Mitochondria are specialized cellular substructures that are essential to human life. They utilize more than 90% of inhaled oxygen, generate nearly all of the cell's energy and participate in many cellular pathways, including metabolism and cell death. Mitochondria are essential to cell growth and function because they convert carbohydrates, fats and proteins from food into the body's principal form of energy, adenosine triphosphate, or ATP. The biological process that creates ATP involves a series of mitochondrial protein complexes known as the electron transport chain. The tissues of the body that rely most heavily on mitochondria are composed of long-lived, energy demanding cell types, like those found in the brain, muscles and the pancreas. As a result, mitochondrial dysfunction has a significant impact on these tissues.

Due to the critical role of mitochondria in so many aspects of cellular function, more than 75 diseases have been linked directly or indirectly to mitochondrial dysfunction. Mitochondrial dysfunction may be an inevitable part of the aging process, resulting from a combination of inherited and acquired genetic and functional defects. It is believed that the increasing average age of the general population, coupled with a more developed understanding of mitochondria, will give mitochondrial medicine an increasingly important and expanding role in healthcare.

The Company has successfully completed a Phase I trial for Parkinson's disease with an estrogen it has designated MITO-4509. This compound is a component of marketed hormone replacement products, but it has minimal feminizing activity. The Company’s future trials will assess the ability of this compound to moderate the symptoms and progression of Parkinson's disease.

The Company has developed a late-stage preclinical product called NeuroStat that it believes will protect the brain tissue of stroke victims by improving mitochondrial stability. The active ingredient of NeuroStat appears to have a high margin of safety and rapidly achieves high drug blood levels after a single subcutaneous injection. This should allow paramedics to administer NeuroStat at the initial point of care soon after a stroke when at-risk brain cells may still be saved from dying. The Company’s proprietary approach may also yield drug candidates and targets for congestive heart failure and heart attacks, where mitochondrial failure causes a series of events similar to what happens with a stroke.

The Company is engaged in research on the role of mitochondria in major metabolic disorders with a focus on obesity and diabetes. The Company is conducting preclinical studies on the contribution of mitochondrial dysfunction to these diseases and developing new targets and drug candidates for therapeutic intervention.

The Company has identified novel compounds, such as MITO-3108, that are currently in preclinical development for the treatment of obesity. The Company has overcome certain toxicity problems previously known to occur with this class of compounds, which appear to lower the body-weight set point in multiple species. The Company believes these compounds represent therapeutic advances because they reduce body weight by modulating the body's own regulatory system, rather than by altering caloric utilization.

The Company has developed novel compounds for the treatment of type II diabetes, including MITO-4183, that it has advanced to preclinical animal studies. These compounds block a novel mitochondrial ion channel that regulates insulin secretion. The Company has also identified peptides that target a mitochondrial enzyme complex and increase insulin secretion.

The Company continues to use its integrated drug discovery capabilities to evaluate new disease indications and to identify likely therapeutic targets. The Company is engaged in the preclinical research and development of drugs to treat other degenerative conditions and diseases associated with mitochondrial dysfunction, including osteoarthritis, glaucoma, Friedreich's ataxia and cancer.

Research and development expense increased 22% to $12.3 million for the year ended December 31, 2001 from $10.1 million for the year ended December 31, 2000.

Cost of products sold of $1.2 million remained constant from the year ended December 31, 2000 to the same period in 2001.

Sales and marketing expense of $1.1 million remained constant from the year ended December 31, 2000 to the same period in 2001.

Interest income increased 2% to $820.0 thousand for the year ended December 31, 2001 from $801.0 thousand for the year ended December 31, 2000.

Interest expense decreased 16% to $429.0 thousand for the year ended December 31, 2001 from $509.0 for the year ended December 31, 2000.