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                    U.S. SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   -----------

                                   FORM 10-KSB

                      (Mark One)
         [X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
                       EXCHANGE ACT OF 1934 (FEE REQUIRED)

                   For the fiscal year ended December 31, 2001

                                       or

       [ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
                     EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                        For the transition period from to

                        Commission file number 333-34765

                            IXION BIOTECHNOLOGY, INC.

              (Exact Name of Small Business Issuer in Its Charter)


                               DELAWARE 59-3174033

      (State or Other Jurisdiction of (I.R.S. Employer Identification No.)
                         Incorporation or Organization)

                          13709 PROGRESS BLVD., BOX 13
                                ALACHUA, FL 32615
             ------------------------------------------------- -----
               (Address of Principal Executive Offices) (Zip Code)

                                  386-418-1428

                (Issuer's Telephone Number, Including Area Code)

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

                                      None

                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 past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing  requirements for the past 90 days. Yes X No ___
--

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  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 amendment to this Form 10-KSB. _X__
          -

         The issuer's  revenue for the most recent fiscal year,  ending December
31, 2001, was $231,740.

         The aggregate  market value of the voting and non-voting  common equity
held by  non-affiliates  computed by  reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as of
March 12, 2002, was  approximately $ 5,637,240 based on the most recent sales of
newly-issued  common equity.  There is no public market for the issuer's  common
stock.

         The number of shares of the issuers  common  stock,  par value $.01 per
share, outstanding as of March 12, 2002, was 7,192,477.

                      DOCUMENTS INCORPORATED BY REFERENCE:

        DOCUMENT                                    PART INTO WHICH INCORPORATED
        --------                                 -------------------------------
The Proxy Statement to be used in connection with              Part III
the annual meeting of stockholders to be held
June 14, 2002 (the "Proxy Statement"),
to be filed with the Commission prior to April
30, 2002, pursuant to Rule 14a-101, Schedule 14A
of the  Exchange Act.


<PAGE>




                                     PART I

Item 1.  Description of Business.

                                   The Company

         Ixion Biotechnology, Inc; a Florida-based, clinical-stage biotechnology
company,  was  formed  as a  Delaware  company  in  1993 to  develop  cell-based
therapies  focused on treatment of metabolic  disorders.  Our two core  business
units are:

      Oxalate  Control:  development of therapies for kidney stones,  primary
hyperoxaluria,  and other recurrent calcium oxalate-related conditions, based on
our proprietary use of unique oxalate-degrading bacteria; and

      Stem Cell / Diabetes: development of therapies to treat diabetes, based
on selecting,  proliferating,  and directing the  differentiation  of adult stem
cells into insulin-producing islet preparations for transplantation.

         Our two  development  programs  arose  from  discoveries  by our  Chief
Scientific Officer; both use living cells to deliver therapeutic  proteins;  and
both are classified as biologics by the FDA. In addition, while the two programs
are technologically  distinct, they complement and balance each other in several
ways, including the size of their respective markets, forecasted time to revenue
generation,  and  opportunities  for  related-product  out-licensing.  We hold a
portfolio  of U.S.  and  international  patents  (both  issued and  pending) and
exclusive licenses relating to our activities in the two programs.

         On April 16, 1999, we entered into an agreement with Q-Med AB (publ), a
biotechnology  company  based in Uppsala,  Sweden.  Pursuant to the agreement we
issued a total of  3,900,000  shares to Q- Med AB and  Qvestor,  LLC, a Delaware
limited liability  company,  and a wholly-owned  subsidiary of Q-Med in exchange
for cash of  $7,800,000  and the  right to a  royalty-free  license  to  Q-Med's
intellectual  property in non-animal,  stabilized  hyaluronic acid. By virtue of
its stock ownership and that of its subsidiary, Qvestor LLC, Q-Med may be deemed
to be the parent of the Company.

         Q-Med, a growing,  profitable Swedish company, develops,  manufactures,
and sells natural,  specialized  medical implants.  Q-Med's shares are listed on
the Stockholm stock exchange,  and it is not related to or affiliated in any way
with Q-Med,  Inc., a Delaware  corporation whose shares are listed on the Nasdaq
small  cap  market.  All  of  Q-Med's   products  are  constructed  using  a
proprietary form of non-animal, stabilized hyaluronic acid. Hyaluronic acid is a
natural polysaccharide, first isolated in 1934. Its main function in the body is
to lubricate moveable parts like joints and muscles and to transport  substances
to and within  cells.  The  majority of Q-Med's  revenues are  accounted  for by
Restylane(R) for the filling out of lips, facial wrinkles, and facial folds.

                         Business Unit: Oxalate Control

General

         We believe we are the world leader in the area of therapies for oxalate
metabolism  disorders.  Our  primary  oxalate  control  technology  is  based on
oxalate-degrading  enzymes,  particularly  those delivered by the non-pathogenic
anaerobic intestinal bacteria, Oxalobacter formigenes ("Oxf").

         Oxf degrades oxalate in healthy people.  Inadequate colonization by Oxf
results in reduced  ability  to degrade  oxalate,  which in turn leads to excess
urinary oxalate.  Although other conditions lead to excess oxalate,  our oxalate
control  technology  allows us to  develop a variety of  products  from the same
basic set of discoveries.


<PAGE>




Products and Market Potential

         Our initial product is IxOC-2.  IxOC-2 is a medical probiotic,  meaning
it is composed of live, active Oxf delivered orally. The Oxf degrades oxalate in
the intestinal tract so that it is not absorbed.

         Excess oxalate plays a role in a variety of disorders including:

ss.      Kidney stones;
ss.      Primary hyperoxaluria;
ss.  Enteric   hyperoxaluria   (lipid   malabsorption   disorders)  including  o
Inflammatory bowel disease (Crohn's disease and ulcerative colitis) and o Cystic
fibrosis; and ss. Possibly vulvodynia.

         Kidney  stones.  The  majority  of kidney  stones  are made of  calcium
oxalate.  Oxalate is an end product of metabolism in the body,  and an important
component of a typical diet. Because it degrades oxalate, Oxf plays an important
role in oxalate homeostasis, both by regulating intestinal absorption of dietary
oxalate and also its  secretion  into  intestinal  lumen from the blood.  Recent
research  indicates an increased  risk of kidney  stones in patient  populations
with significantly decreased intestinal colonization by Oxf.

         Small kidney  stones are often  passed  through the urinary  tract,  an
exceptionally  painful  process.  If a stone cannot be passed,  it is surgically
removed or shattered by  shock-wave  lithotripsy.  Unfortunately,  kidney stones
almost always recur. Although for many patients the time between episodes can be
years, for a significant minority, two or more stones a year are common.

         Kidney  stones are a major  health care  problem in the United  States.
Nearly one in every 1,000  residents in the United States has been  hospitalized
for stones,  and  autopsies  have  revealed  that one in every 100 persons  have
observable stone formation in their kidneys.  Nationwide,  approximately  12% of
the U.S. male population and 6% of the US female  population will develop stones
in their  lifetimes,  but stones  are  particularly  common in the  region  from
Virginia to New Mexico,  commonly  referred  to as the "stone  belt."  There are
approximately one million kidney stone incidents  annually,  the seventh leading
cause of patients  visits to  physicians.  Between  seven and ten of every 1,000
hospital  admissions in the United States are for kidney stones,  translating to
248,000 hospital admissions annually.

         In other parts of the world,  particularly  the Middle East,  Asia, and
India, kidney stones are an even worse problem, since hot climates seem to favor
stone formation.

         Both surgery and lithotripsy are expensive treatments, with the average
outpatient  lithotripsy costing $4,617 and surgery costing $8,308 (including the
hospital stay). Although about 85% of all kidney stone patients pass their stone
without  intervention,  it can be a painful and extended process. Of the 15% who
do not,  most are treated  with  lithotripsy,  usually on an  outpatient  basis.
Approximately 30% of patients with kidney stones are hospitalized. Based on 1993
data (the most recent available),  the total annual cost of kidney stones in the
United States was estimated at $2.39 billion.

         Primary  Hyperoxaluria.  Primary  hyperoxaluria is a genetic (autosomal
recessive)  disease  involving a deficiency of  peroxisomal  alanine  glyoxylate
aminotransferase  activity in the liver.  The  resulting  inability  to regulate
oxalate  synthesis leads to significant  accumulations  of excess oxalate in the
blood and urine.

         Although   primary   hyperoxaluria  is  rare  (we  estimate  there  are
approximately 1,500 patients in major pharmaceutical markets), there is no known
cure and no  available  therapy  for the bulk of affected  patients,  other than
serial liver-kidney transplants.  The disease has a significant infant mortality
and is available for fast-track / orphan drug status with the FDA.

         Enteric Hyperoxaluria.  Enteric hyperoxaluria (meaning  hyperabsorption
of oxalate) is a  complication  of several fat  mal-absorption  diseases such as
inflammatory bowel disease  (including  Crohn's disease and ulcerative  colitis)
and cystic  fibrosis.  There is no  current  treatment  for the  oxalate-related
conditions of such maladies.

o                 Inflammatory  Bowel Disease is a general term which covers two
                  primary   chronic   disorders  that  cause   inflammation   or
                  ulceration in the small and large  intestine:  Crohn's disease
                  and  ulcerative  colitis.  The  cause  of  inflammatory  bowel
                  disease is unknown,  with many  theories,  none  proven.  Many
                  persons with  inflammatory  bowel  disease also have  elevated
                  levels of urinary oxalate,  suggesting that excess oxalate may
                  be a  complicating  factor  in the  disease,  or may  lead  to
                  increased risk of kidney stones.

     Inflammatory  bowel disease afflicts  approximately one million  Americans.
1999 data  indicates a new case  incidence  of 6-12 per  100,000 of  population,
implying on the order of 45,000 new cases annually.


o                 Cystic  fibrosis  afflicts  some  60,000  patients  worldwide.
                  Although various current treatment  regimens are demonstrating
                  success  at  extending  the  lifetimes  of such  sufferers,  a
                  side-effect of these therapies is excessive oxalate absorption
                  from food and, thus, a materially-increased risk and incidence
                  of kidney  stone  formation.  There is also  evidence,  as yet
                  unconfirmed,    that   there   is   an   association   between
                  hyperoxaluria and early death in cystic fibrosis.

         Vulvodynia.  Vulvar vestibulitis syndrome  ("vulvodynia") is a complex,
multifactorial  disorder  with  painful  and  debilitating  symptoms,  including
intense burning,  itching,  and inflammation,  affecting the tissues surrounding
the vagina and urethra.  In chronic  cases it is very  disruptive  of a person's
life.

         Recognition of this condition as a significant,  physiological syndrome
appeared  in  medical  journals  only a few years ago.  There are no  population
studies of the incidence or prevalence of vulvodynia, although the condition may
affect  from  150,000  to 200,000  American  women.  Because  the cause is often
unknown,   treatments  have  been  aimed  at  symptoms  and  include  xylocaine,
acupuncture,  hypnotherapy,  interferon  injections,  and,  as a last  resort in
chronic  cases,  surgery.  Recent  research  suggests  that  vulvodynia  may  be
associated with excess oxalate,  with some investigators  reporting  significant
improvement following control of dietary oxalate.

Clinical Status

         In 2001 we completed an IRB-approved  human study of IxOC-2 at the Wake
Forest  University  School of Medicine.  Data from this study,  which included a
total of 17 normal,  healthy subjects,  demonstrated the safety of IxOC-2 (there
were no adverse events) and provided indication of effectiveness.  The principal
investigator was Ross P. Holmes,  Ph.D.,  Associate Professor of Urology at Wake
Forest and member of our Scientific Advisory Board.

         We  followed  this  study with a pre-IND  meeting  with the FDA in late
2001, at which our regulatory strategy for IxOC-2 was accepted.  We will file an
IND for a  blinded,  placebo-controlled  Phase  I/II  trial in 35  hyperoxaluric
patients in April 2002.  The proposed  clinical  endpoints  will be safety and a
statistically  significant  reduction in urinary oxalate.  The effect on urinary
calcium-oxalate  super-saturation  will  also  be  studied.  This  study  should
commence in May 2002 and be completed by fall 2002.

         We have also  agreed to sponsor a small,  IRB-approved  study under the
direction of Dr. Bernd Hoppe,  Associate Professor of Pediatrics at the Klinikum
der  Universitat  zur Koln.  The study  will  investigate  the  effects  of oral
administration of IxOC-2 on urinary oxalate levels in primary  hyperoxaluria and
cystic fibrosis  patients.  The study will commence after receiving IND approval
in the US, and will last for approximately five months..

         Overall,  clinical  trials for IxOC-2  will  entail  less  expense  and
complexity  than  IxSC-1,  the stem cell  product.  This should  generate  early
revenue  that will  support  development  of the  oxalate  market as well as the
advancement of our Stem Cell / Diabetes program.
<PAGE>

Strategy and Development

     In-house  Development.  IxOC-2,  our  medical  probiotic  oral drug for the
treatment  of  excess   oxalate,   is  initially   targeted  as  a  therapy  for
hyperoxaluria and recurrent kidney stones in the U.S. and primary  hyperoxaluria
in Europe. For 2002, our plan includes:

     o first  revenue  being  generated in Europe,  with primary  hyperoxalurics
receiving IxOC-2 on a "named patient" basis;
     o  first-generation  commercial  product defined and documented  (including
name, form, strength, packaging, fermentation process);
o US Phase I/II trial  completed and report  completed and delivered to the FDA;
and o end of phase II meeting scheduled with the FDA.

         We have a subcontract for the manufacture of clinical trial  quantities
of IxOC-2 to GDS, a contract fermentation company in Elkhart,  Indiana. They are
the  sole  supplier  of  the  clinical  trial   materials.   Following   process
development,  we will contract manufacture of the ultimate formulation to GDS or
another contract manufacturer.

         Our strategic approach envisions:

o        in-house product/process development
o        long-term outsourcing of manufacturing
o        outsourced sales and marketing

         Out-licensing. We have followed the strategy of funding non-therapeutic
applications for our oxalate technology primarily through SBIR or other external
research grants.  We intend to out-license all  non-therapeutic  applications of
our oxalate  technology  once  development  makes an  out-license  available  on
attractive  terms.  We are pursuing  several  opportunities  with  potential for
significant near-term revenue, including:

o                 Oxf  Monitor.  We believe that it is  clinically  important to
                  screen  patients  with  oxalate-associated  diseases  for  the
                  presence or absence of the Oxf bacterium.  The Oxf Monitor,  a
                  nucleic  acid  diagnostic  kit,  will report data that will be
                  more  meaningful  than 24-hour  urinary  oxalate data alone in
                  that it accurately  identifies  and  quantifies  the high-risk
                  population  of kidney stone formers and  stratifies  them with
                  respect to cause.  There is no current  diagnostic  for Oxf in
                  the  marketplace.   In  vitro  diagnostic  products  generated
                  approximately  $3.5  billion  in  revenues  in 1996,  of which
                  approximately $325 million were molecular diagnostics.

                  We would  anticipate that the Oxf Monitor would be marketed in
                  connection with primary  hyperoxaluria,  kidney stones, cystic
                  fibrosis,  and vulvodynia to the approximately 7,300 in-office
                  urologists,  100 cystic fibrosis  treatment  centers (100) and
                  35,000 gynecologists in the U.S.

o                 Oxalate-resistant    Catheter.    We   are    developing    an
                  oxalate-resistant  catheter  under  an SBIR  grant.  Catheters
                  often foster infection and account for the leading side effect
                  of an invasive hospital procedure. One major cause of catheter
                  infection is encrustation by oxalate  crystals on the catheter
                  and  subsequent  bacterial  adhesion.  Such catheters are also
                  often occluded by oxalate crystals, requiring replacement.

                  There  are  approximately   one  million   catheter-associated
                  urinary  tract  infections  that  occur  each year  (involving
                  10-30% of patients with in-dwelling  catheters).  Although use
                  of  anti-microbial  coatings  and  materials  is  growing,  no
                  anti-oxalate  catheter exists.  The world market for catheters
                  was $675 million in 1995.


<PAGE>


                       Business Unit: Stem Cell / Diabetes

General

         As early as 1995-96 we were able to demonstrate that our in vitro-grown
islet  preparations  could  reverse  diabetes  in mice.  Today,  using our islet
producing stem cell ("IPSC")  technology,  we can grow functioning  IPSC-derived
islet  preparations in vitro. We obtain IPSCs from donated adult pancreases and,
using  Ixion-developed  or  refined  methodologies,  we then  isolate,  culture,
differentiate, and proliferate them.

         Diabetics  can  achieve  insulin  independence  after  having  received
transplanted islets from donated pancreases.  The delivery  methodology has been
well-established  by the  Edmonton  Protocol,  originally  developed in Edmonton
Canada,  but now being  performed in 10 islet  transplant  clinics in the United
States.  Our  development  program  seeks to produce  commercial  quantities  of
cultured  functional islet preparations so as to overcome the desperate shortage
of transplantable islets associated with reliance on donor organs.

Products and Market Potential

     Overview. In the summer of 2000, researchers in Edmonton,  Alberta, Canada,
reported that they were able to restore  normal blood sugar levels for a year or
more in diabetic patients by transplanting islets obtained from organ donors. By
February 2002, the Edmonton surgeons had treated a total of 30 patients,  80% of
whom  were  insulin  independent  for at  least  a year,  and  all of  whom  had
significantly  reduced  insulin  requirements.  Their  procedure,  the "Edmonton
Protocol,"  established  the ability of islet  replacement to eliminate  insulin
dependence  and produce  normal  blood  glucose  levels.  However,  the Edmonton
approach has the drawback,  for patients weighing over 155 pounds, it requires a
minimum of two donated pancreases per transplant  patient.  Because there are at
most 5,000 pancreases  available  annually,  only a very small percentage of the
eligible population) can be helped.

     Products.  Our  initial  planned  product  is IxSC-1,  cultured  functional
allogeneic islet  preparations  derived from adult stem cells. This will replace
the current Edmonton  Protocol,  using freshly  transplanted  islets and instead
using our in-vitro grown IPSCs hence solving  today's  severe  shortage of donor
pancreases for transplantation.

         We have been successful in propagating  human islet cells from children
and adult donors, but have not transplanted such islets to date.

         Our second generation product efforts are focused on two fronts:

o                 Developing an autologous  version of IPSC-derived islet preps.
                  Here we would obtain the  necessary  stem cells  directly from
                  the  patient  to be  transplanted,  rather  than from  donated
                  organs,  and use these  cells to provide  transplant  surgeons
                  with functioning, insulin-producing islet preparations. We are
                  working on various  potential sources of autologous stem cells
                  including  trans-differentiating  adult  stem  cells  from  an
                  easy-to-access  tissue (such as bone marrow stem cells,  liver
                  stem  cells,  etc  or  pancreatic  stem  cells  obtained  from
                  ultrasound-guided endoscopic biopsies; and

o                 Developing a means by which  IPSC-derived  islet preps used in
                  an allogeneic  setting can be protectively  encapsulated so as
                  to reduce or eliminate the need for immuno-suppressive  drugs.
                  Our  approach  is  aimed  at  developing  a   formulation   of
                  non-animal stabilized hyaluronic acid ("NASHA"),  in gel form,
                  made  available  to us under a  license  from  Q-Med  AB,  our
                  development partner and investor.

         Our research  indicates that NASHA may also be an effective  "scaffold"
for directed  differentiation or  trans-differentiation  of IPSC and other adult
stem cells.

         Diabetes.  Diabetes is the world's most common metabolic disease. It is
inadequately treated with currently available drugs. In 1995, there were over 16
million  diabetics  in the United  States.  There were 21 million  diabetics  in
Europe and as many as 150 million worldwide.  Type 1 diabetes patients represent
from 5% to 10% of the total number of diabetics  in the U.S.,  or  approximately
800,000 patients.  An additional 1.5 million type 2 diabetics also
<PAGE>

     take  insulin.There  are  approximately  500,000  to 600,000  new  patients
     annually  in the U.S.,  of which  35,000 to  50,000  are type 1  diabetics.
     Approximately  25  percent  of the new type 2  patients  (or  approximately
     110,000) will also take insulin.  In 1995,  diabetes accounted for over 10%
     of total U.S. health care expenditures,  or approximately $100 billion.  In
     1992, the American Diabetes Association  estimated that another $47 billion
     was  spent in  indirect  costs,  such as lost  wages.  Other  sources  have
     estimated  that  indirect  costs may  actually  exceed  the  direct  costs.
     Complications  of  the  disease  include  amputations  of  toes  and  feet,
     blindness, ulcers, nerve damage and cardiovascular, periodontal, and kidney
     disease.  Approximately  30% to 40% of  people  with type 1  diabetes  will
     develop  diabetic   nephropathy   leading  to  kidney  dialysis  and  renal
     transplants. Overall, diabetes is the seventh leading cause of death in the
     U.S.

         Current  non-surgical  therapies,   including  insulin  shots  or  oral
hypoglycemic  medication,   modulate  blood  glucose,  but  cannot  consistently
maintain the diabetic's blood glucose at normal levels. The Diabetes Control and
Complications  Trial  ("DCCT"),   a  nine-year  NIH  study,   demonstrated  that
maintaining blood glucose at normal levels reduces by approximately 60% the risk
of development and progression of diabetes  complications.  However, there is no
drug therapy that supplies  insulin in response to changes in blood glucose with
the speed and precision of functioning islets.

         Market Potential.  The end-user  patients for our therapeutic  diabetic
products   will   ultimately   be  every  type  1  diabetic  and  about  25%  of
insulin-dependent type 2 diabetics.

         To  appreciate  the  number  of  potential   customers,   consider  the
following:

     o    Diabetes  prevalence  increases  with  age  and  reaches  19%  of  the
          population at age 75 (NHANES III survey, 1994).
     o    About two-thirds of the U.S.  diabetic  population has been diagnosed.
          (Presumably   the   one-third  who  are   undiagnosed   are  primarily
          non-insulin dependent type 2 diabetics.)
     o    The U.S. Census Bureau estimated there were 15.7 million  diabetics in
          1997 (excluding undiagnosed diabetics).
     o    Estimates of the total U.S.  type 1  population  range from 800,000 to
          1.5 million,  and the  additional  type 2 population  who require some
          insulin range from 1.5 million to 3.9 million.
     o    About 10% of the type 2 diabetics may have been  misdiagnosed  and are
          actually type 1 diabetics.
     o    There are  approximately  500,000 to 600,000 new patients  annually in
          the U.S., of which 35,000 to 50,000 are type 1 diabetics. Up to 25% of
          the new type 2  patients  (or  approximately  110,000)  will also take
          insulin.
     o    There are 21 million  diabetics  in Europe and as many as 100  million
          worldwide.   Assuming  that  the  same   proportions  are  type  1  or
          insulin-dependent  type 2 diabetics,  there are about 1 million to 1.5
          million  type 1  diabetics  in  Europe  and an  equivalent  number  of
          insulin-dependent type 2 diabetics.

         IxSC-1,  our planned first generation  product will require the patient
to take  immuno-suppressive  drugs to prevent the IPSC-derived islets from being
rejected.  For many people,  the downside of immune suppression may be as bad as
the complications from diabetes.  However,  if one suffers from a severe case of
diabetes,  a transplant,  even with immune suppression,  makes medical sense. We
estimate  that  40,000  type 1  diabetics  and  300,000  type 2  diabetics  have
sufficiently  severe   complications  from  their  diabetes  to  justify  IxSC-1
transplantation even when accompanied by an immuno-suppressive drug regime.

Clinical Status

         In a mouse study in 1995-96 we demonstrated proof of principle that our
in vitro-grown,  stem cell-derived  islet  preparations  could reverse diabetes.
Preclinical  work is now well  underway  in this  program.  We have  initiated a
large-animal  pilot feasibility study in collaboration  with Horatio Rilo, M.D.,
Director,  Cellular  Transplant  Program,  Department of Surgery,  University of
Cincinnati  Medical School.  This study has as its goal the  establishment  of a
porcine  model based on the Edmonton  Protocol,  and we expect to complete it by
summer.
<PAGE>

Thereafter,  we will seek a meeting with the FDA to discuss our planned
pre-clinical  toxicology  and safety  program.  We plan to file an IND and enter
Phase I/II human studies in 2003.

         To complement the above efforts,  we have an ongoing  discovery program
to identify and characterize  pancreatic islet stem and progenitor cells as well
as novel growth factors  associated with them. The goal of such activities is to
discover  factors  important  in islet stem cell  isolation,  purification,  and
differentiation  and to identify  stem cell  markers to which we hope to produce
antibodies useful in stem cell research.

Strategy and Development

         Our strategy is responsive to diabetics'  desire to avoid or reduce the
need to take  insulin  shots  daily  and to reduce or  eliminate  the  lifestyle
restrictions  imposed  by their  disease.  It also  seeks to over come  concerns
caused  by  (i)  the  nature  of a  pancreas  transplant  operation  (major  and
invasive),  and (ii) a severe shortage of donor pancreases for  transplantation.
Finally,  our second  generation  products  will seek to  minimize  the need for
immuno-suppressive drugs.

         For 2002, our research plan includes:

o Characterization of cell lines and feasibility studies of animal models.

o             Trans-differentiating  cells into  functional  islet  preparations
              using "easy-to-access" stem cells, e.g. hematopoieitic stem cells,
              ova liver cells etc.

o             A type C meeting  with the FDA to obtain  approval  of our planned
              preclinical studies to receive sufficient data to proceed to phase
              I human clinical trials

         In the long term (i.e., 3-5 years),  we have as our objective  becoming
the first  company  to  successfully  treat  diabetics  with  somatic  stem cell
therapies that will substantially overcome the effects of diabetes.

         We intend to  pursue  in-house  manufacturing  and  preparation  of our
various planned  IPSC-derived  islet preps. We will,  however,  seek a strategic
partner for assisting us with large scale clinical trials,  as well as sales and
marketing.

         We would expect that the physicians to whom our diabetes products would
be marketed would include:

     o  Endocrinologists  and  diabetologists  (estimated  at about 6,000 in the
     U.S.);
     o Internists and family practitioners; and
     o Transplant surgeons (particularly located in islet transplant centers)

         The primary demand of the physician intermediaries will be that the FDA
have  approved the  product.  They will also  require  substantial  professional
information  in the form of  pre-clinical  and  clinical  data,  reprinted  from
articles appearing in recognized peer reviewed journals.

         Any strategy for marketing our islet  replacement  therapy would likely
also involve the endorsement of the American Diabetes Association,  the Juvenile
Diabetes  Foundation,  and certain  specialist  societies  such as the  American
Association of Clinical  Endocrinologists and the American Society of Transplant
Surgeons.  This is a process  that can be initiated  once studies  demonstrating
efficacy  and  safety  of  our  diabetes   products   have  been   published  in
peer-reviewed journals.

         Successful  U.S.  products  must  take  into  account  the  third-party
reimbursement payers, including Medicare,  Medicaid, Blue Cross/Blue Shield, and
other managed care  organizations.  Third-party payers are motivated  primarily,
but not  exclusively,  by economic  factors.  Since the diabetes  products  will
require  substantial  up-front payments and may challenge  accepted norms, payer
resistance can be anticipated  in the early stages of product  launch.  We would
expect to pay  particular  attention  in  selecting a  strategic  partner to our
prospective marketing partner's success with such constituencies.
<PAGE>

Licensed Technology

         We have licensed from the University of Florida Research Foundation, on
an exclusive  world wide basis,  commercial  rights in two areas: in vitro grown
islet  producing stem cells for curing  diabetes,  and materials and methods for
detection of oxalate and Oxalobacter formigenes.

     Under the UF Research  Foundation  licenses,  we have  licensed five issued
U.S.  oxalate  patents and two issued U.S.  islet  patents.  Still pending under
these licenses are two U.S. oxalate patent  applications,  one U.S. islet patent
application,  and one  US/International  patent application.  We have also filed
internationally  on these  patent  families.  One  oxalate  patent and one islet
patent has been issued in Australia; other countries are pending.

         The license agreements  require the UF Research  Foundation to file and
prosecute the patents and require us to reimburse the costs. They must also take
all steps to defend such patent rights,  also at our expense. If the UF Research
Foundation  fails to take any such  action,  we have the  right to  defend  such
rights at our own expense.

         Except for royalty rates and certain other immaterial differences,  the
terms of our patent licenses with the UF Research  foundation are  substantially
identical.  The UF  Research  Foundation  licensed  its rights on an  exclusive,
worldwide basis for the life of any patents granted. We have rights under the UF
Research  Foundation  licenses to all possible uses of the patent  applications,
any patents issued from such applications,  any divisionals and continuations of
such  applications,  and to any claims of U.S. and foreign  continuation-in-part
applications, and of the resulting patents, which are directed to subject matter
specifically described in such applications.

         Under the UF Research Foundation licenses, we paid a license issue fee,
are  obligated  to  pay  royalties  on  our  net  sales  or  net  sales  of  our
sublicensees,  and must  reimburse the UF Research  Foundation for patent costs.
There are no minimum  annual  royalties.  We are also obliged to obtain  product
liability  insurance  prior to the  sale for  commercial  purposes  of  licensed
products.

         All issued  UF-licensed  oxalate  patents expire in June 2014. A web of
claims in the various  issued patents  (including  the Allison patent  discussed
below) covers our oxalate  products.  The claims in the earliest oxalate patents
tend to be relatively  narrow,  but the later  patents  contain  broader  claims
including the claim to the DNA encoding for formyl-CoA transferase,  a necessary
ingredient of some of our oxalate products.  Claims in pending  applications are
broader still.

         All issued  UF-licensed  islet  patents  expire  between April 2014 and
November  2015.  They  are  primarily  process  patents,   meaning  we  can  bar
competitors from duplicating our particular  islet expansion  technique,  but we
can not bar competitors  from  developing  other,  non-infringing  techniques to
culture islets. Broader claims, including a claim for the IPSC, islet progenitor
cells, and islet-like structures are included in the pending U.S. application.

         In June  1997,  we entered  into a patent  license  agreement  with the
Milton J. Allison Revocable Trust, obtaining exclusive, world-wide rights to the
inventions of Dr. Milton  Allison,  a member of our Scientific  Advisory  Board,
relating to the administration of cells of O. formigenes or natural enzymes from
O. formigenes (or other  microorganisms)  to treat  oxalate-related  conditions.
Under the Allison  patent,  we paid a license issue fee and are obligated to pay
royalties  on net  sales or net  sales of  sublicensees.  There  are no  minimum
royalties  or due  diligence  milestones.  Two patents  have  issued  under this
license.  An  additional  US patent  application  and foreign  applications  are
pending.

         A  number  of  pharmaceutical   companies,   biotechnology   companies,
universities  and  research  institutions,  and  individuals  have filed  patent
applications  or  received  patents  to  technologies  that are  similar  to our
technologies.  We are  aware  of  patent  applications  previously  filed by and
patents  already issued to others that could conflict with our patents or patent
applications,  either by claiming  the same  methods or compounds or by claiming
methods or compounds that could  dominate those licensed to us. In addition,  we
can not assure you that we are aware of all patents or patent  applications that
may  materially  affect our ability to make,  use, or sell any products.  United
States patent  applications are confidential  while pending in the United States
Patent and Trademark Office, and patent  applications filed in foreign countries
are often first  published  months after filing.  Any conflicts  resulting  from
third party  patent  applications  and patents  could  significantly  reduce the
coverage  of the  patents or patent  applications  licensed  to us and limit our
ability to obtain meaningful patent  protection.  If patents are issued to other
companies that contain  competitive or conflicting claims, we may be required to
obtain licenses to these patents or to develop
<PAGE>

or obtain alternative technology.
We can not  assure  you  that we will be able to  obtain  any  such  license  on
acceptable  terms or at all.  If such  licenses  are not  obtained,  we could be
delayed in or prevented from the development or commercialization of our product
candidates, which would have a material adverse effect on us.

         Litigation,  which could result in substantial  cost to us, may also be
necessary  to enforce any patents to which we have  rights or to  determine  the
scope,  validity, and enforceability of other parties' proprietary rights, which
may affect our product candidates and technology.  United States patents carry a
presumption of validity and generally can be invalidated  only through clear and
convincing evidence.  Our licensors may also have to participate in interference
proceedings  declared  by the Patent  Office to  determine  the  priority  of an
invention,  which  could  result  in  substantial  cost to us.  There  can be no
assurance  that  our  licensed  patents  would  be  held  valid  by a  court  or
administrative  body  or  that  an  alleged  infringer  would  be  found  to  be
infringing.  Further,  with respect to the technology licensed by us from the UF
Research  Foundation,   they  are  primarily  responsible  for  any  litigation,
interference,  opposition,  or other  action  pertaining  to  patents  or patent
applications  related  to  the  licensed  technology,  and we  are  required  to
reimburse them for the costs. As a result,  we generally do not have the ability
to institute or determine the conduct of any such patent  proceedings unless the
UF Research  Foundation  does not elect to  institute  or elects to abandon such
proceedings.  In cases  where  they  elect to  institute  and  prosecute  patent
proceedings,  our rights will be dependent in part upon the manner in which they
conduct  the  proceedings.  The  UF  Research  Foundation  could  elect  not  to
vigorously  pursue or defend or to settle such proceedings on terms that are not
favorable to us. An adverse  outcome in any patent  litigation  or  interference
proceeding could subject us to significant liabilities to third parties, require
disputed rights to be licensed from third parties,  or require us to cease using
such technology, any of which could have a material adverse effect on us.

         We can not  assure you that any  existing  patent  application,  or any
future  patent  application  will issue or that any  patents,  if  issued,  will
provide us with adequate patent protection with respect to the covered products,
their uses, technology,  or processes.  In addition,  under our licenses, we are
required to meet specified diligence requirements to retain our rights.

         Because the  inventions  covered by our licenses and proposed  licenses
were  made  with  federal  assistance  (which  is  typical  of  university-based
discoveries),  they are subject to the rights of the federal government under 35
USC Title  18,  "Patent  Rights in  Inventions  Made with  Federal  Assistance,"
including  "march in" rights under which the government has the right to require
us to grant an exclusive  license under any such  inventions to a third party if
the  government  determines  that (1)  adequate  steps  have  not been  taken to
commercialize  such  inventions,  (2) such  action is  necessary  to meet public
health or safety needs,  or (3) such action is necessary to meet the requirement
for public use under federal  regulations.  The  government's  rights  include a
non-exclusive,   paid-up,  worldwide  license  under  such  inventions  for  any
governmental  purpose.  The law also requires any licensor of an invention  that
was partially  funded by federal  grants to obtain a covenant from our exclusive
licensee to substantially manufacture products using the invention in the United
States,  although  this  covenant  is subject to a  discretionary  waiver by the
government.

Patents and Trade Secrets

         Dr. Peck,  our Chief  Scientist,  is an employee of the  University  of
Florida,  and, like any employee of the  University of Florida,  is bound by the
terms of the  University's  patent  policy,  which  requires  that any invention
conceived  of or  developed  in the area in which he is employed  belongs to the
University (subject to the rights of the federal government described above).

         It is our  policy to require  our  directors,  employees,  consultants,
outside scientific collaborators,  and sponsored researchers, and other advisors
to execute  confidentiality  agreements  upon the  commencement of employment or
consulting relationships with us. These agreements provide that all confidential
information  developed or made known to the individual  during the course of his
or her  relationship  with us is to be kept  confidential  and not  disclosed to
third parties.  Ixion also requires signed  confidentiality or material transfer
agreements from any company that is to receive  confidential data or proprietary
compounds.  In the  case  of  employees  and  consultants,  the  confidentiality
agreements  also  generally  provide  that  all  inventions   conceived  by
<PAGE>

     the individual  while  rendering  services to us shall be assigned to us as
our exclusive property  (subject,  in the case of Dr. Peck, and other university
employees, to the prior rights of their employers).

         As noted above, we have actively sought  collaboration  with university
scientists  under the Small  Business  Innovation  Research  and Small  Business
Technology  Transfer  Research  programs as a way of leveraging  our  scientific
resources.  In implementing this practice,  we seek to adjust the work plans and
division of  responsibilities  in such a fashion that any  patentable  discovery
will be Ixion's sole intellectual property. Where that is not possible, we seek,
at  a  minimum,   that  any  discovery  will  be  "joint"  under  the  rules  of
inventorship,  thus  ensuring  for us the  right  to use the  discovery  without
license  from the  university,  although,  in the latter  case, a license of the
university's  joint rights may be desirable  to ensure  exclusive  access to the
invention.

         In order to  produce or use the Oxf  Monitor,  it may be  necessary  to
license  PCR rights from Roche  Diagnostics,  Inc.,  which  makes  non-exclusive
licenses generally  available.  In addition,  to produce our recombinant enzymes
from Oxf,  we must enter into a  commercial  license  with  Brookhaven  National
Laboratory  relating  to  its  T7  technology.  Brookhaven  makes  non-exclusive
licenses generally available.

Competition

         The  biotechnology and  pharmaceutical  industries are characterized by
rapidly evolving technology and intense competition.  Our competitors in general
include major pharmaceutical, chemical, and specialized biotechnology companies,
many of  which  have  larger  R&D  budgets,  as well  as  substantially  greater
experience in developing  products,  in obtaining regulatory  approvals,  and in
manufacturing and marketing diagnostic and pharmaceutical products. In addition,
many biotechnology companies have formed collaborations with large,  established
companies to support research,  development,  and  commercialization of products
that may be competitive with ours. Academic institutions, governmental agencies,
and other public and private research organizations are also conducting research
activities and seeking patent protection and may commercialize products on their
own or through joint ventures.

         We expect  our  products  to  address  a broad  range of  markets.  Our
competition  will be determined in part by the potential  indications  for which
our products are developed and ultimately approved by regulatory authorities. In
addition,  the first pharmaceutical product to reach the market in a therapeutic
or preventive area is often at a significant  competitive  advantage relative to
later entrants to the market.  Accordingly,  the relative speed with which Ixion
or our future corporate partners can develop products,  complete the preclinical
and clinical trials and approval processes,  and supply commercial quantities of
the products to the market are expected to be important competitive factors. Our
competitive  position  will also  depend on our  ability to  attract  and retain
qualified  scientific  and  other  personnel,   develop  effective   proprietary
products, develop and implement production and marketing plans, contract for and
manage third-party service providers, obtain and maintain patent protection, and
secure adequate capital resources.

Government Regulation

         In the United  States,  the FDA  regulates  distribution,  manufacture,
labeling,  and  promotion of  nutritional  supplements,  drugs,  both animal and
human,  medical  devices,  and biologics.  In addition,  manufacturers  of these
products are subject to other federal, state, and local environmental and safety
laws and  regulations.  Governments  in other  countries  may impose  additional
requirements.

         FDA Authorization to Market.  Drugs,  medical devices, or biologics may
not be  commercially  distributed  in the  United  States  unless  they have FDA
authorization.  Obtaining  FDA  authorization  to  market  a  regulated  product
generally  involves the  submission of  preclinical,  product  characterization,
clinical, and manufacturing information.  The process can take a number of years
and the expenditure of significant resources.

         Biologics.  Our  current  therapeutic  products  will be  regulated  as
biologics.  The Food,  Drug,  and Cosmetic Act and the Public Health Service Act
provide that  biologics may not be  commercially  distributed  within the United
States  unless they have been  approved by the FDA. The process  required by the
FDA before our biologics may be marketed in the United States generally involves
five steps:
<PAGE>

     o preclinical laboratory and animal testing,
     o submission to the FDA of an  investigational  new drug application  which
must be effective prior to the initiation of human clinical studies,
     o adequate and  well-controlled  clinical  trials to  establish  safety and
efficacy for its intended use,
     o submission to the FDA of a biologics license application, and
     o review and approval of the biologics license application by the FDA.

         Preclinical  testing covers laboratory  evaluation of product chemistry
and  formulation as well as animal  studies to assess the safety,  pharmacology,
toxicology,  and  efficacy  of the  product.  The  results  of these  tests  are
submitted to the FDA as part of the investigational  new drug application.  If a
company is not notified by the FDA within 30 days of submission, the company may
initiate Phase I clinical  trials.  Clinical  trials are typically  conducted in
three sequential phases, although the phases may overlap.

o                     Phase  I  represents  the  initial  administration  of the
                      biologic to a small group of humans,  healthy  volunteers,
                      to  test  for  safety,   dosage   tolerance,   absorption,
                      distribution,    metabolism,   excretion,   and   clinical
                      pharmacology.

o                     Phase II involves studies in a small number of patients to
                      assess the  efficacy of the  product,  to  ascertain  dose
                      tolerance  and  the  optimal  dose  range,  and to  gather
                      additional  data relating to safety and potential  adverse
                      effects.

o                     Once  an  investigational  drug  is  found  to  have  some
                      efficacy and an acceptable  safety profile in the targeted
                      patient  population,  Phase III studies are  initiated  to
                      establish  safety  and  efficacy  in an  expanded  patient
                      population and multiple clinical study sites.

         The FDA reviews both the  clinical  plans and the results of the trials
and may request that a company  discontinue  or expand the trials at any time if
there are significant safety issues.

         The results of the  preclinical  tests and clinical trials of biologics
are submitted to the FDA in the form of a biologic license application.  The FDA
may request  additional  information,  including  additional  animal  studies or
clinical trials that may extend the review process and delay marketing approval.
The manufacturer  must also pass a pre-market  inspection of its compliance with
good  manufacturing  practices.  There  can be no  assurance  that  the FDA will
authorize  marketing of the product,  or that it will do so in a timely  manner.
Once granted, a biologic license application may place substantial  restrictions
on how the  product is  marketed.  After FDA  approval of the  biologic  license
application  for  the  initial  indications,  further  clinical  trials  may  be
necessary  to gain  approval  for the  labeling of the  product  for  additional
indications.

         Medical Devices.  One of our planned  products,  an in vitro diagnostic
product,  the Oxf  Monitor,  will be  regulated  as a  medical  device.  The FDA
regulates  the  clinical  testing,  manufacture,   labeling,  distribution,  and
promotion of medical devices. Unless exempted by regulation, medical devices may
not be  commercially  distributed  in the United  States  unless  they have been
approved or cleared by the FDA.

         In the United States,  medical devices are classified into one of three
classes (class I, II, or III), on the basis of the controls deemed  necessary by
the  FDA  to  reasonably  assure  their  safety  and  effectiveness.  Under  FDA
regulations,  class I devices  are  subject to general  controls  (for  example,
labeling,   pre-market   notification,   and  adherence  to  good  manufacturing
practices),  and class II devices are subject to general and  specific  controls
(for example,  performance  standards,  patient  registries and FDA guidelines).
Generally,  class III devices are those which must receive a pre-market approval
by  the  FDA to  ensure  their  safety  and  effectiveness  (for  example,  life
sustaining,  life-supporting, and implantable devices, or new devices which have
not been found substantially equivalent to legally marketed devices).

         There are two review  procedures by which  medical  devices can receive
approval or clearance.  Some products may qualify for clearance  under a Section
510(k) procedure,  in which the manufacturer provides a pre-market  notification
that it intends to begin  marketing  the product,  and shows that the product is
substantially  equivalent to another legally marketed product (i.e., that it has
the same intended use and is as safe and effective as a legally
<PAGE>

     marketed  device  and does not raise  different  questions  of  safety  and
effectiveness  than  does  a  legally  marketed  device).  In  some  cases,  the
submission must include data from human clinical studies. Marketing may commence
when the FDA issues a clearance letter finding such substantial equivalence.

         If the medical device does not qualify for the 510(k) procedure (either
because  it is not  substantially  equivalent  to a legally  marketed  device or
because  it is a Class III  device  required  by the  statute  and  implementing
regulations to have an approved  application for pre-market  approval),  the FDA
must approve a  pre-market  approval  application  before  marketing  can begin.
Pre-market approval applications must demonstrate, among other matters, that the
medical  device is safe and  effective.  A pre-market  approval  application  is
typically a complex submission, usually including the results of preclinical and
clinical studies,  and preparing an application is a detailed and time-consuming
process.  Once a pre-market approval  application has been submitted,  the FDA's
review  may be  lengthy  and may  include  requests  for  additional  data.  The
manufacturer  must also pass a pre-market  inspection of its compliance with the
quality  systems  regulations.  We can not be sure  that the FDA will  authorize
marketing of our products under either the 510(k) procedure or PMA procedure.

         Clinical   investigations   of  most   devices   are   subject  to  the
investigational device exemption requirements,  which usually involve FDA review
of the  investigation  before it may begin.  Clinical  investigations of many in
vitro  diagnostic  tests are exempt from the  investigational  device  exemption
requirements,  provided the testing meets certain exemption criteria,  including
labeling as an "investigational use only" product. In addition, in vitro devices
may be  distributed  for  "research  use only,"  provided  they are intended for
laboratory research and labeled for research use. The FDA's current policy is to
encourage  manufacturers of in vitro devices for  "investigational  use only" or
"research  use only" to establish a  certification  program under which these in
vitro devices are distributed to or utilized only by individuals,  laboratories,
or health care  facilities  that have provided the  manufacturer  with a written
certification of compliance  indicating that the  "investigational  use only" or
"research  use only"  product will be  restricted  in use and will,  among other
things, meet institutional review board and informed consent requirements.

         Ixion's Products. The Oxf Monitor, when manufactured by or for us, will
be distributed  initially for research use and will not require FDA review prior
to  distribution  for those uses. To market this product for diagnostic  use, we
intend to request  authorization under the 510(k) procedure for the Oxf Monitor.
Pre-market approval applications may, however, be required.

         We believe that our  therapeutic  products  will require  approval of a
biologic license application before they may be commercially distributed.

         Other FDA Obligations.  Each manufacturing  facility for drugs, medical
devices,  or  biologics,  must be  registered  with  the FDA,  and the  products
manufactured  at that  facility  must be listed  with the FDA. A  manufacturer's
quality  control and  manufacturing  procedures must conform on an ongoing basis
with  good  manufacturing   practices.   Certain  adverse  effects  and  product
malfunctions  must be reported to the FDA. Product labeling and advertising must
comply  with  FDA  requirements.  In  some  cases,  post-market  testing  may be
required,  or other  requirements  imposed.  Complying  with these  requirements
requires substantial time, money, and effort. We intend to rely on our strategic
partners for assistance with these matters.

         FDA  Enforcement.  The FDA  inspects  manufacturers  of drugs,  medical
devices,  and biologics on a regular  basis.  Failure to comply with  applicable
requirements  can,  among  other   consequences,   result  in  civil  penalties,
injunctions,  suspensions and losses of regulatory  approvals,  product recalls,
seizure of products, refusal to allow us to enter into supply contracts with the
government, and criminal prosecution.

         Non-U.S.  Marketing.  For marketing  outside the United States,  we are
also subject to foreign  regulatory  requirements.  Requirements  governing  the
conduct of clinical trials,  product licensing,  pricing, and reimbursement vary
widely from country to country. The time required to obtain approvals by foreign
countries  may be longer or shorter  than that  required for FDA  approval,  and
regulatory  requirements  for foreign  countries may differ  significantly  from
those of the FDA. In some cases, products may not be exported until FDA approval
is  obtained.  We intend to rely on our  strategic  partners  both in the United
States and abroad for assistance with these matters.

     University  Conflicts of Interest.  Because Dr. Peck, our Chief  Scientist,
Dr.  Khan,  Dr.  Schatz,  Dr.  Hatch,  and Dr.  Schuster  are  employees  of the
University of Florida,  and other members of our  Scientific  Advisory Board
<PAGE>

     are employees of other universities, they, and consequently we, are subject
to statutes and guidelines relating to conflicts of interest. In order for Ixion
to  conduct  business  with the  university  employers  of these  members of our
Scientific Advisory Board (including  licensing University of Florida technology
or entering into research support  agreements or  subcontracts),  we must obtain
and  maintain  an  exemption  for any such  persons  acting as a  consultant  or
principal  investigator from the application of the Florida conflict of interest
statutes, and obtain approvals for outside activities for the others.

Scientific Advisory Board

         None of the members of the  Scientific  Advisory  Board is an employee.
Scientific  advisors spend only a small portion of their time on our affairs and
have commitments to other  institutions  that may conflict or compete with their
obligations to us.  Scientific  advisors  collaborate  with us on research grant
applications,  review  and  evaluate  our  research  programs,  advise  us about
technical matters,  consult on product planning and feasibility studies,  assist
in establishing  research  priorities,  provide guidance on clinical  evaluation
programs,  alert us to potential  collaborators,  advise us on new developments,
and recommend personnel.

         The  Scientific  Advisory  Board  meets  periodically  as a  group.  In
addition,  some  members  may meet in smaller  groups or  individually  with our
scientists.  Ixion has  confidentiality  agreements with each scientific advisor
providing that all  confidential  information  shall be our exclusive  property.
Scientific  advisors are not paid in cash,  but are  reimbursed  expenses,  and,
pursuant to the 1994 stock compensation plan, receive 5,000 restricted shares of
Ixion's  common stock upon joining,  and varying  amounts of  restricted  shares
annually (currently 2,250) thereafter.

         The current members of the Scientific Advisory Board are the following:

     Milton J.  Allison,  Ph.D.  Dr.  Allison has long been a pioneer in oxalate
research,  having discovered and named Oxalobacter  formigenes.  He is presently
Professor of  Microbiology,  Immunology,  and  Preventive  Medicine,  Iowa State
University and  Microbiologist  Emeritus of the National  Animal Disease Center,
USDA, Ames, Iowa. He earned his Ph.D. from the University of Maryland.

     Karl-E.  Arfors, Ph.D. Dr. Arfors was a director from 1998 to 2000, when he
resigned as a director to join our Scientific  Advisory Board.  From 1993 to the
present he has been  President  of  Experimental  Medicine,  Inc.,  a company he
founded.  Prior to that he held various scientific and executive  positions with
Pharmacia,  AB. He received his B. Sc. (fil kand),  his B.M. (med kand), and the
degree of Fil Lic (genetics) all from the University of Uppsala.

     Marguerite  Hatch,  Ph.D. Dr. Hatch is currently an associate  professor in
the Pathology Department of the University of Florida Medical School. Previously
she held  positions at the  Pediatrics/Nephrology  Division of the  Northwestern
University  College of Medicine  and  Director of the Kidney Stone Center at the
University of  California,  Irvine  College of Medicine.  Prior to that, she was
Director of the New York Kidney Stone Center,  SUNY Health Science  Center.  She
earned her B.Sc. with Honors from the University  College,  Dublin,  Ireland and
her Ph.D. in 1978 from Trinity College, Dublin, Ireland.

     Ross P. Holmes,  Ph.D.  Dr.  Holmes is an  associate  professor of surgical
sciences-urology  at Wake  Forest  University  School of  Medicine.  Dr.  Holmes
graduated  with a  bachelor's  of science  degree and PhD in  biochemistry  from
Australian National University, Canberra. Before joining Wake Forest University,
he was a senior food scientist and research  associate in the department of Food
Science at University of Illinois.  Holmes has been published extensively on the
topics of oxalate and hyperoxaluria.

         Saeedur R. Khan, Ph.D. Dr. Khan is Associate  Professor of Pathology at
the  University  of  Florida  College of  Medicine  and a leader in the field of
oxalate research and  molecular/microscopy.  His current and previous  committee
memberships  include the NIH Ad hoc Reviewer on Urinary  Stone  Grants;  member,
Center for the Study of Lithiasis and Pathological Calcification;  and member of
the Shands Stone Center Committee.  He earned his undergraduate degree from Agra
University  in Agra,  India,  his masters of science  degree  from the  Peshawar
University, Peshawar, Pakistan, and his Ph.D. from the University of Florida.
<PAGE>

     Desmond  Schatz,  M.D. Dr.  Schatz is the Medical  Director of the Diabetes
Center and Associate  Professor of Pediatric  Endocrinology at the University of
Florida  Medical  School.  He is a Diplomate of the American  Board of Pediatric
Endocrinology   and  a  member  of  the  American  Diabetes   Association,   the
International  Diabetes  Federation,  and the Immunology of Diabetes Society. He
received his  undergraduate  degree from St.  David's  College in  Johannesburg,
South Africa,  and his medical degree from the  University of the  Witwatersrand
Medical School in Johannesburg.

     Sheldon M. Schuster,  Ph.D. Dr. Schuster is Biotechnology  Program Director
for the  University of Florida's  biotechnology  program.  He is a member of the
American  Association for the Advancement of Science and the American Society of
Biological  Chemistry and Molecular Biology.  He was a co-founder of Restoragen,
Inc.,  and is a co-founder  and  chairman of the  scientific  advisory  board of
AquaGene,  Inc. He received  his B.S. in  biochemistry  from the  University  of
California,  Davis and his  Ph.D.  in  biochemistry  and  pharmacology  from the
University of Arizona.

     Hans  Wigzell,   M.D.,  D.Sc.  Dr.  Wigzell  is  presently  the  Rector  of
Stockholm's  famed  Karolinska  Institute.  He received  his medical  degree and
doctorate of science from Karolinska. From 1982 onwards, he has been Chairman of
the  Department  of  Immunology  at  Karolinska.  Among his many  honors was his
service as Chairman of the Nobel Committee of Karolinska from 1990 to 1992.


                Special Note Regarding Forward-Looking Statements

         This annual report on Form 10-KSB of Ixion Biotechnology,  Inc. for the
year ended December 31, 2001 contains certain forward-looking  statements within
the  meaning of Section  27A of the  Securities  Act of 1933,  as  amended,  and
Section  21E of the  Securities  Exchange  Act of 194,  as  amended,  which  are
intended to be covered by the safe harbors created  thereby.  To the extent that
such  statements  are  not  recitations  of  historical  fact,  such  statements
constitute  forward-looking  statements which, by definition,  involve risks and
uncertainties.  In  particular,  without  limitation,  statements  under Item 1,
Industry Description; Business Unit: Oxalate Control; Business Unit: Stem Cell /
Diabetes;  Licensed  Technology;  Competition;  Government  Regulation;  Item 2,
Description  of  Property,   Item  5,  Market  for  Common  Equity  and  Related
Stockholder Matters, and Item 6, Management's Discussion and Analysis or Plan of
operations,  contain forward-looking  statements.  Where, in any forward-looking
statement,  Ixion  expresses an  expectation  or belief as to future  results or
events,  such  expectation  or belief is expressed in good faith and believed to
have  reasonable  basis,  but there can be no  assurance  that the  statement of
expectation or belief will result or be achieved or accomplished.

         Statements  in this report  regarding  the dates on which we anticipate
commencing  clinical  trials  or  filing  for  regulatory  approval,  constitute
forward-looking  statements  under the federal  securities laws. Such statements
are subject to risks and  uncertainties  that could  cause the actual  timing of
such clinical trials or filings to differ materially from those we project. With
respect to such dates, we have made assumptions regarding, among other things,

          o    the successful and timely completion of preclinical tests,
          o    the approval of investigational new drug applications for each of
               our drug candidates by the FDA,
          o    the  availability of a simplified  application way to seek market
               clearance from the FDA for our molecular diagnostic test,
          o    the availability of adequate clinical supplies,
          o    the absence of delays in patient enrollment, and
          o    the availability of the capital  resources  necessary to complete
               the preclinical tests and conduct the clinical trials.

         Our ability to commence clinical trials or file for regulatory approval
on the dates  anticipated is subject to risks.  You should not rely on the dates
on which we anticipate filing regulatory approval or commencing clinical trials.
<PAGE>

         Statements regarding our research and development plans also constitute
forward-looking statements.  Actual research and development activities may vary
significantly from the current plans depending on numerous factors including

o changes in the costs of such activities from current estimates,  o the results
of the  programs,  o the results of clinical  studies  referred to above,  o the
timing of regulatory submissions, technological advances, o determinations as to
commercial potential, and o the status of competitive products.

         All of the above estimates are based on the current expectations of our
management  team,  which  may  change  in the  future  due to a large  number of
potential events, including unanticipated future developments.

         The  following  factors are factors that could cause actual  results or
events to differ  materially from those  anticipated,  and include,  but are not
limited  to:  general  economic,   financial  and  business  conditions;   labor
difficulties;  competition for customers in the biotechnology and pharmaceutical
industries;  the costs of research and  development  of chemical  compounds  and
products; and changes in and compliance with governmental regulations.

Item 2.  Description of Property.

         We lease approximately  11,000 square feet of equipped laboratory space
and office space at 13709 Progress Blvd.,  Alachua,  Florida.  In March 2002, we
agreed to a three year  extension of our lease,  including the addition of 1,100
additional  square feet of  laboratory  space.  The lease now expires in October
2005. The building  housing our offices and labs also has common space available
for  conference  rooms and break rooms,  which are included in the rent.  Annual
expenses  for 2001,  including  repayment  of funds  provided  by the lessor for
tenant improvements and an emergency generator, were approximately $172,000.

         We are developing a small-scale process development facility in our lab
suite to produce  preclinical  quantities  of our Oxf  Monitor  and small  scale
quantities of IxOC-2,  our oxalate control product.  Commercial scale production
will be subcontracted to contract manufacturers.

         We  have  a  graduate  membership   agreement  with  the  Biotechnology
Development Institute under which we have access to specialized  facilities such
as animal rooms,  and additional  small-scale  fermentation  capabilities.  As a
graduate  member,  we may  also use the  specialized  equipment  located  in the
centralized  instrument  lab in the  Biotechnology  Development  Institute at no
extra cost, and we may use the services of the  University's  Core  Laboratories
including the Recombinant  Protein Expression Core, the Flow Cytometry Core, the
Protein  Chemistry Core, and the Electron  Microscopy Core at a special graduate
membership rate. Our graduate  membership also allows us use of the University's
T-1  connection  to the  Internet,  which also  supports  e-mail for many of our
employees.

Item 3.  Legal Proceedings.

         We are not a party to any  legal  proceedings  and are not aware of any
threatened  litigation or regulatory  action that could have a material  adverse
effect on our business, financial condition, or results of operations.

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

         There were no matters  submitted  to a vote of the  Company's  security
holders during the fourth quarter of the Company's fiscal year.

                                     Part II

Item 5.  Market for Common Equity and Related Stockholder Matters.
<PAGE>

Unregistered Sales of Securities

         Set forth below is  information  as to securities  sold by Ixion within
the past three years that were not  registered  under the Securities Act of 1933
(the "Act"). No underwriters were involved in any of the sales, so there were no
underwriting discounts or commissions.  All outstanding securities are deemed to
be  restricted  securities  for  the  purposes  of  the  Act.  All  certificates
representing  our  issued  and  outstanding   restricted  securities  have  been
properly-legended  and  we  have  issued  "stop  transfer"  instructions  to our
transfer agent with respect to such securities,  which legends and stop transfer
instructions are presently in effect unless such securities have been registered
under the Act or have been transferred pursuant to an appropriate exemption from
the registration provisions of the Act.

         Restricted  shares of common  stock have been  issued to members of the
board of directors,  members of the Scientific Advisory Board, and employees and
consultants under our Stock Compensation Plan as follows:

         In July  of  1999,  22,400  shares  (1,000  shares  to  each  of  three
         directors,  5,000 shares to each of two newly-elected directors,  1,000
         shares to each of six members of the  Scientific  Advisory  Board,  and
         3,400 shares to employees  and officers  for  services,  in  aggregate,
         valued at  $89,600 (a portion  of which is  unearned  compensation)  or
         $4.00 per share;

         In January,  March,  June and  December of 2000,  an aggregate of 1,493
         shares to our Associate Director of Research,  Diabetes  Division,  for
         services,  in the  aggregate,  valued at $5,972 (a  portion of which is
         unearned compensation) or $4.00 per share;

         In August,  2000 25,000 shares (1,000 shares to each of five directors,
         5,000 shares to a newly-elected director, 1,000 shares to each of seven
         members of the Scientific Advisory Board, and 8,000 shares to employees
         and officers for services, in aggregate,  valued at $100,000 (a portion
         of which is unearned compensation) or $4.00 per share;

         From  September to December of 2000,  20,940  shares to  employees  and
         officers and 5,000 shares to a newly-appointed member of the Scientific
         Advisory  Board for  services,  in  aggregate,  valued at  $103,760  (a
         portion of which is unearned compensation) or $4.00 per share;

         From April to June of 2001,  250 shares to employees for  services,  in
         aggregate,   valued  at  $1,000  (a  portion   of  which  is   unearned
         compensation) or $4.00 per share;

         In July and December  2001,  1,260 shares to a consultant  for services
         valued at $5,040 (a portion of which is unearned compensation) or $4.00
         per share; and

         In August 2001,  38,400 shares (2,500 shares to each of five directors,
         6,500 shares to a newly-elected director, 2,250 shares to each of eight
         members of the Scientific Advisory Board, and 1,400 shares to employees
         and officers for services, in aggregate,  valued at $153,600 (a portion
         of which is unearned compensation) or $4.00 per share;

We  issued  the above  securities  without  registration  in  reliance  upon the
exemption  provided  by Section  4(2) of the Act as a  transaction  to a limited
number  of  sophisticated  investors  which did not  involve a public  offering,
general  solicitation,  or general  advertisement and the exemption  provided by
Rule 701 promulgated under the Act.

         On April 16, 1999, we entered into an agreement with Q-Med,  AB (publ),
a biotechnology  company with  headquarters  and operations in Uppsala,  Sweden.
Pursuant to this agreement, as amended, we issued a total of 3,900,000 shares of
restricted  common  stock from July 1999 through  July 2000 for  $7,800,000,  or
$2.00  per share to Q-Med,  AB (publ)  and  Qvestor,  LLC,  a  Delaware  limited
liability  company and a wholly-owned  subsidiary of Q-Med AB (publ).  We issued
the  above  securities  without  registration  in  reliance  upon the  exemption
provided by Section 4(2) of the Act as a transaction  to a single  sophisticated
corporate investor that did not involve a public offering, general solicitation,
or general  advertisement  and in  reliance  on the  exemption  provided  by the
provisions of Regulation S.
<PAGE>

In July of 2000,  257,192 shares of common stock were issued to the chairman and
chief  executive  officer,  the president and chief  financial  officer,  and an
employee,  in satisfaction of $1,028,768 in deferred fees and salaries, or $4.00
per share,  in connection  with the closing of the Q-Med  transaction  discussed
above. We issued the above securities without  registration in reliance upon the
exemption  provided  by Section  4(2) of the Act as a  transaction  to a limited
number  of  sophisticated  investors  that did not  involve  a public  offering,
general solicitation, or general advertisement.

At various dates between November 6, 1995, to August 1, 2000, we issued warrants
to purchase an aggregate of 20,672  shares of  restricted  common  stock,  at an
exercise  price of $2.00 per share,  expiring  August 31, 2000, to an accredited
investor and to the University of Florida Research Foundation. All such warrants
were exercised on August 31, 2000.  Pursuant to the exercise of those  warrants,
we issued  20,672  shares  of  restricted  common  stock,  18,672  shares to The
University of Florida  Research  Foundation  and 2,000 shares to the  individual
accredited  investor for total  consideration  of $41,440 or $2.00 per share. We
issued the above securities without  registration in reliance upon the exemption
provided  by Section  4(2) of the Act as a  transaction  to a limited  number of
sophisticated  investors  that  did  not  involve  a  public  offering,  general
solicitation, or general advertisement.

Registered sales of securities:

         In December,  1997, we commenced the public  offering of 400,000 units,
for an aggregate of $4,000,000. Each unit consisted of one share of common stock
and 0.25  charitable  benefit  warrant.  Each whole  charitable  benefit warrant
entitled  someone to purchase one share of common stock at a price of $20.00 per
share. On December 10, 1998, we extended the offering through December 10, 1999,
and thereafter through March 31, 2000.

         In early 1999, we  temporarily  suspended  the offering,  converted the
securities  offered  from units to shares,  retroactively  reduced the  offering
price from $10.00 per unit to $4.00 per share,  and withdrew  250,000 shares and
all unsold charitable benefit warrants from  registration.  We also adjusted the
exercise price for outstanding charitable benefit warrants from $20 per share to
$8 per share and  increased  the number of shares  purchasable  upon exercise of
those  warrants  from 8,605  shares to 21,513  shares.  As a result,  a total of
51,630 additional shares were issued to purchasers in the public offering for no
additional consideration.

         During  the  offering,  we sold a total of  129,000  shares  and 21,513
charitable benefit warrants. We received proceeds of $516,000 in connection with
the public  offering.  Total  offering costs of $124,680 were offset against the
proceeds of the offering We sold the securities directly, except when sales were
to Florida  residents,  in which case sales were made through Unified Management
Corporation,  a Florida  registered  broker dealer. No payments were made to our
directors or officers, or to their associates in connection with the offering.

         The net  proceeds  from the  offering  were used  entirely  to fund our
operations during 1998, 1999, and 2000.

         In  September  1996,  the Company  completed  the private  placement of
$787,270 in Convertible Unsecured Notes due 2001. The private placement provided
investors  with the  option of either  10%  Convertible  Unsecured  Notes  ("10%
Notes") or Variable  Conversion  Rate  Convertible  Unsecured  Notes  ("Variable
Notes").  The 10% Notes accrued  interest at the stated rate until maturity,  or
conversion,  and paid interest  quarterly.  The 10% Notes were  convertible into
shares of the  Company's  common  stock,  at any time  prior to  maturity,  at a
conversion  price of $4.20 per  share.  The  Variable  Notes  were  non-interest
bearing and were  convertible  into shares of the Company's common stock, at any
time prior to  maturity,  at variable  conversion  prices  ranging from $4.20 to
$2.10.  The  variable  conversion  prices  were  based on the length of time the
investor held the notes prior to  conversion,  declining at the rate of $.10 per
quarter  commencing  November,  1996 from the initial conversion price of $4.20.
Offers to issue stock upon  conversion of the notes  pursuant to a  registration
statement on Form S-3 were made to holders of the notes commencing on August 29,
2001, and  terminating on October 3, 2001. As of December 31, 2001,  $650,262 of
the  outstanding  notes had been  converted into 288,936 shares of common stock,
$8,400  of  the  Variable  notes  remained  outstanding  pending  completion  of
documentation relating to conversion, and $128,608 were repaid by the company.
<PAGE>

Other:

         There is no public trading market for our securities.

         As of March 12, 2002,  there were  approximately  200  shareholders  of
record of our common stock.

         We have never  declared or paid any cash  dividends on our common stock
and do not  intend  to pay  any  cash  dividends  on our  common  stock  for the
foreseeable future.

Item 6.  Management's Discussion and Analysis or Plan of Operations

         The following  discussion  and analysis  should be read in  conjunction
with the financial  statements and the related notes thereto included  elsewhere
in this report.  This report  contains  forward-looking  statements that involve
risks and  uncertainties.  Our actual results may differ  significantly from the
results discussed in the  forward-looking  statements.  Factors that might cause
such a difference  include,  but are not limited to, those discussed in "Special
Note Regarding Forward-Looking Statements."

Overview

Economic and Industry Outlook

         Even in light  of the  events  of  September  11,  2001  U.S.  economic
activity  increased in 2001,  as reflected by an increase in the annual level of
GDP of about 1.2%. The National  Bureau of Economic  Research  (NBER) declared a
recession  had begun in March  2001.  Yet,  according  to the Bureau of Economic
Analysis,  an "upturn in real GDP growth"  occurred during the fourth quarter of
2001 and many economists believe there are signs that the "end of the recession"
is beginning or even that no recession as generally  defined actually  occurred.
But,  economists also feel that the recovery process will be slow throughout the
year 2002.  Projections also abound for a strong dollar in the coming year, with
the dollar appreciating more than most other currencies early in 2002.

     A survey by The International Monetary Fund in December 2001 indicated that
the  effects  of the  terrorist  attacks of  September  11,  2001 were  probably
magnified  by  a  global  economic   downturn.   Indications  are  that  "global
macroeconomic"  situations  will  show a  negative  effect  in the  short  term.
Long-term  effects of the attacks are  difficult  to  determine at this stage as
reflected by the numerous conflicting economic projections.

     The  biotechnology  industry is part of the broader health care industry in
the United States,  which accounts for  approximately 14% of the country's gross
domestic product,  or approximately $1 trillion.  The biotechnology  industry is
financed largely by follow-on  offerings and the public sector. Even in light of
the  above-mentioned  economic  factors,  the industry managed to raise over $14
million  in 2001.  According  to Ernst  and  Young  LLP's  Annual  Biotechnology
Industry Reports,  total revenues for the industry have been steadily increasing
since 1995, ending 2001 with $25 billion. The biotechnology  industry ended 2001
with  a  total  of  almost  1,400  companies,  174,000  employees  and a  market
capitalization  of more than $330 billion.  Annual  product  approvals have been
steadily increasing, since 1997, but adequate funding for approval agencies will
be necessary to keep pace with the growing  number of products in the  pipeline.
The National  Institutes  of Health  ("NIH") has estimated a budget of over $1.5
billion in 2002 for cystic  fibrosis,  kidney  disease,  diabetes  and stem cell
research, an increase of 14% over 2001.

         Continued  uncertainty  in the public  markets  will most likely have a
negative impact on total biotechnology investment from all sources in the coming
year.

The Company

         We were  incorporated  in 1993 to focus on the  treatment  of metabolic
disorders;  however, operations did not commence until 1995. Since July 2000 our
emphasis  has been mainly on product  development.  We have not yet received any
material revenues from the sale of products. We do not expect any of our drug or
device product
<PAGE>

     candidates to complete the process of  regulatory  approval in the US prior
to 2004;  however,  our oxalate product,  IxOC-2,  may be eligible  (assuming an
appropriate  outcome  of the Phase I/II  trial  scheduled  for 2002) for sale in
Europe  on a "named  patient"  basis by the end of  2002.  We also  plan to seek
significant additional equity investment from institutional investors commencing
at the end of the first quarter of 2002.

          We expect to continue to incur  substantial  research and  development
          costs resulting from

          o    ongoing product development programs;
          o    expansion of current and new research and  development  programs;
               and
          o    manufacturing of products for use in clinical trials, preclinical
               and clinical testing of our products,  and ultimately for sale in
               Europe.

          We also  expect that  operating,  general  and  administrative  costs,
          including

          o    costs of additional administrative personnel,
          o    legal and  regulatory  costs  necessary  to  support  preclinical
               development and clinical trials, and
          o    costs  associated  with the  creation  of a  marketing  and sales
               organization, if warranted,

will increase in the future, assuming we can finance the increased requirements.
Accordingly, we expect to incur operating losses for the foreseeable future.

         Our operating  expenses will depend on several  factors,  including the
pace of research and development.  Research and development expenses will depend
on the progress and results of our product development efforts,  which we cannot
predict. We may sometimes be able to control the timing of development  expenses
in part by accelerating or decelerating  preclinical  testing and clinical trial
activities,  and other research  activities.  As a result of these  factors,  we
believe that  period-to-period  comparisons in the future may not necessarily be
meaningful.

Results of Operations

Years Ended December 31, 2001 and 2000
<TABLE>
                                   <S>                              <C>                  <C>              <C>

                                                                                                        Percent

                                                                    2001                2000            Change

                                Revenues:                       $    231,740       $     403,782          -42.61%
                                Operating Expenses:               (3,246,104)         (1,808,028)          79.54%
                                Other Income (Expense)                26,862             (43,101)        -162.32%
                                                               ---------------     ---------------    ------------
                                Net Loss                        $ (2,987,502)       $ (1,447,347)         106.41%
</TABLE>

         Total  revenues,  which are  primarily  funds  awarded under  National
Institutes  of Health  ("NIH")  research  grants,  decreased  by almost 43% from
$403,782  for the year ended  December  31, 2000 to $231,740  for the year ended
December  31,  2001  mainly as a result of the  delay of  funding  under new NIH
grants and completion of the following three research contracts:

          o    "Islets from Islet Progenitor/Stem Cells for Implantation";
          o    "Oxalobacter Formigenes Diagnostic Kit Development"; and
          o    "Coating of Urinary Protheses to Prevent Encrustation";

         We expect revenue to begin to increase in 2002 because of

          o    the commencement of funding in early 2002 under:

<PAGE>

          o    A  two-year  NIH  Phase II  Small  Business  Technology  Transfer
               ("STTR") grant entitled  "Enteric  Elimination and Degradation of
               Oxalic  Acid"  (awarded  in 2001)  for a total  of  approximately
               $500,000;

          o    A  two-year  NIH  Phase II  Small  Business  Innovative  Research
               ("SBIR") grant entitled  "Digestion of Food Oxalate"  (awarded in
               2001) for a total of approximately $783,000; and

          o    A six-month NIH Phase I SBIR grant entitled "Differentiating Bone
               Marrow Stem Cells To Cure Diabetes" for $99,000.

[GRAPHIC OMITTED]

                    Comparison of G&A Expenses 2001 vs 2000

                                                2001                2000
                                             _________           _________
Personnel-Related                             517,143             288,986
Professional                                  117,187              69,263
Rent & Utilities                               30,716              21,654
Advertising                                    11,783              20,297
Consultants                                     1,400              37,309
Office                                         46,579              27,583
Capital raising                                69,827                 935
Other G&A                                     143,298             132,303
                                             ________            ________
                                              937,933             598,330


         Operating,  general,  and  administrative  expenses  increased 56% from
         $598,330 for the year ended  December 31, 2000 to $937,933 for the year
         ended December 31, 2001. These increased expenses reflect:

          o    increased personnel and related expenses;
          o    increased professional fees;
          o    increased rental space and associated utilities usage;
<PAGE>

          o    increased general office expenses;
          o    increased capital-raising efforts; and
          o    support of increased research activities;

          offset  somewhat  by  a  reduction  in  advertising,   consulting  and
          travel-related expenses.

         Administrative  expenses as a percentage  of total  operating  expenses
  declined  from 33% for the year ended  December  31,  2000 to 29% for the year
  ended December 31, 2001.

         As we continue to expand our research and  development  activities  and
  commence   with   clinical   trials  in  2002,   we  expect  our  general  and
  administrative  expenses  will  continue to increase  reflecting  a concurrent
  demand for increased administrative support.

[GRAPHIC OMITTED]

                    Comparison of R&D Expenses 2001 vs. 2000

                                                 2001             2000
                                               _______          _______
Personnel-related                              708,237          399,804
Consultants & Subs                             425,052          356,771
Supplies and animal costs                      541,704          172,333
Rent & Utilities                               158,232          100,413
Deprec & Amort                                  98,297           63,946
Clinical & pre-clinical                         91,207                0
Regulatory & quality                            96,363                0
Other misc R&D                                 189,079           116,431
                                               _______           _______
                                              2,308,171        1,209,698


          Research and development expenditures consist primarily of:

               o    payroll-related   expenses  of  research   and   development
                    personnel;
               o    laboratory and animal maintenance and supplies;
               o    laboratory rent and associated utilities;
               o    depreciation on laboratory equipment;
               o    development activities;
               o    clinical and pre-clinical expenses;
               o    payments for sponsored research;
               o    scientific advisors fees;
               o    regulatory consultants fees;
               o    interest on research and development equipment; and
               o    amortization of capitalized patent costs.

          Research and  development  expenses  increased 91% from $1,209,698 for
the year ended  December 31, 2000 to $2,308,171  for the year ended December 31,
2001.  These  increased  expenses  reflect the  intensified  pace in  laboratory
activities and include:

               o    increased  laboratory  personnel  and  the  related  payroll
                    expenses of additional personnel;
               o    increased  consultants' and subcontractors' fees utilized to
                    facilitate  preparations for clinical  trials,  and to carry
                    out studies off-site;
<PAGE>

               o    increased laboratory-related supplies and expenses necessary
                    to carry out planned laboratory operations;
               o    increased   laboratory   space  and   associated   utilities
                    necessary  to  house  additional  personnel  and  laboratory
                    equipment;
               o    increased depreciation on new laboratory equipment;
               o    increased amortization on newly-issued patents;
               o    increased clinical and pre-clinical activities;
               o    increased   regulatory   activities  related  to  regulatory
                    qualification  for  planned  clinical  trials;
               o    increased  activity  related  to  installation  of a quality
                    system; and
               o    miscellaneous research and development expenses.

         We expect our research and development expenses to continue to increase
in  2002  due to an  increase  in the  scale  of  operations,  the  addition  of
regulatory and quality assurance personnel, the planned commencement of clinical
trials, and the receipt of the research grants referred to above.
<PAGE>

[GRAPHIC OMITTED]

            Comparison of Interest Income and Expenses 2001 vs. 2000

                                                 2001             2000
                                               ________         ________
Interest Income                                 88,553            83,919
Interest Expense                               (61,691)         (127,096)


         Interest  expense  decreased  51%  from  $127,096  for the  year  ended
December 31, 2000 to $61,691 for the year ended  December 31, 2001 due primarily
to the  maturity of $787,720 of our  convertible  unsecured  notes in  September
2001, and to the re-payment of the officers'  bridge loans and the conversion of
deferred  administrative  fees and salaries in mid 2000. Interest expense should
increase in 2002 under  financing  arrangements  for the  purchase of office and
laboratory equipment.

         Interest income increased 5.5% from $83,919 for the year ended December
31, 2000 to $88,553 for the year ended  December 31, 2001 due to the  investment
of cash in excess of operating needs. Interest income may decrease in 2002 as we
utilize cash.

Liquidity and Capital Resources

         For the fiscal year ended  December 31, 2001, we had deficit cash flows
from  operations of  $2,506,042  compared to deficit cash flows of $1,125,566 in
fiscal  2000.  The  increased  use of cash  relates  to the  increased  scale of
operations without increased revenues.

         Cash flows from investing activities for the fiscal year ended December
31,  2001 were a net outflow of  $1,917,621  compared to outflows of $298,000 in
fiscal 2000.  Beginning in fiscal 2001, we invested excess cash in vehicles with
greater than 90-day maturities and thus began to classify these investments from
cash and cash equivalents to short term investments. Investments in this account
approximated  $1.7m at December  31, 2001 and will be  liquidated  as we require
cash to fund operating  needs.  We plan to purchase at least $500,000 of capital
laboratory equipment and improvements in 2002.

         Annual expenses during 2001 for our current lease,  were  approximately
$161,000,  compared  to  $112,000  for 2000.  Additionally,  repayment  of funds
provided  by  the  lessor  for  tenant  improvements  and an  emergency  back-up
generator,  were  approximately  $8,500 in 2001.  We expect  that  annual  lease
expenses  will  increase  to a  minimum  of  $173,000  for 2002 as a  result  of
additions to our rented facilities and an increase in rental rates.

         For the fiscal year ended  December 31, 2001, we had  $3,224,695  total
cash flows from financing activities compared to $3,561,483 in fiscal 2000. Both
years reflect cash proceeds received from sales of stock to Q-Med, AB ("Q-Med"),
our majority  shareholder.  In July 2001, we received the  remaining  $3,353,303
which was  called for in our  agreement  with  Q-Med for the prior  issuance  of
stock.  The  $3,353,303  received  from Q-Med is being  used to fund  continuing
operations and our planned expansion.
<PAGE>

         At December 31, 2001, we have $961,310 in cash and cash equivalents and
$1,747,792 in short-term investments.  Until required for operations, our policy
is to invest any excess cash  reserves in bank  deposits,  money  market  funds,
certificates of deposit,  commercial  paper,  corporate notes,  U.S.  government
instruments and other investment-grade quality instruments.

         In November  2001,  we entered  into a funded  research  program with a
university to carry out studies in connection with our islet stem cell research.
The  agreement  calls for us to provide  funding for the  project  whose term is
November  2001 through  November  2002.  We were  required to pay $130,000  upon
execution of the agreement, twelve monthly payment of $32,500 beginning December
2001 and additional payments for purchases of certain supplies and equipment. As
no amounts  had been paid at  December  31,  2001,  we accrued a  liability  for
$187,000  representing  the amounts due. This amount was paid in cash in January
2002.

        A summary of grant funds received from the National Institutes of Health
during the year 2001 follows

o                 In  September  1999 we  received a two-year  award of $200,000
                  (covering  a  23-month  period)  from the NIH to  support  our
                  diabetes research entitled "Islets from Islet  Progenitor/Stem
                  Cells for Implantation".  We subcontracted  $25,000 under this
                  grant,  and have  utilized  the  entire  remaining  balance of
                  approximately $43,000 in 2001.

o                 In September 2000 we were awarded a six month NIH SBIR Phase I
                  grant for $100,000  entitled "M3 Receptor:  Diagnostic  Marker
                  for Sjogren's Syndrome". We subcontracted about $45,000 to the
                  University  of  Florida  and  drew on the  rest  of the  funds
                  available  through  the  expiration  of the grant in the first
                  quarter of 2001.

o                 Also in September, 2000, we awarded a six month NIH SBIR Phase
                  I grant for $99,958 and entitled "Coating of Urinary Protheses
                  to  Prevent  Encrustation".  We  drew on the  remaining  funds
                  available through September of 2001.

o                 Also in September,  2000, we were awarded a six-month NIH SBIR
                  Phase  I  grant,   for  $99,958  and   entitled   "Oxalobactor
                  formigenes  Diagnostic  Kit  Development".   We  drew  on  the
                  remaining funds available through September of 2001.

o                 In  September,  2001 NIH  awarded us a two-year  Phase II STTR
                  grant,  for  $500,000   entitled   "Enteric   Elimination  and
                  Degradation  of Oxalic Acid".  Funds are available  under this
                  grant for 2002.

o                 Also,  in September,  2001 NIH awarded us a two-year  Phase II
                  SBIR grant entitled "Digestion of Food Oxalate" for a total of
                  approximately  $783,000.  Funds are available under this grant
                  during 2002.

o                 In March 2002,  the NIH  awarded us a  six-month  Phase I SBIR
                  grant for $100,000 entitled  "Differentiating Bone Marrow Stem
                  Cells to Cure Diabetes."  Funds are available under this grant
                  during 2002.

o                 We have other grant applications pending.

<PAGE>

The  $3,353,303  received  from  Qvestor  in  July  2001 is  being  used to fund
continuing  operations  and the planned  expansion of the  Company.  The Company
expects to incur additional operating losses for the next several years and will
require additional  financing to continue its development and  commercialization
of products.  These  circumstances  raise  substantial doubt about the Company's
ability to continue as a going  concern.  Management  plans to seek  significant
additional equity investment from institutional  investors commencing at the end
of the  first  quarter  of  2002.

The  biotechnology  industry managed to increase  overall  investment in 2001 to
18.5% of total investments.  With the investment trend moving away from IT, more
investors are looking to  biotechnology  for investment  opportunities,  with an
8.2%  increase  in  terms of  percentage  of  investment  in  biotechnology.  In
addition,  investments in early-stage  companies rose to 62.1% in 2001. In light
of these positive trends, management plans to seek significant additional equity
investment  from  institutional  investors  commencing  at the end of the  first
quarter of 2002. If additional  financing is not available,  management believes
that the cash on hand and cash flows from operations  including  additional SBIR
grants,  during 2002,  should be sufficient to meet its cash requirements in the
coming  year.  If  the  funds  available  to the  Company  are  not  sufficient,
management believes that it can take certain actions such as undertaking certain
expense  reductions  to mitigate the impact.  Although  management  continues to
pursue these plans, there is no assurance that the Company will be successful in
obtaining  financing on terms acceptable to the Company or at all. The financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

Critical Accounting Policies

         Significant  accounting  policies  are  described  in  Note  1  to  the
financial statements.

         The  preparation  of financial  statements  and related  disclosures in
conformity with accounting  principles  generally  accepted in the United States
requires  management to make estimates and assumptions  that affect the reported
amounts of assets and  liabilities  at the date of the financial  statements and
revenue  and  expenses  during the period  reported.  The  following  accounting
policies require  management to make estimates and assumptions.  These estimates
and  assumptions  are reviewed  periodically  and the effects of  revisions  are
reflected  in the period that they are  determined  to be  necessary.  If actual
results  differ  significantly  from  management's   estimates,   the  financial
statements could be materially impacted.

Patents and Patents Pending.

         The Company  capitalizes  direct costs incurred in connection  with the
applications  for patents.  Amortization  of these costs over the estimated life
begins upon issuance or they are expensed  immediately if the patent application
is  rejected  or deemed  impaired,  which  affects  the amount of future  period
amortization  expense and possible  impairment  expense that we will incur.  The
determination of the value of such intangible assets requires management to make
estimates and assumptions that affect our financial statements.

Revenue Recognition.

         Grant revenues are  recognized  over the duration of the study to which
the grant relates as reimbursable costs are incurred.  Revenue related to future
performance  is deferred and recognized  when earned.  The Company has concluded
that its  revenue  recognition  policy is  appropriate  and in  accordance  with
generally accepted accounting principles and SAB No. 101.

Deferred tax assets.

         The  Company  has  provided  a full  valuation  reserve  related to its
substantial   deferred   tax   assets   generated   from  net   operating   loss
carry-forwards.  In the future, if sufficient  evidence of the Company's ability
to generate  sufficient future taxable income becomes apparent,  the Company may
be required to reduce its valuation allowances, resulting in income tax benefits
in the Company's statement of operations. Management evaluates the realizability
of the  deferred  tax  assets  quarterly  and  assesses  the need for  valuation
allowance quarterly.

Recent Accounting Pronouncements

         In June 2001, the Financial  Accounting Standards Board ("FASB") issued
Statement  of  Financial   Accounting  Standards  ("SFAS")  No.  141,  "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the  purchase  method of  accounting,  and  broadens  the criteria for
recording  intangible  assets  separate  from  goodwill.  Recorded  goodwill and
intangibles  will be  evaluated  against  this new  criteria  and may  result in
certain  intangibles  being subsumed into goodwill,  or  alternatively,  amounts
initially recorded as goodwill may be separately identified and recognized apart
from goodwill.  SFAS No. 142 requires the use of a non-amortization  approach to
account for purchased goodwill and certain intangibles. Under a non-amortization
approach, goodwill and certain intangibles will not be amortized into results of
operations,  but instead would be reviewed for  impairment  and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain  intangibles is more than its fair value. The provisions
of SFAS No. 141 applies to goodwill and  intangible  assets  acquired after June
30,  2001.  The  provisions  of SFAS No. 142 will be  adopted by the  Company on
January 1, 2002. The Company does not expect the adoption of these statements to
have material effect on its financial statements.
<PAGE>

     In  August  2001,  the  FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived Assets".  SFAS No. 144 addresses accounting
and reporting for the impairment and disposal of long-lived  assets  disposed of
in fiscal years  beginning after December 15, 2001. SFAS No. 144 supersedes SFAS
No. 121 and the  accounting  and reporting  provisions of Accounting  Principles
Board ("APB") Opinion No. 30, and amends  Accounting  Research  Bulletin ("ARB")
No. 51 to eliminate the exception to  consolidation  for a subsidiary.  SFAS No.
144 establishes a single  accounting model for long-lived  assets to be disposed
of by sale. The Company does not expect the adoption of this statement to have a
material effect on its financial statements.



Item 7.  Financial Statements.

         The financial statements of the Company are set forth beginning on page
F-1, immediately following the signature page of this report.

     Item 8. Changes in and  Disagreements  With  Accountants  on Accounting and
Financial Disclosure.

         None.

                                    Part III

     Item 9.  Directors,  Executive  Officers,  Promoters  and Control  Persons;
Compliance With Section 16(a) of the Exchange Act.

Item 10.  Executive Compensation.

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

Item 12.  Certain Relationships and Related Transactions.

         The  information  required under Part III, Items 9, 10, 11, and 12, has
been  omitted  from this  report  since  the  Company  intends  to file with the
Securities and Exchange Commission (the  "Commission"),  not later than 120 days
after the close of its  fiscal  year,  a  definitive  proxy  statement  prepared
pursuant  to  Regulation  14A,  which  information  is  hereby  incorporated  by
reference.

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

Exhibits  marked by  asterisk(s)  are included with this Report;  other exhibits
have been incorporated by reference to other documents filed by us with the SEC.
<TABLE>
<S>              <C>

Exhibit
Number                                   Description

2.1               Stock Purchase  Agreement with Qvestor,  LLC, dated July 14, 2000.(12)
3.1               Certificate of Incorporation of Registrant (1)
3.2               Certificate of Amendment to Certificate of Incorporation of Registrant (1)
3.3               Certificate of Amendment to Certificate of Incorporation of Registrant (1)
3.4               Bylaws of Registrant, as amended and restated (5)
3.5               Certificate of Amendment of Certificate of Incorporation, dated June 11, 1999 (8)
3.6               Certificate of Incorporation, as amended and restated (8)
4.1               Form of Registrant's Common Stock Certificate (2)
4.2               Form of Registrant's Charitable Benefit Warrant Certificate (5)
4.3               Charitable Benefit Warrant Agreement, dated as of December 10, 1997(5)
4.9               Warrant Agreement with Brandywine Consultants, Inc., dated June 23, 1997 (2)
4.10              Warrant Agreement with Brandywine Consultants, Inc., dated October 24, 1997 (2)
4.11              Amendment to Charitable Benefit Warrant Agreement dated September 30, 1999 (9)
</TABLE>

<PAGE>

<TABLE>
<S>              <C>

10.1              Agreement to Purchase Shares, dated as of October 10, 1994 (filed as exhibit 10.12 to Form
                  SB-2, File No. 333-334765, dated August 29, 1997)
10.2              Incubator License Agreement with the University of Florida Research Foundation, Inc., dated
                  June 26, 1995 (filed as exhibit 10.14 to Form SB-2, File No. 333-334765, dated August 29, 19971)
10.3              Amendment No. 1, dated July 31, 1996 to Incubator License Agreement with the University of
                  Florida Research Foundation, Inc. (filed as exhibit 10.15 to Form SB-2, File No. 333-334765,
                  dated August 29, 199)
10.4              Amendment No. 2, dated October 1, 1996 to Incubator License Agreement with the University of
                  Florida Research Foundation, Inc. (filed as exhibit 10.16 to Form SB-2, File No. 333-334765,
                  dated August 29, 199)
10.5              Amendment No. 3, dated November 7, 1996 to Incubator License Agreement with the University of
                  Florida Research Foundation, Inc. (filed as exhibit 10.17 to Form SB-2, File No. 333-334765,
                  dated August 29, 199)
10.6              Amendment No. 4, dated January 21, 1997 to Incubator License Agreement with the University of
                  Florida Research Foundation, Inc. (filed as exhibit 10.18 to Form SB-2, File No. 333-334765,
                  dated August 29, 199)
10.7              Patent License Agreement with Research Component with the University of Florida Research
                  Foundation, Inc. relating to Oxalobacter formigenes, dated January 11, 1995 (filed as exhibit
                  10.20 to Amendment 3 to Form SB-2, File No. 333-334765, dated December 9, 1997) (a)
10.8              Amendment No. 1 to Patent License Agreement with Research Component with the University of
                  Florida Research Foundation, Inc. relating to Oxalobacter formigenes, dated December 20, 1995
                  (filed as exhibit 10.21 to Amendment 3 to Form SB-2, File No. 333-334765, dated December 9,
                  1997)

10.9              Amendment No. 2 to Patent License Agreement with Research Component with the University of
                  Florida Research Foundation, Inc. relating to Oxalobacter formigenes, dated October 9, 1996
                  (filed as exhibit 10.22 to Amendment 3 to Form SB-2, File No. 333-334765, dated December 9,
                  1997) (a)
10.10             Patent License Agreement with Research Component with the University of Florida Research
                  Foundation, Inc. relating to Pancreatic Stem Cells, dated February 17, 1995 (filed as exhibit
                  10.23 to Amendment 3 to Form SB-2, File No. 333-334765, dated December 9, 1997) (a)
10.11             Amendment No. 1 to Patent License Agreement with Research Component with the University of
                  Florida Research Foundation, Inc. relating to Pancreatic Stem Cells, dated October 9, 1996
                  (filed as exhibit 10.24 to Amendment 3 to Form SB-2, File No. 333-334765, dated December 9,
                  1997) (a)
10.12             Patent License Agreement with Milton J. Allison, dated June 23, 1997. (filed as exhibit 10.25
                  to Amendment 3 to Form SB-2, File No. 333-334765, dated December 9, 1997) (a)
10.13             Sponsored Research Agreement with Genetics Institute, Inc., dated June 5, 1996 (filed as
                  exhibit 10.26 to Amendment 3 to Form SB-2, File No. 333-334765, dated December 9, 1997) (a)
10.14             Amendment No. 5 to Incubator License Agreement, dated July 19, 1997 (filed as exhibit 10.32 to
                  Form SB-2, File No. 333-334765, dated August 29, 1991)
10.15             Office Lease agreement with Echelon International  Corporation
                  dated as of September 18, 1998 (filed as exhibit 10.33 to Post
                  Effective Amendment No. 2 to Form SB-2, File No. 333-334765,

                  dated February 17, 1999)
10.16             Amendment No. 3 to Patent License Agreement with Research Component with the University of
                  Florida Research Foundation, Inc. relating to Oxalobacter formigenes, dated December 17, 1998
                  (filed as exhibit 10.34 to Post Effective Amendment No. 2 to Form SB-2, File No. 333-334765,
                  dated February 17, 1999) (a)
10.17             Agreement in Principle dated April 16, 1999, with Q-Med AB (filed as exhibit 10.39 to Form
                  10-QSB for the quarter ended June 30, 1999, dated August 15, 1999)
10.18             Amended and Restated Agreement in Principle dated September 7,
                  1999 with Q-Med, AB (filed as exhibit 10.42 to Form 10-QSB for
                  the quarter ended September 30, 1999, dated November 15, 1999)
</TABLE>

<PAGE>
<TABLE>
<S>               <C>

10.19             1994 Stock Option Plan, as amended. (filed as exhibit 10.44 to Form 10_KSB for the year ended
                  December 31, 1999, dated March 31, 2000)
10.20             Consulting Agreement with Ammon B. Peck, dated March 6, 2000. (filed as exhibit 10.45 to Form
                  10-QSB for the quarter ended March 31, 2000, dated May 15, 2000)
10.21             Research Agreement with the University of Florida dated September 9, 2000 (filed as exhibit
                  10.1 to Form 10-QSB for the quarter ended September 30, 2000, dated November 15, 2000). ()
10.22             Consulting Agreement with Ross P. Holmes, dated September 27, 2000 (filed as exhibit 10.3 to
                  Form 10-QSB for the quarter ended September 30, 2000, dated November 15, 2000). ()
10.23             First Amendment of Lease Agreement with Innovations Partners, Ltd., dated August 15, 2000
                  (filed as exhibit 10.48 to Form 10-KSB for the year ended December 31, 2000, dated March 31,
                  2001)
10.24             Stock Compensation Plan as amended March 30, 2001 (filed as exhibit 10.49 to Form 10-KSB for
                  the year ended December 31, 2000, dated March 31, 2001)
*10.25            Modification and Extension of Lease Agreement with Innovations Partners, Ltd., dated March 1,
2002

*10.26            BioHybrid Technologies 10% Convertible Promissory Bridge Note dated September 21, 2001
*10.27            Funded Research Agreement with the University Surgical Group of Cincinnati, dated
                  November 19, 2001 (a)

*11.1             Statement regarding computation of earnings per share (included as Note 1 in financial
                  statements)
23.1              Consent of Independent Accountants

99.1                   Employment Agreement, dated July 14, 2000, with Weaver H. Gaines. (1)
99.2      Shareholders Agreement, dated July 14, 2000, among  the Company, Q-Med, AB, Qvestor, LLC,
                            Ammon B. Peck, and Weaver H. Gaines. (1)
99.3      Director's Agreement with David C. Peck, dated July 14, 2000.  (1)
99.4      Voting Trust Agreement between the Company, certain shareholders, and Qvestor, LLC, dated
                            July 14, 2000. (12)
99.5                    Side letter, dated July 14, 2000, from Q-Med, AB.  (1)
99.6                    Agreement and Release with Ammon B. Peck, dated July 14, 2000. (1)
99.7                    Agreement and Release  with David C. Peck, dated July 14, 2000. (1)
99.8                    Agreement and Release with Weaver H. Gaines, dated July 14, 2000. (1)
99.9                    Agreement and Release with Theodore L. Snow, dated July 14, 2000. (1)
99.10       Press release dated July 17, 2000, regarding Q-Med, AB, Qvestor, LLC, and the Company.
               (1)

*99.11                Employment Agreement with Jon Heimer, dated January 2, 2002.

(a)           Confidential  information has been omitted from these document and
              filed  separately  with the  Commission  pursuant to a request for
              Confidential Treatment.

*        Filed herewith.
(1)      Incorporated by reference to Form 8-K, dated July 14, 2000.
</TABLE>




Item 13(b)   Reports on Form 8-K.

         No reports on Form 8-K were filed during the quarter ended December 31,
2001.

<PAGE>


                                   Signatures

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

                            Ixion Biotechnology, Inc.

                            By: /S/ Weaver H. Gaines

                            Weaver H. Gaines, Chairman
                            and Chief Executive Officer

         In accordance  with the  requirements  of the Exchange Act, this report
has been  signed by the  following  persons on behalf of the  Company and in the
capacities indicated on March 19, 2002.

SIGNATURE                                           TITLE

/S/ Weaver H. Gaines                      Chairman of the Board, Chief Executive
---------------------------
Officer, Weaver H. Gaines                 and Director

/S/ Kimberly A. Ramsey                    Vice President and Controller
---------------------------
Kimberly A. Ramsey

/S/ Bengt Agerup                           Director
Bengt Agerup

/S/ Hakan Edstrom                          Director
Hakan Edstrom

/S/David M. Margulies                      Director
David M. Margulies
---------------------------


/S/ Vincent P. Mihalik                     Director
Vincent P. Mihalik
------------------------------------


/S/ David C. Peck                          Director
David C. Peck
------------------------------

/S/ Thomas P. Stagnaro                     Director
------------------------------
Thomas P. Stagnaro


<PAGE>


Ixion Biotechnology, Inc.
Contents

                                                                  Page

Report of Independent Certified Public Accountants                 F-1

Financial Statements:

    Balance Sheet                                                  F-2

    Statements of Operations                                       F-3

    Statements of Stockholders' Equity                             F-4

    Statements of Cash Flows                                       F-5

    Notes to Financial Statements                                  F-7








<PAGE>




               Report of Independent Certified Public Accountants

The Board of Directors and Stockholders
Ixion Biotechnology, Inc.

In our opinion,  the  accompanying  balance sheet and the related  statements of
operations,  stockholders' equity and cash flows present fairly, in all material
respects,  the financial position of Ixion Biotechnology,  Inc. (the Company) at
December 31, 2001 and the results of its  operations  and its cash flows for the
years ended December 31, 2001 and 2000, in conformity with accounting principles
generally accepted in the United States of America.  These financial  statements
are the  responsibility of the Company's  management;  our  responsibility is to
express  an  opinion  on these  financial  statements  based on our  audits.  We
conducted our audits of these  statements in accordance with auditing  standards
generally  accepted in the United States of America,  which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussion  in Note 1 to the
financial  statements,  the  Company  has had  significant  losses and  requires
additional  financing  to continue  its  development  and  commercialization  of
products which raises substantial doubt about its ability to continue as a going
concern.  Management's  plans in regard to 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.

January 11, 2002
Tampa, Florida

PricewaterhouseCoopers LLP


<PAGE>
<TABLE>
Ixion Biotechnology, Inc.
Balance Sheet
December 31, 2001

                                     Assets
<S>                                                                                 <C>

Current assets:
  Cash and cash equivalents                                                           $   961,310
  Short-term investments                                                                1,747,792
  Accounts receivable net of allowance for doubtful accounts of $5,000                     71,198
  Prepaid expenses                                                                         43,717
  Other current assets                                                                      2,750
                                                                                      ___________
          Total current assets                                                          2,826,767

Property and equipment, net                                                               346,845

Patents and patents pending, less accumulated amortization of $28,444                     453,202
                                                                                      ___________
          Total assets                                                                $ 3,626,814


                      Liabilities and Stockholders' Equity

Current liabilities:
  Accounts payable                                                                    $    75,671
  Variable conversion rate convertible note payable                                         8,400
  Liability under funded research program                                                 187,000
  Accrued expenses                                                                        155,229
                                                                                       __________
          Total current liabilities                                                       426,300

Long-term liabilities:
  Liability under research agreement                                                       42,317
  Deferred rent, including accrued interest                                                28,720
                                                                                       __________
          Total long-term liabilities                                                      71,037
                                                                                       __________
          Total liabilities                                                               497,337
                                                                                       __________

Commitments (Notes 1,4,6,7,8,9 and 10)

Stockholders' equity:
  Common stock, $.01 par value; authorized 20,000,000, issued and
    Outstanding 7,185,477 shares                                                           71,855
  Additional paid-in capital                                                           11,801,208
  Accumulated deficit                                                                 (8,454,237)
  Less unearned compensation                                                            (289,349)
                                                                                       __________
          Total stockholders' equity                                                    3,129,477
                                                                                      ___________
          Total liabilities and stockholders' equity                                  $ 3,626,814

 </TABLE>

  The accompanying notes are an integral part of these financial statements.
                                      F-2


<PAGE>

<TABLE>
Ixion Biotechnology, Inc.
Statements of Operations
Years Ended December 31, 2001 and 2000

<S>                                                    <C>                         <C>

                                                        2001                        2000

Revenues:

  Income under research agreement                   $     3,913               $      2,450
  Income under research grants                          227,827                    401,332
                                                     __________                ___________
          Total revenues                                231,740                    403,782

Expenses:
  Operating, general and administrative                 937,933                    598,330
  Research and development                            2,308,171                  1,209,698
                                                     __________                ___________
          Total expenses                              3,246,104                  1,808,028

Other income (expense):
  Interest expenses                                     (61,691)                  (127,096)
  Interest income                                        88,553                     83,919
  Other income (expense)                                     -                          76
                                                     __________                ___________
          Other income net                               26,862                    (43,101)
                                                     __________                ___________
Net loss                                            $(2,987,502)               $(1,447,347)
                                                    ___________                ___________
Basic and diluted net loss per share                $     (0.43)               $     (0.30)
                                                     __________                ___________

Weighted average common shares-basic and diluted      6,951,446                  4,832,181
                                                     __________                ___________
</TABLE>

  The accompanying notes are an integral part of these financial statements.
                                      F-3



<PAGE>


<TABLE>

Ixion Biotechnology, Inc.
Statements of Stockholders' Equity
Years Ended December 31, 2001 and 2000

<S>                          <C>                      <C>           <C>             <C>         <C>            <C>

                                                       Additional                                 Unearned

                                 Common Stock            Paid-In    Accumulated        Notes        Compen-
                               Shares      Amount        Capital       Deficit       Receivable     sation      Total

Balance, December 31, 1999   2,926,044   $29,260    $  2,419,818   $(4,019,388)   $      -    $  (242,102)  ($1,812,412)

  Sale of stock, $4.00
   per share                      38,300       383         152,817             -           -             -    153,200
  Issuance of stock under
   stock compensation plan,
   $4.00 per share                50,940       509         203,251             -            -(203,760)          -
  Warrants exercised for
   common stock at $2.00
   per share                      20,672       207          41,233             -             -            -     41,440

  Stock issued for services        1,493        15           5,957             -             -            -      5,972

  Conversion of bridge loan
   payable to officer, $4.00
   per share                       4,650        47          18,554             -             -            -      18,601

  Conversion of deferred fees
   and salaries, $4.00 per
   share                         257,192     2,572       1,026,196             -             -            -    1,028,768
  Sale of stock, $2.00 per
   share                       3,562,500    35,625       7,089,375             -     (3,353,303)          -    3,771,697

  Amortization of unearned Compen-
   sation over service period         -         -               -              -             -       142,548      142,548

  Offering costs                      -         -             (820)            -             -            -         (820)

  Net loss                            -         -               -      (1,447,347)           -            -    (1,447,347)
                               _________    ______      _________      __________    __________     ________    __________
Balance December 31, 3000      6,861,791    68,618      10,956,381     (5,466,735)   (3,353,303)    (303,314)  1,901,647

  Issuance of stock under
   Compensation plan,
    4.00 per share                33,490       335         133,626             -             -       (133,961)
-
  Compensation on 17,500 stock
   Options issued to

    Non-employees                     -         -          58,800             -             -       (58,800)
-
  Stock issued for services       1,260        13           5,028             -             -            -         5,041

  Conversion of subordinated
   Notes payable at

    $2.10 per share             268,223     2,682         560,586             -             -            -        563,268

  Conversion of subordinated
   Notes payable at $4.20
    per share                    20,713       207          86,787             -             -            -         86,994

  Amortization of unearned
   Compensation over

    Service period                  -          -               -              -             -       206,726        206,726

  Receipt of shareholder

   Receivable                       -          -               -           -         3,353,303         -          3,353,303

  Net loss                          -          -               -      (2,987,502)           -          -         (2,987,502)
                             _________    _______     ___________    ___________    __________    _________     ___________


Balance, December 31, 2001   7,185,477    $71,855     $11,801,208    $(8,454,237)   $       -     $(289,349)
$3,129,477
</TABLE>
  The accompanying notes are an integral part of these financial statements.
                                      F-4

<PAGE>
<TABLE>

Ixion Biotechnology, Inc.
Statement of Cash Flows
Years Ended December 31, 2001 and 2000

<S>                                                                 <C>              <C>

                                                                     2001             2000

Cash flows from operating activities:

  Net loss                                                       $(2,987,502)     $(1,447,347)
  Adjustments to reconcile net loss to net cash used in
    Operating activities:

      Depreciation                                                    96,336           50,220
      Amortization                                                    11,030           16,110
      Amortization of debt discount                                   38,107           57,168
      Stock issued for services                                        5,041            5,972
      Stock compensation expense                                     206,726          142,548
      Increase in prepaid expense and other current assets           (10,706)         (44,142)
      (Increase) decrease in accounts receivable                     (69,918)          31,645
      Increase in deferred revenue                                        -             1,281
      Increase in accounts payable and accrued expenses               16,827           11,734
      Increase in liability under funded research program            187,000               -
      Increase in deferred fees and salaries                              -            84,726
      Decrease in deferred rent                                           -              (348)
      Increase (decrease) in interest payable                          1,017         (35,133)
                                                                  __________        _________
        Net cash used in operating activities                     (2,506,042)      (1,125,566)

Cash flows from investing activities:

  Purchase of property and equipment                                (135,018)        (246,430)
  Payments for patents and patents pending                           (48,123)         (51,570)
  Purchase of short-term investments                              (1,734,480)               -
                                                                  ___________      __________
        Net cash used in investing activities                     (1,917,621)        (298,000)

Cash flows from financing activities:

  Proceeds from issuance of common stock                           3,353,303        3,966,341
  Repayments of loans from officers                                       -          (396,400)
  Principal reductions in notes payable                             (128,608)          (7,638)
  Payment of deferred offering costs                                      -              (820)
                                                                   _________        _________
        Net cash provided by financing activities                  3,224,695        3,561,483

Net Increase (decrease) in cash and cash equivalents              (1,198,968)       2,137,917

Cash and cash equivalents at beginning of period                   2,160,278           22,361
                                                                  __________       __________
Cash and cash equivalents at end of period                        $  961,310       $2,160,278

</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-5


<PAGE>

<TABLE>

Ixion Biotechnology, Inc.
Statements of Cash Flows - Continued
Years Ended December 31, 2001 and 2000


<S>                                                                   <C>                <C>
                                                                      2001               2000


Supplemental disclosure of cash flow information:

  Cash paid during the year for:

  Interest                                                            $   19,882       $   77,188
                                                                      __________       __________

  Supplemental disclosure of noncash investing and Financing activities:

      Conversion of notes payable in exchange for 288,936 shares
        of common stock                                               $  650,262               -
                                                                      __________       __________
      Conversion of deferred fees and salaries for 257,192 shares
        of common stock                                               $        -       $1,028,768
                                                                      __________       __________
      Conversion of bridge loans payable to officers in exchange
        for 4,650 shares of common stock                              $        -       $   18,600
                                                                      __________       __________
      Common stock, stock warrants and stock options issued
        for services or technology                                    $    5,041       $    8,232
                                                                      __________       __________
      Common stock issued under Stock Compensation Plan               $  133,961       $  203,760
                                                                      __________       __________
      Stock options issued to non-employees under Stock Option Plan   $   58,800       $       -
                                                                      __________       __________
</TABLE>
  The accompanying notes are an integral part of these financial statements.
                                      F-6

<PAGE>

Notes to Financial Statements
Years Ended December 31, 2001 and 2000


1.       Organization and Business:

        Organization

     Ixion  Biotechnology,  Inc., a Delaware  corporation (the  "Company"),  was
     incorporated  on March  25,  1993 to focus on the  treatment  of  metabolic
     disorders.  The  Company  is  primarily  engaged  in  the  development  and
     commercialization of certain products related to these disorders.

        Q-Med Transaction

     On July 14, 2000, Qvestor, LLC ("Qvestor"),  a Delaware subsidiary of Q-Med
     AB (publ), a biotechnology company based in Uppsala,  Sweden,  exercised an
     option granted in April 1999 to acquire  3,337,500  shares of the Company's
     common  stock  for  cash of  $6,675,000  and a  world-wide,  non-exclusive,
     royalty free license of its  hyaluronic  acid  technology  for use with the
     Company's islet  technology.  Qvestor paid cash of $3,321,697 in July 2000.
     The balance of the  $6,675,000  cash purchase  price was paid in July 2001.
     From April 1999 through June 19, 2000,  Q-Med AB had  previously  purchased
     562,500  shares  of  common  stock  for a cash  price  per  share of $2.00,
     including  225,000  shares  in  2000.  Q-Med  group's  total  common  stock
     ownership of the Company is 3,900,000  shares,  or approximately 54% of the
     outstanding shares at December 31, 2001,  constituting a majority ownership
     of the Company.

        Basis of Presentation

     The accompanying  financial  statements have been prepared on a basis which
     assumes  that the  Company  will  continue  as a going  concern  and  which
     contemplates  the realization of assets and the satisfaction of liabilities
     and  commitments  in the  normal  course  of  business  and do not  reflect
     adjustments  that might  result if the  Company is unable to  continue as a
     going concern. The Company incurred a net loss of approximately  $2,987,500
     for the year ended  December 31, 2001,  and as of December 31, 2001,  had a
     total  accumulated  deficit of  approximately  $8,454,200.  The Company had
     deficit cash from operations of approximately $2,506,000 and $1,125,600 for
     2001 and 2000, respectively.

     The  approximately  $3,353,300  received from Qvestor in July 2001 is being
     used  to  fund  continuing  operations  and the  planned  expansion  of the
     Company.  The Company expects to incur additional  operating losses for the
     next  several  years as the  Company  prepares  for the  manufacturing  and
     marketing of its  products.  Management  believes that the cash on hand and
     cash flows from operations including  additional SBIR grants,  during 2002,
     will be sufficient to meet its cash requirements in the coming year. If the
     funds available to the Company are not sufficient, management believes that
     it can take certain actions such as undertaking  certain expense  reduction
     actions to mitigate the impact.  However,  should cash from additional SBIR
     grants and other services not be sufficient, there can be no assurance that
     management's  actions  will be  sufficient  to avoid a liquidity  shortfall
     during 2002.


<PAGE>
Notes to Financial Statements
Years Ended December 31, 2001 and 2000

2.       Significant Accounting Policies:

        Cash, Cash Equivalents and Short Term Investments

        The Company  considers all highly liquid  instruments with a maturity of
        three  months  or  less  at time  of  purchase  to be cash  equivalents.
        Short-term investments are accounted for in accordance with Statement of
        Financial   Accounting   Standards  No.  115,  "Accounting  for  Certain
        Investments in Debt and Equity  Securities".  The Company has classified
        its short-term  investments as held-to-maturity and has recorded them at
        cost  plus  accrued  interest  on the  Company's  balance  sheet,  which
        approximates   fair  value.   The  Company  limits  its  temporary  cash
        investments to domestic  obligations  rated P1/A1 or Aaa/AAA or above by
        Moody's   Investors'   Services   or   Standard  &  Poors   Corporation,
        respectively.  At  times,  such  investments  may be in  excess  of FDIC
        insurance  limits.  The Company has not  experienced any loss to date on
        these investments.

        Income Taxes

        Deferred income taxes are recognized for the tax  consequences in future
        years of differences between the tax bases of assets and liabilities and
        their financial  reporting amounts at each year end based on enacted tax
        laws and  statutory  tax rates  applicable  to the  periods in which the
        differences are expected to affect taxable income. A valuation allowance
        is provided  against the future  benefit of deferred tax assets if it is
        determined  that it is more likely than not that the future tax benefits
        associated with the deferred tax asset will not be realized.  Income tax
        expense is the tax  payable  for the  period  and the change  during the
        period in deferred tax assets and liabilities.

        Property and Equipment

        Property  and  equipment  are  stated  at  cost.  Gains  and  losses  on
        disposition are recognized in the year of the disposal. Expenditures for
        maintenance and repairs are expensed as incurred.

        Depreciation  is  computed  using  the  straight-line  method  over  the
        estimated lives of the assets (three - five years).

        Patents and Patents Pending

        Patents  and  patents  pending  consist  of  direct  costs  incurred  in
        connection  with the  applications  for patents.  Amortization  of these
        costs over the estimated life begins upon issuance of the patent or they
        will be expensed  immediately  if rejected.  At December  31, 2001,  the
        Company  has been issued  eight U.S.  patents,  two foreign  patents and
        purchased  another through the issuance of 1,000 shares of common stock.
        Patents are being amortized over 13-17 years.  The Company  periodically
        evaluates the  recoverability of intangibles when impairment  indicators
        exist. If impairment indicators exist,  management determines whether an
        impairment in value has occurred by comparing the estimated undiscounted
        cash flows from future  operations with the recorded values.  Management
        considers several  indicators in assessing  impairment  including trends
        and  prospects  as  well  as  the  effects  of   obsolescence,   demand,
        competition and other economic factors.


<PAGE>
Notes to Financial Statments
Years Ended December 31, 2001 and 2000

  2.    Significant Accounting Policies - Continued:

        Revenue Recognition

        The Company has received  funding from the U.S.  government and, in some
        cases  certain  corporations,  in  support  of  research  in return  for
        permitting  those  corporations  exclusive  review of  certain  research
        results for limited  time  periods.  Revenues  for 2001 and 2000 consist
        primarily of proceeds from Small Business  Innovative  Research  Program
        (SBIR) and Small Business  Technology  Transfer  Research  (STTR) grants
        from the National  Institutes of Health ("NIH") to fund various research
        projects.  Grant revenues are not contingent upon any specified  results
        of the studies.  Grant revenues are recognized  over the duration of the
        study to which the grant  relates as  reimbursable  costs are  incurred.
        Revenue  related to future  performance  is deferred and  recognized  as
        revenue when earned.

        Research and Development

        Research and development costs are charged to expense as incurred.

        Deferred Rent

        Deferred  rent  represents  a  portion  of the rent  payable  under  the
        Company's former facilities  license with the Biotechnology  Development
        Institute  ("BDI") and accrued  interest  thereon.  The deferred  amount
        bears interest at 12% on the outstanding  balance,  compounded annually.
        The Company will repay the  liability  through a 1% royalty on net sales
        of any products  developed  during its tenancy at the BDI,  such royalty
        not to exceed the outstanding balance.

        Stock Based Compensation

        The Company  applies APB Opinion No. 25 and related  Interpretations  in
        accounting for stock issued to employees  under this plan.  Compensation
        expense  resulting from stock options issued under the stock option plan
        (Note 6) is measured at the grant date based upon the difference between
        the exercise  price and the market value of the common stock.  All stock
        options  issued to  employees  during  2001 and 2000 were  granted at an
        exercise  price  equal  to the  market  value  at  the  date  of  grant.
        Stock-based   compensation   arrangements  involving  non-employees  are
        accounted for under Statement of Financial Accounting Standards No. 123,
        "Accounting  for  Stock-Based  Compensation"  ("SFAS 123").  The Company
        provides  the   disclosure   requirements   of  SFAS  123  for  employee
        arrangements.

        Net Loss Per Share

        Basic net loss per share is computed  using the weighted  average number
        of common shares outstanding for the period.  Diluted net loss per share
        is not  presented,  as the  effects of  including  potentially  dilutive
        securities in the computation is  antidilutive.  Common stock equivalent
        shares consist of stock options, warrants and convertible notes payable.
        For the years  ended  December  31,  2001 and 2000,  options to purchase
        281,850 and 115,500  shares of common stock,  warrants to purchase 6,000
        shares of common  stock,  and notes payable  convertible  into 4,000 and
        311,557  shares of common stock were  excluded from the  calculation  of
        earnings per share since their inclusion would be antidilutive.


<PAGE>
Notes to Financial Statements
Years Ended December 31, 2001 and 2000

  2.    Significant Accounting Policies - Continued:

        Use of Estimates

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

        Recent Accounting Pronouncements

        In June 2001, the Financial  Accounting  Standards Board ("FASB") issued
        Statement of Financial  Accounting Standards ("SFAS") No. 141, "Business
        Combinations" and SFAS No. 142, "Goodwill and Other Intangible  Assets".
        SFAS No. 141 requires  business  combinations  initiated  after June 30,
        2001 to be accounted for using the purchase  method of  accounting,  and
        broadens the criteria for  recording  intangible  assets  separate  from
        goodwill.  Recorded  goodwill and intangibles will be evaluated  against
        this new criteria and may result in certain  intangibles  being subsumed
        into goodwill, or alternatively,  amounts initially recorded as goodwill
        may be separately  identified and recognized  apart from goodwill.  SFAS
        No. 142 requires the use of a  non-amortization  approach to account for
        purchased  goodwill and certain  intangibles.  Under a  non-amortization
        approach,  goodwill and certain  intangibles  will not be amortized into
        results of operations,  but instead would be reviewed for impairment and
        written down and charged to results of operations only in the periods in
        which the  recorded  value of goodwill and certain  intangibles  is more
        than its fair value.  The  provisions  of SFAS No. 141 apply to goodwill
        and  intangible  assets  acquired after June 30, 2001. The provisions of
        SFAS No.  142 will be adopted  by the  Company  on January 1, 2002.  The
        Company  does  not  expect  the  adoption  of these  statements  to have
        material effect on its financial statements.

          In August  2001,  the FASB issued SFAS No.  144,  "Accounting  for the
     Impairment  or  Disposal  of  Long-Lived  Assets".  SFAS No. 144  addresses
     accounting  and  reporting  for the  impairment  and disposal of long-lived
     assets  disposed of in fiscal years beginning after December 15, 2001. SFAS
     No. 144 supersedes SFAS No. 121 and the accounting and reporting provisions
     of  Accounting   Principles  Board  ("APB")  Opinion  No.  30,  and  amends
     Accounting  Research  Bulletin ("ARB") No. 51 to eliminate the exception to
     consolidation  for  a  subsidiary.   SFAS  No.  144  establishes  a  single
     accounting  model for  long-lived  assets to be  disposed  of by sale.  The
     Company does not expect the  adoption of this  statement to have a material
     effect on its financial statements.


<PAGE>
Notes to Financial Statements
Years Ended December 31, 2001 and 2000


3.  Property and Equipment:

        Property  and  equipment  consists of the  following  as of December 31,
2001:

        Furniture and fixtures                               $   2,489
        Computer equipment                                      35,435
        Office equipment                                         3,163
        Leasehold improvements                                  20,713
        Laboratory equipment                                   493,789
                                                             _________
                                                               555,589
        Less accumulated depreciation                         (208,744)
                                                             _________
                                                              $346,845

4.       Notes Payable:

        In  September  1996,  the Company  completed  the private  placement  of
        $787,270  in  Convertible  Unsecured  Notes  due in  2001.  The  private
        placement  provided  investors with the option of either 10% Convertible
        Unsecured Notes ("10% Notes") or Variable  Conversion  Rate  Convertible
        Unsecured Notes  ("Variable  Notes").  The 10% Notes accrued interest at
        the  stated  rate  until  maturity,  or  conversion,  and paid  interest
        quarterly.  The 10% Notes were  convertible into shares of the Company's
        common stock,  at any time prior to maturity,  at a conversion  price of
        $4.20 per share. The Variable Notes were  non-interest  bearing and were
        convertible into shares of the Company's common stock, at any time prior
        to maturity,  at variable  conversion  prices ranging from $4.20 down to
        $2.10. The variable  conversion  prices were based on the length of time
        the investor held the notes prior to  conversion,  declining at the rate
        of $.10 per quarter commencing November 1996 from the initial conversion
        price of $4.20  which was  greater  than the market  value of the common
        stock  at the  date  of  issuance.  The  fair  value  of the  beneficial
        conversion  feature of $285,835 at  September  1996 was recorded as debt
        discount,  reducing  notes  payable and  increasing  additional  paid-in
        capital. The debt discount was amortized using the straight-line method,
        which approximated the effective  interest method,  over the term of the
        Variable  Notes and to the date of the deepest  discount.  During  2001,
        $650,262 of the outstanding  notes were converted into 288,936 shares of
        common stock and $128,608 were repaid by the Company. As of December 31,
        2001,  $8,400  of  the  Variable  Notes  remained   outstanding  pending
        completion of documentation relating to conversion.
<PAGE>

Notes to Financial Statements
Years Ended December 31, 2001 and 2000

5.  Income Taxes:

        The  components  of the  Company's  net  deferred  tax asset and the tax
        effects  of  the  primary  temporary  differences  giving  rise  to  the
        Company's deferred tax asset are as follows as of December 31, 2001:

        Net operating loss carryforward                     $ 3,400,000
                                                            ___________

        Deferred tax asset                                    3,400,000
        Valuation allowance                                  (3,400,000)
                                                            ___________

        Net deferred tax asset                              $       -
                                                            ___________

        Any tax benefits for the years ended December 31, 2001 and 2000 computed
        based on  statutory  federal  and state rates are  completely  offset by
        valuation  allowances  established since realization of the deferred tax
        benefits are not considered more likely than not.

6.       Stockholders' Equity:

        Common Stock Warrants

        On August  31,  2000,  18,672  shares of common  stock  were  issued for
        warrants  exercised by the University of Florida at a price of $2.00 per
        share (issued in partial  payment of rent for the  Company's  facilities
        pursuant to the License  Agreement  between  the  University  of Florida
        Research Foundation, Inc. and the Company).

        Also,  on August 31, 2000,  2,000 shares of common stock were issued for
        warrants exercised by an individual at a price of $2.00 per share.

        There were no common stock warrants issued during 2000 or 2001.

        Common stock warrants outstanding at December 31, 2001 are as follows:

        Number                Exercise Price                Expiration Date

        6,000                     $5.00             February 2002-October 2002


        As part of the Company's public offering commenced in December 1997, the
        Company sold units which consist of one share of common stock,  $.01 par
        value,  and a .25  Charitable  Benefit  Warrant.  Each whole  Charitable
        Benefit  Warrant  entitles  the holder to  purchase  one share of common
        stock at a price of $8 per share.  Four units were  required  to acquire
        one whole Charitable  Benefit  Warrant.  Approved  qualified  charitable
        organizations may exercise Charitable Benefit Warrants at any time until
        the expiration date (December 9, 2007, unless  extended);  holders other
        than approved qualified charitable organizations may not exercise except
        between  December 9, 2006 and December 9, 2007. The  Charitable  Benefit
        Warrants were detached from the common stock immediately on purchase. At
        December  31,  2001,  there  were  21,513  Charitable  Benefit  Warrants
        outstanding.


<PAGE>
Notes to Financial Statements
Years Ended December 31, 2001 and 2000


   6.   Stockholders' Equity - Continued:

        Stock Option Plan

        The Company has a stock option plan under which 500,000 shares of common
        stock are  reserved  for issuance  upon  exercise of options  granted to
        non-employee directors,  officers,  employees, members of the Scientific
        Advisory  Board and  consultants  of the  Company.  Options  granted  to
        members of the Scientific  Advisory Board  generally vest at the rate of
        25% at the end of each three-month period following the grant. All other
        options  generally vest at the rate of 20% per year and are  exercisable
        within ten years after date of grant. Activity under the Company's stock
        option plan is set forth below:

                                                               Exercise
                                                  Shares        Price

        Outstanding at December 31, 1999          173,500    $0.02-$10.00
          Granted                                 116,400        $4.00
          Exercised                                     -
          Forfeited                               (87,500)   $4.00-$10.00
          Canceled                                (86,900)   $4.00-$4.40
                                                  ________
        Outstanding at December 31, 2000          115,500    $0.02-$4.00
          Granted                                 166,350    $4.00-$4.40
          Exercised                                     -
          Forfeited                                     -
          Canceled                                      -
                                                  ________

        Outstanding at December 31, 2001          281,850    $0.02-$4.40



        The status of options outstanding at December 31, 2001 is as follows:

                      Weighted       Weighted
                      Average         Average           Number
        Shares     Remaining Life  Exercise Price     Exercisable

        2,000        2.67 years        $0.02             2,000
        3,500        3.42 years        $0.75             3,500
        8,000        4.45 years        $3.00             8,000
       72,500        7.59 years        $4.20            45,949
       24,500        8.47 years        $4.00            17,526
      171,350        9.43 years        $4.03             4,363
      _______                                           ______
      281,850                                           81,338



<PAGE>
Notes to Financial Statements
Years Ended December 31, 2001 and 2000

       6.       Stockholders' Equity - Continued:

        Stock Option Plan - Continued

        On April 1, 2001, the Company  granted  ten-year stock options under the
        stock  option  plan to  purchase  17,500  shares of  common  stock at an
        exercise price of $4.00 per share to members of the Company's Scientific
        Advisory  Board.  The  options  vest at a rate of 25% per  quarter.  The
        $58,800  fair  value  of  these   non-employee   options,   based  on  a
        Black-Scholes option pricing model, is included in unearned compensation
        to be  expensed  as the  options  vest.  As these  options  vest over 12
        months,  the Company  will be required to  re-measure  the fair value of
        these options at each reporting period prior to vesting and then finally
        at the vesting date of the options.

        Given the limited time period that the Company's stock has been publicly
        registered,  as well as the lack of  history  to  estimate  patterns  of
        exercise and option term, fair value disclosures required under SFAS No.
        123 are provided as a range from low to high for the  expected  term and
        volatility.  Fair  value is  estimated  using the  Black-Scholes  option
        pricing model and the following assumptions:

                                     2001              2000
                                Low       High     Low     High

        Discount Rate           4.09%     5.02%    6.16%   6.03%

        Volatility                50%       80%      30%    100%

        Option Life (Years)        3         9        5       9



        The  weighted  average  fair  value of  options  granted  to other  than
        non-employee  consultants  during  fiscal  year 2001 and 2000 was in the
        range of $1.50 to $3.27 and $1.52 to $2.90 per option, respectively. Had
        compensation cost for the Company's  stock-based  compensation plan been
        determined  based on the fair value at the grant dates for these  awards
        consistent with the method of SFAS 123, the Company's  reported net loss
        and loss per share for  fiscal  year  2001 and 2000  would  have been as
        follows:
                                                     Pro Forma
                                  Actual        Low             High

        2001 Net Loss           $2,987,502    $3,074,351     $3,176,418
        2001 Loss Per Share          (0.43)        (0.44)         (0.46)

        2000 Net Loss           $1,447,347    $1,476,263     $1,505,678
        2000 Loss Per Share          (0.30)        (0.30)         (0.31)



<PAGE>
Notes to Financial Statements
Years Ended December 31, 2001 and 2000


   6.   Stockholders' Equity - Continued:

        Stock Compensation Plan

        The Company  does not pay cash  compensation  to outside  members of the
        Board of Directors or to members of the  Company's  Scientific  Advisory
        Board. Accordingly,  the stock compensation plan reserves 250,000 shares
        of common stock to be issued to non-employee  directors,  members of the
        Scientific Advisory Board, officers, employees and consultants.

        New  outside  members  of the  Board or the  Scientific  Advisory  Board
        receive  5,000 shares upon  joining,  and all will receive  2,250 shares
        annually during the term of the stock  compensation  plan. Shares either
        vest upon  delivery or time of service.  For the shares  which vest over
        time of service,  unearned compensation  equivalent to the fair value at
        the date of grant is charged against  stockholders' equity and amortized
        over the service period to compensation expense.  Shares which vest upon
        delivery are recorded as compensation expense upon issuance.

        At December 31, 2001, a total of 209,083  shares had been granted  under
        the  stock  compensation  plan.   Compensation   expense  recognized  in
        connection  with such awards under the stock  compensation  plan for the
        years  ended  December  31,  2001 and 2000 was  $206,726  and  $142,548,
        respectively.  Total unearned compensation related to stock compensation
        plan awards was $289,349 at December 31, 2001 and will be  recognized as
        expense over future periods of service.

7.       Related-Party Transactions:

        Through 1999, the  Chairman/Chief  Executive  Officer and President made
        loans to the Company  pursuant  to the terms of bridge loan  agreements.
        Under these  agreements,  the Company  borrowed a total of approximately
        $90,000 in 1999. In March 2000, the officer  converted $18,600 principal
        amount of these loans into 4,650  shares of common  stock.  At the Q-Med
        closing  (Note 1),  $442,957 in bridge loans and accrued  interest  were
        repaid to the officers.  As of December 31, 2001, no bridge loans remain
        outstanding.

        Through  2000,  the  Company  deferred  the  payment of  salaries of the
        Chairman/Chief  Executive  Officer,  the  President  and the Senior Vice
        President/Chief Scientist pursuant to agreements between the Company and
        such  executives.   The  deferred  amounts  bore  interest,   compounded
        annually, at a rate established by the Board of Directors, and was reset
        annually at the rate on 30-year treasury bonds in effect on January 1 of
        any given year plus 1%.  The rate  during  2000 was 7.47%.  At the Q-Med
        closing, as a condition of the stock purchase  agreement,  $1,028,768 of
        these  deferred  fees and salaries due to officers  and  employees  were
        satisfied  through the issuance of 257,192  shares of restricted  common
        stock, of which 62,289 shares vested  immediately;  50% of the remaining
        194,903 shares vest on July 13, 2001, and 1/12 of the remaining  balance
        (approximately  8,120 shares) vest monthly  thereafter.  At December 31,
        2001, no fees or salaries have been deferred.
<PAGE>

Notes to Financial Statements
Years Ended December 31, 2001 and 2000

8.  Sponsored Research Agreement:

        On June 5, 1996,  the Company  entered into an agreement  with  Genetics
        Institute,   Inc.   ("GI")   relating  to  Islet  Producing  Stem  Cells
        Technology.  Under the agreement,  GI sponsored  certain research by the
        Company and provided  funding of $275,000 over a 12-month  period,  plus
        patent expenses of approximately  $35,000. The agreement with GI was not
        extended  after the initial  12-month  period.  The  revenue  under this
        contract was recognized on a pro rata basis  consistent  with the period
        over  which the  research  was  conducted  as well as upon  delivery  of
        certain research reports.  Under the agreement,  the Company is required
        to  reimburse  GI for certain  patent  costs if GI does not exercise its
        option for an exclusive  license for the technology.  As of December 31,
        2001, GI has not  exercised  its right for an exclusive  license to this
        technology and costs of $42,317 are recorded as a liability.

9.       Risks and Uncertainties:

        The Company's  product  candidates are in an early stage of development.
        The Company has not  completed  the  development  of any  products  and,
        accordingly,  has not  received  any  regulatory  approvals or commenced
        marketing activities.  Significant revenues have not been generated from
        the sale of its products.

        The Company's development and commercialization  rights for its proposed
        products are derived from its license  agreements with the University of
        Florida and others.  A  deterioration  in the  relationship  between the
        Company  and the  University  of Florida  could have a material  adverse
        effect on the Company.

        The Company is aware of  potentially  significant  risks  regarding  the
        patent rights licensed by the Company relating to Islet  Progenitor/Stem
        Cells and to its  oxalate  technology.  The  Company  may not be able to
        commercialize  its proposed  diabetic products due to patent rights held
        by third parties other than the Company's licensors.

10.      Commitments:

        Lease

        In 2001, the Company increased its rental space to approximately  11,079
        square feet for its current  term which runs  through  October 31, 2002.
        Total  rent  expense  under this lease was  approximately  $160,098  and
        $112,000  during  2001 and 2000,  respectively.  Future  minimum  rental
        payments under this lease at December 31, 2001 are as follows:

        Year Ending December 31, 2002                     $173,419
                                                          ________

        The Company  expects to renew the lease for an additional  term of three
        years at an amount at least equal to the existing cost.


<PAGE>

Notes to Financial Statements
Years Ended December 31, 2001 and 2000

  10.  Commitments - Continued:

        Other

        The Company  issued 1,000 shares of restricted  common stock in exchange
        for a patent in February 1997. In addition to the issuance of stock, the
        Company will be required to pay  royalties  of 2% of net sales,  if any,
        generated from the patented technology.

        The Company has licensed the exclusive rights to technology in two areas
        from the  University  of Florida  Research  Foundation.  The  Company is
        obligated  to  pay  royalties  on net  sales  of the  Company  or  their
        sublicensees  on products in these areas.  As there have been no product
        sales to date,  there have been no  amounts  owed  under  these  license
        agreements.

        In November 2001,  the Company  entered into a funded  research  program
        with a university to carry out islet stem cell  research.  The agreement
        calls for the Company to provide  funding for the project  whose term is
        November  2001 through  November  2002.  The Company was required to pay
        $130,000 upon  execution of the agreement,  twelve  monthly  payments of
        $32,500 beginning December 2001 and additional payments for purchases of
        certain supplies and equipment.  As no amounts had been paid at December
        31, 2001, the Company has accrued a liability for $187,000  representing
        the amounts due. The monthly payments may be terminated at any time upon
        thirty days written notice from the Company.