                                                           |                                            |                                 | Cash used in operating activities                                                                                      |         |          | (1,764,559 | )          |         |          | (2,421,931 | )
|                                                                           |                                            |                                 |                                                                                                                        |         |          |            |            |        
|Cash Flows from Investing
	Activities:                                     |                                            |                                 |                                                                                                                        |         |          |            |            |        
|Capital expenditures                                                       |                                            |                                 | (191,263                                                                                                               | )       |          |            | (332,959   | )      
|Cash paid for acquisitions, net of cash acquired                           |                                            |                                 | (172,088                                                                                                               | )       |          |            |           |        
|                                                                           |                                            |                                 |                                                                                                                        |         |          |            |            |        
|                                                                           |                                            |                                 | Cash used in investing activities                                                                                      |         |          | (363,351   | )          |         |          | (332,959   | )
|                                                                           |                                            |                                 |                                                                                                                        |         |          |            |            |        
|Cash Flows from Financing
	Activities:                                     |                                            |                                 |                                                                                                                        |         |          |            |            |        
|Repayments of notes receivable from shareholders                           |                                            |                                 | 260                                                                                                                    |         |          |            | 36,000     |        
|Proceeds from borrowings against notes payable
	and line of credit         |                                            |                                 | 2,500,000                                                                                                              |         |          |            | 3,309,151  |        
|Payments of financing costs                                                |                                            |                                 |                                                                                                                       |         |          |            | (95,000    | )      
|Principal payments on notes payable and lines of
	credit                   |                                            |                                 | (200,000                                                                                                               | )       |          |            | (4,555,651 | )      
|Proceeds from issuance of common stock, net of
	costs                      |                                            |                                 |                                                                                                                       |         |          |            | 11,410,152 |        
|Proceeds from issuance of notes payable to
	shareholder                    |                                            |                                 | 941,945                                                                                                                |         |          |            |           |        
|Proceeds from issuance of convertible notes
	payable to shareholder        |                                            |                                 | 700,000                                                                                                                |         |          |            |           |        
|Principal payments on convertible notes payable
	to shareholder            |                                            |                                 | (1,831,627                                                                                                             | )       |          |            |           |        
|                                                                           |                                            |                                 |                                                                                                                        |         |          |            |            |        
|                                                                           |                                            |                                 | Cash provided by financing activities                                                                                  |         |          | 2,110,578  |            |         |          | 10,104,652 |  
|                                                                           |                                            |                                 |                                                                                                                        |         |          |            |            |        
|Change in cash                                                             |                                            |                                 | (17,332                                                                                                                | )       |          |            | 7,349,762  |        
|Cash, beginning of period                                                  |                                            |                                 | 20,886                                                                                                                 |         |          |            | 3,554      |        
|                                                                           |                                            |                                 |                                                                                                                        |         |          |            |            |        
|Cash, end of period                                                        |                                            | $                               | 3,554                                                                                                                  |         |          | $          | 7,353,316  |        
|                                                                           |                                            |                                 |                                                                                                                        |         |          |            |            |        
|Supplemental disclosure of cash flow
	information  Cash paid for interest |                                            | $                               | 426,041                                                                                                                |         |          | $          | 924,296    |        
|                                                                           |                                            |                                 |                                                                                                                        |         |          |            |            |        
|Supplemental disclosure of noncash investing and
	financing activities:    |                                            |                                 |                                                                                                                        |         |          |            |            |        
|                                                                           |                                            |                                 | Noncash portion of acquisitions (assumptions of
	liabilities, issuance of note payable, and issuance of common
	stock) |         | $        | 5,656,361  |            |         | $        |           |  
|                                                                           |                                            |                                 |                                                                                                                        |         |          |            |            |        
|                                                                           |                                            |                                 | Conversions of preferred stock, bridge loans, and
	convertible notes payable into common equity                        |         | $        |           |            |         | $        | 3,207,988  |  
|                                                                           |                                            |                                 |                                                                                                                        |         |          |            |            |        

See notes to consolidated financial statements.

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##### Table of Contents



MICROHELIX, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Years Ended December 31, 2000 and
2001


1.     Summary of
Significant Policies and Basis of Presentation

Nature of
Operations microHelix,
Inc. and its wholly owned subsidiary, BioElectric Corporation
(collectively, the Company), is primarily engaged in
the design, manufacture, and sale of micro cables, connectors,
and assemblies for use in medical devices.

Basis of
Presentation In August
2001, the Company completed a 1-for-9.0588 reverse split of its
common stock, the effects of which have been retroactively
applied to the Companys financial statements for all
periods presented. The reverse split was applied to outstanding
common stock, as well as any common stock warrants and options
granted as of the time of the reverse split.

The consolidated financial statements include the
accounts of microHelix, Inc. and its wholly owned subsidiary,
BioElectric Corporation (BioElectric). All
significant intercompany balances and transactions are
eliminated upon consolidation. The results of BioElectric have
been included in the consolidated financial statements since the
date of acquisition (Note 2).

Name Change and
Reorganization On
December 31, 2000, mHL Development Company and its
subsidiaries were legally merged into one entity with the
exception of BioElectric Corporation, a wholly owned subsidiary
that transferred substantially all of its assets and liabilities
to the Company. In March 2001, mHL Development Company legally
changed its name to microHelix, Inc.

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
amounts reported in the consolidated financial statements and
accompanying notes. This includes, among other things,
evaluation of the remaining life and recoverability of
long-lived assets and the recoverability of inventories. Actual
results could differ from those estimates.

Credit and
Collection The Company
extends credit to its customers based on an assessment of a
customers financial circumstances, generally without
requiring collateral. Some of our significant customers have
experienced financial difficulties in the past, and future
financial difficulties of customers could have a material
adverse effect on the Companys business.

Inventoriesare
stated at the lower of cost (first-in, first-out) or market.

Property and Equipmentare recorded at cost. Depreciation is
provided using the straight-line method over the estimated
useful lives of the assets (three to seven years) beginning on
the date placed in service. Leasehold improvements are amortized
over the lesser of the remaining lease term or the useful life.
Costs of repairs and maintenance are expensed as incurred.
Management periodically evaluates the recoverability of property
and equipment by comparing the carrying amounts to future
undiscounted cash flows expected to be generated by such assets.
The Company has not identified any such impairment losses to
date.

Intangible and Other Assetsprimarily represent patent costs that
are amortized using the straight-line method over their
estimated useful lives or 15 years, whichever is shorter,
once the technology is completed and in use. Management
periodically evaluates the recoverability of intangibles based
on current and anticipated income and undiscounted future cash
flows.

Impairment of Long-Lived
Assets The Company
evaluates its long-lived assets for financial impairments and
will continue to evaluate them if events or changes in
circumstance indicate the carrying amount of such assets may not
be fully recoverable.

Revenue
Recognition The Company
recognizes revenue from commercial sales of micro cables,
connectors, assemblies and related supplies when title passes,
which is upon shipment. Commercial sales are made F.O.B. point
of shipment. Returns are limited to nonconforming products.

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##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Development contracts are structured on a cost or
cost plus basis. Revenue from development contracts for
non-recurring engineering is recognized as time and materials
costs are incurred. Revenue from contracts for the production of
prototypes is recognized when the title passes, which is upon
shipment. Prototypes are tested at the Companys facility
for customer specifications prior to shipment.

Revenue on government contracts and grants is
recognized as time and materials costs are incurred using the
percentage of completion method. The government generally
provides grants to perform specific research and is not the
ultimate customer.

As of December 31, 2000 and 2001, there were
no unbilled or pre-billed amounts on outstanding contracts.
Earnings on non-recurring engineering contracts were immaterial
for the years ended December 31, 2000 and 2001. Earnings on
government contracts are presented in the statements of
operations.

Research and
Development Internal
research and development costs are expensed as incurred.
Third-party research and development costs are expensed as the
contracted work is performed.

Income
Taxes The liability method
is used to account for income taxes. Deferred income taxes are
provided for the temporary effects of differences in the
recognition of revenues and expenses for financial statement and
income tax reporting purposes. Valuation allowances reduce
deferred tax assets to an amount more likely than not to be
realized.

Stock-Based
Compensation Compensation
expense for stock-based employee compensation is measured using
the method prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees. Pro forma disclosures of net losses are
made as if the method prescribed by Statement of Financial
Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, had been applied
in measuring compensation expense.

Financial
Instruments The carrying
value of the Companys cash, accounts receivable, accounts
payable, other accrued liabilities, and line of credit
approximate their estimated fair values due to the short
maturities of those instruments. At December 31, 2001, the
estimated fair value of notes payable was $626,734 as compared
to the carrying value of $750,000. The estimated fair value of
notes payable to shareholder was $1,243,281 as compared to the
carrying value of $1,325,830. Estimated rates currently
available to the Company for debt with similar terms are used to
estimate the fair value of notes payable and notes payable to
shareholder.

Comprehensive
Loss Comprehensive loss
for the years ended December 31, 2000 and 2001 was the same
as the reported net loss.

Recent Accounting
Pronouncements In June
1998, June 1999, and June 2000, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, SFAS No. 137, Deferral of the Effective
Date of FASB Statement No. 133, and SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain
Hedging Activities, respectively (collectively the
Statements). The Statements establish accounting and
reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities. They require that an entity recognize
all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair
value. The Statements are effective for fiscal years beginning
after June 15, 2000. The Company adopted the Statements on
January 1, 2001. The adoption of the Statements did not
have a material impact on the Companys consolidated
financial statements.

In July 2001, the FASB issued SFAS No. 141,
Business Combinations. The statement discontinues the use
of the pooling of interests method of accounting for business
combinations. The statement is effective for all business
combinations after June 30, 2001. The effects of this
statement did not have a material impact on the Companys
consolidated financial statements.

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##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. The statement will
require discontinuing the amortization of goodwill and other
intangible assets with indefinite useful lives. Instead, these
assets will be tested periodically for impairment and written
down to their fair market values as necessary. This statement is
effective for fiscal years beginning after December 15,
2001. We have completed an evaluation of the effects of this
statement and do not believe it will have a material impact on
the consolidated financial statements.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which is effective January 1, 2002.
SFAS 144 addresses accounting and reporting of long-lived
assets, except goodwill, that are either held and used or
disposed of through sale or other means. The Company is
currently assessing, but has not yet determined the impact of
SFAS 144 on its financial position, results of operations and
cash flows.

Net Loss Per
Share Basic net loss per
share has been computed by dividing net loss by the weighted
average number of shares outstanding during each period. Diluted
loss per share has been computed by dividing net loss adjusted
for interest on convertible bridge loans and notes payable by
the weighted average common stock and common stock equivalent
shares outstanding during each period using the treasury stock
method for employee stock option plans and warrants, and the
if-converted method for redeemable preferred stock and
convertible bridge loans and notes payable, if the common
equivalent shares were not anti-dilutive. Common stock
equivalents were anti-dilutive for all periods presented.

Options to purchase 148,827 and 235,609 shares of
common stock were outstanding as of December 31, 2000 and
2001, respectively, but were not included in the computation of
diluted net loss per share for the years then ended because the
options were anti-dilutive. These options expire on dates
beginning April 2009 through October 2011. Common equivalent
shares of 521,471 and 508,952 at December 31, 2000 and
2001, respectively, from assumed conversion of redeemable
preferred stock, convertible notes payable, and stock warrants
were not included in the computation of diluted net loss per
share as they were anti-dilutive.

2.     Mergers and
Acquisitions

Effective February 4, 2000, the Company
acquired all of the outstanding common stock of BioElectric, a
developer of custom electronic interconnect systems for the
human body located in Portland, Oregon. The Company paid
$160,000 in cash, issued a promissory note for $340,000, and
agreed to either make cash payments of $730,000 or issue 80,585
shares of common stock in each of five years beginning on
December 31, 2001. In December 2000, the Company issued
402,923 shares with a fair value of $9.19 per share to the
former owner of BioElectric in full satisfaction of the portion
of the purchase price that was to be paid over the five-year
period. The fair value of the 402,923 shares issued to acquire
BioElectric was established by valuing the BioElectric stock
received in the exchange considering such factors as the nature
and history of BioElectric, the economic outlook for BioElectric
and its industry, the book value of the BioElectric stock, its
financial condition, the markets for its products, and its
earning capacity. The income approach was used to determine fair
value. Income projections for the year 2000 through 2004 were
discounted using a 40% discount rate and a 5% growth rate from
the end of the projection period. The former owner has agreed to
certain stock transfer restrictions determined in a separate
agreement, including a right of first refusal for the Company.
This stock transfer restriction agreement terminated on the
effective date of the Companys initial public offering,
November 16, 2001.

The acquisition of BioElectric has been accounted
for using the purchase method of accounting. Accordingly, the
results of operations of BioElectric have been included in the
consolidated financial statements of the Company since the date
of acquisition.

28



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##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair
value. Assets and liabilities acquired were as follows:

|                               |                                         |                               |   |           |           | 
|------------------------------ | --------------------------------------- | ----------------------------- | - | --------- | --------- | 
|Fair value of assets acquired: |                                         |                               |   |          
|                               | Tangible assets                         |                               | $ | 879,224   |          
|                               | Patents                                 |                               |   | 4,844,167 |          
|                               | Other                                   |                               |   | 92,870    |          
|                               |                                         |                               |   |          
|                               |                                         | Fair value of assets acquired |   |           | 5,816,261 | 
|Less:                          |                                         |                               |   |          
|                               | Cash paid, net of acquired cash of $100 |                               |   | 159,900   |          
|                               | Note payable issued                     |                               |   | 340,000   |          
|                               | Common stock issued                     |                               |   | 3,704,167 |          
|                               |                                         |                               |   |          
|                               |                                         | Liabilities assumed           |   | $         | 1,612,194 | 
|                               |                                         |                               |   |          

In connection with an acquisition in 1999, the
Company entered into a non-exclusive cable supply agreement with
the former owner of the equipment and inventories acquired with
an initial term effective through December 31, 2004. Prices
for the products to be purchased are fixed for the term of the
agreement, although subject to change upon mutual consent of the
parties. The Company will earn rebates as a financial incentive
should certain annual contract values for the cable purchases be
achieved. As of December 31, 2001, the Company had not yet
met the minimum required annual contract value to earn any such
rebates.

3.     Inventories

Inventories are as follows:

|                  |       |              |           |         | 
|----------------- | ----- | ------------ | --------- | ------- | 
|                  |       | December 31,
|                  |       | 2001        
|                  |       |             
|Raw materials     |       | $            | 1,210,730 |        
|Work-in-process   |       |              | 98,233    |        
|Finished goods    |       |              | 2,074     |        
|Inventory reserve |       |              | (430,760  | )      
|                  |       |              |           |        
|                  | Total |              | $         | 880,277 | 
|                  |       |              |           |        

As a result of the reduced forecast in the
ultrasound market during the last quarter of 2001, we increased
the provision for inventory reserves by $430,760.

29



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MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     Property and
Equipment

Property and equipment are as follows:

|                               |                              |              |           |           | 
|------------------------------ | ---------------------------- | ------------ | --------- | --------- | 
|                               |                              | December 31,
|                               |                              | 2001        
|                               |                              |             
|Machinery and equipment        |                              | $            | 2,344,520 |          
|Leasehold improvements         |                              |              | 203,638   |          
|Office furniture and equipment |                              |              | 227,157   |          
|Automobiles                    |                              |              | 20,000    |          
|Software                       |                              |              | 53,210    |          
|                               |                              |              |           |          
|                               |                              |              | 2,848,525 |          
|Accumulated depreciation       |                              |              | (980,695  | )        
|                               |                              |              |           |          
|                               | Property and equipment  net |              | $         | 1,867,830 | 
|                               |                              |              |           |          

5.     Intangible and
Other Assets

Intangible and other assets are as follows:

|                         |                                   |              |           |           | 
|------------------------ | --------------------------------- | ------------ | --------- | --------- | 
|                         |                                   | December 31,
|                         |                                   | 2001        
|                         |                                   |             
|Patents                  |                                   | $            | 4,955,466 |          
|Accumulated amortization |                                   |              | (29,430   | )        
|                         |                                   |              |           |          
|                         | Intangible and other assets  net |              | $         | 4,926,036 | 
|                         |                                   |              |           |          

6.     Line of Credit
and Notes Payable

In December 2001, the Company entered into a
revolving line of credit and equipment loan agreement with a
bank. Proceeds from the borrowings were used to repay, in full,
principal and interest of a line of credit and note payable
aggregating $382,728. The line of credit bears interest at the
prime rate plus 1% (5.75% at December 31, 2001) and allows
the Company to borrow up to $2,000,000. At December 31,
2001, $711,000 was outstanding on the line of credit, with
interest paid monthly and principal due May 30, 2003.

As of December 31, 2001, the Company was in
compliance with the financial covenants established in the line
of credit and borrowing agreement.

30



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MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Notes payable consisted of the following:

|                                                                                                                                                                                     |                                    |              |          |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------- | ------------ | -------- | --------- | 
|                                                                                                                                                                                     |                                    | December 31,
|                                                                                                                                                                                     |                                    | 2001        
|                                                                                                                                                                                     |                                    |             
|Note payable, interest at prime plus 1.25%, 6% at
	December 31, 2001, principal and interest payable
	monthly, due in full on December 30, 2004, secured by
	inventory and equipment |                                    |              | 750,000  |          
|Note payable to shareholder, interest at 12% at
	December 31, 2001, interest payable monthly and principal
	payments due March 2003 and December 2004, secured
	by certain assets    |                                    |              | 546,945  |          
|Note payable to shareholder, interest at 12% at
	December 31, 2001, interest payable monthly and principal
	payments due March 2003 and December 2004, secured
	by certain assets    |                                    |              | 383,885  |          
|Note payable to shareholder, interest at 15% at
	December 31, 2001, interest payable monthly and principal
	payment due December 2002, secured by certain assets                     |                                    |              | 235,000  |          
|Note payable to shareholder, interest at 12% at
	December 31, 2001, interest payable monthly and principal
	payments due March 2003 and December 2004, secured
	by certain assets    |                                    |              | 160,000  |          
|                                                                                                                                                                                     |                                    |              |          |          
|                                                                                                                                                                                     | Total notes payable                |              |          | 2,075,830 | 
|Less current portion                                                                                                                                                                 |                                    |              | (575,830 | )        
|                                                                                                                                                                                     |                                    |              |          |          
|                                                                                                                                                                                     | Long-term portion of notes payable |              | $        | 1,500,000 | 
|                                                                                                                                                                                     |                                    |              |          |          

Long-term notes payable consist of a $500,000
note payable to a bank and $1,000,000 of notes payable to
shareholder.

Principal payments due on notes payable are as
follows as of December 31, 2001:

|     |       |   |         |           | 
|---- | ----- | - | ------- | --------- | 
|2002 |       | $ | 575,830 |          
|2003 |       |   | 650,000 |          
|2004 |       |   | 850,000 |          
|     |       |   |         |          
|     | Total |   | $       | 2,075,830 | 
|     |       |   |         |          

In February 2002, the Companys President
and Chief Executive Officer (the shareholder), along
with the Board of Directors, agreed to reduce the interest rates
on notes payable to shareholder from 12% to 7.5% and extend the
terms for $400,000 of the balance from December 31, 2002 to
March 31, 2003 and the remaining $600,000 of the balance
will be due December 31, 2004. The shareholder, who also
serves as trustee of the Sass Living Trust, along with Board of
Directors, also agreed to reduce the interest rate on the note
payable to the Sass Living Trust from 15% to 7.5%. In connection
with the revisions, the Company repaid $90,830 of principal in
2002 in order to reduce the outstanding principal to $1,000,000.
Additionally, the Company paid accrued interest in full for both
the notes payable to the shareholder and to the Sass Living
Trust in the amounts of approximately $460,000 and $72,000,
respectively. As a result of the above events, the Company has
classified $1,000,000 of the notes payable to shareholder as
long-term at December 31, 2001.

7.     Income
Taxes

Deferred income taxes, reflecting the net tax
effects of temporary differences between the carrying amount of
assets and liabilities recognized for financial reporting
purposes and the amounts recognized for income tax purposes, are
based on tax laws currently enacted.

31



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MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Components of deferred tax assets are as follows:

|                                         |                    |              |            |           |   | 
|---------------------------------------- | ------------------ | ------------ | ---------- | --------- | - | 
|                                         |                    | December 31,
|                                         |                    | 2001        
|                                         |                    |             
|Federal net operating loss carryforwards |                    | $            | 2,846,385  |          
|State net operating loss carryforwards   |                    |              | 387,564    |          
|Stock-based compensation                 |                    |              | 136,287    |          
|Related party interest                   |                    |              | 220,707    |          
|Other                                    |                    |              | 84,075     |          
|                                         |                    |              |            |          
|                                         | Deferred tax asset |              |            | 3,675,018 |  
|Valuation allowance                      |                    |              | (3,675,018 | )        
|                                         |                    |              |            |          
|                                         |                    | Net          |            | $         |  | 
|                                         |                    |              |            |          

As of December 31, 2001, the Company had
federal and state net operating loss carryforwards of $8,132,528
and $5,872,181, respectively, expiring during the years 2013
through 2021. No provision for income taxes has been provided
due to the Companys net losses.

SFAS No. 109, Accounting for Income
Taxes, requires that the tax benefit of net operating
losses, temporary differences, and credit carryforwards be
recorded as an asset to the extent that management assesses that
realization is more likely than not. Realization of
the future tax benefits is dependent on the Companys
ability to generate sufficient taxable income within the
carryforward period. Because of the Companys current
operating losses, management has provided a 100% valuation
allowance for its net deferred tax assets. Ownership changes due
to the planned sale of the Companys common stock, as part
of the units, could limit the amount of net operating loss
carryforwards available for use in any one year or in the
aggregate.

8.     Shareholders
Equity

Common Stock Effective November 16, 2001, the
Company accomplished an initial public offering (the
offering) in which it issued 2,000,000 units at
$6.00 per unit. A unit consisted of one share of common stock,
one Class A warrant to purchase one share of common stock,
and one Class B warrant to purchase one share of common
stock. In December 2001, the Company issued an additional
300,000 units as the representatives of the underwriters
exercised their over-allotment option.

In connection with the offering, redeemable
preferred stock of $450,000 was converted into 165,585 shares of
common stock, convertible bridge loans of $600,000 plus accrued
interest of $22,673 were converted into 103,779 units, and
convertible notes payable to shareholder of $2,135,315 were
converted into 355,886 units.

As discussed in Note 1, in August 2001, the
Company completed a 1-for-9.0588 reverse split of its common
stock. The effects of the reverse split have been retroactively
applied to the Companys financial statements for all
periods presented.

Dividend Policy The declaration and payment of any
future cash dividends is prohibited by the Companys credit
agreement and may be similarly restricted in the future.

Stock Incentive Plan The Companys 2001 Stock
Incentive Plan (the 2001 Plan) was adopted by the
board of directors in July 2001 and approved by the shareholders
in August 2001. The 2001 Plan provides for the issuance of
options to purchase up to 600,000 shares of common stock.
Options are granted under various vesting arrangements, up to a
maximum of five years and expire after a maximum of ten years
and are subject to a stock transfer restriction agreement to be
entered into upon exercise.

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MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has a 1998 Stock Incentive Plan (the
1998 Plan), which provides for issuance of options
to purchase up to 220,780 shares of common stock to its
employees and service providers. Options are granted under
various vesting arrangements, up to a maximum of five years and
expire after a maximum of ten years and are subject to a stock
transfer restriction agreement to be entered into upon exercise.

The following table summarizes activity under the
1998 and 2001 Plans:

|                                        |  |                     |         |           |  |              |      |  |  |   |      | 
|--------------------------------------- |  | ------------------- | ------- | --------- |  | ------------ | ---- |  |  | - | ---- | 
|                                        |  |                    
|                                        |  | Outstanding Options
|                                        |  |                    
|                                        |  |                     |         | Weighted  |  |             
|                                        |  |                     |         | Average   |  | Weighted    
|                                        |  |                     |         | Exercise  |  | Average Fair
|                                        |  | Number              |         | Price Per |  | Value Per   
|                                        |  | of Shares           |         | Share     |  | Share       
|                                        |  |                     |         |           |  |             
|Balance at December 31, 1999            |  |                     | 70,365  |           |  | $            | 4.27 |  |  | $ | 1.97 | 
|Options granted, less than market price |  |                     | 67,088  |           |  |              | 2.72 |  |  |   | 7.24 | 
|Options granted at market price         |  |                     | 11,332  |           |  |              | 9.06 |  |  |   | 3.90 | 
|                                        |  |                     |         |           |  |              |      |  |  |   |      | 
|Balance at December 31, 2000            |  |                     | 148,785 |           |  |              | 3.93 |  |  |   | 4.49 | 
|Options granted, less than market price |  |                     | 68,994  |           |  |              | 9.06 |  |  |   | 3.97 | 
|Options granted at market price         |  |                     | 60,519  |           |  |              | 3.58 |  |  |   | 1.57 | 
|Options cancelled                       |  |                     | (42,688 | )         |  |              | 2.86 |  |  |   | 4.85 | 
|                                        |  |                     |         |           |  |              |      |  |  |   |      | 
|Balance at December 31, 2001            |  |                     | 235,609 |           |  | $            | 5.54 |  |  | $ | 3.52 | 
|                                        |  |                     |         |           |  |              |      |  |  |   |      | 

In November 2001, the Company made an exchange
offer to employees who held options at an exercise price of
$9.06 per share, in which the employees would be able to be
granted new options in six months and one day from the
cancellation date of their existing options. In connection with
this offer, 34,607 options were cancelled.

The following table summarizes information about
stock options outstanding and exercisable under the 1998 and
2001 Plans at December 31, 2001:

|               |  |                     |         |                     |  |           |      |             |  |           |      |  |  |  |        |  |  |   |      | 
|-------------- |  | ------------------- | ------- | ------------------- |  | --------- | ---- | ----------- |  | --------- | ---- |  |  |  | ------ |  |  | - | ---- | 
|               |  |                     |         |                     |  |          
|               |  | Options Outstanding |         |                    
|               |  |                     |         | Options Exercisable
|               |  |                     |         | Weighted-           |  |           |      |            
|               |  |                     |         | Average             |  | Weighted- |      |             |  | Weighted-
|               |  |                     |         | Remaining           |  | Average   |      | Number      |  | Average  
|               |  | Number              |         | Contractual         |  | Exercise  |      | of Options  |  | Exercise 
|Exercise Price |  | of Options          |         | Life (yrs)          |  | Price     |      | Exercisable |  | Price    
|               |  |                     |         |                     |  |           |      |             |  |          
|$1.09          |  |                     | 2,208   |                     |  |           | 6.50 |             |  | $         | 1.09 |  |  |  | 1,325  |  |  | $ | 1.09 | 
|$2.72          |  |                     | 110,329 |                     |  |           | 7.72 |             |  |           | 2.72 |  |  |  | 42,462 |  |  |   | 2.72 | 
|$3.58          |  |                     | 60,519  |                     |  |           | 9.24 |             |  |           | 3.58 |  |  |  | 0      |  |  |   | 3.58 | 
|$9.06          |  |                     | 62,533  |                     |  |           | 9.15 |             |  |           | 9.06 |  |  |  | 9,000  |  |  |   | 9.06 | 
|               |  |                     |         |                     |  |           |      |             |  |           |      |  |  |  |        |  |  |   |      | 
|               |  |                     | 235,609 |                     |  |           | 8.45 |             |  | $         | 5.54 |  |  |  | 52,787 |  |  | $ | 3.76 | 
|               |  |                     |         |                     |  |           |      |             |  |           |      |  |  |  |        |  |  |   |      | 

In 2000, the Company issued approximately 39,492
options to certain employees in lieu of ten months of salary and
wages. The intrinsic value of the options granted in lieu of
salary was equivalent to the reduction in employee salaries.
Accordingly, no deferred compensation was recorded.

The Company has computed, for pro forma
disclosure purposes, the value of all stock options granted
during the years ended December 31, 2000 and 2001 using the
Black-Scholes option pricing model. The weighted average
assumptions used for stock option grants for the year ended
December 31, 2000, were a risk-free interest rate of
5.375%, 26% volatility, no expected dividend yield, and an
expected life of 7.5 years. The weighted average
assumptions used for stock option grants for the year ended
December 31, 2001, were a risk-free interest rate of
4.860%, 29% volatility, no expected dividend yield, and an
expected life of 7.5 years.

33



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MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

If the Company had accounted for the 1998 and
2001 Plans in accordance with SFAS No. 123, the
Companys net loss and net loss per common share would have
been adjusted to the following pro forma amounts:

|                                             |             |                         |   |            |   |  |   |            |  
|-------------------------------------------- | ----------- | ----------------------- | - | ---------- | - |  | - | ---------- | -
|                                             |             |                        
|                                             |             | Year Ended December 31,
|                                             |             |                        
|                                             |             | 2000                    |   | 2001      
|                                             |             |                         |   |           
|Net loss:                                    |             |                         |   |            |   |  |   |           
|                                             | As reported |                         | $ | (2,067,589 | ) |  | $ | (3,047,482 | )
|                                             | Pro forma   |                         |   | (2,138,358 | ) |  |   | (3,179,839 | )
|Basic and diluted net loss per common share: |             |                         |   |            |   |  |   |           
|                                             | As reported |                         |   | (1.55      | ) |  |   | (1.82      | )
|                                             | Pro forma   |                         |   | (1.61      | ) |  |   | (1.40      | )

The pro forma amounts may not be indicative of
the effects on reported net loss for future periods due to the
effect of options vesting over a period of years and the
awarding of stock compensation in future years.

Stock Warrants In connection with bridge loans issued
in June 2001, the Company granted warrants to purchase 156,000
units at 90% of the initial public offering price. The warrants
may be exercised at any time during a period of three years
commencing on the first anniversary of the effective date of the
offering or November 16, 2002. Interest expense of $162,963
was recorded based on the fair value of the warrants that was
calculated using the Black-Scholes pricing model and the
following assumptions: risk-free interest rate of 4.58%, no
expected dividend yield, 30% volatility, and an expected life of
3.75 years.

In connection with a credit facility agreement
entered into in January 2001, the Company granted 4,416 common
stock warrants at an exercise price of $9.0588 per share. The
warrants expire in January 2008. A discount of $10,419 on the
line of credit and note payable issued under the former credit
facility was calculated as the difference between the exercise
price of the warrants and the fair value of the Companys
common stock calculated using the Black-Scholes pricing model
and the following assumptions: risk-free interest rate of
4.625%, no expected dividend yield, 30% volatility, and an
expected life of five years. The discount was applied
proportionately to the proceeds of the related line of credit
and note payable to be amortized over the life of the
agreements, which were paid in full as of December 31,
2001. Accordingly, the discount has been fully amortized as of
December 31, 2001.

Deferred Compensation In connection with stock option grants
issued to employees and consultants of the Company, deferred
compensation of $182,043 and zero was recorded during 2000 and
2001, respectively. Deferred compensation related to stock
options granted to employees was calculated as the difference
between the exercise price of the options and the estimated fair
value of the Companys common stock and is being amortized
on a straight-line basis over the vesting period of the options.
Deferred compensation related to stock options granted to
consultants during 2000 was calculated as the difference between
the exercise price of the options and the fair value of the
Companys common stock calculated using the Black-Scholes
pricing model and the following assumptions: risk-free interest
rate of 5.375%, no expected dividend yield, 26% volatility and
an expected life of five years. Deferred compensation to
consultants is being amortized on a straight-line basis over the
related service periods.

9.     Related-Party
Transactions

The shareholder has a controlling interest in
National Applied Science, Inc., Red Dot, Inc., and Fidelcor
Capital. During 2001, the Company settled all due to/from
affiliate amounts.

There are no transactions with the affiliates
that impact sales or expenses.

34



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##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Significant transactions and balances with
shareholders are summarized below:

|                                                     |  |              |           | 
|---------------------------------------------------- |  | ------------ | --------- | 
|                                                     |  | December 31,
|                                                     |  | 2001        
|                                                     |  |             
|Notes receivable from shareholders for common
	stock |  | $            | 57,940    | 
|                                                     |  |              |           | 
|Accrued interest to shareholder                      |  | $            | 530,546   | 
|                                                     |  |              |           | 
|Notes payable to shareholder                         |  | $            | 1,325,830 | 
|                                                     |  |              |           | 
|Deferred shareholder compensation                    |  | $            | 200,000   | 
|                                                     |  |              |           | 

|                                |  |                         |         |      |  |   |         | 
|------------------------------- |  | ----------------------- | ------- | ---- |  | - | ------- | 
|                                |  |                        
|                                |  | Year Ended December 31,
|                                |  |                        
|                                |  | 2000                    |         | 2001
|                                |  |                         |         |     
|Interest expense to shareholder |  | $                       | 357,859 |      |  | $ | 166,150 | 

During 1999, the shareholder of the Company
agreed to defer his annual compensation of $200,000 to future
periods in order to improve the Companys cash flow. In
February 2002, the Company agreed to repay $125,000 of the
deferred compensation and the shareholder agreed to forgive the
remaining $75,000. Accordingly, the $200,000 of deferred
compensation has been classified as a current liability as of
December 31, 2001.

10.     Commitments
and Contingencies

Operating Leases The Company leases certain office
space and equipment. The operating leases expire at various
dates through November 2005. Future minimum rental commitments
under noncancelable operating leases are as follows:

|                         |                                 |   |         |         | 
|------------------------ | ------------------------------- | - | ------- | ------- | 
|Year Ending December 31, |                                 |  
|                         |                                 |  
|2002                     |                                 | $ | 301,183 |        
|2003                     |                                 |   | 54,702  |        
|2004                     |                                 |   | 8,134   |        
|2005                     |                                 |   | 7,895   |        
|2006                     |                                 |   | 5,266   |        
|                         |                                 |   |         |        
|                         | Total                           |   |         | 377,180 | 
|Less: Sublease income    |                                 |   | (97,472 | )      
|                         |                                 |   |         |        
|                         | Net operating lease commitments |   | $       | 279,708 | 
|                         |                                 |   |         |        

Rent expense was $358,282 and $321,342 (net of
sublease income of $37,489 and $89,974) for the years ended
December 31, 2000 and 2001, respectively.

Government contracts The Company enters into governmental
contracts, in which it may commit to certain equipment
purchases. However, the contracting party is obligated to
reimburse the Company for all such purchases.

Litigation From time to time, the Company is
involved as a defendant in litigation in the ordinary course of
business, the outcome of which cannot be predicted with
certainty. Management believes that any ultimate liability from
litigation will not materially affect the financial position,
results of operations, or cash flows of the Company.

35



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##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

11.     Major
Customers

In 2000, revenues from two customers represented
$619,268 or 15% and $531,316 or 12%, respectively, of the
Companys revenues. In 2001, revenues from three customers
represented $1,852,757 or 30%, $1,182,809 or 19%, and $746,674
or 12%, respectively, of the Companys revenues. Revenues
earned from governmental contracts were from the same customer
for all periods presented.

12.     Segments

The Company operates in two segments. The wire
and cable segment designs and manufactures micro cables,
connectors, and assemblies for use in medical devices. The
government contracts segment performs research funded by
governmental institutions, primarily the National Institutes of
Health, for development of custom electronic interconnect
systems for the human body.

The following is a summary of various financial
amounts for each of the Companys business segments. There
were no intersegment sales during any of the periods presented.

|                               |                      |                         |   |           |           |  |   |            |            | 
|------------------------------ | -------------------- | ----------------------- | - | --------- | --------- |  | - | ---------- | ---------- | 
|                               |                      |                        
|                               |                      | Year Ended December 31,
|                               |                      |                        
|                               |                      | 2000                    |   | 2001     
|                               |                      |                         |   |          
|Sales:                         |                      |                         |   |           |           |  |   |           
|                               | Wire and cable       |                         | $ | 3,297,169 |           |  | $ | 5,461,053  |           
|                               | Government contracts |                         |   | 960,474   |           |  |   | 761,230    |           
|                               |                      |                         |   |           |           |  |   |           
|                               |                      | Total                   |   | $         | 4,257,643 |  |   | $          | 6,222,283  | 
|                               |                      |                         |   |           |           |  |   |           
|Gross profit (loss):           |                      |                         |   |           |           |  |   |           
|                               | Wire and cable       |                         | $ | 375,052   |           |  | $ | (89,887    | )         
|                               | Government contracts |                         |   | 453,911   |           |  |   | 289,684    |           
|                               |                      |                         |   |           |           |  |   |           
|                               |                      | Total                   |   | $         | 828,963   |  |   | $          | 199,797    | 
|                               |                      |                         |   |           |           |  |   |           
|Depreciation and amortization: |                      |                         |   |           |           |  |   |           
|                               | Wire and cable       |                         | $ | 282,435   |           |  | $ | 369,881    |           
|                               | Government contracts |                         |   | 81,154    |           |  |   | 97,384     |           
|                               |                      |                         |   |           |           |  |   |           
|                               |                      | Total                   |   | $         | 363,589   |  |   | $          | 467,265    | 
|                               |                      |                         |   |           |           |  |   |           
|Assets:                        |                      |                         |   |           |           |  |   |           
|                               | Wire and cable       |                         | $ | 8,132,143 |           |  | $ | 15,743,446 |           
|                               | Government contracts |                         |   | 600,536   |           |  |   | 503,152    |           
|                               |                      |                         |   |           |           |  |   |           
|                               |                      | Total                   |   | $         | 8,732,679 |  |   | $          | 16,246,598 | 
|                               |                      |                         |   |           |           |  |   |           

The following is a summary of sales by geographic
region.

|       |               |                         |   |           |           |  |   |           |           | 
|------ | ------------- | ----------------------- | - | --------- | --------- |  | - | --------- | --------- | 
|       |               |                        
|       |               | Year Ended December 31,
|       |               |                        
|       |               | 2000                    |   | 2001     
|       |               |                         |   |          
|Sales: |               |                         |   |           |           |  |   |          
|       | North America |                         | $ | 3,803,475 |           |  | $ | 5,952,024 |          
|       | Europe        |                         |   | 431,735   |           |  |   | 262,223   |          
|       | Other         |                         |   | 22,433    |           |  |   | 8,036     |          
|       |               |                         |   |           |           |  |   |          
|       |               | Total                   |   | $         | 4,257,643 |  |   | $         | 6,222,283 | 
|       |               |                         |   |           |           |  |   |          

36



---



##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Sales to customers in the United States were
$3,774,488 and $5,931,950 during the years ending
December 31, 2000 and 2001, respectively.

The following is a summary of long-lived assets
by geographic location.

|              |  |                   |           | 
|------------- |  | ----------------- | --------- | 
|              |  | December 31, 2001
|              |  |                  
|United States |  | $                 | 6,666,585 | 
|Mexico        |  |                   | 127,281   | 
|              |  |                   |           | 
|              |  | $                 | 6,793,866 | 
|              |  |                   |           | 

13.     Retirement
Plan

The Company offers a 401(k) employee savings plan
with eligibility requirements of three months of service. There
are no required employer contributions and no Company
contributions were made to the plan during the years ended
December 31, 2000 and 2001.

14.     Subsequent
Events

During February 2002, as discussed at Note 6, the
Company agreed to pay the shareholder $90,830 of principal and
$532,000 of accrued interest in exchange for interest rate
reductions and an extension of the maturity date on notes
payable to shareholder.

Additionally, in February 2002, as discussed at
Note 10, the shareholder agreed to accept $125,000 as full and
complete satisfaction of a long-term liability of $200,000 that
was carried by the Company for deferred salary for services
rendered during the year 1999.

* * * * * *

37



---



##### Table of Contents








|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 8. | Changes in and Disagreements with
	Accountants on Accounting and Financial Disclosure

None.






PART III







|        |                                                    
|------- | ---------------------------------------------------
|Item 9. | Directors and Executive Officers of the
	Registrant

The response to this item is incorporated herein
by reference to the Companys definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on
June 6, 2002.






|         |                       
|-------- | ----------------------
|Item 10. | Executive Compensation

The response to this item is incorporated herein
by reference to the Companys definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on
June 6, 2002.






|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 11. | Security Ownership of Certain Beneficial
	Owners and Management

The response to this item is incorporated herein
by reference to the Companys definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on
June 6, 2002.






|         |                                                
|-------- | -----------------------------------------------
|Item 12. | Certain Relationships and Related
	Transactions

The response to this item is incorporated herein
by reference to the Companys definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on
June 6, 2002.






PART IV







|         |                                  
|-------- | ---------------------------------
|Item 13. | Exhibits and Reports on
	Form 8-K

|        |          |             |  |                                                                                                                                                     
|------- | -------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 3.1(1)   |             |  | Amended and Restated Articles of Incorporation of
	microHelix, Inc.                                                                                 
|        | 3.2(1)   |             |  | Bylaws of microHelix, Inc.                                                                                                                          
|        | 4.2(1)   |             |  | Form of Warrant Agreement among microHelix, Inc.
	and UMB Bank, n.a., as Warrant Agent, including the form of
	Class A Warrant and Class B Warrant  
|        | 4.3(1)   |             |  | Form of Unit Certificate                                                                                                                            
|        | 4.4(1)   |             |  | Form of Warrant to Paulson Investment Company,
	Inc.                                                                                                
|        | 10.1(1)  |             |  | Agreement to Provide Registration and
	Subscription Rights dated July 1, 1999 between
	Richard G. Sass and The Polymer Technology Group             
|        | 10.2(1)  |             |  | Warrant dated March 27, 2000 to The Polymer
	Technology Group                                                                                       
|        | 10.3(1)  |             |  | Warrant Agreement dated January 5, 2001 with
	Imperial Bank, as predecessor-in-interest to Comerica Bank                                            
|        | 10.4(1)  |             |  | Amendment to Warrant Agreement dated May 31,
	2001 with Imperial Bank, as predecessor-in-interest to Comerica
	Bank                                 
|        | 10.5(1)  |             |  | Antidilution Agreement dated January 5, 2001
	between microHelix, Inc. and Imperial Bank, as
	predecessor-in-interest to Comerica Bank              
|        | 10.6(1)  |             |  | Stock Transfer Restriction Agreement dated
	January 5, 2001 between microHelix, Inc. and Imperial Bank,
	as predecessor-in-interest to Comerica Bank
|        | 10.7(1)  |             |  | Promissory Note dated December 7, 1991 from
	microHelix, Inc. in favor of Richard G. Sass                                                           
|        | 10.8(1)  |             |  | Promissory Note and Security Agreement dated
	December 15, 1999 from microHelix, Inc. in favor of
	Richard G. Sass                                  
|        | 10.9(1)  |             |  | Promissory Note and Security Agreement dated
	January 20, 2000 from microHelix, Inc. in favor of Sass
	Revocable Trust                              
|        | 10.10(1) |             |  | Promissory Note and Security Agreement dated
	February 1, 2000 from microHelix, Inc. in favor of
	Richard G. Sass                                   

38



---



##### Table of Contents



|        |          |             |  |                                                                                                                                                                                                     
|------- | -------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 10.11(1) |             |  | Promissory Note and Security Agreement dated
	August 1, 2000 from microHelix, Inc. in favor of
	Richard G. Sass                                                                                     
|        | 10.12(1) |             |  | Promissory Note and Security Agreement dated
	April 12, 2001 from microHelix, Inc. in favor of
	Richard G. Sass                                                                                     
|        | 10.13(1) |             |  | Standard Commercial-Industrial Lease Agreement
	dated August 1, 2000 between microHelix, Inc. and La Bajada
	Land Company LLC                                                                       
|        | 10.14(1) |             |  | Addendum for Manufacturing Space Lease Agreement
	dated November 1, 2000 between microHelix, Inc. and Javid
	LLC                                                                                    
|        | 10.15(1) |             |  | Addendum for Manufacturing Space Sub-Lease dated
	June 23, 2000 between microHelix, Inc. and Agave Wire                                                                                             
|        | 10.16(1) |             |  | Lease Agreement dated April 20, 1992 between
	microHelix, Inc. and Pacific Realty Associates, L.P., and lease
	amendments dated August 12, 1992, February 16, 1995,
	April 26, 1996 and July 3, 1997
|        | 10.17(1) |             |  | microHelix, Inc. 1998 Stock Incentive Plan                                                                                                                                                          
|        | 10.18(1) |             |  | Form of Incentive Stock Option Agreement for 1998
	Stock Incentive Plan                                                                                                                             
|        | 10.19(1) |             |  | Form of Non-Statutory Stock Option Agreement for
	1998 Stock Incentive Plan                                                                                                                         
|        | 10.20(1) |             |  | microHelix, Inc. 2001 Stock Incentive Plan                                                                                                                                                          
|        | 10.21(1) |             |  | Form of Incentive Stock Option Agreement for 2001
	Stock Incentive Plan                                                                                                                             
|        | 10.22(1) |             |  | Form of Non-Statutory Stock Option Agreement for
	2001 Stock Incentive Plan                                                                                                                         
|        | 10.23(1) |             |  | Form of Warrant for Bridge Loan                                                                                                                                                                     
|        | 10.24(1) |             |  | National Institutes of Health Grant Number 5
	R44 NS33427-03, dated July 19, 2001                                                                                                                   
|        | 10.25(1) |             |  | National Institutes of Health Grant Number 2
	R44 MH59502-02, dated September 29, 2000                                                                                                              
|        | 10.26(2) |             |  | Form of Amended and Restated Promissory Note
	dated February 8, 2002 from microHelix, Inc. in favor of
	Richard G. Sass in the original principal amount of $456,115                                
|        | 10.27(2) |             |  | Form of Amended and Restated Promissory Note
	dated February 8, 2002 from microHelix, Inc. in favor of
	Richard G. Sass in the original principal amount of $160,000                                
|        | 10.28(2) |             |  | Form of Amended and Restated Promissory Note
	dated February 8, 2002 from microHelix, Inc. in favor of
	Richard G. Sass in the original principal amount of $383,885                                
|        | 10.29(2) |             |  | Form of Amended and Restated Security Agreement
	dated February 8, 2002 from microHelix, Inc. to Richard G.
	Sass                                                                                   
|        | 10.30(2) |             |  | Promissory Note dated December 21, 2001
	between microHelix, Inc. and West Coast Bank                                                                                                               
|        | 10.31(2) |             |  | Business Loan Agreement dated December 21,
	2001 between microHelix, Inc. and West Coast Bank                                                                                                       
|        | 10.32(2) |             |  | Commercial Security Agreement dated
	December 21, 2001 between microHelix, Inc. and West Coast
	Bank                                                                                                
|        | 10.33(2) |             |  | Promissory Note dated December 21, 2001
	between microHelix, Inc. and West Coast Bank                                                                                                               
|        | 10.34(2) |             |  | Business Loan Agreement (Asset Based) dated
	December 21, 2001 between microHelix, Inc. and West Coast
	Bank                                                                                        
|        | 10.35(2) |             |  | Commercial Security Agreement dated
	December 21, 2001 between microHelix, Inc. and West Coast
	Bank                                                                                                
|        | 10.36(2) |             |  | Subordination Agreement between microHelix, Inc.
	and West Coast Bank                                                                                                                               
|        | 21.1(1)  |             |  | Subsidiaries of microHelix, Inc.                                                                                                                                                                    



---



|    |                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Companys
	Registration Statement on Form SB-2 (Reg.
	No. 333-65872), declared effective on November 16,
	2001.
|   
|(2) | Filed herewith.                                                                                                                                 

39



---



##### Table of Contents



SIGNATURES

In accordance with the requirements of
Section 13 or 15 (d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
this behalf by the undersigned, thereunto duly authorized.

| |  |                  |  | 
| |  | ---------------- |  | 
| |  | MICROHELIX, INC.

| |  |                                        |  |                    
| |  | -------------------------------------- |  | -------------------
| |  | By:                                    |  | /s/ RICHARD G. SASS
| |  | Richard G. SassChief Executive Officer

| |  |       |  |               
| |  | ----- |  | --------------
| |  | Dated |  | March 26, 2002
| |  |       |  |               

In accordance with the requirements of the
Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

|                                           |  |                                                  |  |               
|------------------------------------------ |  | ------------------------------------------------ |  | --------------
|Signature                                  |  | Title                                            |  | Date          
|                                           |  |                                                  |  |               
|                                          
|/s/ RICHARD G. SASSRichard G. Sass         |  | Chairman, President and
	Chief Executive Officer |  | March 26, 2002
|                                          
|/s/ TERRENCE A. RIXFORDTerrence A. Rixford |  | Chief Financial Officer and Director             |  | March 26, 2002
|                                          
|/s/ DAVID R. BULLENDavid R. Bullen         |  | Director                                         |  | March 26, 2002
|                                          
|/s/ JANE K. CONNERJane K. Conner           |  | Director                                         |  | March 26, 2002
|                                          
|/s/ JOHN L. CRARYJohn L. Crary             |  | Director                                         |  | March 26, 2002
|                                          
|/s/ TYRAM H. PETTITTyram H. Pettit         |  | Director                                         |  | March 26, 2002
|                                          
|/s/ JAMES B. STEWARTJames B. Stewart       |  | Director                                         |  | March 26, 2002
|                                          
|/s/ JAMES M. WILLIAMSJames M. Williams     |  | Director                                         |  | March 26, 2002

40



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##### Table of Contents



EXHIBIT INDEX

|        |          |             |  |                                                                                                                                                                                                     
|------- | -------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 3.1(1)   |             |  | Amended and Restated Articles of Incorporation of
	microHelix, Inc.                                                                                                                                 
|        | 3.2(1)   |             |  | Bylaws of microHelix, Inc.                                                                                                                                                                          
|        | 4.2(1)   |             |  | Form of Warrant Agreement among microHelix, Inc.
	and UMB Bank, n.a., as Warrant Agent, including the form of
	Class A Warrant and Class B Warrant                                                  
|        | 4.3(1)   |             |  | Form of Unit Certificate                                                                                                                                                                            
|        | 4.4(1)   |             |  | Form of Warrant to Paulson Investment Company,
	Inc.                                                                                                                                                
|        | 10.1(1)  |             |  | Agreement to Provide Registration and
	Subscription Rights dated July 1, 1999 between Richard G. Sass
	and The Polymer Technology Group                                                             
|        | 10.2(1)  |             |  | Warrant dated March 27, 2000 to The Polymer
	Technology Group                                                                                                                                       
|        | 10.3(1)  |             |  | Warrant Agreement dated January 5, 2001 with
	Imperial Bank, as predecessor-in-interest to Comerica Bank                                                                                            
|        | 10.4(1)  |             |  | Amendment to Warrant Agreement dated May 31,
	2001 with Imperial Bank, as predecessor-in-interest to Comerica
	Bank                                                                                 
|        | 10.5(1)  |             |  | Antidilution Agreement dated January 5, 2001
	between microHelix, Inc. and Imperial Bank, as
	predecessor-in-interest to Comerica Bank                                                              
|        | 10.6(1)  |             |  | Stock Transfer Restriction Agreement dated
	January 5, 2001 between microHelix, Inc. and Imperial Bank,
	as predecessor-in-interest to Comerica Bank                                                
|        | 10.7(1)  |             |  | Promissory Note dated December 7, 1991 from
	microHelix, Inc. in favor of Richard G. Sass                                                                                                           
|        | 10.8(1)  |             |  | Promissory Note and Security Agreement dated
	December 15, 1999 from microHelix, Inc. in favor of Richard
	G. Sass                                                                                  
|        | 10.9(1)  |             |  | Promissory Note and Security Agreement dated
	January 20, 2000 from microHelix, Inc. in favor of Sass
	Revocable Trust                                                                              
|        | 10.10(1) |             |  | Promissory Note and Security Agreement dated
	February 1, 2000 from microHelix, Inc. in favor of Richard
	G. Sass                                                                                   
|        | 10.11(1) |             |  | Promissory Note and Security Agreement dated
	August 1, 2000 from microHelix, Inc. in favor of Richard G.
	Sass                                                                                     
|        | 10.12(1) |             |  | Promissory Note and Security Agreement dated
	April 12, 2001 from microHelix, Inc. in favor of
	Richard G. Sass                                                                                     
|        | 10.13(1) |             |  | Standard Commercial-Industrial Lease Agreement
	dated August 1, 2000 between microHelix, Inc. and La Bajada
	Land Company LLC                                                                       
|        | 10.14(1) |             |  | Addendum for Manufacturing Space Lease Agreement
	dated November 1, 2000 between microHelix, Inc. and Javid
	LLC                                                                                    
|        | 10.15(1) |             |  | Addendum for Manufacturing Space Sub-Lease dated
	June 23, 2000 between microHelix, Inc. and Agave Wire                                                                                             
|        | 10.16(1) |             |  | Lease Agreement dated April 20, 1992 between
	microHelix, Inc. and Pacific Realty Associates, L.P., and lease
	amendments dated August 12, 1992, February 16, 1995,
	April 26, 1996 and July 3, 1997
|        | 10.17(1) |             |  | microHelix, Inc. 1998 Stock Incentive Plan                                                                                                                                                          
|        | 10.18(1) |             |  | Form of Incentive Stock Option Agreement for 1998
	Stock Incentive Plan                                                                                                                             
|        | 10.19(1) |             |  | Form of Non-Statutory Stock Option Agreement for
	1998 Stock Incentive Plan                                                                                                                         
|        | 10.20(1) |             |  | microHelix, Inc. 2001 Stock Incentive Plan                                                                                                                                                          
|        | 10.21(1) |             |  | Form of Incentive Stock Option Agreement for 2001
	Stock Incentive Plan                                                                                                                             
|        | 10.22(1) |             |  | Form of Non-Statutory Stock Option Agreement for
	2001 Stock Incentive Plan                                                                                                                         
|        | 10.23(1) |             |  | Form of Warrant for Bridge Loan                                                                                                                                                                     
|        | 10.24(1) |             |  | National Institutes of Health Grant Number 5 R44
	NS33427-03, dated July 19, 2001                                                                                                                   
|        | 10.25(1) |             |  | National Institutes of Health Grant Number 2 R44
	MH59502-02, dated September 29, 2000                                                                                                              



---



##### Table of Contents



|        |          |             |  |                                                                                                                                                                     
|------- | -------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 10.26(2) |             |  | Form of Amended and Restated Promissory Note
	dated February 8, 2002 from microHelix, Inc. in favor of
	Richard G. Sass in the original principal amount of $456,115
|        | 10.27(2) |             |  | Form of Amended and Restated Promissory Note
	dated February 8, 2002 from microHelix, Inc. in favor of
	Richard G. Sass in the original principal amount of $160,000
|        | 10.28(2) |             |  | Form of Amended and Restated Promissory Note
	dated February 8, 2002 from microHelix, Inc. in favor of
	Richard G. Sass in the original principal amount of $383,885
|        | 10.29(2) |             |  | Form of amended and Restated Security Agreement
	dated February 8, 2002 from microHelix, Inc. to Richard G.
	Sass                                                   
|        | 10.30(2) |             |  | Promissory Note dated December 21, 2001
	between microHelix, Inc. and West Coast Bank                                                                               
|        | 10.31(2) |             |  | Business Loan Agreement dated December 21,
	2001 between microHelix, Inc. and West Coast Bank                                                                       
|        | 10.32(2) |             |  | Commercial Security Agreement dated
	December 21, 2001 between microHelix, Inc. and West Coast
	Bank                                                                
|        | 10.33(2) |             |  | Promissory Note dated December 21, 2001
	between microHelix, Inc. and West Coast Bank                                                                               
|        | 10.34(2) |             |  | Business Loan Agreement (Asset Based) dated
	December 21, 2001 between microHelix, Inc. and West Coast
	Bank                                                        
|        | 10.35(2) |             |  | Commercial Security Agreement dated
	December 21, 2001 between microHelix, Inc. and West Coast
	Bank                                                                
|        | 10.36(2) |             |  | Subordination Agreement between microHelix, Inc.
	and West Coast Bank                                                                                               
|        | 21.1(1)  |             |  | Subsidiaries of microHelix, Inc.                                                                                                                                    



---



|    |                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Companys
	Registration Statement on Form SB-2 (Reg.
	No. 333-65872), declared effective on November 16,
	2001.
|   
|(2) | Filed herewith.