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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB/A
                                 (Amendment No. 1)

                     ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

                         Commission File Number 0-27035
                                                -------

                                MICROISLET, INC.
             (Exact name of registrant as specified in its charter)

             Nevada                                            88-0408274
             ------                                            ----------
(State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                          Identification Number)

6370 Nancy Ridge Drive, Suite 112, San Diego, California          92121
--------------------------------------------------------          -----
        (Address of principal executive offices)                (Zip Code)

                                 (858) 657-0287
                                 --------------
              (Registrant's telephone number, including area code)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                          Common Stock, $.001 par value
                          -----------------------------
                                (Title of Class)

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

The Registrant's revenues for its most recent fiscal year were $137,087.

As of March 27, 2003, the aggregate market value of the voting stock of the
Registrant held by non-affiliates of the Registrant was $7,910,210.*

The number of shares of Common Stock, $.001 par value, outstanding on March 27,
2003, was 22,658,611.

* Excludes the Common Stock held by executive officers, directors and
shareholders whose ownership exceeds 5% of the Common Stock outstanding on
March 27, 2003. The calculation does not reflect a determination that such
persons are affiliates for any other purposes.

--------------------------------------------------------------------------------



<PAGE>

Explanatory Note:

This Form 10-K/A is filed to correct the opinion of Levitz, Zacks & Ciceric
concerning the Registrant's financial statements as of and for the year ended
December 31, 2001 and for the period from inception (November 10, 1998) to
December 31, 2001. In accordance with Rule 12b-15 under the Securities Exchange
Act, the complete text of Part II, Item 7 is included. The report on Controls
and Procedures of Part III, Item 14 is also included. This report does not
attempt to update the information included herein beyond the original filing
date.

PART II

ITEM 7. FINANCIAL STATEMENTS

The financial statements required by this Item 7 begin on page F-1 and
are located following the signature page and officer certifications.

PART III

ITEM 14.    CONTROLS AND PROCEDURES.

(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act,
as amended, within 90 days of the filing date of this report. Based on their
evaluation, our principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures are effective.

(b) There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in paragraph (a) above.

SIGNATURES

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

                                   MICROISLET, INC.

                                   By:  /S/ John F. Steel IV
                                        -------------------------------------
                                        John F. Steel IV
                                        Chairman and Chief Executive Officer
                                        (Principal Executive Officer)

                                   Date:  September 26, 2003

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

<TABLE>
<CAPTION>
          Signature                                Title                           Date
          ---------                                -----                           ----

<S>                                    <C>                                    <C>
/S/ John F. Steel IV                   Chairman and Chief Executive Officer   September 26, 2003
------------------------------         (Principal Executive Officer)
John F. Steel IV

/S/ William G. Kachioff                Vice President, Finance and Chief      September 26, 2003
------------------------------         Financial Officer
William G. Kachioff                    (Principal Financial and Accounting
                                       Officer)

/S/ Hartoun Hartounian, Ph.D.          President, Chief Operating Officer     September 26, 2003
------------------------------         and Director
Hartoun Hartounian, Ph.D.

/S/        *                           Director                               September 26, 2003
------------------------------
Robert W. Anderson, M.D.

/S/        *                           Director                               September 26, 2003
------------------------------
James R. Gavin III, M.D., Ph.D.

/S/        *                           Director                               September 26, 2003
------------------------------
Steven T. Frankel

* By John F. Steel IV, Attorney In Fact
</TABLE>



<PAGE>

                                 CERTIFICATIONS

I,   John F. Steel IV, certify that:

1.   I have reviewed this Amendment No. 1 to annual report on Form 10-KSB/A of
     MicroIslet, Inc.;

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

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

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

     a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

     b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

     c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

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

     a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

     b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6.   The registrant's other certifying officers and I have indicated in this
     annual report whether there were significant changes in internal controls
     or in other factors that could significantly affect internal controls
     subsequent to the date of our most recent evaluation, including any
     corrective actions with regard to significant deficiencies and material
     weaknesses.

Dated: September 26, 2003

/S/ John F. Steel IV
----------------------------------
John F. Steel IV
Chairman and Chief Executive Officer (Principal Executive Officer)



<PAGE>

I,   William G. Kachioff, certify that:

1.   I have reviewed this Amendment No. 1 to annual report on Form 10-KSB/A of
     MicroIslet, Inc.;

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

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

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

     a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

     b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

     c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

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

     a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

     b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6.   The registrant's other certifying officers and I have indicated in this
     annual report whether there were significant changes in internal controls
     or in other factors that could significantly affect internal controls
     subsequent to the date of our most recent evaluation, including any
     corrective actions with regard to significant deficiencies and material
     weaknesses.

Dated: September 26, 2003

/S/ William G. Kachioff
----------------------------------
William G. Kachioff
Vice President, Finance and Chief Financial Officer (Principal Financial
Officer)



<PAGE>

Deloitte & Touche LLP
Suite 1900
701 "B" Street
San Diego, California 92101-8198

Tel: (619) 232-6500
Fax: (619) 237-1755
www.deloitte.com
                                                   [Deloitte & Touche logo here]

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders of
MicroIslet, Inc.
San Diego, California

We have audited the accompanying consolidated balance sheet of MicroIslet, Inc.
(the "Company"), a development stage enterprise, as of December 31, 2002 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended, and for the period from August 21, 1998 (date of
incorporation) to December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The Company's
financial statements as of and for the year ended December 31, 2001, and for the
period August 21, 1998 (date of incorporation) through December 31, 2001 were
audited by other auditors whose report, dated July 2, 2002, expressed an
unqualified opinion on those statements and included an explanatory paragraph
that described the restatement discussed in Note 12 to the financial statements.
The financial statements for the period August 21, 1998 (date of incorporation)
through December 31, 2001 reflect total revenues and net loss of $16,846 and
$5,932,106, respectively, of the related totals. The other auditors' report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for such prior periods, is based solely on the report of such other
auditors.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also included assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, based on our audit and the report of other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company at December 31, 2002, and the results of its
operations and its cash flows for the year then ended, and for the period from
August 21, 1998 (date of incorporation) to December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.

[Deloitte & Touche letterhead here]

                                      F-1



<PAGE>

The accompanying financial statements have been prepared assuming that the

Company will continue as a going concern. The Company is a development stage
enterprise engaged in developing and marketing patented technologies in the
field of transplantation therapy for patients with insulin-dependent diabetes.
As discussed in Note 1 to the financial statements, the Company incurred a net
loss of $6.1 million during 2002, and had an accumulated deficit of $12.0
million as of December 31, 2002. The Company expects to incur substantial
additional operating costs, and is dependent on future events, including
obtaining adequate financing to fulfill its development activities. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ Deloitte & Touche LLP

March 11, 2003

                                      F-2



<PAGE>
LEVITZ,                                             701 B STREET, 4TH FLOOR
ZACKS &                                             SAN DIEGO, CALIFORNIA 92101
CICERIC
CERTIFIED PUBLIC ACCOUNTANTS                        (619) 238-1077
                                                    Fax# (619) 696-8614
                                                    MAIL@LZC.COM

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
MICROISLET, INC.
San Diego, California

We have audited the accompanying balance sheet of MicroIslet, Inc. (a
development stage company) as of December 31, 2001, and the related statements
of operations, stockholders' equity and cash flows for the year ended December
31, 2001, and for the period from August 21, 1998 (inception) to December 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MicroIslet, Inc. (a development
stage company) at December 31, 2001, and the results of its operations and its
cash flows for the year ended December 31, 2001, and for the period from August
21, 1998 (inception) to December 31, 2001, in conformity with accounting
principles generally accepted in the United States. As discussed in Note 12, the
financial statements for 2001 have been restated.

/s/ Levitz, Zacks & Ciceric

July 2, 2002
San Diego, California

                                      F-3



<PAGE>

<TABLE>

                                               MicroIslet, Inc.
                                         (A Development Stage Company)
                                          Consolidated Balance Sheets
<CAPTION>

                                                                                December 31,       December 31,
                                                                                   2002               2001
                                                                                                    (Restated)
                                                                               -------------      -------------
<S>                                                                            <C>                <C>
ASSETS

Current Assets:
  Cash                                                                         $    813,696       $    548,781
  Grants receivable                                                                  35,047              4,972
  Prepaid expenses                                                                  110,469             23,908
                                                                               -------------      -------------

        Total current assets                                                        959,212            577,661

Equipment, net                                                                      167,074             61,264
Patent, net                                                                          11,996             12,470
Deposits and other assets                                                            50,210             16,702
                                                                               -------------      -------------

        Total assets                                                           $  1,188,492       $    668,097
                                                                               =============      =============

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Research expenses due to stockholder                                         $    230,000       $    240,000
  Deferred grant revenue                                                             40,352                 --
  Accounts payable and accrued expenses                                             435,303             66,379
                                                                               -------------      -------------

        Total current liabilities                                                   705,655            306,379
                                                                               -------------      -------------

Stockholders' Equity:
  Convertible preferred stock - $.001 par value: 10,000,000
    shares authorized; zero shares and 82,888 shares issued
    and outstanding at December 31, 2002 and December 31, 2001,
    respectively; aggregate liquidation preference
    of $186,500 at December 31, 2001                                                     --                 83
  Common stock - $.001 par value: 50,000,000 shares
    authorized; 22,658,592 and 17,415,575 shares issued and
    outstanding  at December 31, 2002 and December 31, 2001, respectively            22,659             17,416
  Additional paid-in capital                                                     12,498,419          6,276,325
  Deficit accumulated during the development stage                              (12,038,241)        (5,932,106)
                                                                               -------------      -------------

        Total stockholders' equity                                                  482,837            361,718
                                                                               -------------      -------------

        Total liabilities and stockholders' equity                             $  1,188,492       $    668,097
                                                                               =============      =============
</TABLE>

                               See notes to consolidated financial statements.

                                                     F-4



<PAGE>
<TABLE>

                                               MicroIslet, Inc.
                                         (A Development Stage Company)

                                     Consolidated Statements of Operations
<CAPTION>

                                                                                        August 21, 1998
                                                              Year Ended                       to
                                                             December 31,                December 31,
                                                       2002                2001               2002
                                                                       (Restated)
                                                   -------------      -------------      -------------
<S>                                                <C>                <C>                <C>
   Grant revenue                                   $    137,087       $     16,846       $    153,933

Expenses:
   Research and development expenses                  1,137,465          4,093,997          5,865,332
   General and administrative expenses                5,106,412            827,871          6,360,506
                                                   -------------      -------------      -------------
    Operating expenses                               (6,243,877)        (4,921,868)       (12,225,838)
                                                   -------------      -------------      -------------
    Loss from operations                             (6,106,790)        (4,905,022)       (12,071,905)
                                                   -------------      -------------      -------------

Other income (expense):
   Interest income                                       19,432              9,268             50,283
   Interest and other expenses                          (18,777)              (161)           (18,938)
   Other                                                     --              1,819              2,319
                                                   -------------      -------------      -------------

      Total other income (expense)                          655             10,926             33,664
                                                   -------------      -------------      -------------

      Net loss                                     $ (6,106,135)      $ (4,894,096)      $(12,038,241)
                                                   =============      =============      =============

Basic and diluted net loss per share               $       (.29)      $       (.29)      $       (.66)
                                                   =============      =============      =============

Weighted average number of shares outstanding
  used in calculation                                20,904,114         16,977,840         18,372,013
                                                   =============      =============      =============
</TABLE>

                               See notes to consolidated financial statements.

                                                     F-5



<PAGE>
<TABLE>

                                               MicroIslet, Inc.
                                         (A Development Stage Company)
                                           Statements of Cash Flows
<CAPTION>

                                                        Year Ended         Year Ended      August 21, 1998 to
                                                     December 31, 2002  December 31, 2001  December 31, 2002
                                                                           (Restated)
                                                     -----------------  -----------------  -----------------
<S>                                                    <C>                <C>                <C>
Cash flows from operating activities:
  Net loss                                             $ (6,106,135)      $ (4,894,096)      $(12,038,241)
  Adjustments to reconcile net loss to net cash
   used in operating activities:
    Warrant compensation expense                          3,477,723                 --          3,477,723
    In process research and development
      acquired for common stock                                  --          2,067,518          2,067,518
    Compensation paid with stock options                    331,473          1,340,746          1,883,241
    Depreciation and amortization                            34,484             16,970             61,596
    Loss on disposal of equipment                            15,084                 --             15,084
Changes in operating assets and liabilities:
    Deposits and other assets                               (33,508)            (8,208)           (62,680)
    Grants receivable                                       (30,075)            (4,972)           (35,047)
    Prepaid expenses                                        (86,561)           (14,811)          (110,469)
    Deferred grant revenue                                   40,352                 --             40,352
    Accounts payable and accrued expenses                   368,924             48,815            435,303
    Research expenses due to stockholder                    (10,000)           240,000            230,000
                                                       -------------      -------------      -------------

        Net cash used in operating activities            (1,998,239)        (1,208,038)        (4,035,620)
                                                       -------------      -------------      -------------

Cash flows from investing activities:
  Purchases of equipment                                   (154,904)           (20,882)          (243,280)
                                                       -------------      -------------      -------------

        Net cash used in investing activities              (154,904)           (20,882)          (243,280)
                                                       -------------      -------------      -------------

Cash flows from financing activities:
  Proceeds from sale of common stock                      2,418,058          1,487,500          4,906,096
  Proceeds from sale of preferred stock                          --                 --            186,500
                                                       -------------      -------------      -------------

        Net cash provided by financing activities         2,418,058          1,487,500          5,092,596
                                                       -------------      -------------      -------------

        Net increase in cash                                264,915            258,580            813,696

Cash at beginning of period                                 548,781            290,201                 --
                                                       -------------      -------------      -------------

Cash at end of period                                  $    813,696       $    548,781       $    813,696
                                                       =============      =============      =============

Interest paid                                          $        411       $        161       $        572
Income taxes paid                                      $      3,282       $         --       $         --

Non-cash investing and financing activities:
  In-process research and development
    acquired for common stock                          $         --       $  2,067,518       $  2,067,518
</TABLE>

                                See notes to consolidated financial statements.

                                                     F-6



<PAGE>
<TABLE>
                                                    MicroIslet, Inc.
                                              (A Development Stage Company)
                                           Statements of Stockholders' Equity
<CAPTION>

                                              PREFERRED STOCK            COMMON STOCK        ADDITIONAL
                                        -------------------------  -------------------------   PAID-IN     ACCUMULATED
                                            Shares       Amount       Shares      Amount       CAPITAL        DEFICIT      TOTAL
                                        ------------ ------------  ------------ ------------ ------------  ------------ ------------
<S>                                          <C>     <C>          <C>           <C>          <C>           <C>          <C>
Sale of common stock to
founders, August 21, 1998                         0  $         0    12,594,203  $    12,594  $   (12,110)  $         0  $       484
Stock issued pursuant to
license agreement,
                     September 15, 1998           0            0       344,586          345         (323)            0           22
                                        ------------ ------------  ------------ ------------ ------------  ------------ ------------

Balance, December 31, 1998                        0            0    12,938,789       12,939      (12,433)            0          506

Sale of preferred stock, net:
                            May 4, 1999      82,888           83             0            0      186,417             0      186,500
Net loss                                                                                                       -72,775      (72,775)
                                        ------------ ------------  ------------ ------------ ------------  ------------ ------------

Balance, December 31, 1999                   82,888           83    12,938,789       12,939      173,984       -72,775      114,231

Sale of common stock, net:
                       January 20, 2000           0            0     1,706,679        1,707      498,293             0      500,000
                       January 24, 2000           0            0       500,080          500         (468)            0           32
Payments received for
January 1, 2001 stock sale                        0            0             0            0      500,000             0      500,000
Compensation expense related to
valuation of options issued                       0            0             0            0      211,022             0      211,022
Net loss                                          0            0             0            0            0      -965,235     (965,235)
                                        ------------ ------------  ------------ ------------ ------------  ------------ ------------

Balance, December 31, 2000                   82,888           83    15,145,548       15,146    1,382,831    -1,038,010      360,050

                                    See notes to consolidated financial statements.
</TABLE>

                                                          F-7



<PAGE>
<TABLE>

                                                    MicroIslet, Inc.
                                              (A Development Stage Company)
                                           Statements of Stockholders' Equity
<CAPTION>

                                              PREFERRED STOCK            COMMON STOCK        ADDITIONAL
                                      -------------------------  -------------------------   PAID-IN     ACCUMULATED
                                          Shares       Amount       Shares      Amount       CAPITAL        DEFICIT        TOTAL
                                   ------------- ------------- ------------- ------------- ------------- ------------- -------------
<S>                                      <C>     <C>             <C>         <C>           <C>           <C>           <C>
Balance, December 31, 2000               82,888            83    15,145,548        15,146     1,382,831    -1,038,010       360,050

Sale of common stock, net:
                  January 1, 2001            --            --     1,706,679         1,707       498,293            --       500,000
                     July 2, 2001            --            --        52,094            52        99,948            --       100,000
                 November 2, 2001            --            --       166,668           166       887,334            --       887,500
Stock issued pursuant to
license agreement,
                 October 16, 2001            --            --       344,586           345     2,067,173            --     2,067,518
Compensation expense related to
valuation of options issued                  --            --            --            --     1,340,746            --     1,340,746
Net loss                                     --            --            --            --            --    (4,894,096)   (4,894,096)
                                   ------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2001               82,888  $         83    17,415,575  $     17,416  $  6,276,325  $ (5,932,106) $    361,718
                                   ============= ============= ============= ============= ============= ============= =============

Sale of common stock, net:

                   April 24, 2002            --            --       504,620           505     2,430,351            --     2,430,856
                     May 13, 2002            --            --        10,000            10        53,990            --        54,000
                     May 15, 2002            --            --         8,333             8        44,992            --        45,000
                  August 31, 2002            --            --        16,334            17        88,185            --        88,202

33,334 shares due pursuant to
Investment Banking Agreement                 --            --            --            --      (200,000)           --      (200,000)

Conversion of preferred stock
to common stock                         (82,888)          (83)    1,295,332         1,295        (1,212)           --            --

Issuance of shares in merger
with ALD Services, Inc.                      --            --     3,408,398         3,408        (3,408)           --            --

Reverse Merger Warrant Expense               --            --            --            --     3,477,723            --     3,477,723

Compensation expense related to
valuation of options issued                  --            --            --            --       331,473            --       331,473

Net loss                                     --            --            --            --            --    (6,106,135)   (6,106,135)
                                   ------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2002                   --            --    22,658,592        22,659    12,498,419   (12,038,241)      482,837
                                   ============= ============= ============= ============= ============= ============= =============

                                     See notes to consolidated financial statements.
</TABLE>

                                                          F-8



<PAGE>

NOTES TO THE FINANCIAL STATEMENTS

Note 1  DESCRIPTION OF BUSINESS

MicroIslet, Inc. ("MicroIslet", "We," or the "Company") is engaged in the
research, development, and commercialization of patented technologies in the
field of transplantation therapy for patients with insulin-dependent diabetes.
The Company has not commenced planned principal operations and is considered to
be in the development stage. The Company intends to continue its research and
development efforts and, ultimately, to begin market introduction of its
products.

Prior to May 28, 2002, the Company was known as ALD Services, Inc. ("ALD"). The
merger of MicroIslet, Inc., a Delaware corporation ("MSLT-Delaware"), with a
wholly-owned subsidiary of ALD was completed on April 24, 2002 (the "Merger").
The Merger was accounted for as a reverse acquisition because former
shareholders of MSLT-Delaware owned a majority of the outstanding stock of ALD
immediately subsequent to the Merger. Because the Merger was treated as a
reverse acquisition, the 2002 condensed consolidated financial information
presented herein includes the financial results of MSLT-Delaware for the entire
year ended December 31, 2002, and the financial results of the Company (which
functions as a holding company after the Merger) for the post-Merger period from
April 24, 2002 through December 31, 2002. The 2001 financial information
presented herein includes only the financial results of MSLT-Delaware for the
year ended December 31, 2001. The financial information from inception includes
the financial results of MSLT-Delaware from its inception on August 21, 1998 to
December 31, 2002, and the financial results of the Company for the post-Merger
period from April 24, 2002 through December 31, 2002. The balance sheet at
December 31, 2001 is that of MSLT-Delaware.

The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company incurred net losses of $6.1 million for 2002, and had an
accumulated deficit of $12.0 million as of December 31, 2002. The Company
expects to incur substantial additional costs, including costs related to
ongoing research and development activities, preclinical studies and trials. The
future funding is subject to continued agreement of a business plan by
investors. In the event funding is not obtained, the Company may be required to
curtail operations. These factors among others may indicate that the Company
will be unable to continue as a going concern for a reasonable period of time.

The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to attain successful operations. Management is
continuing its efforts to obtain additional funds so that the Company can meet
its obligations and sustain operations

The Company believes that its existing funds will be sufficient to fund its
operating expenses and capital requirements into the second quarter of 2003. The
Company intends to raise additional debt and/or equity financing to sustain its
operations.

Note 2.  SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
---------------------

The accompanying consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America.

The Company is a new enterprise in the development stage as defined by Statement
No. 7 of the Financial Accounting Standards Board, since it has derived only
minimal revenues from its activities to date.

                                      F-9



<PAGE>

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 reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.

Reclassifications
-----------------

Certain prior year reclassifications have been made to conform to the current
year presentation.

Equipment
---------

Equipment is stated at cost. Depreciation is computed on the straight-line
method over the estimated useful asset lives, which range from three to five
years. Repairs and maintenance are charged to expense as incurred.

Intangibles and Long-Lived Assets
---------------------------------

The Company's policy regarding long-lived assets is to review such long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. If the review indicates
that long-lived assets are not recoverable (i.e. the carrying amount is less
than the future projected undiscounted cash flows), their carrying amount would
be reduced to fair value. The Company carries no goodwill on its books at either
December 31, 2002 or 2001. Further, during fiscal 2002 and 2001, the Company had
no material impairments of intangible assets, which consist primarily of
patents.

On January 1, 2002, the Company adopted Financial Accounting Standards Board
("FASB") Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("FAS 144"). Under FAS 144, the Company reviews long-lived
assets for impairment when circumstances indicate the carrying amount of an
asset may not be recoverable based on the undiscounted cash flows of the asset.
If the carrying amount of the asset is determined not to be recoverable, a
write-down to fair value is recorded. The adoption of FAS 144 did not have a
material impact on the Company's financial statements.

Research and Development
------------------------

Research and development costs are charged to operations when incurred. Research
and development expenses in 2001 include $2,067,518 of in-process research and
development acquired for common stock.

Income Taxes
------------

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, " Accounting for Income Taxes." In
accordance with SFAS No. 109, the Company records a valuation allowance against
net deferred tax assets if, based upon the available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income and when temporary differences become deductible. The
Company considers, among other available information, uncertainties surrounding
the recoverability of deferred tax assets, scheduled reversals of deferred tax
liabilities, projected future taxable income, and other matters in making this
assessment.

Segment Reporting
-----------------

The Company currently operates in a single segment. In addition, financial
results are prepared and reviewed by management as a single operating segment.
The Company continually evaluates its operating activities and the method
utilized by management to evaluate such activities and will report on a segment
basis when appropriate to do so.

                                      F-10



<PAGE>

Stock-Based Compensation
------------------------

We have adopted the disclosure provisions of FASB Statement No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123"). Under FAS 123, companies have the
option to measure compensation costs for stock options using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). Under APB 25, compensation expense is
generally not recognized when both the exercise price is the same as the market
price and the number of shares to be issued is set on the date the employee
stock option is granted. Since our employee stock options are granted on this
basis and we have chosen to use the intrinsic value method, we do not recognize
compensation expense for stock option grants. We do, however, include in Note xx
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied.

Deferred charges for options granted to non-employees are determined in
accordance with Statement of Financial Accounting Standards No. 123 and EITF
96-18 as the fair value of the consideration or the fair value of the equity
instruments issued, whichever is more reliably measured. Deferred charges for
options granted to non-employees are periodically remeasured as the underlying
options vest and are included as unearned stock compensation in the
stockholders' equity section of the balance sheet.

Based on FAS 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", the Company does not plan to voluntarily change its method of
accounting, but has implemented the amended disclosure requirements as shown
below:

                                                                 August 21, 1998
                                                                 (Inception) to
                                                                   December 31
                                       2002           2001            2002
                                  -------------   -------------   -------------
Net loss, as reported             $ (6,106,135)   $ (4,894,096)   $(12,038,241)
Adjustment to compensation
expense under SFAS 148                (926,418)       (143,306)     (1,112,499)

Net loss, pro forma               $ (7,032,553)   $ (5,037,402)   $(13,150,740)

Net loss per share, as reported:
 Basic and diluted                $       (.29)   $       (.29)   $       (.66)

Net loss per share, pro forma:
 Basic and diluted                $       (.34)   $       (.30)   $       (.72)

Grant Revenue
-------------

The Company recognizes grant revenue as qualifying research expenses are
incurred.

New Accounting Pronouncements
-----------------------------

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which elaborates on the disclosures to be
made by a guarantor about its obligations under certain guarantees issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The Interpretation expands on the accounting guidance of
SFAS No. 5, "Accounting for Contingencies," SFAS No. 57, "Related Party
Disclosures," and SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments." It also incorporates without change the provisions of FASB
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others." Companies must implement the initial recognition and measurement
provision of Interpretation No. 45 for guarantees issued or modified after
December 15, 2002. The disclosures of Interpretation No. 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company does not believe the adoption of Interpretation No. 45 will
have a material impact on the Company's financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value-based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based compensation
and the effect of the method used on reported results. The voluntary transition
and amended disclosure requirements are effective for the Company for fiscal
years ending after December 15, 2002. The interim reporting requirements are
effective for the Company's interim periods beginning January 1, 2003. The
Company currently accounts for stock-based employee compensation under the
intrinsic value method in accordance with APB No. 25. The Company does not plan
to voluntarily change its method of accounting, but had implemented the amended
disclosure requirements as of December 31, 2002.

                                      F-11



<PAGE>

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51." Interpretation No.
46 provides guidance for identifying a controlling financial interest
established by means other than voting interests. It requires consolidation of a
variable interest entity by an enterprise that holds such a controlling
financial interest. The Interpretation is effective for all newly formed
variable interest entities after January 31, 2003. The Interpretation is
effective for fiscal years or interim periods beginning after June 15, 2003, for
variable interest entities in which a company holds a variable interest that it
acquired before February 1, 2003. The Company does not believe the adoption of
FASB Interpretation No. 46 will have a material impact on its financial
statements.

Concentration of Credit Risk
----------------------------

The Company maintains its cash balances in a financial institution and a money
market fund at the same institution. Cash balances at the institution are
insured by the Federal Deposit Insurance Corporation up to $100,000. The money
market fund is uninsured.

Note 3.        COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

                                                     2002                2001
                                                  ----------          ----------
Equipment
---------
Laboratory equipment                              $ 101,823           $  21,751
Computer equipment                                   41,078              45,152
Furniture and fixtures                               30,655              22,149
Leasehold Improvements                               14,488                  --
Assets in Progress                                   30,000                  --
                                                  ----------          ----------
                                                  $ 218,044           $  89,052

Less accumulated depreciation                       (50,970)            (27,788)
                                                  ----------          ----------

                                                  $ 167,074           $  61,264
                                                  ==========          ==========

Intangible assets
-----------------

Patents                                           $  13,892           $  13,892

Less accumulated amortization                        (1,896)             (1,422)
                                                  ----------          ----------

                                                  $  11,996           $  12,470
                                                  ==========          ==========

Note 4.  LICENSE AGREEMENT

In September 1998, the Company entered into a license agreement with Duke
University (Duke). Under the terms of the agreement, the Company has the right
to develop and commercialize technology related to therapies for diabetes
developed and patented by Duke. The Company issued 344,586 shares of its common
stock to Duke upon the execution of the license agreement. The Company issued an
additional 344,586 shares to Duke upon issuance of the first patent involving
the technology which occurred in October 2001. The Company is obligated to issue
an additional 344,586 shares to Duke upon approval of a licensed product. The
cost of the license rights is based on the fair value of the Company's stock
when earned by Duke and has been expensed as acquired in-process research and
development because the technology is in the early development stage and has no
foreseeable alternative future uses. Research and development expenses in 2001
include $2,067,518 of in-process research and development acquired for common
stock. The Company is obligated to pay Duke a royalty of 5% of all proceeds
generated by any future commercial products derived from the licensed
technology. The Company has also reimbursed Duke for research costs related to
developing the technology for commercial use. The Company sponsored Duke's
research in the amount of $0 in 2002, $252,793 in 2001, and $500,000 from August
21, 1998 (inception) to December 31, 2002. The amount recorded as research
expenses due stockholder of $230,000 as of December 31, 2002 represents charges
Duke has billed the Company. The amount due, timing and form of payment are
currently under negotiation.

                                      F-12



<PAGE>

Note 5.  COMMITMENTS

The Company has office and laboratory facilities under noncancelable operating
leases. Rent expense was $159,827 for the year ended December 31, 2002 and
$215,810 from August 21, 1998 (inception) to December 31, 2002. The following is
a schedule of total future minimum lease payments under all noncancelable
operating leases:

               Year Ending December 31
               -----------------------

                  2003                                        $     207,913
                  2004                                              215,972
                  2005                                              167,732
                  2006                                                2,705
                                                              --------------

                  TOTAL                                       $     594,322

                                      F-13



<PAGE>

Note 6. MERGER OF MSLT-DELAWARE AND A WHOLLY OWNED SUBSIDIARY OF ALD AND SALE OF
SECURITIES

On April 24, 2002, the Company consummated an integrated series of transactions
which resulted in the effective exchange of 3,913,018 shares of common stock for
net proceeds of $2.4 million. As a result, MSLT-Delaware became a wholly owned
subsidiary of ALD, which was previously a "public shell entity," through a
reverse triangular merger involving MSLT- Delaware, ALD and a newly formed,
wholly owned subsidiary of ALD (the "Merger"). For accounting purposes, the
Company was deemed to have issued 3,408,398 shares of common stock (the "Merger
Shares") in exchange for all of the outstanding equity securities of ALD. ALD
had no assets or liabilities at the time of the Merger. Contemporaneous with the
Merger, MSLT-Delaware closed a private placement (the "Private Offering") in
which it sold 504,620 shares of common stock in exchange for approximately $2.4
million of net cash proceeds. The sale of these common shares was subject to the
terms of an Investment Banking Agreement and a Private Placement Memorandum. The
terms of the agreements included specified minimum gross offering proceeds of $3
million, and a requirement that MSLT-Delaware complete the aforementioned
transaction with a "public shell entity." Pursuant to this private offering, the
investors were granted the right to receive additional shares of common stock if
MSLT Delaware sells any securities for less than $6.00 per share. In the event
of such a sale, these investors would be entitled to an additional number of
shares equal to the number of additional shares they would have received had
their initial investment been made at the lower price.

Two individuals who were affiliates of ALD were also then affiliates of ASA
Investment Company ("ASA"), which served as the placement agent for the Private
Offering. One of these individuals was ALD's former president and sole director
("ALD's President"), and the other individual was the beneficial owner of 76.9%
of the ALD's outstanding common stock prior to the Merger ("ALD's majority
shareholder"). Certain trusts affiliated with ALD's majority shareholder
subscribed for 175,000 MSLT-Delaware shares ($1,050,000 gross proceeds) in the
Private Offering. 52,500 of such shares ($315,000 gross proceeds) were purchased
by one of these trusts as a nominee for a company associated with ALD's
President and his brother, who was also then affiliated with ASA. ASA received
cash commissions equal to ten percent of the gross Private Offering proceeds,
and in connection with the Merger, received an investment banking fee of
$200,000 and is owed 33,334 shares of common stock. Cash payments to ASA were
withheld from the gross offering proceeds distributed to the Company and have
been recorded as a direct reduction to the proceeds received by the Company in
the Private Offering. The Company was advised in May 2002 that ALD's majority
shareholder, ALD's President and his brother were no longer affiliated with ASA.

The Company believes that the Private Offering and the issuance of the Merger
Shares is a single capital raising activity that netted proceeds of
approximately $2.4 million. Because of the integrated nature of the transactions
described above, no expense has been recorded for either the Merger Shares or
the Private Offering shares deemed issued by the Company.

The Merger resulted in a change in control of ALD. The sole director resigned
effective upon the close of business on April 24, 2002, and was replaced by a
four-member board of directors appointed by MSLT-Delaware. The board of
directors expanded to five directors in May 2002.

After the merger, we sold an additional 34,667 shares of our common stock at a
price of $6.00 per share in private placements which raised net proceeds of
approximately $187,000. These shares were issued and sold on substantially
similar terms and conditions as MSLT Delaware's April 2002 private placement
described above and were recorded in May and August 2002 upon receipt of
confirming documentation. ASA earned a commission of $20,800 in connection with
these subsequent sales.

The Company agreed to file a registration statement with the Securities and
Exchange Commission to register for resale all of the shares sold through ASA in
private placements. The registration statement was filed July 25, 2002, was
subsequently amended, and was declared effective on February 14, 2003..

Note 7.  RELATED PARTIES/ISSUANCE OF WARRANTS

On April 2, 2002, ALD issued an aggregate of 1,000,000 Class A Warrants and
500,000 Class B Warrants to three persons, including ALD's majority shareholder,
ALD's President and his brother. The Class A Warrants and the Class B Warrants
are referred to collectively as the "Warrants."

Each outstanding Class A Warrant entitles the holder thereof to purchase one
share of common stock at a price of $6.00 per share and each outstanding Class B
Warrant entitles the holder thereof to purchase one share of common stock at a
price of $12.00 per share. Subject to restrictions and limitations contained in
an associated Warrant Agreement, both the Class A and the Class B Warrants are
generally exercisable by the holders thereof at any time between August 1, 2002
and July 31, 2007. The Warrant Agreement requires the Company to register the
shares underlying the Warrants and to maintain an effective registration
statement during such time as the Warrants and underlying shares remain
outstanding.

The Company has valued the Warrants at approximately $5,900,000. This valuation
was determined using the Black-Scholes option pricing model using the five year
life of the Warrants, an annual risk free rate of return of 5.2%, volatility of
120% and no dividends.

Because the Warrants related to services provided in connection with the
transaction discussed in Note 2 above, these Warrants been recorded as a direct
reduction to the proceeds received by the Company in the Private Offering. The
excess of the value of the Warrants over the proceeds ($3,477,723) has been
recorded as warrant compensation expense.

                                      F-14



<PAGE>

Note 8.  STOCKHOLDERS' EQUITY

Convertible Preferred Stock
---------------------------

On April 24, 2002 each of the 82,888 shares of preferred stock outstanding was
converted into 15.6275 shares of common stock in connection with the Merger.

Stock Splits
------------

Effective November 7, 2000, the Board of Directors authorized a 5-for-1 stock
split of the Company's $.001 par value common stock. As a result of the split,
3,876,640 additional shares were issued. All references in the accompanying
financial statements to the number of common shares and per-share amounts have
been restated to reflect the stock split. Effective October 18, 2001, the Board
of Directors authorized a 3.1255-for-1 stock split of the Company's $.001 par
value common stock. As a result of the split, 11,843,483 additional shares were
issued. All references in the accompanying financial statements to the number of
common shares and per-share amounts have been restated to reflect the stock
split.

Stock Options
-------------

During 2000, the Company adopted a stock option plan for employees, outside
consultants and directors. There are 4,000,000 common shares available for grant
under the plan. The plan allows for incentive options with exercise prices of at
least 100% of the fair market value of the Company's common stock and
nonqualified options with exercise prices of at least 85% of the fair market
value of the Company's common stock. All options have a ten-year life and
generally vest over a three-year period.

The Company applies APB Opinion 25 in accounting for stock options granted to
employees and directors performing director services. Compensation cost is based
on the excess of the fair value of the stock over the exercise price on the
measurement date, which is generally the grant date, and is recognized over the
vesting period of the options. Compensation cost charged to operations for
options granted to employees and directors performing director services was
$228,701 in 2002 and $250,583 in 2001, and $690,308 from August 21, 1998
(inception) to December 31, 2002.

The Company applies SFAS 123 and EITF 96-18 in accounting for stock options
granted to outside consultants and directors performing advisory services.
Compensation cost is recognized over the vesting period based on the fair value
of the options at each balance sheet date until the grantee's performance is
complete. The fair value of these options was estimated using the Black-Scholes
pricing model with the following weighted-average assumptions for the years
ended December 31, 2002 and 2001: risk free interest rate of 5%; dividend yield
of 0%; volatility of 80% in 2002 and 54% in 2001; expected life of 10 years; and
market value of the Company's common stock ranging from $2.05 to $3.50 in 2002
and the estimated value ranging from $0.59 to $6.00 in 2001. Compensation cost
charged to operations for options granted to consultants performing advisory
services was $102,770 in 2002 and $1,090,163 in 2001, and $1,192,993 from August
21, 1998 (inception) to December 31, 2002.

Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee and director stock
options under the fair value method of SFAS 123. The fair value for these
options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for the years
ended December 31, 2002 and 2001: risk free interest rate of 5%; dividend yield
of 0%; volatility of 80% in 2002 and 54% in 2001; expected life of 10 years; and
market value of the Company's common stock ranging from $2.20 to $6.00 in 2002
and the estimated value ranging from $0.59 to $6.00 in 2001.

                                      F-15



<PAGE>

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Adjustments are made
for options forfeited prior to vesting. The effects on compensation expense and
net income had compensation cost for employee and director stock options been
determined based on fair value at the date of grant consistent with the
provisions of SFAS 123. See table disclosure at Note 2.

The following summary presents the options under the plan granted, exercised,
expired, forfeited and outstanding at December 31, 2002, 2001 and 2000:

                                                                       Weighted
                                                                       Average
                                                        Number of      Exercise
                                                          Shares         Price
                                                        ----------    ----------
               Outstanding at January 1, 2000                  --     $     .00

               Granted                                  2,203,476     $     .29
               Exercised                                       --            --
               Expired                                         --            --
               Forfeited                                       --            --
                                                        ----------

               Outstanding at December 31, 2000         2,203,476     $     .29

               Granted                                    954,843     $     .39
               Exercised                                       --            --
               Expired                                         --            --
               Forfeited                                       --            --
                                                        ----------

               Outstanding at December 31, 2001         3,158,319     $     .32

               Granted                                    587,898     $    4.18
               Exercised                                       --            --
               Expired                                         --            --
               Forfeited                                 (312,550)          .29
                                                        ----------

               Outstanding at December 31, 2002         3,433,667     $     .94
                                                        ==========

                                      F-16



<PAGE>

The weighted average fair value of options granted during 2002 and 2001 was
$3.49 and $1.16, respectively. The following summary presents the exercise
prices, number of options outstanding and exercisable, and the remaining
contractual lives of the Company's stock options at December 31, 2002:

                                                                       Weighted
                                                                       Average
                                       Number of Shares               Remaining
                              -------------------------------        Contractual
         Exercise Price       Outstanding         Exercisable           Life
         --------------       ------------        -----------        -----------
              $0.29             2,517,593          1,800,029            7.96
              $0.59               328,180            160,183            8.57
              $5.00               344,000             87,722            9.18
              $4.40                47,000              7,833            9.50
              $2.95               146,894            124,672            9.81
              $2.14                50,000                 --           10.00
                              ------------        -----------
                   Total        3,433,667          2,180,439            8.80

Note 9.  EARNINGS PER SHARE

Basic earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of an entity, such as
stock options, warrants or convertible securities. Potential common shares
related to convertible preferred stock and stock options were not included in
the calculation of diluted earnings per share in 2002 and 2001 because of their
anti-dilutive effect.

Note 10.  INCOME TAXES

                                                    2002            2001
                                                                (Restated)
                                                ------------   ------------
         Deferred tax assets:
           Net operating loss carryforwards     $ 2,876,000    $   965,000
           Acquired in-process R&D                       --        885,000
           Stock-based compensation                 511,000        665,000
           Warrants                               1,490,000             --
           Research and Development credit          683,000             --
           Accrued vacation                              --         18,000
                                                ------------   ------------
                                                  5,560,000      2,533,000
         Deferred tax liabilities:
           State taxes                             (462,000)      (178,000)
           Accrual to cash                         (250,000)            --
           Other                                     (5,000)            --
                                                ------------   ------------

         Net deferred tax asset                   4,843,000      2,355,000
         Less valuation allowance                (4,843,000)    (2,355,000)
                                                ------------   ------------

                                                $       -0-    $       -0-
                                                ============   ============

The net deferred tax asset has been fully reserved due to uncertainties as to
its realizability. The valuation allowance increased by $2,488,000 in 2002 and
$1,945,000 in 2001.

The Company has not recorded income tax expense or benefit for the year ended
December 31, 2002, and that period from August 21, 1998 (inception) through
December 31, 2002. The net deferred tax asset has been full reserved due to
uncertainties as to its realizability. The valuation allowance increased by
$2,488,000 in 2002 and $1,945,000 in 2001.

At December 31, 2002, the Company has net operating carryforwards of
approximately $6,706,250 for federal and state purposes. The federal and state
net operating loss carryforwards begin to expire in 2019 and 2007, respectively.

                                      F-17



<PAGE>

The provision for income taxes differs from the amount using the statutory
federal income tax rate of 34% as follows:

                                                       2002             2001
                                                                      (Restated)
                                                   ------------     ------------
         Federal tax benefit at statutory rate     $ 2,072,000      $ 1,660,000
         State tax benefit, net                        588,000          285,000
         Increase in valuation allowance            (2,488,000)      (1,945,000)
         Other permanent items                          15,000               --
         Stock based compensation                     (187,000)              --
                                                   ------------     ------------

         Provision for income taxes                $       -0-      $       -0-
                                                   ============     ============

Note 11.  EMPLOYEE SAVINGS PLAN

We have established an employee savings plan pursuant to Section 401(k) of the
Internal Revenue Code. The plan allows participating employees to deposit into
tax deferred investment accounts up to 60% of their salary, subject to annual
limits. We are not required to make matching contributions under the plan, and
we did not make any such contributions in fiscal years 2002 and 2001, nor in any
prior period since inception of the plan.

Note 12.       RESTATEMENT

The 2001 financial statements have been restated to correct a misapplication of
U.S. generally accepted accounting principles related to accounting for stock
options granted to outside consultants and directors performing advisory
services. As a result of the restatement, an additional $918,000 of stock
compensation expense was recorded for 2001. The additional expense relates to
changes in the estimated fair value of the Company's stock between the grant
date and December 31, 2001.

The effects of the restatement on the net loss for 2001 are as follows:

<TABLE>
<CAPTION>
         <S>                                                             <C>
         Net loss:
           Previously reported                                           $ (3,976,096)
           Adjustment to record additional stock compensation expense        (918,000)
                                                                         -------------

           Restated                                                      $ (4,894,096)
                                                                         =============

         Basic and diluted net loss per share:
           Previously reported                                           $       (.23)
           Adjustment to record additional stock compensation expense            (.06)
                                                                         -------------

           Restated                                                      $       (.29)
                                                                         =============
</TABLE>

                                      F-18