##### 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,
    2002                                           
|  
|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

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: $5,171,331.

The aggregate market value of the voting and
non-voting common equity held by non-affiliates, as of
March 13, 2003, was approximately $1,051,000 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 13, 2003, was
approximately $111,000 and $417,000, 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 13,
2003 was 4,659,886 shares of Common Stock, 2,780,498
Class A Warrants, and 2,780,498 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
    2003 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.



---






---

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 Condition 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                                                    
|CERTIFICATIONS
|EXHIBIT 10.37 
|EXHIBIT 10.38 
|EXHIBIT 10.39 
|EXHIBIT 10.40 
|EXHIBIT 10.41 
|EXHIBIT 10.42 
|EXHIBIT 99.1  
|EXHIBIT 99.2  



---



##### Table of Contents






PART I




Item 1.  Business

Overview

microHelix, Inc. (microHelix or the Company) is a
leading designer, manufacturer and marketer of customized
electronic micro-interconnect systems for the medical
(ultrasound, minimally invasive and fully-implantable),
commercial and military markets. We manufacture and market
coated wire including ultra-thin wall pinhole free wire and
custom cable for a number of applications. We also design and
manufacture specialty connectors and flex circuits and offer a
range of laser micro machining services. microHelix has
successfully served these markets for over ten years. As a small
company, we pride ourselves on being cost-competitive and
responsive, combined with a high level of technical expertise.

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 moved from research and development to commercial sales of
our systems to medical device original equipment manufacturers
(OEMs). We provide interconnect systems to medical
device OEMs in three principal markets:



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

We also provide interconnect systems to OEMs
serving military, test & measurement and surveillance
equipment customers.

We design and build interconnect systems using
wire sizes ranging from 58 AWG to 20 AWG and use both
custom and off-the-shelf connectors. We develop and manufacture
cables with anywhere from 1 to 1,000 conductors and offer a
range of shielding and strengthening alternatives. Although most
of our cables are insulated with fluoropolymers, we have
extensive experience with other materials including
biocompatible polymers. We also have special expertise in
designing cable assemblies that withstand corrosion from both
body fluids and other corrosive materials.

In-house capabilities include design and
development using computer aided CAD systems, a state-of-the-art
cable plant, a proprietary micro-extruder, prototype lab,
machine shop and complete assembly operations located in
Portland, Oregon and Nogales, Mexico. We also operate an
advanced laser micro-machining division that includes
engineering, development and manufacturing capabilities. Our
equipment includes two quadruple YAG laser systems 
266nm UV and one Nd:YAG laser system 
1064nm IR.

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,
    engineering and prototype development phase for the
    customers devices;                                                                                 
|
| |  | Expertise in working with a variety of materials
    and processes including wire coating, cable construction,
    injection molding of parts and components, laser micro-machining
    and metal plating; and
|
| |  | High-quality, cost-effective manufacturing and
    assembly with a particular focus on all aspects of fine wire
    handling and termination.                                                                 

Each of our existing and target markets is
dominated by several large OEMs. Smaller niche companies
generally serve the remainder of each market. 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 which
manufacture established products and components a
cost-efficient, reliable source for higher volume interconnect
systems.

1



---



##### Table of Contents



We currently supply components, cable assemblies
and interconnect systems in commercial quantities to OEMs of
non-invasive diagnostic ultrasound devices and minimally
invasive devices. We manufacture these interconnect systems and
assemblies as either a sole source or second source. In
addition, we supply prototype systems to OEMs in the fully
implantable device market that we expect will provide us the
opportunity to participate in the development of this growing
market.

Our broad technology platform allows us to
effectively integrate the design and manufacture of all
components of any sophisticated electronic interconnect system
to provide a complete cost-effective assembly.

Receiving ISO 9001:2000 corporate registration
has been an important priority for both microHelix and its
customers. Following a successful registration audit in March
2003, we have been recommended for ISO 9001:2000 registration.

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 between
components of both medical and commercial devices. 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
    and other materials.

Our technologies are 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 initial 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 target markets and products

microHelix is principally focused on meeting the
interconnect system needs of medical device OEMs, although the
Company has also customers in the commercial, military and
security industries. Medical device customers account for more
than 90% of revenues and remain the Companys primary
market focus.

Continuing advances in medicine and technology
have radically changed many aspects of medical science.
Physicians 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 (eg. LVADs,
pacemakers and neuromodulation devices). These advances in
medical science require continuous improvement in medical
equipment technology, particularly in the areas of device
miniaturization, efficiency and reliability.

2



---



##### Table of Contents



In the diagnostic ultrasound field, continuous
improvements in imaging technology now permit real time color 3D
imaging and further miniaturization has expanded ultrasound
applications in outpatient surgery. A new generation of portable
PC-based low cost ultrasound systems has made ultrasound
technology both more affordable and more accessible. The
industry is experiencing a new round of growth as a result of
these improvements in technology. Serving the medical ultrasound
market is a core capability for microHelix where we combine
engineering excellence with experienced and highly efficient
cable manufacturing and assembly operations.

The minimally invasive device market has
experienced significant growth, a combination of a continuous
improvement in outpatient procedures and an aging population.
The size of certain types of medical devices used in these
procedures such as intravascular ultrasound (IVUS)
and electrophysiology (EP) cardiac mapping catheters
are often limited by the size of the natural pathways of the
human body and the organs into which they 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.

The implantable device market includes a variety
of devices and applications including Left Ventricle Assist
Devices (LVADs), pacemakers and neuromodulation
devices (pain management). microHelix has developed market
opportunities in several areas including manufacturing
biocompatible ultra thin wall wire, implantable antenna
assemblies and implantable cable assemblies. Reliability is
essential for devices intended for medium or long-term implant,
as is the ability to design and manufacture devices that can
survive long term inside the human body. microHelix has worked
for several years perfecting processes and capabilities that
make the Company an obvious partner for medical device OEMs
developing products for this rapidly growing market.

Our commercial business leverages our
interconnect system design and manufacturing capabilities with
applications as diverse as heads-up displays, submarine towed
arrays, micro-cameras and cables for guidance systems. Although
accounting for less than 10% of our business, these markets all
require the ability to design and manufacture durable and
reliable micro-miniature cables that perform the same functions
as larger cables while taking up less space.

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, highly reliable
devices capable of performing increasingly complex functions. We
also believe that the markets for our customers devices,
particularly on the medical side, 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 $1,164,420 at December 31, 2002.

Non-invasive
diagnostic ultrasound device market

In 2002, global ultrasound equipment sales
exceeded $3 billion. The industry reported overall revenue
growth of approximately 7%. Growth has been driven by continuous
improvements in imaging technology (eg. real time full color
3-D imaging) that has produced demand for a whole new
generation of transducers and related ultrasound equipment.
Portable ultrasound units (PCbased) have also taken
ultrasound imaging into the field, reducing cost and increasing
potential applications. With cost-containment driving the
medical world, diagnosis and treatment are continuing to move
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.

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. We
manufacture complex high performance ultrasound cable in our
Portland cable plant.

3



---



##### Table of Contents



We complete ultrasound cable assemblies (adding
connectors, flex circuits and PCBs) at our Nogales, Mexico
facility. This facility was acquired in December 1999 and
provides our customers with a highly skilled work force,
experienced management in Tucson and Nogales and a low-cost
production source.


We work with the industry-leading medical
ultrasound OEMs and have a deserved reputation for engineering
excellence, consistent quality, competitive pricing and on-time
delivery. We also work on various non-medical ultrasound
applications. We view our ultrasound business unit to be both a
core-competency and a foundation for significant growth. In
support of this, we continue to commit capital to enhancing our
capabilities in both cable production and assembly and to
providing working capital needed to support various programs for
major customers.

We have four major ultrasound customers.
Ultrasound revenues accounted for 26% of total revenues
in 2002.



| |                                     
| | ------------------------------------
| | Minimally invasive device
    market

Electro physiology, or EP, is an emerging sector
in minimally invasive surgery. 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 intravascular ultrasound
and 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.

microHelix currently manufactures assemblies for
IVUS catheters and is also manufacturing certain components for
EP cardiac mapping catheters. As part of serving this market, we
have begun to develop and manufacture specialty connectors and
other molded parts that are used in these assemblies. We are
also working with certain customers on navigational sensors and
the flexible tips of EP catheters that perform certain
diagnostic and therapeutic functions. Our long-term strategy is
to develop and manufacture sub-assemblies and eventually
complete assemblies for our OEM customers. As part of this
process, we work on next generation technology with
our customers, providing a technologically sophisticated partner
with extensive R&D experience. Our systems and technologies
also 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 2002, one major customer
accounted for virtually all of our IVUS catheter business. As of
December 31, 2002, we had four major customers in the
minimally invasive device market. Sales to these customers
represented 44% of our total sales for 2002.

4



---



##### Table of Contents





| |                                    
| | -----------------------------------
| | 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 and managing pain. 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, chronic pain and
neurological disorders like Parkinsons disease and
epilepsy. The foundation of biocompatible material science
knowledge and experience that we have applied to implantable
cables and cable assemblies is valuable to OEMs as they work to
develop a new generation of devices.

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 but as fully implantable technologies advance and
battery life is extended, LVADs may become the permanent
solution for many patients. 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 design
and manufacture components for two leading OEMs.

Neurostimulation devices are implantable medical
devices that extend into certain areas of the spinal cord or
brain and can sense and stimulate these areas. These devices are
used to control chronic pain, epileptic seizures, and tremors
associated with Parkinsons disease. Although there are a
variety of medical devices in development in the
neurostimulation market, our primary focus has been on providing
certain components that are part of pacing-like devices to
manage chronic pain. Advanced work done by microHelix in the
development and manufacture of deep brain probes will open up
additional opportunities for us as the use of multi-electrode
brain probes for both data collection and therapy expands.

At December 31, 2002, we had four major
customers in the fully implantable device market. Sales to these
customers accounted for 16% of our total sales for 2002.

Other
Products

We have also actively marketed our design,
engineering, and manufacturing capabilities to other non-medical
customers. Specific business opportunities have developed for
(1) commercial cable and wire including ultra thin wall
coated wire (2) micro cable assemblies including customized
connectors and (3) laser micro machining. Current and
prospective customers in this market serve the defense,
aerospace and test and measurement markets. Further development
of these non-medical markets remains a sales and marketing
focus. This activity accounted for approximately 5% of total
sales for 2002.

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. In 2002,
sales to our four largest customers, Jomed N.V., GE Parallel
Design, World Heart and Philips Medical Systems, accounted for
28%, 12%, 11% and 10%, respectively, of total sales. During
2002, we discontinued our relationship with World Heart.

Sales and marketing

Our direct sales force currently consists of our
Director of Marketing and Sales, a Technical Sales Support group
and three manufacturer representative organizations. All
Ultrasound sales and marketing efforts are managed by the
General Manager of our Ultrasound Division headquartered in
Tucson. Application and product development engineers located
both in Portland and in Tucson support sales efforts.

5



---



##### Table of Contents



We rely primarily on direct contact with current
and potential customers, industry trade shows and our general
reputation in the market to generate awareness of our
capabilities. Current customers and targeted prospects receive
regular sales visits. As necessary, our engineers support and
visit customers to promote collaborative design engineering. We
develop and supply our systems to OEMs of all sizes, including
multinational corporations.

Our sales cycle, depending on the type of
product, generally takes from six to eighteen months from the
initial visit to the first shipment. Our sales process
frequently involves designing our systems into new devices, so
the sale of these systems in commercial quantities may be
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.

Our medical device customers 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.

Manufacturing

Portland,
Oregon Headquarters

We have 20,000 square feet of office and
manufacturing space at our headquarters in Portland, Oregon.
Other than ultrasound cable assemblies, we generally design,
develop, manufacture and assemble most of our interconnect
systems in Portland. 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.

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.

6



---



##### Table of Contents



Tucson,
Arizona/ Nogales, Mexico Facilities

We have approximately 3,500 square feet of office
and warehouse space in Tucson, Arizona. This facility provides
space for administration of the Nogales plant, ultrasound design
and manufacturing engineers, customer service personnel,
inventory storage and shipping and receiving. We have
approximately 15,000 square feet of manufacturing, warehouse and
office space in Nogales, Mexico. The facility is approximately
five years old.

We manufacture most of the ultrasound cables used
in our diagnostic ultrasound interconnect systems in our
Portland facility. The cables are shipped to our office in
Tucson, Arizona where they are kitted with the necessary
connector parts and shipped to our Nogales, Mexico facility
where the interconnect systems are assembled. After testing and
quality review, the completed assemblies are returned to our
facility in Tucson for final inspection and shipment to our
customers.

Competition

Several 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 W.L. Gore, Precision
Interconnect (Tyco), Temp-Flex, Tensolite and Bay Associates.
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 some of 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
supply customers depends on our ability to propose and execute
on a program that is both technologically sound 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 2002,
government grants from the National Institutes of Health
accounted for 9% of our total revenues, and we anticipate that
government grant sources will continue to decline as a
percentage of our total sales.

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 for government
research contracts.

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. As
our business has matured, the focus of our efforts has shifted
from basic research and development to the development of
specific

7



---



##### Table of Contents



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.


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

|                  |  |                         |           |      |  |   |           | 
|----------------- |  | ----------------------- | --------- | ---- |  | - | --------- | 
|                  |  |                        
|                  |  | Year Ended December 31,
|                  |  |                        
|Source            |  | 2001                    |           | 2002
|                  |  |                         |           |     
|Government grants |  | $                       | 761,000   |      |  | $ | 476,000   | 
|Customer-funded   |  |                         | 951,000   |      |  |   | 559,000   | 
|Self-funded       |  |                         | 101,000   |      |  |   | 650,000   | 
|                  |  |                         |           |      |  |   |           | 
|Total             |  | $                       | 1,813,000 |      |  | $ | 1,685,000 | 
|                  |  |                         |           |      |  |   |           | 

Patents and intellectual property

We have patents, patent applications and trade
secrets and we use the method of protection that is most
appropriate for the particular circumstance. 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
11 U.S. patents. Additionally,
13 U.S. patent applications have been filed with the
United States Patent and Trademark Office. The patent
applications are in various stages of examination. Any future
patents may not be granted and if granted, may be invalidated,
circumvented, challenged, or licensed to others. 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 11 issued patents noted
above will expire between 2016 and 2021. We also rely on trade
secret law and nondisclosure agreements to protect our
intellectual property.

We currently do not own any trademarks that are
listed on the principal register of the United States Patent and
Trademark Office. We have, however, applied to register
microHelix as a trademark. Our intellectual property
also includes common law trademarks, service marks and trade
names.

To supplement the technologies that we develop
internally, we have licensed rights to use intellectual
properties held by third parties, and we may license additional
intellectual property rights in the future. If any of these
agreements terminate, we would be required to exclude the
licensed intellectual property from our existing and future
products.

We have not yet needed to enforce any of our
patent or other intellectual property rights. Any decision to do
so will depend on the particular facts and circumstances and
facts of the matter compared to the cost and benefits from such
an enforcement effort. While we believe our patents afford some
competitive advantage, the resources available to us to identify
potential infringements and to defend our rights against
infringement limit such protection. 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 assure 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 intent to infringe on the 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
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

8



---



##### Table of Contents



processes may be found to infringe intellectual
property rights of others. If it is necessary or desirable, we
may seek licenses under those intellectual property rights.
However, we cannot be sure that licenses will be offered or that
the terms of any offered license would be acceptable to us. Any
such challenges could result in significant liability costs and
defense costs and could have a material adverse effect on
product sales.


Company history

The company began in 1991 in Portland, Oregon as
a grant and private equity funded research company, formed to
develop leading edge manufacturing techniques for medical device
interconnect systems. We began manufacturing operations in 1998,
designing and building cable assemblies and micro-electric
interconnects for use in the medical device, commercial and
defense industries.

In April 1999, we acquired Key-Tech, a privately
held Portland-based designer and manufacturer of interconnect
systems for the medical and commercial markets. In addition to
acquiring a customer base, we significantly enhanced our
manufacturing and engineering capabilities.

In December 1999, we acquired the assets of the
medical ultrasound division of Alcatel NA Cable Systems, Inc.,
the United States subsidiary of one of the largest wire and
cable manufacturers in the world, which designs and manufactures
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 acquired all the stock of
BioElectric Corporation.

As a result of these acquisitions, microHelix now
combines the innovative and multi-disciplined capabilities of an
R&D company with the experience and know-how of a full line
manufacturing company, specializing in the challenges of
interconnect systems ranging in size and complexity.

microHelix, Inc. (NASDAQ: MHLX) successfully
completed its Initial Public Offering in November 2001. The
proceeds of this IPO have been used, among other things, to
further expand development and manufacturing capabilities,
permitting us to better serve the expanding and changing needs
of our medical, defense and commercial customers.

Employees

We had 59 full-time employees in the United
States as of December 31, 2002. In our corporate offices
and manufacturing and engineering facilities in Portland,
Oregon, we had 54 full-time employees and in our office in
Tucson, Arizona, we had five full-time employees. Additionally,
we contract with a company in Mexico that employs 24 people
who 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. The Companys
future success will depend upon its ability to continue to
attract, retain, and motivate highly skilled and qualified
employees.




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 November 2004. 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, of which we sublease out
15,000 square feet. The current lease expired in January 2003
and contained renewal options. The Company is currently
negotiating new lease terms.




Item 3.     Legal
Proceedings

As of March 13, 2003, 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

9



---



##### Table of Contents



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.





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 2002.




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
consisting of one share of Common Stock, one Class A
Warrant and one Class B Warrant, 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 13, 2003, there were approximately 47 holders of
record of our Common Stock and approximately 749 beneficial
owners of our Common Stock. As of March 13, 2003, the
closing price of our Common Stock was $.35 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 13, 2003
there were approximately 9 Class A warrantholders of record
and the closing price of our Class A Warrants was $.04 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 13,
2003 there were approximately 10 Class B warrant holders of
record and the closing price of our Class B Warrants was
$.15 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 periods
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.

Common Stock MHLX

|                                 |  |      |      |     |  |   |      | 
|-------------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|2001 Fiscal Quarters             |  | High |      | Low
|                                 |  |      |      |    
|Fourth Quarter, from November 16 |  | $    | 3.40 |     |  | $ | 3.35 | 

|                     |  |      |      |     |  |   |      | 
|-------------------- |  | ---- | ---- | --- |  | - | ---- | 
|2002 Fiscal Quarters |  | High |      | Low
|                     |  |      |      |    
|First Quarter        |  | $    | 4.10 |     |  | $ | 2.00 | 
|Second Quarter       |  | $    | 2.23 |     |  | $ | .95  | 
|Third Quarter        |  | $    | 1.25 |     |  | $ | .33  | 
|Fourth Quarter       |  | $    | .64  |     |  | $ | .27  | 

Class A Warrant
MHLXW

|                                 |  |      |     |     |  |  |     | 
|-------------------------------- |  | ---- | --- | --- |  |  | --- | 
|2001 Fiscal Quarters             |  | High |     | Low
|                                 |  |      |     |    
|Fourth Quarter, from November 16 |  |      | .29 |     |  |  | .29 | 

10



---



##### Table of Contents



|                     |  |      |      |     |  |   |     | 
|-------------------- |  | ---- | ---- | --- |  | - | --- | 
|2002 Fiscal Quarters |  | High |      | Low
|                     |  |      |      |    
|First Quarter        |  | $    | 1.06 |     |  | $ | .27 | 
|Second Quarter       |  | $    | .28  |     |  | $ | .05 | 
|Third Quarter        |  | $    | .10  |     |  | $ | .01 | 
|Fourth Quarter       |  | $    | .35  |     |  | $ | .01 | 

Class B Warrant
MHLXZ

|                                 |  |      |     |     |  |  |     | 
|-------------------------------- |  | ---- | --- | --- |  |  | --- | 
|2001 Fiscal Quarters             |  | High |     | Low
|                                 |  |      |     |    
|Fourth Quarter, from November 16 |  |      | .43 |     |  |  | .43 | 

|                     |  |      |      |     |  |   |     | 
|-------------------- |  | ---- | ---- | --- |  | - | --- | 
|2002 Fiscal Quarters |  | High |      | Low
|                     |  |      |      |    
|First Quarter        |  | $    | 1.31 |     |  | $ | .42 | 
|Second Quarter       |  | $    | .55  |     |  | $ | .18 | 
|Third Quarter        |  | $    | .45  |     |  | $ | .05 | 
|Fourth Quarter       |  | $    | .10  |     |  | $ | .01 | 

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. See Item 6 Managements
Discussion and Analysis of Financial Condition and Results of
Operations.

Shareholders of Record

As of March 13, 2003, there were
approximately 47 shareholders of record of the Companys
Common Stock, 9 Class A Warrantholders of record and 10
Class B Warrantholders of record.

Securities Authorized for Issuance Under
Equity Compensation Plans

Securities authorized for issuance under equity
compensation plans consists of the following:

|                                                               |       |                  |         |                  |  |               |      |      |  |  |         |         | 
|-------------------------------------------------------------- | ----- | ---------------- | ------- | ---------------- |  | ------------- | ---- | ---- |  |  | ------- | ------- | 
|                                                               |       | (a)              |         | (b)              |  | (c)          
|                                                               |       |                  |         |                  |  |              
|                                                               |       |                  |         |                  |  | Number of    
|                                                               |       |                  |         |                  |  | securities   
|                                                               |       |                  |         |                  |  | remaining    
|                                                               |       |                  |         |                  |  | available for
|                                                               |       |                  |         |                  |  | future       
|                                                               |       | Number of        |         |                  |  | issuance     
|                                                               |       | securities to be |         | Weighted-        |  | under equity 
|                                                               |       | issued upon      |         | average exercise |  | compensation 
|                                                               |       | exercise of      |         | price of         |  | plans        
|                                                               |       | outstanding      |         | outstanding      |  | (excluding   
|                                                               |       | options,         |         | options,         |  | securities   
|                                                               |       | warrants and     |         | warrants and     |  | reflected in 
|                                                               |       | rights           |         | rights           |  | column(a))   
|                                                               |       |                  |         |                  |  |              
|Plan Category                                                  |       |                  |         |                  |  |               |      |      |  |  |         |        
|Equity compensation plans approved by
    security holders     |       |                  | 376,029 |                  |  | $             | 3.57 |      |  |  | 377,135 |        
|Equity compensation plans not approved by
    security holders |       |                  | 26,150  |                  |  |               | .34  |      |  |  | 33,850  |        
|                                                               |       |                  |         |                  |  |               |      |      |  |  |         |        
|                                                               | Total |                  |         | 402,179          |  |               | $    | 2.60 |  |  |         | 410,985 | 
|                                                               |       |                  |         |                  |  |               |      |      |  |  |         |        

11



---



##### Table of Contents



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, was 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 Condition and Results of
Operations

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

Cautionary Statement

This Managements Discussion and Analysis of
Financial Condition and Results of Operations and other sections
of 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 and from time to time
in the Companys other Securities and Exchange Commission
filings and reports. In addition, such statements could be
affected by general industry and market conditions and growth
rates, and general domestic and international economic
conditions. Such forward-looking statements speak only as of the
date on which they are made, and the Company does not intend,
nor undertake any obligation to update any such forward-looking
statements to reflect events or circumstances occurring after
the date of this Annual Report. If the Company does update or
correct one or more forward-looking statements, investors and
others should not conclude that the Company will make additional
updates or corrections with respect thereto or with respect to
other forward-looking statements.

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, 2001 and 2002.
The following discussion should be read in conjunction with the
financial statements and related notes appearing elsewhere in
this Annual Report.

Overview

microHelix, Inc. is a leading designer,
manufacturer and marketer of customized electronic
micro-interconnect systems for the medical (ultrasound,
minimally invasive and fully-implantable), commercial and
military markets. We manufacture and market coated wire
including ultra-thin wall pinhole free wire and custom cable for
a number of applications. We also design and manufacture
specialty connectors and flex circuits and offer a range of
laser micro machining services. microHelix has successfully
served these markets for over ten years.

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 moved from research and development to commercial sales of
our systems to

12



---



##### Table of Contents



medical device original equipment manufacturers
(OEMs). We provide interconnect systems to medical
device OEMs in three principal markets:




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

We also provide interconnect systems to OEMs
serving military, test & measurement and surveillance
equipment customers.

Our objective is to be a 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,
    engineering and prototype development phase for the
    customers devices;                                                                             
|
| |  | Expertise in working with a variety of materials
    and processes including wire coating, cable construction,
    injection molding of parts and components, laser micro-machining
    and metal plating,
|
| |  | High-quality, cost-effective manufacturing and
    assembly with a particular focus on all aspects of fine wire
    handling and termination.                                                             

We offer large OEMs which manufacture established
products and components a cost-efficient, reliable source for
higher volume interconnect systems. For smaller companies, we
become a reliable process and product development partner that
can provide a customized, application-specific product for their
new electronic interconnect applications.

Our technologies and manufacturing processes have
been developed to address the need for ever smaller and more
complex interconnect systems that transmit data, power and other
electronic signals between components of various medical devices
and of non-medical systems.

Receiving ISO 9001:2000 corporate registration
has been an important priority for both microHelix and its
customers. Following a successful registration audit in March
2003, we have been recommended for ISO 9001:2000 corporate
registration.

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 including those
related to product returns, bad debts, inventories, prepaid
expenses, intangible assets, income taxes, warranty obligations,
litigation and other contingencies. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or 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
reimbursement 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

13



---



##### Table of Contents



recognized when the title passes, which is upon
shipment. Prototypes are tested at the Companys facility
to customer specifications prior to shipment.


Government grant sales are 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. 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. During the year ended December 31, 2002, the
Company determined that certain patents were impaired and
recorded a $3,811,767 impairment loss. The impairment is a
result of the change in the direction of the Company to focus on
short-term activities, which do not encompass the utilization of
all of the related patents.

Results of operations

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

|                     |                                |                          |     |      |     |    |      |    |      |   
|-------------------- | ------------------------------ | ------------------------ | --- | ---- | --- | -- | ---- | -- | ---- | --
|                     |                                |                         
|                     |                                | Year Ended              
|                     |                                | December 31,            
|                     |                                |                         
|                     |                                | 2001                     |     | 2002
|                     |                                |                          |     |     
|Sales                |                                |                          | 100 | %    |     |    | 100  | % 
|Cost of sales        |                                |                          | 97  |      |     |    | 100  |   
|                     |                                |                          |     |      |     |    |      |   
|Gross profit         |                                |                          | 3   |      |     |    | 0    |   
|                     |                                |                          |     |      |     |    |      |   
|Operating expenses:  |                                |                          |     |      |     |    |      |   
|                     | Research and development       |                          |     | 2    |     |    |      | 13 |     
|                     | Sales and marketing            |                          |     | 7    |     |    |      | 20 |     
|                     | General and administrative     |                          |     | 29   |     |    |      | 40 |     
|                     | Impairment loss on intangibles |                          |     |     |     |    |      | 74 |     
|                     |                                |                          |     |      |     |    |      |   
|                     |                                | Total operating expenses |     |      | 38  |    |      |    | 147  |   
|Loss from operations |                                |                          | (35 | )    |     |    | (147 | ) 
|Other expense        |                                |                          | (15 | )    |     |    |     |   
|                     |                                |                          |     |      |     |    |      |   
|                     |                                | Net loss                 |     |      | (50 | )% |      |    | (147 | )%
|                     |                                |                          |     |      |     |    |      |   



| |                                                                            
| | ---------------------------------------------------------------------------
| | Year ended December 31, 2002 compared
    with year ended December 31, 2001

Sales for the year ended December 31, 2002
were $5,171,331, as compared to $6,222,283 for the year ended
December 31, 2001, or a decrease in sales of $1,050,952.
Wire and cable sales decreased by $765,668 in 2002 compared to
2001. Such decrease is attributable entirely to a decrease in
sales to one ultrasound customer. Sales from government grants
decreased by $285,284 in 2002 compared to 2001, as a result of
the completion of two of our four outstanding grant awards. As
discussed previously in this Annual Report, the Company decided
to reduce its dependency on government grant sources and
therefore a drop in grant sales was expected.

Gross profit for the year ended December 31,
2002 was $2,630, as compared to $199,797 for the year ended
December 31, 2001. The primary reason for the decrease is
the reduction in amounts received from government grants. For
the year ended December 31, 2001, gross profit from
government grants was $289,684 compared to $2,618 from this same
source for the year ended December 31, 2002.

Research and development expenses were $649,538
for the year ended December 31, 2002, compared to $100,815
for the year ended December 31, 2001, or an increase of
$548,723. The Company funds its research and development effort
in three ways: self-funding, government grant-funding and
customer-funding. During

14



---



##### Table of Contents



2002, government grant funding was less than the
prior year and, in addition to this, a major engineering
customer-funded development contract was terminated in 2002.


Sales and marketing expenses for the year ended
December 31, 2002 were $1,048,152, compared to $451,516 for
the year ended December 31, 2001, or an increase of
$596,636. $207,000 of this increase is related to the write-off
of a disputed engineering development contract receivable. The
balance of the expense increase is primarily due to the build-up
of an inside and outside sales force, as well as to commissions
paid to various manufacturing representative organizations.

General and administrative expenses for the year
ended December 31, 2002 were $2,057,087 compared to
$1,787,475 for the year ended December 31, 2001, or an
increase of $270,482. This increase is solely attributable to
expenses associated with the Company being a public company for
the entire fiscal year 2002, as the Companys initial
public offering occurred in November 2001. Expenses such as
auditing fees, legal fees, investor relations fees, filing and
listing fees all contributed to this increase.

Other expense, net for the year ended
December 31, 2002 was $35,794 compared to $907,473 for the
year ended December 31, 2001, or a decrease of $871,679.
This decrease is attributable to a $217,546 non-cash charge
taken in 2001 associated with the Companys IPO, as well as
the payment of certain loans in December 2001 with a portion of
the proceeds from the IPO and the resulting reduction in
interest expense thereafter.

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, 2002, the Company had
$2,131,549 of cash and cash equivalents. Cash used in operating
activities in fiscal 2002 was $4,135,852, compared to $2,421,931
during 2001, or an increase of $1,713,921. This increase in the
use of cash can be primarily attributed to two factors: first,
to fund increased losses of $740,459 (excluding the impairment
loss on intangibles) and secondly, to pay deferred interest and
compensation to a shareholder in the amount of $730,546.

The Company has incurred recurring negative cash
flows and losses from operations and at December 31, 2002
had an accumulated deficit of $16,612,122. The Companys
continuation as a going concern is contingent upon its ability
to obtain additional financing and to generate revenue and cash
flow to meet its obligations on a timely basis.

The Company expects additional capital will be
required during 2003 to continue operating in accordance with
its current plans. If the Company is not successful in securing
additional funding it will have to reduce its operating expenses
to a level commensurate with its revenue expectations. Effective
April 7, 2003, the Company reduced salaries to
80 percent of regular pay. The Company is making a
concerted effort to only bid on those contracts that will have a
short-term payoff and at this time the Company is less focused
on longer term research and development projects. If the Company
is unable to raise additional permanent capital or cannot bring
its cost structure in line with revenues, it may be forced to
seek protection of the courts through reorganization, bankruptcy
or insolvency proceedings.

Capital expenditures for the year ended
December 31, 2002 were $173,196 compared to capital
expenditures in the prior year of $332,959, or a decrease in
expenditures of $159,763, due to cost reductions.

For the year ended December 31, 2002,
$912,719 of cash was used in financing activities to pay down
loans and a line of credit, compared to $10,104,652 cash that
was generated from financing activities in the prior year,
principally due to the completion of the Companys IPO in
November 2001.

As of December 31, 2002, we had a $1,500,000
line of credit for working capital, secured by accounts
receivable and inventory. As of December 31, 2002, there was
$739,111 outstanding on the line of credit.

15



---



##### Table of Contents



The following table discloses the Companys
contractual cash obligations as of December 31, 2002:

|                                         |  |                        |           |           |  |           |           |           |  |   |         |  |  |   |   | 
|---------------------------------------- |  | ---------------------- | --------- | --------- |  | --------- | --------- | --------- |  | - | ------- |  |  | - | - | 
|                                         |  |                       
|                                         |  | Payments Due by Period
|                                         |  |                       
|                                         |  |                        |           | Less than |  |          
|Contractual Obligations                  |  | Total                  |           | 1 Year    |  | 1-3 Years |           | 4-5 Years
|                                         |  |                        |           |           |  |           |           |          
|Operating leases, net of sublease income |  | $                      | 370,945   |           |  | $         | 184,650   |           |  | $ | 186,295 |  |  | $ |  | 
|Line of credit                           |  |                        | 739,111   |           |  |           | 739,111   |           |  |   |        |  |  |   |  | 
|Long-term debt to shareholder            |  |                        | 1,135,000 |           |  |           | 535,000   |           |  |   | 600,000 |  |  |   |  | 
|                                         |  |                        |           |           |  |           |           |           |  |   |         |  |  |   |   | 
|Total contractual cash obligations       |  | $                      | 2,245,056 |           |  | $         | 1,458,761 |           |  | $ | 786,295 |  |  | $ |  | 
|                                         |  |                        |           |           |  |           |           |           |  |   |         |  |  |   |   | 

In January 2003, the Company repaid $135,000 of
notes payable to shareholder. In March 2003, the Company
borrowed $200,000 from an unrelated party and repaid $500,000 of
the notes payable to shareholder.

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. In
addition, if any of these risks occur, the market price of
shares of our Common Stock could decline and investors could
lose all or part of their investment:

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.           

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.

16



---



##### Table of Contents



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.

Three customers, Philips Medical Systems, Jomed
N.V. and World Heart, accounted for 30%, 19%, and 12%,
respectively, of our 2001 sales. In 2002, sales to our four
largest customers, Jomed N.V., GE Parallel Design, World Heart,
and Philips Medical Systems, accounted for 28%, 12%, 11%, and
10%, respectively, of our revenues. 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 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.

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.

17



---



##### Table of Contents



Our current manufacturing operations in Mexico
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 at this facility. 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 July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (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 Company has
not entered into any business combinations and has no recorded
goodwill or intangible assets with indefinite lives. As such,
the adoption of this statement did not have a material effect on
the Companys 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
was adopted on January 1, 2002. The Company has no goodwill
or intangible assets with indefinite lives as of
December 31, 2002.

In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the fair value of a
liability for an asset retirement obligation to be recognized in
the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs
are capitalized as part of the carrying amount of the long-lived
asset. SFAS No. 143 is effective for the Company for the
fiscal year ending December 31, 2003. The Company believes
the adoption of this statement will have no material impact on
its financial statements.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which was adopted on January 1,
2002. SFAS No. 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. As discussed
elsewhere in this Annual Report, the Company recorded an
impairment loss of $3,811,767 on certain patents during the year
ended December 31, 2002.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB No. 4, 44, and 64, Amendment of FASB
No. 13, and Technical Corrections. SFAS No. 145
rescinds FASB No. 4, Reporting Gains and Losses from
Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements, rescinds SFAS No. 44, Accounting for
Intangible Assets of Motor Carriers,and amends SFAS
No. 13, Accounting for Leases. This statement also
amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe
their applicability under changed conditions. This statement is
effective for our financial statements for our fiscal year
beginning January 1, 2003. The Company does not expect the
adoption of this statement to have a material effect on the
Companys financial statements.

18



---



##### Table of Contents



In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. This statement requires companies to recognize
costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or
disposal plan, and nullifies Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity.
Costs covered by the standard include lease termination costs
and certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing, or other
exit or disposal activity. This statement is to be applied
prospectively to exit or disposal activities initiated after
December 31, 2002. The Company does not expect the adoption
of this statement to have a material effect on the
Companys financial statements.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS
No. 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair
value based method of accounting for stock-based employee
compensation. This statement is effective for the year ended
December 31, 2002. The adoption of this statement did not
have a material effect on the Companys financial
statements.

In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN No. 45),
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN No. 45 is an interpretation of FASB
Statements No. 5, 57 and 107 and rescinds FIN No. 35.
This interpretation elaborates on the disclosures to be made by
a guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. The
disclosure requirements in FIN No. 45 are effective for the
year ended December 31, 2002. The adoption of this
interpretation did not have a material effect on the
Companys financial statements.




Item 7.     Financial
Statements

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

19



---



##### Table of Contents



INDEX TO FINANCIAL STATEMENTS

|                 |                                                                                                                  |      |  |    | 
|---------------- | ---------------------------------------------------------------------------------------------------------------- | ---- |  | -- | 
|                 |                                                                                                                  | Page
|                 |                                                                                                                  |     
|microHelix, Inc. |                                                                                                                  |      |  |   
|                 | Independent Auditors Report                                                                                     |      |  | 21 | 
|                 | Consolidated Balance Sheet as of
    December 31, 2002                                                           |      |  | 22 | 
|                 | Consolidated Statements of Operations for the
    Years Ended December 31, 2001 and 2002                         |      |  | 23 | 
|                 | Consolidated Statements of Shareholders
    Equity (Deficit) for the Years Ended December 31, 2001 and
    2002 |      |  | 24 | 
|                 | Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2001 and 2002                         |      |  | 25 | 
|                 | Notes to Consolidated Financial Statements                                                                       |      |  | 26 | 

20



---



##### 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, 2002, 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, 2002. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
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, 2002, and
the results of their operations and their cash flows for each of
the two years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the
United States of America.

The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the financial
statements, the Companys recurring losses from operations,
recurring negative cash flows from operations, and accumulated
deficit raise substantial doubt about its ability to continue as
a going concern. Managements plans concerning these
matters are also described in Note 1. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.



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

Portland, Oregon

April 7, 2003


21



---



##### Table of Contents



MICROHELIX, INC.

CONSOLIDATED BALANCE SHEET

December 31, 2002


|                                               |                                                                                                               |                             |           |             |           | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | --------------------------- | --------- | ----------- | --------- | 
|                                               |                                                                                                               | December 31,               
|                                               |                                                                                                               | 2002                       
|                                               |                                                                                                               |                            
|Assets                                        
|Current Assets:                                |                                                                                                               |                             |           |            
|                                               | Cash                                                                                                          |                             | $         | 2,131,549   |          
|                                               | Accounts receivable, net of allowance of $19,517.                                                             |                             |           | 1,117,807   |          
|                                               | Due from affiliates                                                                                           |                             |           | 37,247      |          
|                                               | Inventories (Note 2)                                                                                          |                             |           | 705,162     |          
|                                               | Prepaid expenses                                                                                              |                             |           | 110,523     |          
|                                               |                                                                                                               |                             |           |            
|                                               |                                                                                                               | Total current assets        |           |             | 4,102,288 | 
|Property and equipment  net
    (Note 3)      |                                                                                                               |                             | 1,546,453 |            
|Intangible and other assets  net
    (Note 4) |                                                                                                               |                             | 1,094,983 |            
|                                               |                                                                                                               |                             |           |            
|                                               |                                                                                                               | Total                       |           | $           | 6,743,724 | 
|                                               |                                                                                                               |                             |           |            
|Liabilities and Shareholders
    Equity      
|Current Liabilities:                           |                                                                                                               |                             |           |            
|                                               | Accounts payable                                                                                              |                             | $         | 476,712     |          
|                                               | Accrued liabilities                                                                                           |                             |           | 444,813     |          
|                                               | Line of credit (Note 5)                                                                                       |                             |           | 739,111     |          
|                                               | Current portion of notes payable to shareholder
    (Notes 5 and 8)                                           |                             |           | 535,000     |          
|                                               |                                                                                                               |                             |           |            
|                                               |                                                                                                               | Total current liabilities   |           |             | 2,195,636 | 
|                                               |                                                                                                               |                             |           |            
|Long-Term Liabilities:                         |                                                                                                               |                             |           |            
|                                               | Long-term portion of notes payable to shareholder
    (Notes 5 and 8)                                         |                             |           | 600,000     |          
|                                               |                                                                                                               |                             |           |            
|                                               |                                                                                                               | Total long-term liabilities |           |             | 600,000   | 
|                                               |                                                                                                               |                             |           |            
|                                               |                                                                                                               | Total liabilities           |           |             | 2,795,636 | 
|                                               |                                                                                                               |                             |           |            
|Shareholders Equity (Note 7):                 |                                                                                                               |                             |           |            
|                                               | Common stock, no par value, 5,519,495 shares
    authorized, 4,659,886 issued and outstanding at December 31. |                             |           | 14,179,467  |          
|                                               | Preferred stock, no par value, 5,000,000 shares
    authorized, zero issued and outstanding at December 31    |                             |           |            |          
|                                               | Additional paid-in capital                                                                                    |                             |           | 6,487,417   |          
|                                               | Notes receivable from shareholders for common
    stock (Note 8)                                              |                             |           | (57,940     | )        
|                                               | Deferred compensation expense                                                                                 |                             |           | (48,734     | )        
|                                               | Accumulated deficit                                                                                           |                             |           | (16,612,122 | )        
|                                               |                                                                                                               |                             |           |            
|                                               |                                                                                                               | Total shareholders equity  |           |             | 3,948,088 | 
|                                               |                                                                                                               |                             |           |            
|                                               |                                                                                                               | Total                       |           | $           | 6,743,724 | 
|                                               |                                                                                                               |                             |           |            

See notes to consolidated financial statements.

22



---



##### Table of Contents



MICROHELIX, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

Years Ended December 31, 2001 and
2002


|                                                             |                                         |                          |            |           |           |   |            |           |           |  
|------------------------------------------------------------ | --------------------------------------- | ------------------------ | ---------- | --------- | --------- | - | ---------- | --------- | --------- | -
|                                                             |                                         |                         
|                                                             |                                         | Year Ended December 31, 
|                                                             |                                         |                         
|                                                             |                                         | 2001                     |            | 2002     
|                                                             |                                         |                          |            |          
|Sales:                                                       |                                         |                          |            |           |           |   |            |          
|                                                             | Wire and cable                          |                          | $          | 5,461,053 |           |   | $          | 4,695,385 |          
|                                                             | Government grants                       |                          |            | 761,230   |           |   |            | 475,946   |          
|                                                             |                                         |                          |            |           |           |   |            |          
|                                                             |                                         | Total sales              |            |           | 6,222,283 |   |            |           | 5,171,331 |  
|Cost of Sales:                                               |                                         |                          |            |           |           |   |            |          
|                                                             | Wire and cable                          |                          |            | 5,550,940 |           |   |            | 4,695,373 |          
|                                                             | Government grants                       |                          |            | 471,546   |           |   |            | 473,328   |          
|                                                             |                                         |                          |            |           |           |   |            |          
|                                                             |                                         | Total cost of sales      |            |           | 6,022,486 |   |            |           | 5,168,701 |  
|                                                             |                                         |                          |            |           |           |   |            |          
|                                                             |                                         | Gross profit             |            |           | 199,797   |   |            |           | 2,630     |  
|Operating Expenses:                                          |                                         |                          |            |           |           |   |            |          
|                                                             | Research and development                |                          |            | 100,815   |           |   |            | 649,538   |          
|                                                             | Sales and marketing                     |                          |            | 451,516   |           |   |            | 1,048,152 |          
|                                                             | General and administrative              |                          |            | 1,787,475 |           |   |            | 2,057,087 |          
|                                                             | Impairment loss on intangibles (Note 4) |                          |            | 0         |           |   |            | 3,811,767 |          
|                                                             |                                         |                          |            |           |           |   |            |          
|                                                             |                                         | Total operating expenses |            |           | 2,339,806 |   |            |           | 7,566,544 |  
|                                                             |                                         |                          |            |           |           |   |            |          
|Loss from operations                                         |                                         |                          | (2,140,009 | )         |           |   | (7,563,914 | )        
|Other Income (Expense):                                      |                                         |                          |            |           |           |   |            |          
|                                                             | Other income                            |                          |            |          |           |   |            | 75,000    |          
|                                                             | Interest income                         |                          |            | 17,335    |           |   |            | 68,783    |          
|                                                             | Interest expense                        |                          |            | (758,658  | )         |   |            | (87,296   | )        
|                                                             | Interest expense to shareholder         |                          |            | (166,150  | )         |   |            | (92,281   | )        
|                                                             |                                         |                          |            |           |           |   |            |          
|                                                             |                                         | Other expense  net      |            |           | (907,473  | ) |            |           | (35,794   | )
|                                                             |                                         |                          |            |           |           |   |            |          
|Net loss                                                     |                                         | $                        | (3,047,482 | )         |           | $ | (7,599,708 | )        
|                                                             |                                         |                          |            |           |           |   |            |          
|Net loss per common share  basic and diluted                |                                         | $                        | (1.82      | )         |           | $ | (1.63      | )        
|                                                             |                                         |                          |            |           |           |   |            |          
|Shares used in per share calculation  basic
    and diluted |                                         |                          | 1,674,522  |           |           |   | 4,659,886  |          
|                                                             |                                         |                          |            |           |           |   |            |          

See notes to consolidated financial statements.

23



---



##### Table of Contents



MICROHELIX, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY (DEFICIT)

Years Ended December 31, 2001 and
2002


|                                                          |  |              |           |            |  |         |            |            |  |              |           |         |  |       |         |   |  |   |          |   |  |   |             |   |  |   |            |  
|--------------------------------------------------------- |  | ------------ | --------- | ---------- |  | ------- | ---------- | ---------- |  | ------------ | --------- | ------- |  | ----- | ------- | - |  | - | -------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                          |  |              |           |            |  |         |            |            |  |              |           |        
|                                                          |  | Common Stock |           | Additional |  |         |            |            |  |              |           |        
|                                                          |  |              |           | Paid-In    |  | Notes   |            | Deferred   |  | Accumulated  |           |        
|                                                          |  | Shares       |           | Amount     |  | Capital |            | Receivable |  | Compensation |           | Deficit |  | Total
|                                                          |  |              |           |            |  |         |            |            |  |              |           |         |  |      
|Balance, January 1, 2001.                                 |  |              | 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 |  
|Grant of stock options                                    |  |              |           |            |  |         |            |            |  |              | 2,105     |         |  |       |         |   |  |   | (2,105   | ) |  |   |             |   |  |   |            |  
|Amortization of deferred compensation                     |  |              |           |            |  |         |            |            |  |              |           |         |  |       |         |   |  |   | 38,193   |   |  |   |             |   |  |   | 38,193     |  
|Net loss                                                  |  |              |           |            |  |         |            |            |  |              |           |         |  |       |         |   |  |   |          |   |  |   | (7,599,708  | ) |  |   | (7,599,708 | )
|                                                          |  |              |           |            |  |         |            |            |  |              |           |         |  |       |         |   |  |   |          |   |  |   |             |   |  |   |            |  
|Balance, December 31, 2002                                |  |              | 4,659,886 |            |  | $       | 14,179,467 |            |  | $            | 6,487,417 |         |  | $     | (57,940 | ) |  | $ | (48,734  | ) |  | $ | (16,612,122 | ) |  | $ | 3,948,088  |  
|                                                          |  |              |           |            |  |         |            |            |  |              |           |         |  |       |         |   |  |   |          |   |  |   |             |   |  |   |            |  

See notes to consolidated financial statements.

24



---



##### Table of Contents



MICROHELIX, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

Years Ended December 31, 2001 and
2002


|                                                                              |                                            |                                   |                                                                                                    |         |          |            |            |           |          |            |  
|----------------------------------------------------------------------------- | ------------------------------------------ | --------------------------------- | -------------------------------------------------------------------------------------------------- | ------- | -------- | ---------- | ---------- | --------- | -------- | ---------- | -
|                                                                              |                                            |                                  
|                                                                              |                                            | Year Ended December 31,          
|                                                                              |                                            |                                  
|                                                                              |                                            | 2001                              |                                                                                                    | 2002   
|                                                                              |                                            |                                   |                                                                                                    |        
|Cash Flows from Operating
    Activities:                                     |                                            |                                   |                                                                                                    |         |          |            |            |          
|Net loss                                                                      |                                            | $                                 | (3,047,482                                                                                         | )       |          | $          | (7,599,708 | )        
|Adjustments to reconcile net loss to cash used in
    operating activities:   |                                            |                                   |                                                                                                    |         |          |            |            |          
|                                                                              | Depreciation and amortization              |                                   |                                                                                                    | 467,265 |          |            |            | 518,139   |         
|                                                                              | Stock compensation expense                 |                                   |                                                                                                    | 52,871  |          |            |            | 36,088    |         
|                                                                              | Amortization of deferred inventory charges |                                   |                                                                                                    | 17,043  |          |            |            | 6,237     |         
|                                                                              | Forgiveness of deferred compensation       |                                   |                                                                                                    |        |          |            |            | (75,000   | )       
|                                                                              | Interest charges on warrants               |                                   |                                                                                                    | 173,382 |          |            |            |          |         
|                                                                              | Impairment loss on intangibles (Note 4)    |                                   |                                                                                                    |        |          |            |            | 3,811,767 |         
|                                                                              | Change in:                                 |                                   |                                                                                                    |         |          |            |            |           |         
|                                                                              |                                            | Accounts receivable, net          |                                                                                                    |         | (437,351 | )          |            |           | (69,234  | )         
|                                                                              |                                            | Inventories                       |                                                                                                    |         | 235,968  |            |            |           | 168,878  |           
|                                                                              |                                            | Due from affiliates               |                                                                                                    |         | 65,016   |            |            |           | (37,247  | )         
|                                                                              |                                            | Prepaid expenses                  |                                                                                                    |         | (139,701 | )          |            |           | 62,148   |           
|                                                                              |                                            | Intangible and other assets       |                                                                                                    |         | 55,562   |            |            |           | (4,280   | )         
|                                                                              |                                            | Accounts payable                  |                                                                                                    |         | (54,230  | )          |            |           | (365,059 | )         
|                                                                              |                                            | Accrued interest                  |                                                                                                    |         | (78,323  | )          |            |           |         |           
|                                                                              |                                            | Accrued interest to shareholder   |                                                                                                    |         | 101,508  |            |            |           | (530,546 | )         
|                                                                              |                                            | Deferred shareholder compensation |                                                                                                    |         |         |            |            |           | (125,000 | )         
|                                                                              |                                            | Accrued liabilities               |                                                                                                    |         | 187,365  |            |            |           | 66,965   |           
|                                                                              |                                            | Due to affiliates                 |                                                                                                    |         | (20,824  | )          |            |           |         |           
|                                                                              |                                            |                                   |                                                                                                    |         |          |            |            |          
|                                                                              |                                            |                                   | Cash used in operating activities                                                                  |         |          | (2,421,931 | )          |           |          | (4,135,852 | )
|                                                                              |                                            |                                   |                                                                                                    |         |          |            |            |          
|Cash Flows from Investing
    Activities:                                     |                                            |                                   |                                                                                                    |         |          |            |            |          
|Capital expenditures                                                          |                                            |                                   | (332,959                                                                                           | )       |          |            | (173,196   | )        
|                                                                              |                                            |                                   |                                                                                                    |         |          |            |            |          
|                                                                              |                                            |                                   | Cash used in investing activities                                                                  |         |          | (332,959   | )          |           |          | (173,196   | )
|                                                                              |                                            |                                   |                                                                                                    |         |          |            |            |          
|Cash Flows from Financing
    Activities:                                     |                                            |                                   |                                                                                                    |         |          |            |            |          
|Repayments of notes receivable from shareholders                              |                                            |                                   | 36,000                                                                                             |         |          |            |           |          
|Proceeds from borrowings against notes payable
    and line of credit         |                                            |                                   | 3,309,151                                                                                          |         |          |            | 1,070,020  |          
|Payments of financing costs                                                   |                                            |                                   | (95,000                                                                                            | )       |          |            |           |          
|Principal payments on notes payable and lines of
    credit                   |                                            |                                   | (4,555,651                                                                                         | )       |          |            | (1,982,739 | )        
|Proceeds from issuance of common stock, net of
    costs                      |                                            |                                   | 11,410,152                                                                                         |         |          |            |           |          
|                                                                              |                                            |                                   |                                                                                                    |         |          |            |            |          
|                                                                              |                                            |                                   | Cash provided/(used) by financing activities                                                       |         |          | 10,104,652 |            |           |          | (912,719   | )
|                                                                              |                                            |                                   |                                                                                                    |         |          |            |            |          
|Change in cash                                                                |                                            |                                   | 7,349,762                                                                                          |         |          |            | (5,221,767 | )        
|Cash, beginning of period                                                     |                                            |                                   | 3,554                                                                                              |         |          |            | 7,353,316  |          
|                                                                              |                                            |                                   |                                                                                                    |         |          |            |            |          
|Cash, end of period                                                           |                                            | $                                 | 7,353,316                                                                                          |         |          | $          | 2,131,549  |          
|                                                                              |                                            |                                   |                                                                                                    |         |          |            |            |          
|Supplemental disclosure of cash flow
    information  Cash paid for interest |                                            | $                                 | 924,296                                                                                            |         |          | $          | 710,123    |          
|                                                                              |                                            |                                   |                                                                                                    |         |          |            |            |          
|Supplemental disclosure of noncash investing and
    financing activities:    |                                            |                                   |                                                                                                    |         |          |            |            |          
|                                                                              |                                            |                                   | Conversions of preferred stock, bridge loans, and
    convertible notes payable into common equity |         | $        | 3,207,988  |            |           | $        |           |  
|                                                                              |                                            |                                   |                                                                                                    |         |          |            |            |          

See notes to consolidated financial statements.

25



---



##### Table of Contents



MICROHELIX, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Years Ended December 31, 2001 and
2002




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

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.

Going
Concern These financial
statements have been prepared on a going concern basis which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has
incurred recurring losses and had negative cash flows from
operations during each of the past two years and at
December 31, 2002 had an accumulated deficit of
$16,612,122. This indicates that the Company may be unable to
continue as a going concern for a reasonable period of time.
These financial statements do not include any adjustments
relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities
that may be necessary should the Company be unable to continue
as a going concern. The Companys continuation as a going
concern is contingent upon its ability to obtain additional
financing, and to generate revenue and cash flow to meet its
obligations on a timely basis.

The Company expects additional capital will be
required during 2003 to continue operating in accordance with
its current plans. If the Company is not successful in securing
additional funding it will have to reduce its operating expenses
to a level commensurate with its revenue expectations. As of
April 7, 2003, the Company reduced salaries to
80 percent of regular pay and the Company is making a
concerted effort to only bid on those contracts that will have a
short-term payoff and at this time the Company is less focused
on longer term research and development projects. If the Company
is unable to raise additional permanent capital or cannot bring
its cost structure in line with revenues, it may be forced to
seek protection of the courts through reorganization, bankruptcy
or insolvency proceedings.

Critical Accounting Policies and
Estimates The preparation
of consolidated financial statements in conformity with
accounting principles generally accepted in the United States
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, including those
related to the remaining life and recoverability of long-lived
assets, the recoverability of inventories, product returns, bad
debts, prepaid expenses, intangible assets, income taxes,
warranty obligations, litigation and other contingencies. We
base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.

We believe the following critical accounting
policies and related judgments and estimates affect the
preparation of our consolidated financial statements. The
Company recognizes revenue from commercial sales

26



---



##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 reimbursement 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 to customer specifications prior to
shipment. Government grant sales are 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 assets primarily represent patent costs that are
amortized using the straight-line method over their estimated
useful lives. 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.

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. During the year ended December 31, 2002, the Company
determined that certain patents were impaired and recorded a
$3,811,767 impairment loss as discussed at Note 4.

Impairment of Long-Lived
Assets The Company
evaluates its long-lived assets for financial impairment and
will continue to evaluate them if events or changes in
circumstances indicate the carrying amount of such assets may
not be fully recoverable. As a result of recurring losses and a
focus on the short-term direction of the Company, certain
patents were tested for impairment and a $3,811,767 impairment
loss was recorded during the year ended December 31, 2002
as discussed in Note 4.

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 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.

27



---



##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Revenue on government 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, 2001 and 2002, 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, 2001 and 2002. Earnings on
government grants 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 The Company
continues to measure compensation expense for its stock-based
employee compensation plans using the method prescribed by
Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees.
The Company provides pro forma disclosures of net income and
earnings per share 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.

If compensation cost on stock options granted
under these plans had been determined based on the fair value of
the options consistent with that described in 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,
|                                             |             |                        
|                                             |             | 2001                    |   | 2002      
|                                             |             |                         |   |           
|Net loss:                                    |             |                         |   |            |   |  |   |           
|                                             | As reported |                         | $ | (3,047,482 | ) |  | $ | (7,599,708 | )
|                                             | Pro forma   |                         |   | (3,179,839 | ) |  |   | (7,842,835 | )
|Basic and diluted net loss per common share: |             |                         |   |            |   |  |   |           
|                                             | As reported |                         |   | (1.82      | ) |  |   | (1.63      | )
|                                             | Pro forma   |                         |   | (1.40      | ) |  |   | (1.68      | )

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

The fair value of each option grant was estimated
on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for
the grants:

|                                                             |  |                         |            |      |  |  |            | 
|------------------------------------------------------------ |  | ----------------------- | ---------- | ---- |  |  | ---------- | 
|                                                             |  |                        
|                                                             |  | Year Ended December 31,
|                                                             |  |                        
|                                                             |  | 2001                    |            | 2002
|                                                             |  |                         |            |     
|Dividend yield                                               |  |                         | None       |      |  |  | None       | 
|Risk-free interest rate                                      |  |                         | 4.860%     |      |  |  | 2.630%     | 
|Expected volatility                                          |  |                         | 29%        |      |  |  | 98%        | 
|Expected option lives                                        |  |                         | 7.50 years |      |  |  | 4.02 years | 
|Weighted-average fair value of options granted
    per share |  |                         | $3.52      |      |  |  | $.49       | 

Refer to Note 8 for further information
regarding the Companys stock option plan.

28



---



##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2002, the
estimated fair value of notes payable to shareholder was
$1,014,137 as compared to the carrying value of $1,135,000.
Estimated rates currently available to the Company for debt with
similar terms are used to estimate the fair value of notes
payable to shareholder.

Comprehensive
Loss Comprehensive loss
for the years ended December 31, 2001 and 2002 was the same
as the reported net loss.

Recent Accounting
Pronouncements In July
2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (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 Company has not
entered into any business combinations and has no recorded
goodwill or intangible assets with indefinite lives. As such,
the adoption of this statement did not have a material effect on
the Companys 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
was adopted on January 1, 2002. The Company has no goodwill
or intangible assets with indefinite lives as of
December 31, 2002.

In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement Obligations.SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in
which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized
as part of the carrying amount of the long-lived asset. SFAS
No. 143 is effective for the Company for the fiscal year
ending December 31, 2003. The Company believes the adoption
of this statement will have no material impact on its financial
statements.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which was adopted on January 1,
2002. SFAS No. 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. As discussed
elsewhere in this Annual Report, the Company recorded an
impairment loss of $3,811,767 on certain patents during the year
ended December 31, 2002. See further discussion at
Note 4.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB No. 4, 44, and 64, Amendment of FASB
No. 13, and Technical Corrections. SFAS No. 145
rescinds FASB No. 4, Reporting Gains and Losses from
Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements, rescinds SFAS No. 44, Accounting for
Intangible Assets of Motor Carriers,and amends SFAS
No. 13, Accounting for Leases. This statement also
amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe
their applicability under changed conditions. This statement is
effective for our financial statements for our fiscal year
beginning January 1, 2003. The Company does not expect the
adoption of this statement to have a material effect on the
Companys financial statements.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. This Statement requires companies to recognize
costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or
disposal plan, and nullifies Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity.
Costs covered by the standard include lease termination costs
and certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing, or other
exit or disposal activity. This statement is to be applied
prospectively to exit or disposal activities

29



---



##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

initiated after December 31, 2002. The
Company does not expect adoption of this statement to have a
material effect on the Companys financial statements.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS
No. 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair
value based method of accounting for stock-based employee
compensation. This statement is effective for the year ended
December 31, 2002. The adoption of this statement did not
have a material effect on the Companys financial
statements.

In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN No. 45),
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN No. 45 is an interpretation of FASB
Statements No. 5, 57 and 107 and rescinds FIN No. 35.
This interpretation elaborates on the disclosures to be made by
a guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. The
disclosure requirements in FIN No. 45 are effective for the
year ended December 31, 2002. The adoption of this
interpretation did not have a material effect on the
Companys financial statements.

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 235,609 and
402,179 shares of common stock were outstanding as of
December 31, 2001 and 2002, 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 June 2008 through
December 2012. Common equivalent shares outstanding of 508,952
and zero at December 31, 2001 and 2002, 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.     Inventories

Inventories are as follows:

|                |       |              |         |         | 
|--------------- | ----- | ------------ | ------- | ------- | 
|                |       | December 31,
|                |       | 2002        
|                |       |             
|Raw materials   |       | $            | 606,969 |        
|Work-in-process |       |              | 98,193  |        
|                |       |              |         |        
|                | Total |              | $       | 705,162 | 
|                |       |              |         |        

30



---



##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     Property and
Equipment

Property and equipment are as follows:

|                               |                              |              |            |           | 
|------------------------------ | ---------------------------- | ------------ | ---------- | --------- | 
|                               |                              | December 31,
|                               |                              | 2002        
|                               |                              |             
|Machinery and equipment        |                              | $            | 2,432,540  |          
|Leasehold improvements         |                              |              | 205,024    |          
|Office furniture and equipment |                              |              | 265,658    |          
|Automobiles                    |                              |              | 20,000     |          
|Software                       |                              |              | 85,968     |          
|                               |                              |              |            |          
|                               |                              |              | 3,009,190  |          
|Accumulated depreciation       |                              |              | (1,462,737 | )        
|                               |                              |              |            |          
|                               | Property and equipment  net |              | $          | 1,546,453 | 
|                               |                              |              |            |          

4.     Intangible and
Other Assets

Intangible and other assets are as follows:

|                         |                                   |              |           |           | 
|------------------------ | --------------------------------- | ------------ | --------- | --------- | 
|                         |                                   | December 31,
|                         |                                   | 2002        
|                         |                                   |             
|Patents                  |                                   | $            | 1,143,699 |          
|Other assets             |                                   |              | 4,280     |          
|Accumulated amortization |                                   |              | (52,996   | )        
|                         |                                   |              |           |          
|                         | Intangible and other assets  net |              | $         | 1,094,983 | 
|                         |                                   |              |           |          

During the year ended December 31, 2002, as
a result of recurring losses and a change in the direction of
the Company to focus on short-term activities, the Company
tested certain patents in the wire and cable segment for
impairment. As a result of the Companys tests, $3,811,767
was recorded as an impairment loss on intangibles in the
consolidated statements of operations. The Company developed a
net cash flow forecast specifically related to the patents in
question, applied a royalty stream to the forecast, and
discounted the resulting stream in order to determine the
estimated fair value of the patents. The estimated fair value
was then compared to the carrying value of the related patents,
which resulted in the impairment loss of $3,811,767.

5.     Line of Credit
and Notes Payable

In December 2002, the Company entered into a
revolving line of credit with an asset-based lender. The line of
credit is secured by accounts receivable. The line of credit
bears interest at the prime rate plus 6.25% (10.25% at
December 31, 2002) and allows the Company to borrow up to
$1,500,000. At December 31, 2002, $739,111 was outstanding
on the line of credit.

As of December 31, 2002, the Company was in
compliance with the terms of the line of credit.

31



---



##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Notes payable consist of the following:

|                                                                                                                                                                                            |                                    |              |          |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | ------------ | -------- | --------- | 
|                                                                                                                                                                                            |                                    | December 31,
|                                                                                                                                                                                            |                                    | 2002        
|                                                                                                                                                                                            |                                    |             
|Note payable to shareholder, interest at 7.5% at
    December 31, 2002, interest payable monthly and principal
    payment due March 2003, secured by certain assets                        |                                    | $            | 456,115  |          
|Note payable to shareholder, interest at 7.5% at
    December 31, 2002, interest payable monthly and principal
    payments due March 2003 and December 2004, secured by certain
    assets |                                    |              | 383,885  |          
|Note payable to shareholder, interest at 7.5% at
    December 31, 2002, interest payable monthly and principal
    payment due December 2002, secured by certain assets                     |                                    |              | 135,000  |          
|Note payable to shareholder, interest at 7.5% at
    December 31, 2002, interest payable monthly and principal
    payment due December 2004, secured by certain assets                     |                                    |              | 160,000  |          
|                                                                                                                                                                                            |                                    |              |          |          
|                                                                                                                                                                                            | Total notes payable                |              |          | 1,135,000 | 
|Less current portion                                                                                                                                                                        |                                    |              | (535,000 | )        
|                                                                                                                                                                                            |                                    |              |          |          
|                                                                                                                                                                                            | Long-term portion of notes payable |              | $        | 600,000   | 
|                                                                                                                                                                                            |                                    |              |          |          

All notes payable outstanding at
December 31, 2002 are payable to shareholder.

Principal payments due on notes payable are as
follows as of December 31, 2002:

|     |       |   |         |           | 
|---- | ----- | - | ------- | --------- | 
|2003 |       | $ | 535,000 |          
|2004 |       |   | 600,000 |          
|     |       |   |         |          
|     | Total |   | $       | 1,135,000 | 
|     |       |   |         |          

In February 2002, the Companys former
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.

In January 2003 the Company repaid the $135,000
note payable to shareholder. Additionally, in March 2003, the
Company repaid $500,000 of principal and $4,293 of accrued
interest on the remaining notes payable to shareholder. In March
2003, the Company borrowed $200,000 on a short-term unsecured
note at a 12 percent interest rate to finance short-term
working capital requirements.

6.     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.

32



---



##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Components of deferred tax assets are as follows:

|                                           |                    |              |            |           |   | 
|------------------------------------------ | ------------------ | ------------ | ---------- | --------- | - | 
|                                           |                    | December 31,
|                                           |                    | 2002        
|                                           |                    |             
|Federal net operating loss carryforwards   |                    | $            | 4,199,019  |          
|State net operating loss carryforwards     |                    |              | 749,610    |          
|Deferred compensation                      |                    |              | 152,175    |          
|Basis difference in property and equipment |                    |              | (124,800   | )        
|Basis difference in intangible assets      |                    |              | (372,673   | )        
|Other                                      |                    |              | 123,575    |          
|                                           |                    |              |            |          
|                                           | Deferred tax asset |              |            | 4,726,906 |  
|Valuation allowance                        |                    |              | (4,726,906 | )        
|                                           |                    |              |            |          
|                                           |                    | Net          |            | $         |  | 
|                                           |                    |              |            |          

As of December 31, 2002, the Company had
federal and state net operating loss carryforwards of
$11,997,197 and $11,357,728, respectively, expiring during the
years 2013 through 2022. 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.

7.     Shareholders
Equity

Common Stock Effective November 16, 2001, the
Company completed 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.

Preferred Stock The Company is authorized to issue
$5,000,000 shares of preferred stock. As of
December 31, 2002, there were zero shares issued and
outstanding.

Stock Option Plan The Companys 2002
Non Qualified Stock Option Plan (the 2002
Non Qualified Plan) was adopted by the board of
directors in October 2002. The 2002 Non Qualified Plan
provides for the issuance of options to purchase up to 60,000
shares of common stock to its employees and consultants. Options
are granted under various vesting arrangements.

Stock Incentive Plans 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

33



---



##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

The Company has a 1998 Stock Incentive Plan (the
1998 Plan), under which grants of options to
purchase up to 153,164 shares of common stock to its employees
and service providers are outstanding. Options were 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. In 2002, the Board of Directors voted to discontinue
further grants of options under this plan.

The following table summarizes current year
activity under the 1998, 2001, and 2002 Plans:

|                                           |  |                     |         |           |  |              |      |  |  |   |      | 
|------------------------------------------ |  | ------------------- | ------- | --------- |  | ------------ | ---- |  |  | - | ---- | 
|                                           |  |                    
|                                           |  | Outstanding Options
|                                           |  |                    
|                                           |  |                     |         | Weighted  |  |             
|                                           |  |                     |         | Average   |  | Weighted    
|                                           |  |                     |         | Exercise  |  | Average Fair
|                                           |  | Number              |         | Price Per |  | Value Per   
|                                           |  | of Shares           |         | Share     |  | Share       
|                                           |  |                     |         |           |  |             
|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 | 
|Options granted, less than market price    |  |                     | 60,519  |           |  |              | 3.10 |  |  |   | 2.32 | 
|Options granted at market price            |  |                     | 176,059 |           |  |              | .97  |  |  |   | .67  | 
|Options granted, greater than market price |  |                     | 3,500   |           |  |              | 1.28 |  |  |   | .37  | 
|Options cancelled                          |  |                     | (73,508 | )         |  |              | 3.28 |  |  |   | .63  | 
|                                           |  |                     |         |           |  |              |      |  |  |   |      | 
|Balance at December 31, 2002.              |  |                     | 402,179 |           |  | $            | 2.60 |  |  | $ | .49  | 
|                                           |  |                     |         |           |  |              |      |  |  |   |      | 

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.

34



---



##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information about
stock options outstanding and exercisable under the 1998, 2001,
and 2002 Plans at December 31, 2002:

|               |  |                     |         |                     |  |           |      |             |  |           |      |  |  |  |        |  |  |   |      | 
|-------------- |  | ------------------- | ------- | ------------------- |  | --------- | ---- | ----------- |  | --------- | ---- |  |  |  | ------ |  |  | - | ---- | 
|               |  |                     |         |                     |  |          
|               |  | 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    
|               |  |                     |         |                     |  |           |      |             |  |          
|$. 34          |  |                     | 26,150  |                     |  |           | 9.84 |             |  | $         | .34  |  |  |  | 0      |  |  | $ | 0    | 
|$ .37          |  |                     | 30,750  |                     |  |           | 9.77 |             |  |           | .37  |  |  |  | 0      |  |  |   | 0    | 
|$ .50          |  |                     | 18,090  |                     |  |           | 9.95 |             |  |           | .50  |  |  |  | 0      |  |  |   | 0    | 
|$ .60          |  |                     | 2,000   |                     |  |           | 9.65 |             |  |           | .60  |  |  |  | 0      |  |  |   | 0    | 
|$ .65          |  |                     | 14,000  |                     |  |           | 9.70 |             |  |           | .65  |  |  |  | 0      |  |  |   | 0    | 
|$1.09          |  |                     | 2,208   |                     |  |           | 5.48 |             |  |           | 1.09 |  |  |  | 1,768  |  |  |   | 1.09 | 
|$1.28          |  |                     | 114,500 |                     |  |           | 9.44 |             |  |           | 1.28 |  |  |  | 1,250  |  |  |   | 1.28 | 
|$1.40          |  |                     | 33,006  |                     |  |           | 7.69 |             |  |           | 1.40 |  |  |  | 13,232 |  |  |   | 1.40 | 
|$2.72          |  |                     | 92,983  |                     |  |           | 6.94 |             |  |           | 2.72 |  |  |  | 52,398 |  |  |   | 2.72 | 
|$3.10          |  |                     | 10,519  |                     |  |           | 9.11 |             |  |           | 3.10 |  |  |  | 1,840  |  |  |   | 3.10 | 
|$9.06          |  |                     | 57,973  |                     |  |           | 8.47 |             |  |           | 9.06 |  |  |  | 21,402 |  |  |   | 9.06 | 
|               |  |                     |         |                     |  |           |      |             |  |           |      |  |  |  |        |  |  |   |      | 
|               |  |                     | 402,179 |                     |  |           | 8.63 |             |  | $         | 2.60 |  |  |  | 91,890 |  |  | $ | 3.96 | 
|               |  |                     |         |                     |  |           |      |             |  |           |      |  |  |  |        |  |  |   |      | 

Refer to Note 1 for disclosure of pro forma
results assuming the Company determined compensation cost on
stock options granted under these plans based on the fair value
of the options consistent with that described in SFAS
No. 123.

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, November 16, 2002. Interest expense of $162,963
was recorded during 2001, 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, there was no
deferred compensation recorded during 2001 and 2002,
respectively. Deferred compensation related to stock options
granted to employees is 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 to consultants is being amortized on a
straight-line basis over the related service periods.

35



---



##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     Related-Party
Transactions

The shareholder has a controlling interest in
iSense Corporation, Red Dot, Inc., and Fidelcor Capital. During
2002, the Company settled all due to/from affiliate amounts.

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

Significant transactions and balances with
shareholders are summarized below:

|                                                        |  |              |           | 
|------------------------------------------------------- |  | ------------ | --------- | 
|                                                        |  | December 31,
|                                                        |  | 2002        
|                                                        |  |             
|Due from affiliates                                     |  | $            | 37,247    | 
|                                                        |  |              |           | 
|Notes receivable from shareholders for common
    stock |  | $            | 57,940    | 
|                                                        |  |              |           | 
|Notes payable to shareholder                            |  | $            | 1,135,000 | 
|                                                        |  |              |           | 

|                                |  |                     |         |      |  |   |        | 
|------------------------------- |  | ------------------- | ------- | ---- |  | - | ------ | 
|                                |  |                    
|                                |  | Year Ended December
|                                |  | 31,                
|                                |  |                    
|                                |  | 2001                |         | 2002
|                                |  |                     |         |     
|Interest expense to shareholder |  | $                   | 166,150 |      |  | $ | 92,281 | 

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, there is no longer a deferred
shareholder compensation liability as of December 31, 2002.

In January 2003, the Company repaid $135,000 of
the note payable to shareholder.

9.     Commitments
and Contingencies

Operating Leases The Company leases certain office
space and equipment. The operating leases expire at various
dates through November 2006. Future minimum rental commitments
under noncancelable operating leases are as follows:

|                         |                                 |   |         |         | 
|------------------------ | ------------------------------- | - | ------- | ------- | 
|Year Ending December 31, |                                 |  
|                         |                                 |  
|2003                     |                                 | $ | 192,148 |        
|2004                     |                                 |   | 173,134 |        
|2005                     |                                 |   | 7,895   |        
|2006                     |                                 |   | 5,266   |        
|                         |                                 |   |         |        
|                         | Total                           |   |         | 378,443 | 
|Less: Sublease income    |                                 |   | (7,498  | )      
|                         |                                 |   |         |        
|                         | Net operating lease commitments |   | $       | 370,945 | 
|                         |                                 |   |         |        

Rent expense was $321,342 and $282,272 (net of
sublease income of $89,974 and $108,028) for the years ended
December 31, 2001 and 2002, respectively.

Government grants The Company enters into government
grants, 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

36



---



##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

ultimate liability from litigation will not
materially affect the financial position, results of operations,
or cash flows of the Company.

10.     Major
Customers

In 2001, sales from three customers represented
$1,852,757 or 30%, $1,182,809 or 19%, and $746,674 or 12%,
respectively, of the Companys sales. In 2002, sales from
four customers represented $1,428,867 or 28%, $637,047 or 12%,
$558,946 or 11%, and $538,454 or 10%, respectively, of the
Companys sales. Sales from governmental grants were from
the same customer for all periods presented.

11.     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 grants 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,
|                               |                   |                        
|                               |                   | 2001                    |   | 2002      
|                               |                   |                         |   |           
|Sales:                         |                   |                         |   |            |            |  |   |          
|                               | Wire and cable    |                         | $ | 5,461,053  |            |  | $ | 4,695,385 |          
|                               | Government grants |                         |   | 761,230    |            |  |   | 475,946   |          
|                               |                   |                         |   |            |            |  |   |          
|                               |                   | Total                   |   | $          | 6,222,283  |  |   | $         | 5,171,331 | 
|                               |                   |                         |   |            |            |  |   |          
|Gross profit (loss):           |                   |                         |   |            |            |  |   |          
|                               | Wire and cable    |                         | $ | (89,887    | )          |  | $ | 12        |          
|                               | Government grants |                         |   | 289,684    |            |  |   | 2,618     |          
|                               |                   |                         |   |            |            |  |   |          
|                               |                   | Total                   |   | $          | 199,797    |  |   | $         | 2,630     | 
|                               |                   |                         |   |            |            |  |   |          
|Depreciation and amortization: |                   |                         |   |            |            |  |   |          
|                               | Wire and cable    |                         | $ | 369,881    |            |  | $ | 420,755   |          
|                               | Government grants |                         |   | 97,384     |            |  |   | 97,384    |          
|                               |                   |                         |   |            |            |  |   |          
|                               |                   | Total                   |   | $          | 467,265    |  |   | $         | 518,139   | 
|                               |                   |                         |   |            |            |  |   |          
|Assets:                        |                   |                         |   |            |            |  |   |          
|                               | Wire and cable    |                         | $ | 15,743,446 |            |  | $ | 6,337,956 |          
|                               | Government grants |                         |   | 503,152    |            |  |   | 405,768   |          
|                               |                   |                         |   |            |            |  |   |          
|                               |                   | Total                   |   | $          | 16,246,598 |  |   | $         | 6,743,724 | 
|                               |                   |                         |   |            |            |  |   |          

37



---



##### Table of Contents



MICROHELIX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a summary of sales by geographic
region.

|       |               |                         |   |           |           |  |   |           |           | 
|------ | ------------- | ----------------------- | - | --------- | --------- |  | - | --------- | --------- | 
|       |               |                        
|       |               | Year Ended December 31,
|       |               |                        
|       |               | 2001                    |   | 2002     
|       |               |                         |   |          
|Sales: |               |                         |   |           |           |  |   |          
|       | North America |                         | $ | 5,952,024 |           |  | $ | 5,055,545 |          
|       | Europe        |                         |   | 262,223   |           |  |   | 59,968    |          
|       | Other         |                         |   | 8,036     |           |  |   | 55,818    |          
|       |               |                         |   |           |           |  |   |          
|       |               | Total                   |   | $         | 6,222,283 |  |   | $         | 5,171,331 | 
|       |               |                         |   |           |           |  |   |          

Sales to customers in the United States were
$5,931,950 and $5,053,290 during the years ending
December 31, 2001 and 2002, respectively.

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

|              |  |                   |           | 
|------------- |  | ----------------- | --------- | 
|              |  | December 31, 2002
|              |  |                  
|United States |  | $                 | 2,531,717 | 
|Mexico        |  |                   | 109,719   | 
|              |  |                   |           | 
|              |  | $                 | 2,641,436 | 
|              |  |                   |           | 

12.     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, 2001 and 2002.

* * * * * *

38



---



##### 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 Companys 2003 Annual Meeting of Shareholders.






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

The response to this item is incorporated herein
by reference to the Companys definitive Proxy Statement
for the Companys 2003 Annual Meeting of Shareholders.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|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 Companys 2003 Annual Meeting of Shareholders.






|         |                                                   
|-------- | --------------------------------------------------
|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 Companys 2003 Annual Meeting of Shareholders.




PART IV






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

(a) Exhibits

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

39



---



##### Table of Contents



|        |          |             |  |                                                                                                                                                                                                              
|------- | -------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 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                                                                                                                    
|        | 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                                                                                                                                     
|        | 10.37(3) |             |  | Lease Amendment dated October 28, 2002
    between microHelix, Inc. and Pacific Realty Associates, L.P.                                                                                                      

40



---



##### Table of Contents



|        |          |             |  |                                                                                                                                    
|------- | -------- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 10.38(3) |             |  | microHelix, Inc. 2002 Nonqualified Stock Option
    Plan                                                                           
|        | 10.39(3) |             |  | Terms and Conditions of Option Grant and/or Stock
    Purchase Under microHelix, Inc. 2002 Nonqualified Stock Option
    Plan      
|        | 10.40(3) |             |  | National Institutes of Health Grant Number 1
    R43 MH65011-01, dated March 20, 2002                                              
|        | 10.41(3) |             |  | National Institutes of Health Grant Number 1
    R43 EY13346-01A1, dated March 25, 2002                                            
|        | 10.42(3) |             |  | National Institutes of Health Grant Number 1
    R43 CA94374-01, dated September 12, 2002                                          
|        | 10.43(3) |             |  | Loan and Security Agreement (Asset Based) dated
    December 10, 2002 Between microHelix, Inc. and Access
    Business Finance, LLC
|        | 21.1(1)  |             |  | Subsidiaries of microHelix, Inc.                                                                                                   
|        | 99.1(3)  |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002     
|        | 99.2(3)  |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002     



---



|    |                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|(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) | Incorporated by reference to the Companys
    Annual Report on Form 10-KSB for the year ended
    December 31, 2001.                                    
|   
|(3) | Filed herewith.                                                                                                                                          

(b) Reports on Form 8-K

During the three month period ended
December 31, 2002, the Company filed one report on
Form 8-K on October 24, 2002 with respect to a press
release announcing the Companys financial results for the
quarter ended September 30, 2002. No financial statements
were filed with this report.



|         |                                       
|-------- | --------------------------------------
|Item 14. | Disclosure Controls and
    Procedures

(a) Evaluation of Disclosure Controls and
Procedures: Within the 90-day period prior to the filing of this
report, an evaluation was carried out under the supervision and
with the participation of the Companys management
including the Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), of the effectiveness
of our disclosure controls and procedures. Based on that
evaluation, the CEO and CFO have concluded that the
Companys disclosure controls and procedures are effective
to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and
Exchange Commission rules and forms.

(b) Changes in Internal Controls. There have
been no significant changes in internal controls or in other
factors that could significantly affect those controls,
subsequent to the date of their most recent evaluation.

41



---



##### 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/ TYRAM H. PETTIT
| |  | Tyram H. PettitPresident and Chief Executive Officer

| |  |       |  |              
| |  | ----- |  | -------------
| |  | Dated |  | April 7, 2003
| |  |      

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/ TYRAM H. PETTITTyram H. Pettit         |  | President, Chief Executive Officer and Director                               |  | April 7, 2003
|                                          
|/s/ TERRENCE A. RIXFORDTerrence A. Rixford |  | SR VP Finance, Chief Financial Officer,
    Treasurer, Secretary and Director |  | April 7, 2003
|                                          
|/s/ JAMES M. WILLIAMSJames M. Williams     |  | Acting Chairman                                                               |  | April 7, 2003
|                                          
|/s/ RICHARD G. SASSRichard G. Sass         |  | Director                                                                      |  | April 7, 2003
|                                          
|/s/ JANE K. CONNERJane K. Conner           |  | Director                                                                      |  | April 7, 2003
|                                          
|/s/ JOHN L. CRARYJohn L. Crary             |  | Director                                                                      |  | April 7, 2003
|                                          
|/s/ JAMES B. STEWARTJames B. Stewart       |  | Director                                                                      |  | April 7, 2003

42



---



##### 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                                                                                                      
|        | 10.37(3) |             |  | Lease Amendment dated October 28, 2002
    between microHelix, Inc. and Pacific Realty
    Associates, L.P.                                                                   
|        | 10.38(3) |             |  | microHelix, Inc. 2002 Nonqualified
    Stock Option Plan                                                                                                                      
|        | 10.39(3) |             |  | Terms and Conditions of Option Grant and/or Stock
    Purchase Under microHelix, Inc. 2002 Nonqualified Stock
    Option Plan                                                 
|        | 10.40(3) |             |  | National Institutes of Health Grant
    Number 1 R43 MH65011-01, dated March 20, 2002                                                                                         
|        | 10.41(3) |             |  | National Institutes of Health Grant
    Number 1 R43 EY13346-01A1, dated
    March 25, 2002                                                                                   
|        | 10.42(3) |             |  | National Institutes of Health Grant
    Number 1 R43 CA94374-01, dated
    September 12, 2002                                                                                 
|        | 10.43(3) |             |  | Loan and Security Agreement (Asset Based) dated
    December 10, 2002 Between microHelix, Inc. and Access
    Business Finance, LLC                                           
|        | 21.1(1)  |             |  | Subsidiaries of microHelix, Inc.                                                                                                                                              
|        | 99.1(3)  |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002                                                
|        | 99.2(3)  |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002                                                



---



|    |                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|(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) | Incorporated by reference to the Companys
    Annual Report on Form 10-KSB for the year ended
    December 31, 2001.                                    
|   
|(3) | Filed herewith.                                                                                                                                          



---



##### Table of Contents






CERTIFICATIONS

I, Tyram H. Pettit, certify that:

1. I have reviewed this annual report on
Form 10-KSB of microHelix, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in the Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b. evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c. presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or
persons performing the equivalent function):



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

6. The registrants other certifying
officers and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                                          
| | -----------------------------------------
| | /s/ TYRAM H. PETTIT                      
| |                                          
| | TYRAM H. PETTIT                          
| | President and Chief Executive
    Officer

Date: April 7, 2003



---



##### Table of Contents



CERTIFICATIONS

I, Terrence A. Rixford, certify that:

1. I have reviewed this annual report on
Form 10-KSB of microHelix, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in the Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b. evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c. presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or
persons performing the equivalent function):



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

6. The registrants other certifying
officers and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                              
| | -----------------------------
| | /s/ TERRENCE A. RIXFORD      
| |                              
| | TERRENCE A. RIXFORD          
| | Senior Vice President-Finance
| | and Chief Financial Officer  

Date: April 7, 2003