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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-QSB

|  |  |                                                                                                                                    
|- |  | -----------------------------------------------------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended September 30, 2003

OR

|  |  |                                                                                                                               
|- |  | ------------------------------------------------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the Transition Period
from           to

Commission file number: 001-16781

|                                                                 
|-----------------------------------------------------------------
|MICROHELIX, INC                                                  
|                                                                 
|(Exact Name of Small Business Issuer as Specified in its Charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Oregon                                                         |  | 91-1758621                          
|                                                               |  |                                     
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

|                                         |  |           
|---------------------------------------- |  | ----------
|16125 SW 72ND Ave.; Portland, Oregon     |  | 97224     
|                                         |  |           
|(Address of Principal Executive
Offices) |  | (Zip Code)

(Issuers Telephone Number, Including Area Code): 503/968-1600

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 o

The number of shares outstanding of each of the issuers classes of common
equity, as of September 30, 2003, was 4,619,886 shares of Common Stock,
2,780,498 Class A Warrants, and 2,780,498 Class B Warrants.

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





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TABLE OF CONTENTS



|                               |                                                                                                |                                            |  |  |  |  |  | 
|------------------------------ | ---------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | ITEM 1. FINANCIAL STATEMENTS  UNAUDITED                                                      
|                               |                                                                                                | CONSOLIDATED BALANCE SHEETS               
|                               |                                                                                                | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                               |                                                                                                | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                               |                                                                                                | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|                               |                                                                                                | ITEM 3. CONTROLS AND PROCEDURES           
|PART II  OTHER INFORMATION   
|                               | ITEM 5. OTHER INFORMATION                                                                     
|                               | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                      
|SIGNATURES                    
|EXHIBIT 31.1                  
|EXHIBIT 31.2                  
|EXHIBIT 32.1                  
|EXHIBIT 32.2                  



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##### Table of Contents



TABLE OF CONTENTS

|                               |                                                                                               |                                                                                                       |   |      |   | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | - | ---- | - | 
|                               |                                                                                               |                                                                                                       |   | Page
|                               |                                                                                               |                                                                                                       |   |     
|PART I  FINANCIAL INFORMATION |                                                                                               |                                                                                                       | 3 |     
|                               | ITEM 1. FINANCIAL STATEMENTS  UNAUDITED                                                      |                                                                                                       |   |      |  
|                               |                                                                                               | Consolidated balance sheets as of December 31, 2002 and September 30, 2003                            |   |      | 4 | 
|                               |                                                                                               | Consolidated statements of operations for the three and nine months ended
September 30, 2003 and 2002 |   |      | 5 | 
|                               |                                                                                               | Consolidated statements of cash flows for the three and nine months ended
September 30, 2003 and 2002 |   |      | 6 | 
|                               |                                                                                               | Notes to consolidated financial statements                                                            |   |      | 7 | 
|                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |                                                                                                       |   | 11   |  
|                               | ITEM 3. CONTROLS AND PROCEDURES                                                               |                                                                                                       |   | 13   |  
|PART II  OTHER INFORMATION    |                                                                                               |                                                                                                       |   |     
|                               | ITEM 5. OTHER INFORMATION                                                                     |                                                                                                       |   | 14   |  
|                               | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                      |                                                                                                       |   | 15   |  
|                               | SIGNATURES                                                                                    |                                                                                                       |   | 16   |  
|                               | CERTIFICATIONS                                                                                |                                                                                                       |   | 17   |  

2



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PART I  FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS  UNAUDITED

The accompanying unaudited consolidated financial statements of microHelix,
Inc. (the Company) include all adjustments (consisting only of normal
recurring accruals) which management considers necessary for fair presentation
of financial position as of September 30, 2003 and of operating results and of
cash flows for the three and nine month periods ended September 30, 2002 and
2003.

3



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MICROHELIX, INC.




CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                                                                   |                             |           |                   |           |                    |           |             |           | 
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | --------- | ----------------- | --------- | ------------------ | --------- | ----------- | --------- | 
|                                     |                                                                                                                                                                   |                             |           | December 31, 2002 |           | September 30, 2003
|                                     |                                                                                                                                                                   |                             |           |                   |           |                   
|Assets                               |                                                                                                                                                                   |                             |           |                   |           |                    |           |            
|                                     | Current Assets:                                                                                                                                                   |                             |           |                   |           |                    |           |             |          
|                                     | Cash                                                                                                                                                              |                             | $         | 2,131,549         |           |                    | $         | 421,258     |          
|                                     | Accounts receivable, net of allowance of $19,517 and $41,602                                                                                                      |                             |           | 1,117,807         |           |                    |           | 794,800     |          
|                                     | Due from affiliates                                                                                                                                               |                             |           | 37,247            |           |                    |           | 45,138      |          
|                                     | Inventories (Note 2)                                                                                                                                              |                             |           | 705,162           |           |                    |           | 780,080     |          
|                                     | Prepaid expenses                                                                                                                                                  |                             |           | 110,523           |           |                    |           | 51,677      |          
|                                     |                                                                                                                                                                   |                             |           |                   |           |                    |           |            
|                                     |                                                                                                                                                                   | Total current assets        |           |                   | 4,102,288 |                    |           |             | 2,092,953 | 
|Property and equipment  net         |                                                                                                                                                                   |                             | 1,546,453 |                   |           |                    | 1,442,770 |            
|Intangible and other assets  net    |                                                                                                                                                                   |                             | 1,094,983 |                   |           |                    | 1,130,788 |            
|                                     |                                                                                                                                                                   |                             |           |                   |           |                    |           |            
|                                     |                                                                                                                                                                   | Total                       |           | $                 | 6,743,724 |                    |           | $           | 4,666,511 | 
|                                     |                                                                                                                                                                   |                             |           |                   |           |                    |           |             |          
|Liabilities and Shareholders Equity |                                                                                                                                                                   |                             |           |                   |           |                    |           |            
|                                     | Current Liabilities:                                                                                                                                              |                             |           |                   |           |                    |           |             |          
|                                     | Accounts payable                                                                                                                                                  |                             | $         | 476,712           |           |                    | $         | 420,261     |          
|                                     | Accrued liabilities                                                                                                                                               |                             |           | 444,813           |           |                    |           | 416,013     |          
|                                     | Line of credit                                                                                                                                                    |                             |           | 739,111           |           |                    |           | 563,271     |          
|                                     | Short-term borrowing                                                                                                                                              |                             |           |                  |           |                    |           | 100,000     |          
|                                     | Current portion of capital lease obligation                                                                                                                       |                             |           |                  |           |                    |           | 190,514     |          
|                                     | Current portion of notes payable to shareholder                                                                                                                   |                             |           | 535,000           |           |                    |           |            |          
|                                     |                                                                                                                                                                   |                             |           |                   |           |                    |           |            
|                                     |                                                                                                                                                                   | Total current liabilities   |           |                   | 2,195,636 |                    |           |             | 1,690,059 | 
|                                     |                                                                                                                                                                   |                             |           |                   |           |                    |           |            
|Long-Term Liabilities:               |                                                                                                                                                                   |                             |           |                   |           |                    |           |            
|                                     | Deferred gain on sale-leaseback                                                                                                                                   |                             |           |                  |           |                    |           | 243,727     |          
|                                     | Capital lease obligation                                                                                                                                          |                             |           |                  |           |                    |           | 158,369     |          
|                                     | Long-term portion of notes payable to shareholder                                                                                                                 |                             |           | 600,000           |           |                    |           | 327,000     |          
|                                     |                                                                                                                                                                   |                             |           |                   |           |                    |           |            
|                                     |                                                                                                                                                                   | Total long-term liabilities |           |                   | 600,000   |                    |           |             | 729,096   | 
|                                     |                                                                                                                                                                   |                             |           |                   |           |                    |           |            
|                                     |                                                                                                                                                                   | Total liabilities           |           |                   | 2,795,636 |                    |           |             | 2,419,155 | 
|                                     |                                                                                                                                                                   |                             |           |                   |           |                    |           |            
|Shareholders Equity:                |                                                                                                                                                                   |                             |           |                   |           |                    |           |            
|                                     | Common stock, no par value, 5,519,495 shares authorized,
4,659,886 and 4,619,886 issued and outstanding at December
31, 2002 and September 30, 2003, respectively |                             |           | 14,179,467        |           |                    |           | 14,159,467  |          
|                                     | Preferred Stock, no par value, 5,000,000 shares authorized,
zero issued and outstanding at December 31, 2002 and
September 30, 2003, respectively                 |                             |           |                  |           |                    |           |            |          
|                                     | Additional paid-in capital                                                                                                                                        |                             |           | 6,487,417         |           |                    |           | 6,487,417   |          
|                                     | Notes receivable from shareholders for common stock                                                                                                               |                             |           | (57,940           | )         |                    |           | (57,940     | )        
|                                     | Deferred compensation expense                                                                                                                                     |                             |           | (48,734           | )         |                    |           | (32,572     | )        
|                                     | Accumulated deficit                                                                                                                                               |                             |           | (16,612,122       | )         |                    |           | (18,309,016 | )        
|                                     |                                                                                                                                                                   |                             |           |                   |           |                    |           |            
|                                     |                                                                                                                                                                   | Total shareholdersequity   |           |                   | 3,948,088 |                    |           |             | 2,247,356 | 
|                                     |                                                                                                                                                                   |                             |           |                   |           |                    |           |            
|                                     |                                                                                                                                                                   | Total                       |           | $                 | 6,743,724 |                    |           | $           | 4,666,511 | 
|                                     |                                                                                                                                                                   |                             |           |                   |           |                    |           |             |          

See notes to consolidated financial statements.

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MICROHELIX, INC.




CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                         |                                 |                              |           |                                  |         |                                 |           |         |         |      |            |           |           |   |            |         |           |  
|-------------------------------------------------------- | ------------------------------- | ---------------------------- | --------- | -------------------------------- | ------- | ------------------------------- | --------- | ------- | ------- | ---- | ---------- | --------- | --------- | - | ---------- | ------- | --------- | -
|                                                         |                                 |                              |           | Three Months Ended September 30, |         | Nine Months Ended September 30,
|                                                         |                                 |                              |           |                                  |         |                                
|                                                         |                                 |                              |           | 2002                             |         | 2003                            |           | 2002    |         | 2003
|                                                         |                                 |                              |           |                                  |         |                                 |           |         |         |     
|Sales                                                    |                                 | $                            | 1,357,248 |                                  |         | $                               | 1,376,713 |         |         | $    | 3,659,773  |           |           | $ | 3,961,162  |        
|Cost of Sales                                            |                                 |                              | 1,344,841 |                                  |         |                                 | 1,288,077 |         |         |      | 3,753,452  |           |           |   | 3,748,345  |        
|                                                         |                                 |                              |           |                                  |         |                                 |           |         |         |      |            |           |           |   |            |        
|                                                         |                                 | Gross profit (loss)          |           |                                  | 12,407  |                                 |           |         | 88,636  |      |            |           | (93,679   | ) |            |         | 212,817   |  
|                                                         |                                 |                              |           |                                  |         |                                 |           |         |         |      |            |           |           |   |            |        
|Operating Expenses:                                      |                                 |                              |           |                                  |         |                                 |           |         |         |      |            |           |           |   |            |        
|                                                         | Research and development        |                              |           | 180,306                          |         |                                 |           | 170,785 |         |      |            | 433,888   |           |   |            | 610,592 |          
|                                                         | Sales and marketing             |                              |           | 226,239                          |         |                                 |           | 132,364 |         |      |            | 640,698   |           |   |            | 423,279 |          
|                                                         | General and administrative      |                              |           | 518,309                          |         |                                 |           | 253,203 |         |      |            | 1,646,471 |           |   |            | 850,883 |          
|                                                         |                                 |                              |           |                                  |         |                                 |           |         |         |      |            |           |           |   |            |        
|                                                         |                                 | Total operating expenses     |           |                                  | 924,854 |                                 |           |         | 556,352 |      |            |           | 2,721,057 |   |            |         | 1,884,754 |  
|                                                         |                                 |                              |           |                                  |         |                                 |           |         |         |      |            |           |           |   |            |        
|Loss from operations                                     |                                 |                              | (912,447  | )                                |         |                                 | (467,716  | )       |         |      | (2,814,736 | )         |           |   | (1,671,937 | )      
|                                                         |                                 |                              |           |                                  |         |                                 |           |         |         |      |            |           |           |   |            |        
|Other Income (Expense):                                  |                                 |                              |           |                                  |         |                                 |           |         |         |      |            |           |           |   |            |        
|                                                         | Gain on sale of asset           |                              |           |                                 |         |                                 |           | 30,508  |         |      |            |          |           |   |            | 60,757  |          
|                                                         | Interest income                 |                              |           | 15,891                           |         |                                 |           | 271     |         |      |            | 63,351    |           |   |            | 9,579   |          
|                                                         | Interest expense                |                              |           | (18,889                          | )       |                                 |           | (17,491 | )       |      |            | (60,729   | )         |   |            | (59,838 | )        
|                                                         | Interest expense to shareholder |                              |           | (21,456                          | )       |                                 |           | (7,670  | )       |      |            | (70,825   | )         |   |            | (35,512 | )        
|                                                         |                                 |                              |           |                                  |         |                                 |           |         |         |      |            |           |           |   |            |        
|                                                         |                                 | Other income (expense)  net |           |                                  | (24,454 | )                               |           |         | 5,618   |      |            |           | (68,203   | ) |            |         | (25,014   | )
|                                                         |                                 |                              |           |                                  |         |                                 |           |         |         |      |            |           |           |   |            |        
|Net loss                                                 |                                 | $                            | (936,901  | )                                |         | $                               | (462,098  | )       |         | $    | (2,882,939 | )         |           | $ | (1,696,951 | )      
|                                                         |                                 |                              |           |                                  |         |                                 |           |         |         |      |            |           |           |   |            |        
|Net loss per common share  basic and diluted            |                                 | $                            | (.20      | )                                |         | $                               | (.10      | )       |         | $    | (.62       | )         |           | $ | (.37       | )      
|                                                         |                                 |                              |           |                                  |         |                                 |           |         |         |      |            |           |           |   |            |        
|Shares used in per share calculation  basic
and diluted |                                 |                              | 4,659,886 |                                  |         |                                 | 4,619,886 |         |         |      | 4,659,886  |           |           |   | 4,619,886  |        
|                                                         |                                 |                              |           |                                  |         |                                 |           |         |         |      |            |           |           |   |            |        

See notes to consolidated financial statements.

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MICROHELIX, INC.




CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                   |                                                                         |                                            |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |            |         |            |  
|-------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------ | ----------------------------------------------- | -------- | ------------------ | ---------- | ----------------- | ---------- | ------- | -------- | ---------- | ---------- | ------- | ---------- | ---------- | ---------- | ------- | ---------- | -
|                                                   |                                                                         |                                            |                                                 |          | Three Months Ended |            | Nine Months Ended
|                                                   |                                                                         |                                            |                                                 |          | September 30,      |            | September 30,    
|                                                   |                                                                         |                                            |                                                 |          |                    |            |                  
|                                                   |                                                                         |                                            |                                                 |          | 2002               |            | 2003              |            | 2002    |          | 2003      
|                                                   |                                                                         |                                            |                                                 |          |                    |            |                   |            |         |          |           
|Cash Flows from Operating Activities:              |                                                                         |                                            |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |           
|                                                   | Net loss                                                                |                                            | $                                               | (936,901 | )                  |            | $                 | (462,041   | )       |          | $          | (2,882,939 | )       |            | $          | (1,696,894 | )      
|                                                   | Adjustments to reconcile net loss to cash used in
operating activities: |                                            |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |            |        
|                                                   |                                                                         | Depreciation and amortization              |                                                 |          | 130,938            |            |                   |            | 138,596 |          |            |            | 396,312 |            |            |            | 395,356 |           
|                                                   |                                                                         | Stock compensation expense                 |                                                 |          | 9,141              |            |                   |            | 5,388   |          |            |            | 27,424  |            |            |            | 16,162  |           
|                                                   |                                                                         | Amortization of deferred inventory charges |                                                 |          | 1,540              |            |                   |            | 1,540   |          |            |            | 4,620   |            |            |            | 4,620   |           
|                                                   |                                                                         | Gain on sale of equipment                  |                                                 |          |                   |            |                   |            | (30,508 | )        |            |            |        |            |            |            | (60,757 | )         
|                                                   |                                                                         | Change in:                                 |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |            |         |           
|                                                   |                                                                         |                                            | Accounts receivable, net                        |          |                    | (652,686   | )                 |            |         | (32,038  | )          |            |         | (174,216   | )          |            |         | 314,872    |  
|                                                   |                                                                         |                                            | Due from affiliates                             |          |                    |           |                   |            |         | 7,891    |            |            |         |           |            |            |         | 244        |  
|                                                   |                                                                         |                                            | Inventories                                     |          |                    | 163,236    |                   |            |         | 31,432   |            |            |         | 103,484    |            |            |         | (79,538    | )
|                                                   |                                                                         |                                            | Prepaid expenses                                |          |                    | 29,699     |                   |            |         | 62,191   |            |            |         | 105,267    |            |            |         | 58,846     |  
|                                                   |                                                                         |                                            | Intangible and other assets                     |          |                    | 999        |                   |            |         | 2,981    |            |            |         | (8,145     | )          |            |         | (53,508    | )
|                                                   |                                                                         |                                            | Accounts payable                                |          |                    | (139,056   | )                 |            |         | (95,050  | )          |            |         | (604,197   | )          |            |         | (56,451    | )
|                                                   |                                                                         |                                            | Accrued interest to shareholder                 |          |                    |           |                   |            |         |         |            |            |         | (530,546   | )          |            |         |           |  
|                                                   |                                                                         |                                            | Accrued liabilities                             |          |                    | (1,697     | )                 |            |         | 12,084   |            |            |         | 53,125     |            |            |         | (28,800    | )
|                                                   |                                                                         |                                            | Deferred shareholder compensation               |          |                    |           |                   |            |         |         |            |            |         | (200,000   | )          |            |         |           |  
|                                                   |                                                                         |                                            |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |           
|                                                   |                                                                         |                                            | Cash used in operating activities               |          |                    | (1,394,787 | )                 |            |         | (357,534 | )          |            |         | (3,709,811 | )          |            |         | (1,185,848 | )
|                                                   |                                                                         |                                            |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |           
|Cash Flows from Investing Activities:              |                                                                         |                                            |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |           
|                                                   | Capital expenditures                                                    |                                            |                                                 | (34,410  | )                  |            |                   | (13,105    | )       |          |            | (170,216   | )       |            |            | (25,298    | )      
|                                                   | Proceeds from sale of equipment                                         |                                            |                                                 |         |                    |            |                   | 50,000     |         |          |            |           |         |            |            | 469,000    |        
|                                                   |                                                                         |                                            |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |           
|                                                   |                                                                         |                                            | Cash provided by (used in) investing activities |          |                    | (34,410    | )                 |            |         | 36,895   |            |            |         | (170,216   | )          |            |         | 443,702    |  
|                                                   |                                                                         |                                            |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |           
|Cash Flows from Financing Activities:              |                                                                         |                                            |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |           
|                                                   | Proceeds from borrowings against notes payable and
lines of credit      |                                            |                                                 |         |                    |            |                   | 1,343,484  |         |          |            |           |         |            |            | 3,737,635  |        
|                                                   | Principal payments on notes payable and lines of credit                 |                                            |                                                 | (773,422 | )                  |            |                   | (1,348,044 | )       |          |            | (1,080,827 | )       |            |            | (4,621,475 | )      
|                                                   | Restricted short-term investment                                        |                                            |                                                 | 707,570  |                    |            |                   |           |         |          |            | (636,855   | )       |            |            |           |        
|                                                   | Principal payments on capital lease obligations                         |                                            |                                                 |         |                    |            |                   | (56,056    | )       |          |            |           |         |            |            | (64,305    | )      
|                                                   | Repurchase of common stock                                              |                                            |                                                 |         |                    |            |                   |           |         |          |            |           |         |            |            | (20,000    | )      
|                                                   |                                                                         |                                            |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |           
|                                                   |                                                                         |                                            | Cash used in financing activities               |          |                    | (65,852    | )                 |            |         | (60,616  | )          |            |         | (1,717,682 | )          |            |         | (968,145   | )
|                                                   |                                                                         |                                            |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |           
|Change in cash                                     |                                                                         |                                            | (1,495,049                                      | )        |                    |            | (381,255          | )          |         |          | (5,597,709 | )          |         |            | (1,710,291 | )         
|Cash, beginning of period                          |                                                                         |                                            | 3,250,656                                       |          |                    |            | 802,513           |            |         |          | 7,353,316  |            |         |            | 2,131,549  |           
|                                                   |                                                                         |                                            |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |           
|Cash, end of period                                |                                                                         | $                                          | 1,755,607                                       |          |                    | $          | 421,258           |            |         | $        | 1,755,607  |            |         | $          | 421,258    |           
|                                                   |                                                                         |                                            |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |            |        
|Supplemental disclosure of cash flow information  |                                                                         |                                            |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |           
|                                                   | Cash paid for interest                                                  |                                            | $                                               | 40,345   |                    |            | $                 | 30,656     |         |          | $          | 662,100    |         |            | $          | 95,350     |        
|                                                   |                                                                         |                                            |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |            |        
|                                                   | Assets acquired under capital lease                                     |                                            | $                                               |         |                    |            | $                 | 372,169    |         |          | $          |           |         |            | $          | 413,188    |        
|                                                   |                                                                         |                                            |                                                 |          |                    |            |                   |            |         |          |            |            |         |            |            |            |        

See notes to consolidated financial statements.

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MICROHELIX, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Policies and Basis of Presentation

The accompanying quarterly consolidated financial statements of
microHelix, Inc. and its wholly owned subsidiary, BioElectric Corporation
(collectively, the Company) are unaudited and include all adjustments
(consisting only of normal recurring accruals) considered necessary by
management to present a fair statement of the results of operations, financial
position and cash flows. They have been prepared in accordance with generally
accepted accounting principles in the United States of America for interim
financial information and with the instructions to Form 10-QSB of Regulation
S-B. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles in the United States of America for complete
financial statements.

The results of operations for the three and nine month periods ended
September 30, 2003 are not necessarily indicative of the results to be expected
for the full year. For further information, refer to the financial statements
and footnotes thereto included in the Companys Form 10-KSB for the fiscal year
ended December 31, 2002.

Use of Estimates The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. This
includes, among other things, evaluation of the remaining life and
recoverability of long-lived assets. Actual results could differ from those
estimates.

Critical Accounting Policies and Estimates

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

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

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

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

Stock Based Compensation The Company generally does not recognize
compensation expense relating to employee stock options because it generally
grants options with an exercise price equal to the fair value of the stock on
the effective date of grant. If the Company had elected to recognize
compensation expense using a fair value approach, and therefore determined the
compensation based on the value as determined by the Black-Scholes option
pricing model, the pro forma net loss and pro forma loss per share would have
been as follows:

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|                                                         |                                                                                                                                   |   |                    |     |                   |   |          |     |      |   |            |         |   |   |            |         |  
|-------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | - | ------------------ | --- | ----------------- | - | -------- | --- | ---- | - | ---------- | ------- | - | - | ---------- | ------- | -
|                                                         |                                                                                                                                   |   | Three Months Ended |     | Nine Months Ended
|                                                         |                                                                                                                                   |   | September 30,      |     | September 30,    
|                                                         |                                                                                                                                   |   |                    |     |                  
|                                                         |                                                                                                                                   |   | 2002               |     | 2003              |   | 2002     |     | 2003
|                                                         |                                                                                                                                   |   |                    |     |                   |   |          |     |     
|Net loss, as reported                                    |                                                                                                                                   | $ | (936,901           | )   |                   | $ | (462,098 | )   |      | $ | (2,882,939 | )       |   | $ | (1,696,951 | )      
|                                                         | Add/(Deduct): Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of tax |   |                    | (67 | )                 |   |          | (57 | )    |   |            | (56,166 | ) |   |            | (96,799 | )
|                                                         |                                                                                                                                   |   |                    |     |                   |   |          |     |      |   |            |         |   |   |            |        
|Net loss, pro forma                                      |                                                                                                                                   | $ | (936,968           | )   |                   | $ | (462,155 | )   |      | $ | (2,939,105 | )       |   | $ | (1,793,750 | )      
|                                                         |                                                                                                                                   |   |                    |     |                   |   |          |     |      |   |            |         |   |   |            |        
|Net loss per common share  basic and
diluted            |                                                                                                                                   | $ | (0.20              | )   |                   | $ | (0.10    | )   |      | $ | (0.62      | )       |   | $ | (0.37      | )      
|Net loss per common share  basic and
diluted, pro forma |                                                                                                                                   | $ | (0.20              | )   |                   | $ | (0.10    | )   |      | $ | (0.63      | )       |   | $ | (0.39      | )      

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

There were no options exercised during the three and nine months ended
September 30, 2003. There were zero and 117,500 new options granted at an
exercise price of $0.35 per share during the three and nine months periods
ending September 30, 2003, respectively. There were 12,789 and 36,227 options
canceled at prices ranging from $0.34 to $9.06 per share during the three and
nine months ended September 30, 2003, respectively.

Recent Accounting Pronouncements In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement Obligations.SFAS No. 143 requires the
fair value of a liability for an asset retirement obligation to be recognized
in the period in which it is incurred if a reasonable estimate of fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. SFAS No. 143 was adopted by the
Company on January 1, 2003, and had no material impact on its financial
statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB No. 4, 44,
and 64, Amendment of FASB No. 13, and Technical Corrections. SFAS No. 145
rescinds FASB No. 4, Reporting Gains and Losses from Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements, rescinds SFAS No. 44, Accounting for
Intangible Assets of Motor Carriers,and amends SFAS No. 13, Accounting for
Leases. This statement also amends other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. This statement was adopted by the
Company on January 1, 2003, and had no material effect on the Companys
financial statements.

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

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. It also amends the
disclosure provisions of SFAS No. 123 to require prominent disclosure about the
effects on reported net income of an entitys accounting policy decisions with
respect to stock-based employee compensation. Finally, this statement amends
APB Opinion No. 28, Interim Financial Reporting, to require disclosure about
those effects in interim financial information. The Company adopted SFAS No.
148 in the fourth quarter of 2002. Since the Company has not changed to a fair
value method of stock-based compensation, the applicable portion of this
statement only affects our disclosures.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. This
statement requires that certain freestanding financial instruments be reported
as liabilities and also requires certain disclosures in the financial
statements. The financial instruments described in the statement were
previously reported by issuers as part of equity or between the liabilities and
equity sections of the balance sheet. This statement is effective for financial
instruments

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entered into or modified after May 15, 2003 and is effective for
preexisting instruments on July 1, 2003. The adoption of this statement did not
have a material impact on the Companys financial statements.

Financial Accounting Standards Board Interpretation (FIN) 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, requires expanded disclosures by
guarantors in interim and annual financial statements about obligations under
certain guarantees. In addition, FIN 45 requires guarantors to recognize, at
the inception of a guarantee, a liability for the obligation it has undertaken
in issuing the guarantee. The recognition and initial measurement provision was
applicable to guarantees issued or modified after December 31, 2002. FIN 45
does not currently have an impact on our financial position.

Financial Accounting Standards Board Interpretation (FIN) 46,
Consolidation of Variable Interest Entities, requires consolidation where there
is a controlling financial interest in a variable interest entity, previously
referred to as a special-purpose entity. The implementation of FIN 46 has been
delayed and will be effective during the fourth quarter of fiscal year
2003.
We do not anticipate an impact to our financial position or results of
operations

Reclassifications Certain reclassifications have been made to the 2002
financial statements to conform to the 2003 financial statement presentation.

2. Inventories

Inventories are as follows:

|                |       |   |              |         |               |   |         |         | 
|--------------- | ----- | - | ------------ | ------- | ------------- | - | ------- | ------- | 
|                |       |   | December 31, |         | September 30,
|                |       |   | 2002         |         | 2003         
|                |       |   |              |         |              
|Raw materials   |       | $ | 606,969      |         |               | $ | 692,766 |        
|Work-in-process |       |   | 98,193       |         |               |   | 87,314  |        
|                |       |   |              |         |               |   |         |        
|                | Total |   | $            | 705,162 |               |   | $       | 780,080 | 
|                |       |   |              |         |               |   |         |        

3. Line of Credit and Notes Payable to Shareholder

In December 2002, the Company entered into a revolving line of credit with
an asset-based lender. The line of credit is secured by accounts receivable.
The line of credit bears interest at the prime rate plus 6.25% (10% at
September 30, 2003) and allows the Company to borrow up to $1,500,000. At
September 30, 2003, $563,271 was outstanding on the line of credit. As of
September 30, 2003, the Company was in compliance with the terms of the line of
credit.

Notes payable to shareholder consist of the following:

|                                                                                                                                                                                                       |                                                   |   |         |              |   |               |         |         |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------- | - | ------- | ------------ | - | ------------- | ------- | ------- |  | 
|                                                                                                                                                                                                       |                                                   |   |         | December 31, |   | September 30,
|                                                                                                                                                                                                       |                                                   |   |         | 2002         |   | 2003         
|                                                                                                                                                                                                       |                                                   |   |         |              |   |              
|Note payable to shareholder, interest at 7.5% at
December 31, 2002, interest payable monthly and
principal payment due March 2003, secured by
certain assets                                           |                                                   | $ | 456,115 |              |   | $             |        |        
|Note payable to shareholder, interest at 7.5% at
December 31, 2002 and September 30, 2003, interest
payable monthly and principal payments due March
2003 and December 2004, secured by certain assets |                                                   |   | 383,885 |              |   |               |        |        
|Note payable to shareholder, interest at 7.5% at
December 31, 2002, interest payable monthly and
principal payment due December 2002, secured by
certain assets                                        |                                                   |   | 135,000 |              |   |               |        |        
|Note payable to shareholder, interest at 7.5% at
December 31, 2002 and September 30, 2003, interest
payable monthly and principal payments due March
2003 and December 2004, secured by certain assets |                                                   |   | 160,000 |              |   |               |        |        
|Note payable to shareholder, interest at 9% at
September 30, 2003, interest payable monthly and
principal payment due December 2004, secured by certain assets                                         |                                                   |   |        |              |   |               | 327,000 |        
|                                                                                                                                                                                                       |                                                   |   |         |              |   |               |         |        
|                                                                                                                                                                                                       | Total notes payable to shareholder                |   |         | 1,135,000    |   |               |         | 327,000 | 
|                                                                                                                                                                                                       | Current portion                                   |   |         | (535,000     | ) |               |         |        | 
|                                                                                                                                                                                                       |                                                   |   |         |              |   |               |         |        
|                                                                                                                                                                                                       | Long-term portion of notes payable to shareholder |   | $       | 600,000      |   |               | $       | 327,000 | 
|                                                                                                                                                                                                       |                                                   |   |         |              |   |               |         |        

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In January 2003, the Company repaid the $135,000 note payable to the
Companys former President and Chief Executive Officer (the shareholder). In
March 2003, the Company repaid $500,000 of principal and $4,293 of accrued
interest on the remaining notes payable to shareholder. On June 24, 2003, in
conjunction with a sale-leaseback transaction, the two outstanding notes
payable to shareholder were consolidated into one note bearing interest at 9%,
with interest payable monthly, and the aggregate unpaid principal amount
together with accrued and unpaid interest due December 31, 2004. As a condition
of the sale-leaseback transaction, in July 2003, the Company prepaid $123,000
on the note payable to shareholder. Additionally, in July 2003, the Company
disposed of certain assets which secured the note to shareholder and as a
condition of the sale of these assets, prepaid $50,000 on the note payable to
shareholder from the proceeds thereof.

In March 2003, the Company borrowed $200,000 on a short-term unsecured
note at a 12% interest rate, to finance short-term working capital
requirements. There was $100,000 outstanding on the short-term unsecured note
at September 30, 2003.

4. Related-Party Transactions

Significant transactions and balances with shareholders are summarized
below:

|                                                    |  |              |           |               |  |   |         | 
|--------------------------------------------------- |  | ------------ | --------- | ------------- |  | - | ------- | 
|                                                    |  | December 31, |           | September 30,
|                                                    |  | 2002         |           | 2003         
|                                                    |  |              |           |              
|Due from affiliates                                 |  | $            | 37,247    |               |  | $ | 45,138  | 
|                                                    |  |              |           |               |  |   |         | 
|Notes receivable from shareholders for common stock |  | $            | 57,940    |               |  | $ | 57,940  | 
|                                                    |  |              |           |               |  |   |         | 
|Notes payable to shareholder                        |  | $            | 1,135,000 |               |  | $ | 327,000 | 
|                                                    |  |              |           |               |  |   |         | 

|                                |  |                          |        |                         |  |      |       |      |  |   |        |  |  |   |        | 
|------------------------------- |  | ------------------------ | ------ | ----------------------- |  | ---- | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|                                |  | Three Month Period Ended |        | Nine Month Period Ended
|                                |  | September 30,            |        | September 30,          
|                                |  |                          |        |                        
|                                |  | 2002                     |        | 2003                    |  | 2002 |       | 2003
|                                |  |                          |        |                         |  |      |       |     
|Interest expense to
shareholder |  | $                        | 21,456 |                         |  | $    | 7,670 |      |  | $ | 70,825 |  |  | $ | 35,512 | 
|                                |  |                          |        |                         |  |      |       |      |  |   |        |  |  |   |        | 

During 1999, the shareholder agreed to defer his annual compensation of
$200,000 to future periods in order to improve the Companys cash flow. In
February 2002, the Company agreed to pay $125,000 of the deferred compensation
and the shareholder agreed to forgive the remaining $75,000. In January 2003
and March 2003, the Company repaid $135,000 and $500,000 notes payable to
shareholder.

5. Loss Per Share

Basic net loss per share has been computed by dividing net loss by the
weighted average number of shares outstanding during each period. Diluted loss
per share has been computed by dividing net loss by the weighted average common
stock and common stock equivalent shares outstanding during each period using
the treasury stock method for employee stock option plans and warrants, if the
common equivalent shares were not anti-dilutive. Common stock equivalents were
anti-dilutive for all periods presented.

* * * * * *

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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The following discussion provides information which management believes is
relevant to an assessment and understanding of the Companys operations and
financial condition. This discussion should be read in conjunction with the
unaudited consolidated financial statements and accompanying notes.

Forward-Looking Statements

Statements in this filing which are not historical facts are
forward-looking statements under the provisions of the Private Securities
Litigation Reform Act of 1995. Such statements reflect managements current
views and estimates of future economic and market circumstances, industry
conditions, company performance, and financial results. You can identify
forward-looking statements by the use of words such as may, will, should,
expects, plans, anticipates, believes, estimates, predicts,
intends, potential, continue, or the negatives of such terms or other
comparable terminology. Forward-looking statements also include the assumptions
underlying or relating to any of the foregoing matters. All forward-looking
statements are subject to risks and uncertainties that could cause the
Companys actual future results to differ materially from the results discussed
herein. Factors that could adversely affect future events, transactions or
results include, but are not limited to, unfavorable economic conditions,
disruptions or other effects related to terrorism and acts of war, the
existence of demand for, and acceptance of, the Companys products and
services, regulatory approvals and developments, economic conditions, the
impact of competition and pricing, new product offerings by competitors,
successful completion of special engineering projects, successful completion of
long-term production contracts, and other risks and factors as are described
from time to time in the Companys Securities and Exchange Commission filings,
including but not limited to, the risks detailed in the Risk Factors section
of the Companys Annual Report on Form 10-KSB for the year ended December 31,
2002. The forward-looking statements contained in this Form 10-QSB speak only
as of the date on which they are made, and the Company undertakes no obligation
and does not intend to update or revise these forward-looking statements to
reflect events or circumstances that occur after the date of this filing. If
the Company does update or correct one or more forward-looking statements,
investors and others should not conclude that the Company will make additional
updates or corrections with respect thereto or with respect to other
forward-looking statements.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, and expenses, and related disclosure of
contingent assets and liabilities. We evaluate our estimates on an on-going
basis, including those related to product returns, bad debts, inventories,
prepaid expenses, intangible assets, income taxes, warranty obligations,
litigation, and other contingencies. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimated under different assumptions or conditions. We believe the following
critical accounting policies and related judgments and estimates affect the
preparation of our consolidated financial statements.

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

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

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

Intangible and Other Assetsprimarily represent patent costs that are
amortized using the straight-line method over their estimated useful lives or
15 years, whichever is shorter, once the technology is completed and in use.
Management periodically evaluates the

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recoverability of intangibles based on current and anticipated income and
undiscounted future cash flows. The recoverability of our intangible asset
costs depends in part on the development of additional commercial products from
those technologies, the acceptance of such products in the marketplace, and our
ability to generate significant revenues and cash flows from these products.

RESULTS OF OPERATIONS

THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002

Total sales for the third quarter ending September 30, 2003 were $1,377,000,
compared to total sales of $1,357,000 reported in the third quarter of last
year, an increase of $20,000.

Total sales for the nine month period ending September 30, 2003 were
$3,961,000, compared to total sales of $3,659,000 reported in the first nine
months of last year, an increase of $302,000 or 8%. On a year-to-date basis,
sales have increased to customers in the minimally invasive and ultrasound
markets and these increases were offset to some extent by sales decreases in
the implantable market and from government grants.

Gross profit for the third quarter of 2003 was $89,000, compared to $12,000
recorded in the third quarter of last year. The principal reason for the gross
profit improvement in the quarter was due to improved utilization in the
Portland, Oregon plant. In addition, in the third quarter of last year the
operations of the Portland plant were adversely impacted by negative margins
earned from a development contract that was terminated in the fourth quarter of
2002.

Gross profit for the nine month period ending September 30, 2003 was a positive
$213,000, compared to a negative gross margin of $94,000 recorded in the nine
month period ending September 30, 2002. This improvement in gross profit was
realized from cost reductions and improvements in efficiency in both the
Portland, Oregon and Nogales, Mexico plants.

Total operating expenses were $556,000 in the third quarter of 2003, compared
to total operating expenses of $925,000 incurred in the third quarter of the
previous year. Sales and marketing expenses were $132,000 in the third quarter
of 2003, compared to $226,000 in the third quarter of 2002. The decrease in
sales and marketing expenses can primarily be attributed to changing from
exclusively a direct sales organization to a distribution organization that
employs both direct sales and manufacturing representatives. General and
administrative expenses were $253,000 in the third quarter of 2003, compared to
$518,000 in the third quarter of 2002. This reduction in general and
administrative expenses is a result of the cost reduction program that was
initiated in October 2002. These reductions included employee terminations,
pay reductions, reduced company benefit programs and reductions in travel,
legal and investor relation expenses.

Total operating expenses were $1,885,000 for the first nine months of 2003,
compared to $2,721,000 in total operating expenses for the first nine months of
2002, a reduction of $836,000 or 31%. The expense reductions in the first nine
months of 2003 compared to the first nine months of 2002 for both sales and
marketing and general and administrative expenses, are essentially the same as
those described in the preceding paragraph for the third quarter.

Research and development expenses in the third quarter of 2003 were $171,000,
compared to $180,000 recorded in the same quarter last year. On a year-to-date
basis through September 2003, research and development expenses were $611,000
compared to $434,000 for the same nine month period a year ago. Research and
development expenses were greater in 2003 because, in the prior year,
engineering expenses were related to a major development contract that was
billed to a customer. In 2003 there was no such contract. A much greater
portion of the Companys research and development related to expenses incurred
in 2003 is classified as expense rather than as product cost.

Other income was $6,000 in the third quarter of 2003, compared to other expense
of $24,000 recorded in the third quarter of 2002. Other income of $6,000 was
realized primarily from a gain on the sale of an asset that was offset by
interest expense. For the first nine months of 2003, other expense was
$25,000, compared to $68,000 for the first nine months of 2002.

In summary, as a result of improvements in gross profit and reductions in
operating expense, the net loss for the third quarter of 2003 of $462,000
represents an improvement of $475,000 from the $937,000 loss recorded in the
third quarter of 2002. For the first nine months of 2003, losses have been
reduced by 41% from $2,883,000 recorded in the first nine months of 2002, to
$1,697,000 recorded during the first nine months of this year.

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LIQUIDITY AND CAPITAL RESOURCES

THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002

During the third quarter of 2003 the Company used $381,000 of cash, compared to
$1,495,000 of cash used in the third quarter of 2002. This improvement in cash
flow of $1,114,000 can be attributed in part to the $475,000 reduction in net
loss from the $937,000 loss recognized in the third quarter of 2002, compared
to the $462,000 loss recognized in the third quarter of 2003. In addition, a
reduction in cash required to finance accounts receivables accounted for an
improvement of another $621,000. During the third quarter of 2002 accounts
receivable decreased by $653,000, compared to an increase of $32,000 during the
third quarter of 2003 representing a net improvement of $621,000.

For the first nine months of 2003 the Company used $1,710,000 of cash, compared
to $5,598,000 of cash used during the first nine months of 2002, or a reduction
in cash used of $3,888,000 during the first nine months of 2003 compared to the
first nine months of 2002. The decrease in cash used during the period can be
attributed to several factors: first, reductions in operating losses of
$1,186,000, secondly, reduced payments to vendors and suppliers of $548,000,
thirdly, interest paid to shareholders has been reduced by $531,000, fourthly,
changes in accounts receivable have generated $489,000 of cash and lastly,
$750,000 less cash has been used in financing activities. In total these five
factors accounted for $3,504,000 of the total change in cash of $3,888,000.

The cash balance as of September 30, 2003 was $421,000, compared to an $802,000
balance as of June 30, 2003, or a reduction of $381,000 during the three month
period ended September 30, 2003. The Company believes that current operations
can continue to be financed by current borrowing arrangements that are in place
but management understands the importance of obtaining additional permanent
capital. The Company has retained the New York investment banking firm of
Christman, Peters and Madden to assist management in raising this additional
capital. However, the Company cannot predict or guarantee the results of these
efforts.

The following table discloses the Companys contractual cash obligations as of
September 30, 2003:

|                                         |  |                        |           |                  |  |           |           |  |  |   |         | 
|---------------------------------------- |  | ---------------------- | --------- | ---------------- |  | --------- | --------- |  |  | - | ------- | 
|                                         |  | Payments Due by Period
|                                         |  |                       
|Contractual Obligations                  |  | Total                  |           | Less than 1 year |  | 1-3 years
|                                         |  |                        |           |                  |  |          
|Operating leases, net of
sublease income |  | $                      | 572,013   |                  |  | $         | 258,500   |  |  | $ | 313,513 | 
|Line of credit                           |  |                        | 563,271   |                  |  |           | 563,271   |  |  |   |        | 
|Short-term obligation                    |  |                        | 100,000   |                  |  |           | 100,000   |  |  |   |        | 
|Capital lease obligation                 |  |                        | 348,883   |                  |  |           | 190,514   |  |  |   | 158,369 | 
|Long-term debt to shareholder            |  |                        | 327,000   |                  |  |           |          |  |  |   | 327,000 | 
|                                         |  |                        |           |                  |  |           |           |  |  |   |         | 
|Total contractual cash
obligations       |  | $                      | 1,911,167 |                  |  | $         | 1,112,285 |  |  | $ | 798,882 | 
|                                         |  |                        |           |                  |  |           |           |  |  |   |         | 




ITEM 3. CONTROLS AND PROCEDURES

Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Companys
management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded that the
Companys disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. Subsequent to the date of their
evaluation, there were no significant changes in the Companys internal
controls or in other factors that could significantly affect the disclosure
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.

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PART II  OTHER INFORMATION




ITEM 5. OTHER INFORMATION

On September 9, 2002, the Company was notified by Nasdaq that the Company
failed to comply with the $1.00 per share minimum bid price requirement for
continued listing set forth in Marketplace Rule 4310(c)(4) (the Minimum Bid
Price Rule), and that its shares of common stock, Class A warrants and Class B
warrants were therefore subject to delisting from the Nasdaq SmallCap Market.
The Company obtained extensions through September 4, 2003 to regain compliance
with the Minimum Bid Price Rule, but was unsuccessful. On September 8, 2003,
Nasdaq notified the Company that its securities would be immediately delisted
from the Nasdaq SmallCap Market for failure to comply with the Minimum Bid
Price Rule unless the Company requested a hearing before a Nasdaq
Qualifications Hearing Panel (the Panel).

The Company requested a hearing and on October 16, 2003 presented to the Panel
its plan to regain compliance with the Minimum Bid Price Rule. The Company
proposed a 1-for-3 reverse stock split of its common stock to regain compliance
with this rule. The closing price of the Companys common stock on October 31,
2003 was $0.56 per share. The Company intends to seek shareholder approval for
the reverse stock split at a special meeting to be held on or about December 5,
2003 (the Special Shareholders Meeting).

At the October 16, 2003 meeting the Panel also required the Company to present
a plan for complying with the minimum stockholders equity requirement for
continued listing set forth in Marketplace Rule 4310(c)(2)(b)(i) (the
Stockholders Equity Rule). The Stockholders Equity Rule requires
stockholders equity to exceed $2.5 million. As of September 30, 2003, the
Companys stockholders equity was $2.2 million.

Subject to obtaining shareholder approval as required by Nasdaq at the Special
Shareholders Meeting, and to complying with federal and state securities laws,
the Company intends to increase its stockholders equity through a combination
of the following:



| |  |  | The exercise price per share of the Class B warrants would be reduced
to a price equal to the average closing price of the Companys Common
Stock as reported by Nasdaq on the 15 trading days with the highest
closing prices during the 20 trading days immediately preceding the date
of the Special Shareholders Meeting. The Company anticipates the price
reduction will be in effect from approximately December 9, 2003 through
January 16, 2004, after which date the exercise price of the Class B
warrants will return to its current $7.20 per share (subject to
proportional adjustment to reflect the reverse stock split).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company will attempt to sell up to $500,000 of its common stock to certain of
its directors and officers in exchange for cash and/or the forgiveness
of outstanding debt owed to such individuals.                                                                                                                                                                                                                                                                                                                                                                                                                                   

The Company may also attempt to sell additional equity securities in one or
more private placements to third parties.

There can be no assurance that Nasdaq will agree to defer delisting the
Companys securities from the Nasdaq SmallCap Market while the Company pursues
these plans. Even if Nasdaq agrees to the Companys requested timetable, there
can be no assurance that the proposed reverse stock split, warrant repricing
program and sales of equity securities to Company directors and officers, among
others, will enable the Company to regain or maintain compliance with the
Minimum Bid Price Rule or the Stockholders Equity Rule. Even if the reverse
stock split is affected, the minimum bid price of a share of the Companys
common stock may not thereafter remain in excess of $1.00. The warrant
repricing program and the planned sales of equity securities may not raise
enough capital to restore and maintain the Companys stockholders equity at
more than $2.5 million.

The delisting of the common stock from the Nasdaq SmallCap Market or further
declines in the market price of the common stock could greatly impair the
Companys ability to raise capital through equity or debt financings. Continued
listing of the common stock on the Nasdaq SmallCap Market may enhance the
Companys access to capital and increase its flexibility in responding to
anticipated capital requirements. The Company believes that prospective
investors will view an investment in the Company more favorably if shares of
the common stock continue to be listed on the Nasdaq SmallCap Market. In
addition, firms that currently make a market for the common stock could
discontinue that role if the Companys securities are no longer listed on the
Nasdaq SmallCap Market.

If delisted from the Nasdaq SmallCap Market, the Companys securities may be
eligible to trade on the OTC Bulletin Board or in the pink sheets. These
alternatives are generally considered to be less efficient and not as broad a
market as the Nasdaq SmallCap

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Market. Many analysts will not provide research on companies whose stock
trades below certain price levels or that trades on the OTC Bulletin Board or
the pink sheets. No analyst currently provides research on the Company.

If the common stock is delisted from the Nasdaq SmallCap Market, trading in the
Companys securities may become subject to the requirements of certain rules
under the Securities Exchange Act of 1934 which require additional disclosures
by broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, a non-Nasdaq or exchange-listed equity security that
has a market price of less than $5.00 per share, subject to certain
exceptions). In such event, the additional burdens imposed upon broker-dealers
to effect transactions in the Companys securities could inhibit brokers from
trading in the Companys securities and further limit the market liquidity of
the Companys securities and the ability of investors to trade the Companys
securities.

If the Company is unable to raise
additional permanent capital or cannot bring its cost structure in
line with revenues, it may be forced to seek protection of the courts
through reorganization, bankruptcy or insolvency proceedings.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

| |  |              |  |                                                                                                                       
| |  | ------------ |  | ----------------------------------------------------------------------------------------------------------------------
| |  | Exhibit 31.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 Of The Sarbanes-Oxley Act of 2002
| |  | Exhibit 31.2 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 Of The Sarbanes-Oxley Act of 2002
| |  | Exhibit 32.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002
| |  | Exhibit 32.2 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002

(b)  Reports on Form 8-K:

During the three months ended September 30, 2003, the Company filed two
Current Reports on Form 8-K. The first report, filed on July 28, 2003, on the
issuance of a press release announcing the Companys financial results for the
three and six months ended June 30, 2003. The second report, filed on September
11, 2003, on the issuance of a press release announcing receipt of a NASDAQ
Staff Determination dated September 8, 2003.

Additionally, on October 6, 2003, the Company filed a Current Report on
Form 8-K on the issuance of a press release announcing that it had retained the
investment banking firm of Christman, Peters & Madden to advise and assist the
Company in securing additional capital and evaluating options for long-term
growth.

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|                                             |  |                                                        |  |                 
|-------------------------------------------- |  | ------------------------------------------------------ |  | ----------------
|Signature                                    |  | Title                                                  |  | Date            
|                                             |  |                                                        |  |                 
|/s/ Tyram H. Pettit

Tyram H. Pettit         |  | President, Chief Executive
Officer and Director        |  | November 6, 2003
|                                             |  |                                                        |  |                 
|/s/ Terrence A. Rixford

Terrence A. Rixford |  | Senior VP-Finance, Chief
inancial Officer and
Director |  | November 6, 2003

16