##### Table of Contents



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 June 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
(State or Other Jurisdiction of
Incorporation or Organization)         |  | 91-1758621
(I.R.S. Employer Identification No.)
|                                                                              |  |                                                
|16125 SW 72ND Ave.; Portland, Oregon
(Address of Principal Executive Offices) |  | 97224
(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 June 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





---

TABLE OF CONTENTS



|                               |                                                                                                |                                            |  |  |  |  |  | 
|------------------------------ | ---------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | ITEM 1. FINANCIAL STATEMENTS  UNAUDITED                                                      
|                               |                                                                                                | 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.
|PART II  OTHER INFORMATION   
|                               | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   
|                               | 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                  



---



##### Table of Contents



TABLE OF CONTENTS

|                               |                                                                                               |                                                                                                 |   |      |   | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | - | ---- | - | 
|                               |                                                                                               |                                                                                                 |   | Page
|                               |                                                                                               |                                                                                                 |   |     
|PART I  FINANCIAL INFORMATION |                                                                                               |                                                                                                 | 1 |     
|                               | ITEM 1. FINANCIAL STATEMENTS  UNAUDITED                                                      |                                                                                                 |   | 1    |  
|                               |                                                                                               | Consolidated balance sheets as of December 31, 2002 (audited) and June 30, 2003                 |   |      | 2 | 
|                               |                                                                                               | Consolidated statements of operations for the three and six months ended June 30, 2003 and 2002 |   |      | 3 | 
|                               |                                                                                               | Consolidated statements of cash flows for the three and six months ended June 30, 2003 and 2002 |   |      | 4 | 
|                               |                                                                                               | Notes to consolidated financial statements                                                      |   |      | 5 | 
|                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |                                                                                                 |   | 9    |  
|                               | ITEM 3. CONTROLS AND PROCEDURES                                                               |                                                                                                 |   | 12   |  
|PART II  OTHER INFORMATION    |                                                                                               |                                                                                                 |   |     
|                               | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |                                                                                                 |   | 13   |  
|                               | ITEM 5. OTHER INFORMATION                                                                     |                                                                                                 |   | 13   |  
|                               | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                      |                                                                                                 |   | 13   |  
|                               | SIGNATURES                                                                                    |                                                                                                 |   | 14   |  
|                               | CERTIFICATIONS                                                                                |                                                                                                 |   | 15   |  





---



##### Table of Contents






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 June 30, 2003 and of operating results and of cash
flows for the three and six month periods ended June 30, 2002 and 2003.

1



---



##### Table of Contents



MICROHELIX, INC.

CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                                                              |                             |           |                   |           |               |           |             |           | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------- | --------- | ----------------- | --------- | ------------- | --------- | ----------- | --------- | 
|                                     |                                                                                                                                                              |                             |           | December 31, 2002 |           | June 30, 2003
|                                     |                                                                                                                                                              |                             |           |                   |           |              
|Assets                               |                                                                                                                                                              |                             |           |                   |           |               |           |            
|                                     | Current Assets:                                                                                                                                              |                             |           |                   |           |               |           |             |          
|                                     | Cash                                                                                                                                                         |                             | $         | 2,131,549         |           |               | $         | 802,513     |          
|                                     | Accounts receivable, net of allowance of $19,517 and $40,573                                                                                                 |                             |           | 1,117,807         |           |               |           | 770,897     |          
|                                     | Due from affiliates                                                                                                                                          |                             |           | 37,247            |           |               |           | 44,894      |          
|                                     | Inventories (Note 2)                                                                                                                                         |                             |           | 705,162           |           |               |           | 813,052     |          
|                                     | Prepaid expenses                                                                                                                                             |                             |           | 110,523           |           |               |           | 113,868     |          
|                                     |                                                                                                                                                              |                             |           |                   |           |               |           |            
|                                     |                                                                                                                                                              | Total current assets        |           |                   | 4,102,288 |               |           |             | 2,545,224 | 
|Property and equipment  net         |                                                                                                                                                              |                             | 1,546,453 |                   |           |               | 1,577,470 |            
|Intangible and other assets  net    |                                                                                                                                                              |                             | 1,094,983 |                   |           |               | 1,133,769 |            
|                                     |                                                                                                                                                              |                             |           |                   |           |               |           |            
|                                     |                                                                                                                                                              | Total                       |           | $                 | 6,743,724 |               |           | $           | 5,256,463 | 
|                                     |                                                                                                                                                              |                             |           |                   |           |               |           |             |          
|Liabilities and Shareholders Equity |                                                                                                                                                              |                             |           |                   |           |               |           |            
|                                     | Current Liabilities:                                                                                                                                         |                             |           |                   |           |               |           |             |          
|                                     | Accounts payable                                                                                                                                             |                             | $         | 476,712           |           |               | $         | 515,311     |          
|                                     | Accrued liabilities                                                                                                                                          |                             |           | 444,813           |           |               |           | 403,929     |          
|                                     | Line of credit                                                                                                                                               |                             |           | 739,111           |           |               |           | 354,831     |          
|                                     | Short-term borrowing                                                                                                                                         |                             |           |                  |           |               |           | 140,000     |          
|                                     | Current portion of capital lease obligation                                                                                                                  |                             |           |                  |           |               |           | 190,514     |          
|                                     | Current portion of notes payable to shareholder                                                                                                              |                             |           | 535,000           |           |               |           | 148,000     |          
|                                     |                                                                                                                                                              |                             |           |                   |           |               |           |            
|                                     |                                                                                                                                                              | Total current liabilities   |           |                   | 2,195,636 |               |           |             | 1,752,585 | 
|                                     |                                                                                                                                                              |                             |           |                   |           |               |           |            
|Long-Term Liabilities:               |                                                                                                                                                              |                             |           |                   |           |               |           |            
|                                     | Deferred gain on sale-leaseback                                                                                                                              |                             |           |                  |           |               |           | 274,406     |          
|                                     | Capital lease obligation                                                                                                                                     |                             |           |                  |           |               |           | 173,406     |          
|                                     | Long-term portion of notes payable to shareholder                                                                                                            |                             |           | 600,000           |           |               |           | 352,000     |          
|                                     |                                                                                                                                                              |                             |           |                   |           |               |           |            
|                                     |                                                                                                                                                              | Total long-term liabilities |           |                   | 600,000   |               |           |             | 799,812   | 
|                                     |                                                                                                                                                              |                             |           |                   |           |               |           |            
|                                     |                                                                                                                                                              | Total liabilities           |           |                   | 2,795,636 |               |           |             | 2,552,397 | 
|                                     |                                                                                                                                                              |                             |           |                   |           |               |           |            
|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 June 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 June 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           | )         |               |           | (37,960     | )        
|                                     | Accumulated deficit                                                                                                                                          |                             |           | (16,612,122       | )         |               |           | (17,846,918 | )        
|                                     |                                                                                                                                                              |                             |           |                   |           |               |           |            
|                                     |                                                                                                                                                              | Total shareholdersequity   |           |                   | 3,948,088 |               |           |             | 2,704,066 | 
|                                     |                                                                                                                                                              |                             |           |                   |           |               |           |            
|                                     |                                                                                                                                                              | Total                       |           | $                 | 6,743,724 |               |           | $           | 5,256,463 | 
|                                     |                                                                                                                                                              |                             |           |                   |           |               |           |             |          

See notes to consolidated financial statements.

2



---



##### Table of Contents






MICROHELIX, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                         |                                 |                              |            |                             |          |                           |           |         |         |      |            |           |           |   |             |         |           |  
|-------------------------------------------------------- | ------------------------------- | ---------------------------- | ---------- | --------------------------- | -------- | ------------------------- | --------- | ------- | ------- | ---- | ---------- | --------- | --------- | - | ----------- | ------- | --------- | -
|                                                         |                                 |                              |            | Three Months Ended June 30, |          | Six Months Ended June 30,
|                                                         |                                 |                              |            |                             |          |                          
|                                                         |                                 |                              |            | 2002                        |          | 2003                      |           | 2002    |         | 2003
|                                                         |                                 |                              |            |                             |          |                           |           |         |         |     
|Sales                                                    |                                 | $                            | 1,010,558  |                             |          | $                         | 1,478,203 |         |         | $    | 2,302,525  |           |           | $ | 2,489,421   |        
|Cost of Sales                                            |                                 |                              | 1,306,633  |                             |          |                           | 1,295,247 |         |         |      | 2,408,611  |           |           |   | 2,365,240   |        
|                                                         |                                 |                              |            |                             |          |                           |           |         |         |      |            |           |           |   |             |        
|                                                         |                                 | Gross profit (loss)          |            |                             | (296,075 | )                         |           |         | 182,956 |      |            |           | (106,086  | ) |             |         | 124,181   |  
|                                                         |                                 |                              |            |                             |          |                           |           |         |         |      |            |           |           |   |             |        
|Operating Expenses:                                      |                                 |                              |            |                             |          |                           |           |         |         |      |            |           |           |   |             |        
|                                                         | Research and development        |                              |            | 123,943                     |          |                           |           | 136,183 |         |      |            | 253,582   |           |   |             | 439,807 |          
|                                                         | Sales and marketing             |                              |            | 220,496                     |          |                           |           | 134,021 |         |      |            | 414,459   |           |   |             | 290,915 |          
|                                                         | General and administrative      |                              |            | 580,045                     |          |                           |           | 313,963 |         |      |            | 1,128,223 |           |   |             | 597,680 |          
|                                                         |                                 |                              |            |                             |          |                           |           |         |         |      |            |           |           |   |             |        
|                                                         |                                 | Total operating expenses     |            |                             | 924,484  |                           |           |         | 584,167 |      |            |           | 1,796,264 |   |             |         | 1,328,402 |  
|                                                         |                                 |                              |            |                             |          |                           |           |         |         |      |            |           |           |   |             |        
|Loss from operations                                     |                                 |                              | (1,220,559 | )                           |          |                           | (401,211  | )       |         |      | (1,902,350 | )         |           |   | (1,204,221) | )      
|                                                         |                                 |                              |            |                             |          |                           |           |         |         |      |            |           |           |   |             |        
|Other Income (Expense):                                  |                                 |                              |            |                             |          |                           |           |         |         |      |            |           |           |   |             |        
|                                                         | Gain on sale of asset           |                              |            |                           |          |                           |           | 30,249  |         |      |            |         |           |   |             | 30,249  |          
|                                                         | Interest income                 |                              |            | 20,921                      |          |                           |           | 4,316   |         |      |            | 47,460    |           |   |             | 9,308   |          
|                                                         | Interest expense                |                              |            | (24,056                     | )        |                           |           | (21,307 | )       |      |            | (41,840   | )         |   |             | (42,347 | )        
|                                                         | Interest expense to shareholder |                              |            | (21,223                     | )        |                           |           | (9,349  | )       |      |            | (49,369   | )         |   |             | (27,842 | )        
|                                                         |                                 |                              |            |                             |          |                           |           |         |         |      |            |           |           |   |             |        
|                                                         |                                 | Other income (expense)  net |            |                             | (24,358  | )                         |           |         | 3,909   |      |            |           | (43,749   | ) |             |         | (30,632   | )
|                                                         |                                 |                              |            |                             |          |                           |           |         |         |      |            |           |           |   |             |        
|Net loss                                                 |                                 | $                            | (1,244,917 | )                           |          | $                         | (397,302  | )       |         | $    | (1,946,099 | )         |           | $ | (1,234,853  | )      
|                                                         |                                 |                              |            |                             |          |                           |           |         |         |      |            |           |           |   |             |        
|Net loss per common share  basic and diluted            |                                 | $                            | (.27       | )                           |          | $                         | (.09      | )       |         | $    | (.41       | )         |           | $ | (.27        | )      
|                                                         |                                 |                              |            |                             |          |                           |           |         |         |      |            |           |           |   |             |        
|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.

3



---



##### Table of Contents






MICROHELIX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                   |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |            |         |          |          |  
|-------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------ | ----------------------------------------------- | ----------------------------------------------- | ------- | ------------------ | ---------- | ---------------- | ------- | ------- | ---------- | ---------- | ------- | ---------- | ---------- | ---------- | ------- | -------- | -------- | -
|                                                   |                                                                                       |                                            |                                                 |                                                 |         | Three Months Ended |            | Six Months Ended
|                                                   |                                                                                       |                                            |                                                 |                                                 |         | June 30,           |            | June 30,        
|                                                   |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                 
|                                                   |                                                                                       |                                            |                                                 |                                                 |         | 2002               |            | 2003             |         | 2002    |            | 2003      
|                                                   |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |           
|Cash Flows from Operating Activities:              |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |           
|                                                   | Net loss                                                                              |                                            | $                                               | (1,244,917                                      | )       |                    | $          | (397,302         | )       |         | $          | (1,946,099 | )       |            | $          | (1,234,853 | )      
|                                                   | Adjustments to reconcile net loss to cash provided by
(used in) operating activities: |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |            |        
|                                                   |                                                                                       | Depreciation and amortization              |                                                 |                                                 | 133,163 |                    |            |                  | 120,452 |         |            |            | 265,435 |            |            |            | 256,760 |         
|                                                   |                                                                                       | Stock compensation expense                 |                                                 |                                                 | 9,142   |                    |            |                  | 5,387   |         |            |            | 18,283  |            |            |            | 10,774  |         
|                                                   |                                                                                       | Amortization of deferred inventory charges |                                                 |                                                 | 1,540   |                    |            |                  | 1,540   |         |            |            | 3,080   |            |            |            | 3,080   |         
|                                                   |                                                                                       | Gain on sale of equipment                  |                                                 |                                                 |        |                    |            |                  | (30,249 | )       |            |            |        |            |            |            | (30,249 | )       
|                                                   |                                                                                       | Change in:                                 |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |            |         |         
|                                                   |                                                                                       |                                            | Accounts receivable, net                        |                                                 |         | 323,001            |            |                  |         | 146,523 |            |            |         | 478,470    |            |            |         | 346,910  |         
|                                                   |                                                                                       |                                            | Due from affiliates                             |                                                 |         |                   |            |                  |         | (3,515  | )          |            |         |           |            |            |         | (7,647   | )       
|                                                   |                                                                                       |                                            | Inventories                                     |                                                 |         | (70,596            | )          |                  |         | (14,965 | )          |            |         | (59,752    | )          |            |         | (110,970 | )       
|                                                   |                                                                                       |                                            | Prepaid expenses                                |                                                 |         | 117,511            |            |                  |         | (4,966  | )          |            |         | 75,568     |            |            |         | (3,345   | )       
|                                                   |                                                                                       |                                            | Intangible and other assets                     |                                                 |         | 1                  |            |                  |         | (33,736 | )          |            |         | (9,144     | )          |            |         | (56,489  | )       
|                                                   |                                                                                       |                                            | Accounts payable                                |                                                 |         | (100,850           | )          |                  |         | 224,182 |            |            |         | (465,141   | )          |            |         | 38,599   |         
|                                                   |                                                                                       |                                            | Accrued interest to shareholder                 |                                                 |         |                   |            |                  |         |        |            |            |         | (530,546   | )          |            |         |         |         
|                                                   |                                                                                       |                                            | Accrued liabilities                             |                                                 |         | 66,921             |            |                  |         | 59,133  |            |            |         | (145,178   | )          |            |         | (40,884  | )       
|                                                   |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |           
|                                                   |                                                                                       |                                            | Cash provided by (used in) operating activities |                                                 |         | (765,084           | )          |                  |         | 72,534  |            |            |         | (2,315,024 | )          |            |         | (828,314 | )       
|                                                   |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |           
|Cash Flows from Investing Activities:              |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |           
|                                                   | Capital expenditures                                                                  |                                            |                                                 | (33,562                                         | )       |                    |            |                 |         |         |            | (135,806   | )       |            |            | (12,193    | )      
|                                                   | Proceeds from sale of equipment                                                       |                                            |                                                 |                                                |         |                    |            | 419,000          |         |         |            |           |         |            |            | 419,000    |        
|                                                   |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |           
|                                                   |                                                                                       |                                            |                                                 | Cash provided by (used in) investing activities |         |                    | (33,562    | )                |         |         | 419,000    |            |         |            | (135,806   | )          |         |          | 406,807  |  
|                                                   |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |           
|Cash Flows from Financing Activities:              |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |           
|                                                   | Proceeds from borrowings against notes payable and
lines of credit                    |                                            |                                                 |                                                |         |                    |            | 1,319,866        |         |         |            |           |         |            |            | 2,394,151  |        
|                                                   | Principal payments on notes payable and lines of credit                               |                                            |                                                 | (57,971                                         | )       |                    |            | (1,236,896       | )       |         |            | (307,405   | )       |            |            | (3,273,431 | )      
|                                                   | Restricted short-term investment                                                      |                                            |                                                 | (1,344,425                                      | )       |                    |            |                 |         |         |            | (1,344,425 | )       |            |            |           |        
|                                                   | Principal payments on capital lease obligations                                       |                                            |                                                 |                                                |         |                    |            | (8,249           | )       |         |            |           |         |            |            | (8,249     | )      
|                                                   | Repurchase of common stock                                                            |                                            |                                                 |                                                |         |                    |            |                 |         |         |            |           |         |            |            | (20,000    | )      
|                                                   |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |            |        
|                                                   |                                                                                       |                                            |                                                 | Cash provided by (used in) financing activities |         |                    | (1,402,396 | )                |         |         | 74,721     |            |         |            | (1,651,830 | )          |         |          | (907,529 | )
|                                                   |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |           
|Change in cash                                     |                                                                                       |                                            | (2,201,042                                      | )                                               |         |                    | 566,255    |                  |         |         | (4,102,660 | )          |         |            | (1,329,036 | )         
|Cash, beginning of period                          |                                                                                       |                                            | 5,451,698                                       |                                                 |         |                    | 236,258    |                  |         |         | 7,353,316  |            |         |            | 2,131,549  |           
|                                                   |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |           
|Cash, end of period                                |                                                                                       | $                                          | 3,250,656                                       |                                                 |         | $                  | 802,513    |                  |         | $       | 3,250,656  |            |         | $          | 802,513    |           
|                                                   |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |            |        
|Supplemental disclosure of cash flow information  |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |           
|                                                   | Cash paid for interest                                                                |                                            | $                                               | 45,279                                          |         |                    | $          | 30,656           |         |         | $          | 621,755    |         |            | $          | 70,189     |        
|                                                   |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |            |        
|                                                   | Assets acquired under capital lease                                                   |                                            | $                                               |                                                |         |                    | $          | 372,169          |         |         | $          |           |         |            | $          | 372,169    |        
|                                                   |                                                                                       |                                            |                                                 |                                                 |         |                    |            |                  |         |         |            |            |         |            |            |            |        

See notes to consolidated financial statements.

4



---



##### Table of Contents






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 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 for complete financial statements.

The results of operations for the three and six month periods ended June
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 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 loss per share would have been as
follows:

|                                                                                          |  |   |                    |   |                  |   |          |   |      |   |            |   |  |   |            |   | 
|----------------------------------------------------------------------------------------- |  | - | ------------------ | - | ---------------- | - | -------- | - | ---- | - | ---------- | - |  | - | ---------- | - | 
|                                                                                          |  |   | Three Months Ended |   | Six Months Ended
|                                                                                          |  |   | June 30,           |   | June 30,        
|                                                                                          |  |   |                    |   |                 
|                                                                                          |  |   | 2002               |   | 2003             |   | 2002     |   | 2003
|                                                                                          |  |   |                    |   |                  |   |          |   |     
|Net loss, as reported                                                                     |  | $ | (1,244,917         | ) |                  | $ | (397,302 | ) |      | $ | (1,946,099 | ) |  | $ | (1,234,853 | )
|Add/(Deduct): Total stock-based employee
compensation expense determined under fair value |  |   |                    |   |                  |   |          |   |      |   |            |   |  |   |            |  

5



---



##### Table of Contents



|                                                         |                                         |   |                    |     |                  |   |          |        |      |   |            |         |   |   |            |         |  
|-------------------------------------------------------- | --------------------------------------- | - | ------------------ | --- | ---------------- | - | -------- | ------ | ---- | - | ---------- | ------- | - | - | ---------- | ------- | -
|                                                         |                                         |   | Three Months Ended |     | Six Months Ended
|                                                         |                                         |   | June 30,           |     | June 30,        
|                                                         |                                         |   |                    |     |                 
|                                                         |                                         |   | 2002               |     | 2003             |   | 2002     |        | 2003
|                                                         |                                         |   |                    |     |                  |   |          |        |     
|                                                         | based method for all awards, net of tax |   |                    | 253 |                  |   |          | (2,225 | )    |   |            | (56,099 | ) |   |            | (96,742 | )
|                                                         |                                         |   |                    |     |                  |   |          |        |      |   |            |         |   |   |            |        
|Net loss, pro forma                                      |                                         | $ | (1,244,664         | )   |                  | $ | (399,527 | )      |      | $ | (2,002,198 | )       |   | $ | (1,331,595 | )      
|                                                         |                                         |   |                    |     |                  |   |          |        |      |   |            |         |   |   |            |        
|Net loss per common share  basic and diluted            |                                         | $ | (0.27              | )   |                  | $ | (0.09    | )      |      | $ | (0.41      | )       |   | $ | (0.27      | )      
|Net loss per common share  basic and
diluted, pro
forma |                                         | $ | (0.27              | )   |                  | $ | (0.09    | )      |      | $ | (0.43      | )       |   | $ | (0.29      | )      

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 six months ended June
30, 2003. There were 107,500 and 117,500 new options granted at an exercise
price of $0.35 per share during the three and six months periods ending June
30, 2003, respectively. There were 8,636 and 23,438 options canceled at prices
ranging from $0.34 to $9.06 per share during the three and six months ended
June 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 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.

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

6



---



##### Table of Contents





|2. |  | Inventories                
|-- |  | ---------------------------
|  
|   |  | Inventories are as follows:

|                |       |   |              |         |          |   |         |         | 
|--------------- | ----- | - | ------------ | ------- | -------- | - | ------- | ------- | 
|                |       |   | December 31, |         | June 30,
|                |       |   | 2002         |         | 2003    
|                |       |   |              |         |         
|Raw materials   |       | $ | 606,969      |         |          | $ | 726,738 |        
|Work-in-process |       |   | 98,193       |         |          |   | 86,314  |        
|                |       |   |              |         |          |   |         |        
|                | Total |   | $            | 705,162 |          |   | $       | 813,052 | 
|                |       |   |              |         |          |   |         |        

|3. |  | Line of Credit and Notes Payable
|-- |  | --------------------------------
|  

In December 2002, the Company entered into a revolving line of credit with
an asset-based lender. The line of credit is secured by accounts receivable.
The line of credit bears interest at the prime rate plus 6.25% (10.25% at June
30, 2003) and allows the Company to borrow up to $1,500,000. At June 30, 2003,
$354,831 was outstanding on the line of credit. As of June 30, 2003, the
Company was in compliance with the terms of the line of credit.

Notes payable consist of the following:

|                                                                                                                                                                                                  |                                                   |   |              |           |          |   |          |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | - | ------------ | --------- | -------- | - | -------- | ------- | 
|                                                                                                                                                                                                  |                                                   |   | December 31, |           | June 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 June 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 June 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 June 30, 2003, interest
payable monthly
and principal payment due December 2004, secured by certain assets                                         |                                                   |   |             |           |          |   | 500,000  |        
|                                                                                                                                                                                                  |                                                   |   |              |           |          |   |          |        
|                                                                                                                                                                                                  | Total notes payable to shareholder                |   |              | 1,135,000 |          |   |          | 500,000 | 
|Less current portion                                                                                                                                                                              |                                                   |   | (535,000     | )         |          |   | (148,000 | )      
|                                                                                                                                                                                                  |                                                   |   |              |           |          |   |          |        
|                                                                                                                                                                                                  | Long-term portion of notes payable to shareholder |   | $            | 600,000   |          |   | $        | 352,000 | 
|                                                                                                                                                                                                  |                                                   |   |              |           |          |   |          |        

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 $140,000 outstanding on the short-term unsecured note
at June 30, 2003.

7



---



##### Table of Contents



4. Related-Party Transactions

Significant transactions and balances with shareholders are summarized
below:

|                                                    |  |              |           |          |  |   |         | 
|--------------------------------------------------- |  | ------------ | --------- | -------- |  | - | ------- | 
|                                                    |  | December 31, |           | June 30,
|                                                    |  | 2002         |           | 2003    
|                                                    |  |              |           |         
|Due from affiliates                                 |  | $            | 37,247    |          |  | $ | 44,894  | 
|                                                    |  |              |           |          |  |   |         | 
|Notes receivable from shareholders for common stock |  | $            | 57,940    |          |  | $ | 57,940  | 
|                                                    |  |              |           |          |  |   |         | 
|Notes payable to shareholder                        |  | $            | 1,135,000 |          |  | $ | 500,000 | 
|                                                    |  |              |           |          |  |   |         | 

|                                |  |                          |        |                        |  |      |       |      |  |   |        |  |  |   |        | 
|------------------------------- |  | ------------------------ | ------ | ---------------------- |  | ---- | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|                                |  | Three Month Period Ended |        | Six Month Period Ended
|                                |  | June 30,                 |        | June 30,              
|                                |  |                          |        |                       
|                                |  | 2002                     |        | 2003                   |  | 2002 |       | 2003
|                                |  |                          |        |                        |  |      |       |     
|Interest expense to shareholder |  | $                        | 21,223 |                        |  | $    | 9,349 |      |  | $ | 49,369 |  |  | $ | 27,842 | 
|                                |  |                          |        |                        |  |      |       |      |  |   |        |  |  |   |        | 

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.

* * * * * *

8



---



##### Table of Contents






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. 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 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

9



---



##### Table of Contents



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 SIX MONTH PERIODS ENDED JUNE 30, 2003 AND JUNE 30, 2002

Total sales for the second quarter ending June 30, 2003 were $1,478,000,
compared to total sales of $1,011,000 reported in the second quarter of last
year, an increase of $467,000 or 46%. This increase was primarily derived from
existing customers in both the minimally invasive and ultrasound markets.

Total sales for the six month period ending June 30, 2003 were $2,489,000,
compared to total sales of $2,303,000 reported in the first six months of last
year, an increase of $186,000 or 8%. On a year-to-date basis, sales have
increased to customers in the minimally invasive and ultrasound markets,
however these increases were offset by sales decreases in the implantable
market and from government grants.

Gross margin for the second quarter of 2003 was a positive $183,000 compared to
a negative gross margin of $296,000 recorded in the second quarter of 2002.
The principal reason for the $479,000 improvement was due to improved
utilization in both the Portland, Oregon and Nogales, Mexico plants. Both
facilities shipped more products in the second quarter of this year compared to
the same quarter a year ago, while at the same time holding their costs in the
second quarter of 2003 in line with their cost levels a year earlier in the
second quarter of 2002. In addition, the second quarter of 2002 was adversely
impacted by shipments against a development contract that had negative margin
associated with it. This contract was agreed to in anticipation of receiving a
long-term production contract that never materialized.

Gross margin for the six month period ending June 30, 2003 was a positive
$124,000, compared to a negative gross margin of $106,000 recorded in the six
month period ending June 30, 2002. Generally, the same factors that
contributed to the favorable comparison between the second quarter of 2003 and
the second quarter of 2002 contributed to the favorable comparison of gross
margin for the first six months of 2003 compared to the first six months of
2002.

Total operating expenses were $584,000 in the second quarter of 2003, compared
to $924,000 in total operating expenses in the second quarter of 2002
representing a reduction of $340,000 or 37%. The primary reason for this
decrease is attributable to the cost reduction program that was initiated in
October 2002 and, to a lesser extent, selective cost reduction actions that the
Company initiated in April 2003. Sales and marketing expenses were $134,000 in
the second quarter of 2003, compared to $220,000 in the second quarter of 2002.
The primary reason for the reduction in sales and marketing expense is
attributable to changing from exclusively a direct sales organization to a
distribution organization that uses both direct sales and manufacturing
representatives. General and administrative expenses were $314,000 in the
second quarter of 2003, compared to $580,000 in the second quarter of 2002.
This reduction in general and administrative expenses is directly attributable
to the cost reduction program implemented in October 2002. This cost reduction
program included employee layoffs, employee pay reductions, reduced company
benefit programs and reductions in travel, legal and investor relation
expenses.

Total operating expenses were $1,328,000 for the first six months of 2003,
compared to $1,796,000 in total operating expenses for the first six months of
2002, a reduction of $468,000 or 26%. The expense reductions in the sales and
marketing department and the general and administrative departments in the
first six months of 2003, compared to the first six months of 2002 are
primarily attributable to the reasons described in the preceding paragraphs
discussion of expense changes quarter to quarter. Research and development
expenses for the six months ended June 30, 2003 were $440,000, compared to
$254,000 for the first six months of 2002. Research and development expense
was greater in 2003 because during the prior year engineering expenses were
absorbed by a major development contract that was billed to a customer. In
2003, no such contract was available to absorb these expenses.

Other income was $4,000 in the second quarter of 2003, compared to other
expense of $24,000 recorded in the second quarter of 2002. Other income of
$4,000 was realized primarily from a gain on the sale of an asset, plus
interest earned on deposits offset by interest expense. For the first six
months of 2003 interest expense net of other income was $31,000, compared to
$44,000 interest expense net of other income for the first six months of 2002.

As a result of the increased revenue in the second quarter of 2003 compared to
the second quarter of 2002, the improvement in gross margin during this same
period and the reduction in operating expenses and improvement in other income
during this same period the net loss in the second quarter of 2003 was
$397,000, an improvement of $848,000 from the $1,245,000 net loss recorded in
the second

10



---



##### Table of Contents



quarter of 2002. For the first six months of 2003 the net loss was
$1,235,000,compared to a net loss of $1,946,000 recorded in the first six
months of 2002.

LIQUIDITY AND CAPITAL RESOURCES

THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2003 AND JUNE 30, 2002

During the second quarter of 2003 the Company generated $72,000 cash from
operations, compared to a $765,000 use of cash in the second quarter of 2002.
This improvement in operating cash flow of $837,000 can be entirely accounted
for through the reduction in the net operating loss from $1,245,000 in the
second quarter of 2002 to a net operating loss of $397,000 in the second
quarter of 2003, or an improvement of $848,000. Total cash increased by
$566,000 in the second quarter of 2003 compared to a $2,201,000 reduction in
cash in the second quarter of 2002, or a total change in cash flow of
$2,767,000. The most important factors contributing to this change are the
reduction in operating losses of $848,000, proceeds from a sale-leaseback
financing of $369,000 and a transfer of $1,344,000 under a restricted
short-term investment arrangement that occurred in the second quarter of 2002.
These three factors account for $2,611,000 of the total change of $2,767,000
that occurred between the second quarter of 2003 and the second quarter of
2002.

For the first six months of 2003 the Company used $1,329,000 of cash compared
to $4,103,000 of cash used during the first six months of 2002, or a decrease
in cash used of $2,774,000 during the first half of 2003 compared to the first
half of 2002. The decrease in the use of cash during this period was due
primarily to reduced net operating losses of $711,000, a reduction in vendor
payments of $504,000, reduced payments of interest to a shareholder of
$531,000, and a reduction of $744,000 in cash used in financing activities.
These four factors account for $2,490,000 of the total difference in cash used
of $2,774,000.

The cash balance as of June 30, 2003 was $803,000, an increase of $567,000 from
the March 31, 2003 cash balance of $236,000. The Company continues to
investigate additional sources of capital, but the Company cannot predict or
guarantee the outcome of these efforts. The Company continues to believe that
its current operations can be managed with the financing arrangements that are
in place but management understands the importance of securing additional
capital for the Company.

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

|                                         |  |                        |           |                  |  |           |           |  |  |   |         | 
|---------------------------------------- |  | ---------------------- | --------- | ---------------- |  | --------- | --------- |  |  | - | ------- | 
|                                         |  | Payments Due by Period
|                                         |  |                       
|Contractual Obligations                  |  | Total                  |           | Less than 1 year |  | 1-3 years
|                                         |  |                        |           |                  |  |          
|Operating leases, net of sublease income |  | $                      | 518,000   |                  |  | $         | 176,937   |  |  | $ | 341,063 | 
|Line of credit                           |  |                        | 354,831   |                  |  |           | 354,831   |  |  |   |        | 
|Short-term obligation                    |  |                        | 140,000   |                  |  |           | 140,000   |  |  |   |        | 
|Capital lease obligation                 |  |                        | 363,920   |                  |  |           | 190,514   |  |  |   | 173,406 | 
|Long-term debt to shareholder            |  |                        | 500,000   |                  |  |           | 148,000   |  |  |   | 352,000 | 
|                                         |  |                        |           |                  |  |           |           |  |  |   |         | 
|Total contractual cash obligations       |  | $                      | 1,876,751 |                  |  | $         | 1,010,282 |  |  | $ | 866,469 | 
|                                         |  |                        |           |                  |  |           |           |  |  |   |         | 

11



---



##### Table of Contents



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.

12



---



##### Table of Contents






PART II  OTHER INFORMATION




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Companys annual meeting of shareholders was held on June 5, 2003, at which
the following persons were elected to the Board of Directors by a vote of
shareholders, by the votes and for the terms indicated:

|                    |  |     |           |          |  |             |        |  |  |  |      | 
|------------------- |  | --- | --------- | -------- |  | ----------- | ------ |  |  |  | ---- | 
|Director            |  | For |           | Withheld |  | Term Ending
|                    |  |     |           |          |  |            
|James M. Williams   |  |     | 4,022,368 |          |  |             | 7,000  |  |  |  | 2004 | 
|Tyram H. Pettit     |  |     | 4,022,368 |          |  |             | 7,000  |  |  |  | 2004 | 
|Terrence A. Rixford |  |     | 4,022,368 |          |  |             | 7,000  |  |  |  | 2004 | 
|James B. Stewart    |  |     | 4,022,368 |          |  |             | 7,000  |  |  |  | 2004 | 
|John L. Crary       |  |     | 4,022,368 |          |  |             | 7,000  |  |  |  | 2004 | 
|Richard G. Sass     |  |     | 3,974,924 |          |  |             | 54,944 |  |  |  | 2004 | 




ITEM 5. OTHER INFORMATION

On September 9, 2002, the Company was notified by NASDAQ that it was not in
compliance with Marketplace Rule 4310(c)(8)(D) (the Rule) of the NASDAQ
listing requirements because during the 30 consecutive trading days preceding
notification, the Companys common stock closed under the minimum $1.00 per
share bid price requirement. The Company was given 180 days, or until March 10,
2003, to regain compliance with the Rule. If, at anytime before March 10, 2003,
the bid price of the Companys common stock had closed at $1.00 per share or
more for a minimum of 10 consecutive trading days, the Company would generally
have been considered to be in compliance with the Rule. If the Company was
unable to comply with the Rule within the 180 day period, the Company would be
granted an additional 180 days, or until September 5, 2003 to comply provided
that the Company met one of three NASDAQ Small Cap Market listing requirements
(the Requirements). On March 18, 2003, NASDAQ notified the Company that it
would be given another 180 days to comply with Rule. If, at anytime before
September 4, 2003, the bid price of the Companys common stock closes at $1.00
per share or more for a minimum of 10 consecutive trading days, NASDAQ will
notify the Company in writing that the Company is in compliance with the Rule.
If the Company is unable to comply with the Rule by September 4, 2003, NASDAQ
will determine whether the Company then meets any of the Requirements. If
NASDAQ determines that the Company then meets any of the Requirements, NASDAQ
will notify the Company that it has been granted an additional 90 days to
demonstrate compliance with the Rule, otherwise NASDAQ will notify the Company
that its securities will be delisted. The Company would then have the right to
appeal the delisting of its securities to a Listing Qualifications Panel. If
the Company is not granted an additional 90 days to demonstrate compliance, it
intends to appeal any such delisting to a Listing Qualifications Panel.




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 June 30, 2003, the Company filed two Current
Reports on Form 8-K. The first report filed on May 7, 2003, on the issuance of
a press release announcing the Companys financial results for the quarter
ended March 31, 2003. The second report, filed on May 14, 2003 disclosed
non-public information that was presented in the earnings call held by the
Company on May 7, 2003.

13



---



##### Table of Contents






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                     |  | August 13, 2003
|                                             |  |                                                                     |  |                
|/s/ Terrence A. Rixford

Terrence A. Rixford |  | Senior Vice President-Finance,
Chief Financial Officer and
Director |  | August 13, 2003

14