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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

[X]  Annual report under Section 13 or 15(d) of the Securities Exchange Act of
     1934 for the fiscal year ended December 31, 2002

[ ]  Transition report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934 For the transition period from ____________ to ____________

                        Commission file number: 001-16133

                              DELCATH SYSTEMS, Inc.
        (Exact name of Small Business Issuer as specified in its charter)

                 Delaware                                06-1245881
     (State or other jurisdiction of                  (I.R.S. Employer
      incorporation or organization)                 Identification No.)

     1100 Summer Street, Stamford, Connecticut              06905
     (Address of principal executive offices)             (Zip Code)

                                  203-323-8668
                (Issuer's telephone number, including area code)

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

                                           Name of Each Exchange
Title of Each Class                        On Which Registered
--------------------------------------     -----------------------------
Common Stock, par value $.01 per share      Boston Stock Exchange
Redeemable Warrants                         Boston Stock Exchange

      Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, par value $0.01 per share
Redeemable Warrants

Check  whether  the Issuer:  (1) has filed all  reports  required to be filed by
Section 13 or 15(d) of the Securities  Exchange Act of 1934 during the preceding
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 in this form, and no disclosure will be contained, to the best of
the  Issuer'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.  [ ]

The issuer's revenues for its most recent fiscal year were: $0.
The aggregate market value of the voting common stock held by  non-affiliates of
the issuer, based on the closing sales price of $1.05 per share, was $ 4,324,842
as of February 28, 2003.
At February 28, 2003,  the registrant had  outstanding  4,118,897  shares of par
value $0.01 Common Stock.





                       DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for 2003 Annual Meeting of            Incorporated into Part
Stockholders.  (A definitive proxy statement          III of this Form 10-KSB
will be filed with the Securities and Exchange
Commission within 120 days after the close of
the fiscal year covered by this Form 10-KSB.)


           Transitional Small Business Disclosure Format (check one):

                                Yes [ ]     No [X]

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                                     PART I

ITEM 1.   DESCRIPTION OF BUSINESS.

General
-------

We were  incorporated  under  Delaware law in 1988. We are a  development  stage
company,  and we have developed the Delcath system to isolate the liver from the
general circulatory system and to administer  chemotherapy and other therapeutic
agents directly to the liver. Since our inception,  we have raised approximately
$14  million  in  funds  (net of  fundraising  expenses),  and we have  invested
approximately  $10  million of those  funds in research  and  development  costs
associated with development and testing of the Delcath system.

The Delcath system is not currently  approved for marketing by the United States
Food and Drug  Administration,  and it cannot be marketed  in the United  States
without FDA pre-marketing approval. We plan to conduct Phase III clinical trials
designed  to secure  marketing  approval  in the United  States and  possibly in
foreign  markets for use of the Delcath  system with a  particular  chemotherapy
agent,  doxorubicin,  currently used to treat malignant melanoma that has spread
to the liver.  We also plan to continue  our  clinical  trial for the use of the
Delcath  system  with  another  chemotherapy  agent,  melphalan,  which  is also
currently  used to treat  malignant  melanoma  that  has  spread  to the  liver.
Additionally, we plan to continue pre-clinical and clinical trials on the use of
the Delcath system with other chemotherapy agents used to treat liver cancer.

Strategy
--------

Our  objectives  are to establish the use of the Delcath  system as the standard
technique  for  delivering  chemotherapy  agents to the liver and to expand  the
Delcath  technology  so  that it may be used in the  treatment  of  other  liver
diseases and of cancers in other parts of the body.  Our  strategy  includes the
following:

         o  Completing   clinical  trials  to  obtain  FDA  pre-marketing
            approval for use of the Delcath  system with  doxorubicin  to
            treat  malignant  melanoma that has spread to the liver.  Our
            highest priority is completing the Phase III clinical trials,
            data   preparation,   statistical   analysis  and  regulatory
            documents  associated  with  an  application  for  pre-market
            approval  of  commercial  sale of the  Delcath  system in the
            United  States for use in  administering  doxorubicin  in the
            treatment of melanoma that has spread to the liver.

         o  Obtaining approval to market the Delcath system in the United
            States for the treatment of other forms of liver cancer using
            other  chemotherapy  agents and treatment of hepatitis  using
            anti-viral  drugs.  In August  2001,  we  commenced a Phase I
            clinical  trial  at  the  National  Cancer   Institute  using
            melphalan,  a chemotherapy  agent. In addition to researching
            the use of other chemotherapy  agents with the Delcath system
            to  treat  cancer,  we plan  to  research  the  use of  other
            compounds  with the Delcath  system to treat other  diseases,
            such as  hepatitis.  Our timing to begin these  studies  will
            depend on our ability to establish  strategic  alliances with
            pharmaceutical  manufacturers or other strategic  partners in
            conjunction   with  our  research   into  other   therapeutic
            compounds and to raise  additional  funds for these purposes.
            Additional  FDA  pre-marketing  approval  will be required to
            market the Delcath system for these uses.

         o  Introducing the Delcath system into foreign markets.  We will
            seek to establish  strategic  relationships with domestic and
            foreign  firms that have a recognized  presence or experience
            in foreign markets that we intend to target.  Our strategy is
            to focus  on  markets  that  have a high  incidence  of liver
            cancer  and  the  means  to   provide   and  pay  for  cancer
            treatments.  According to the World Health Organization, many
            Asian and European countries, including China, Japan, Greece,
            Hong Kong, the Philippines, France, Germany, Italy and Spain,
            have a higher  incidence  of  liver  cancer  than the  United
            States. Additionally,  Australia has been cited as having the
            highest incidence of skin cancer in the world. Given that our
            current  Phase III  clinical  trials are with a  chemotherapy
            agent  that is used to  treat  malignant  melanoma  that  has
            spread  to  the  liver,   upon  obtaining  FDA  pre-marketing
            approval, we intend to target the

                                    1

            Australian  market.  We also  intend  to seek to  enter  into
            arrangements with strategic partners who have experience with
            obtaining  regulatory  approval and marketing medical devices
            in those  markets  and are  willing to bear the cost of those
            activities.

The Cancer Treatment Market
---------------------------

The American  Cancer Society  projects that about  1,334,100 new cases of cancer
will be diagnosed in 2003.  According to the American Cancer  Society's  "Cancer
Facts and Figures 2003," cancer remains the second leading cause of death in the
United States.  While researchers  continue to develop innovative new treatments
for some forms of this disease, surgical resection, chemotherapy,  radiation and
hormone therapy continue to be the most commonly used treatments.

The  financial  burden  of  cancer is great for  patients,  their  families  and
society.  The National  Institutes of Health,  in the American Cancer  Society's
"Cancer Facts & Figures 2003," estimates the overall costs of cancer in the year
2002 to be $171.6 billion,  including $61 billion in direct medical costs, $15.5
billion for indirect  morbidity costs  attributable to lost  productivity due to
illness and $95.2  billion for indirect  mortality  costs  attributable  to lost
productivity due to death.

The Liver Cancer Market
-----------------------

Liver cancer is one of the most prevalent and lethal forms of cancer  throughout
the world. There are two forms of liver cancer: primary and metastatic.  Primary
liver cancer  originates in the liver.  Metastatic,  or secondary,  liver cancer
results  from the spread of cancer  from other  places in the body to the liver.
With our initial  Phase III  clinical  trials,  we will seek to develop  data on
metastatic  melanoma  which has spread to the liver.  According  to the American
Cancer Society's "Cancer Facts & Figures 2003," the five-year  survival rate for
liver cancer patients ,both primary and secondary, is approximately 7%, compared
to the 62% for all other forms of cancer combined.  In the liver,  tumors can be
surgically  removed  only when they are located in one of the liver's two lobes.
However,  since  symptoms of liver  cancer often do not appear until the disease
has  advanced,  more than 70% of  cancerous  liver tumors  cannot be  surgically
removed at the time of diagnosis.  A significant  number of patients treated for
primary and metastatic  liver cancer will also  experience a recurrence of their
disease.

Metastatic liver cancer is characterized by microscopic pieces of other forms of
cancer that detach  from the  primary  site and travel via the blood  stream and
lymphatic  system into the liver,  where they grow into new tumors.  This growth
often  continues  even after removal of the primary  cancer or cancerous  organ.
When cancer  cells enter the liver and develop  into  tumors,  they tend to grow
very quickly.  In many cases, the patient dies not from the primary cancer,  but
from the tumors in the  liver;  the liver  becomes  the "life  limiting  organ."
People  cannot  survive  without a liver  capable  of  performing  its  critical
biologic  functions:  facilitating  the  conversion  of  food  into  energy  and
filtering toxic agents from the blood. The liver is one of the three most common
sites to which cancer may spread. Due to numerous factors, including the absence
of viable treatment options, metastatic liver cancer often causes death.

According to the 2002 World Health Report, liver cancer is the third most common
form of cancer  worldwide,  accounting for 616,000  deaths.  The American Cancer
Society in its "Cancer Facts & Figures  2003" has  projected  that in the United
States there will be approximately 17,300 newly diagnosed cases of liver cancer,
and 54,200 new cases of melanoma.

Primary  liver cancer is  particularly  prevalent in Southern  Europe,  Asia and
developing  countries,  where the  primary  risk  factors  for the  disease  are
present. These risk factors include: hepatitis-B,  hepatitis-C,  relatively high
levels of alcohol  consumption,  aflatoxin,  cigarette  smoking and  exposure to
industrial pollutants.

Current Liver Cancer Treatments
-------------------------------

The prognosis for primary and secondary liver cancer patients is poor.  Although
limited  treatment  options are currently  available for liver cancer,  they are
typically  ineffective,  are generally associated with significant  side-effects
and can even cause  death.  Traditional  treatment  options,  discussed  in more
detail below, include surgery, chemotherapy,  cryosurgery,  percutaneous ethanol
injection and radiation.

                                    2



Surgery
-------

While  surgery is considered  the "gold  standard"  treatment  option to address
liver  tumors,  an estimated 75% of liver tumors are  unresectable,  which means
they  do not  qualify  for  surgical  removal.  This is  most  often  due to the
following:

         o  Operative risk: limited liver function or poor patient health
            threatens survival as a result of the surgery; or

         o  Technical feasibility:  the proximity of a cancerous tumor to
            a critical organ or artery or the size, location on the liver
            or number of tumors makes surgery not feasible.

For the patients who qualify for surgery,  there are  significant  complications
related to the  procedure.  Recurrence  of tumors is common,  and in that event,
surgery typically cannot be repeated.

We believe that  delivery of drugs with the Delcath  system may enable  surgical
removal in some of the cases which are currently inoperable by reducing the size
and number of tumors sufficiently to make resection feasible.  Shrinking a tumor
using  chemotherapy and then removing the tumor is a procedure known as adjuvant
therapy.  After resection,  chemotherapy can be administered through the Delcath
system with the objective of destroying  micro  metastases in the liver that may
remain undetected, thus preventing or delaying any recurrence of tumor growth.

Chemotherapy
------------

The most prevalent form of liver cancer  treatment is intravenous  chemotherapy.
The  effectiveness of this treatment,  however,  is limited by its side effects.
Generally, the higher the dosage of chemotherapy  administered,  the greater its
ability to kill cancer cells.  However,  due to the toxic nature of chemotherapy
agents,  the higher the dosage  administered,  the greater  damage  chemotherapy
agents  cause to  healthy  tissues.  As a result,  the  dosage  of  chemotherapy
required to kill cancer cells can be lethal to patients.

The side effects caused by doxorubicin, the drug we are seeking to have approved
for use in the Delcath system, are representative of the side-effects associated
with many chemotherapy  agents.  Doxorubicin  causes  irreversible  heart tissue
damage.  Depending on dosage  levels,  the damage caused by  doxorubicin  can be
serious and lead to congestive heart failure.  Doxorubicin can also cause severe
mucositis leading to ulceration of the mouth and digestive  organs,  damage to a
patient's  immune system through  destruction  of bone marrow cells,  as well as
acute nausea, severe vomiting, dermatological problems and hair loss. The use of
doxorubicin  can be fatal  even when it is  administered  with  careful  patient
monitoring.

The  limited  effectiveness  of  intravenous   chemotherapy  treatment  and  its
debilitating, often life-threatening, side-effects makes the decision to undergo
chemotherapy  treatment  difficult.  In some instances,  in an attempt to shrink
tumors, a physician may prescribe a radically high-dose of chemotherapy, despite
its side effects.  In other cases,  recognizing  the inevitable  result of liver
cancer, the physician and patient choose only to manage the patient's discomfort
from cancer with pain killers while foregoing treatment.

To address  this  trade-off  between the  efficacy of  intravenous  chemotherapy
treatment  and  its  dire  side  effects,   physicians  have  experimented  with
techniques  to isolate  the liver  from the  general  circulatory  system and to
achieve a targeted delivery of chemotherapy  agents to the liver. In the 1980's,
a physician developed a procedure in which he surgically diverted the blood flow
from the liver  while  infusing  high  dosages of  chemotherapy  agents into the
liver. A filtration  circuit reduced drug  concentrations  before  returning the
diverted blood to the patient.  The treatment,  however, was not embraced by the
medical community because it is highly invasive, resulting in prolonged recovery
times,  long  hospital  stays  and  very  high  costs.   Other  physicians  have
experimented with the delivery of chemotherapy  agents to the liver by catheter,
attempting  to use one or more  catheters to remove  chemotherapy  agents before
they  enter the  general  circulatory  system.  We are  unaware  of any  system,
however, which contains the patented attributes of the Delcath design.


                                    3



Cryosurgery
-----------

Cryosurgery is the destruction of cancer cells using sub-zero temperatures in an
open surgical procedure. During cryosurgery, multiple stainless steel probes are
placed into the center of the tumor and liquid  nitrogen is  circulated  through
the end of the  device,  creating an ice ball.  Cryosurgery  involves a cycle of
treatments in which the tumor is frozen, allowed to thaw and then refrozen.

While cryosurgery is considered to be relatively effective,  we believe adoption
of this procedure has been limited because:

         o  It is not an option for patients who cannot  tolerate an open
            surgical procedure;

         o  It involves  significant  complications  which are similar to
            other open surgical procedures, as well as liver fracture and
            hemorrhaging caused by the cycle of freezing and thawing;

         o  It is associated with mortality rates estimated to be between
            one and five percent; and

         o  It is expensive compared to other alternatives.

Percutaneous Ethanol Injection
------------------------------

Percutaneous  ethanol injection,  or PEI, involves the injection of alcohol into
the  center of the  tumor.  The  alcohol  causes  cells to dry out and  cellular
proteins to disintegrate, ultimately leading to tumor cell death.

While PEI can be successful in treating some patients with primary liver cancer,
it is generally  considered  ineffective  on large tumors as well as  metastatic
tumors. Patients are required to receive multiple treatments, making this option
unattractive  for  many  patients.   Complications   include  pain  and  alcohol
introduction to bile ducts and major blood vessels. In addition,  this procedure
can cause cancer cells to be deposited along the needle track when the needle is
withdrawn.

Radiation Therapy
-----------------

Radiation therapy uses high dose x-rays to kill cancer cells.  Radiation therapy
is not considered an effective means of treating liver cancer and is rarely used
for this purpose.  Radiation is often used as an adjunct to other treatments for
liver cancer.

Implanted Infusion Pumps
------------------------

Implanted  infusion  pumps  can  be  used  to  better  target  the  delivery  of
chemotherapy  agents to the tumor.  Arrow  International  markets an implantable
pump typically used to treat  colorectal  cancer which has  metastasized  to the
liver. This pump, however, lacks a means of preventing the entry of chemotherapy
agents into the patient's general circulation after it passes through the liver.
This  technique  does  not  enable  physicians  to  prescribe  higher  doses  of
chemotherapy.

Other Methods of Treatment
--------------------------

Still other liver cancer  treatments  include liver  transplants,  embolization,
removal  of  tumors  through  the use of radio  frequency  waves  and the use of
biological  response  modulators,   monoclonal  antibodies  and  liposomes.  The
effectiveness  of  these   treatments  is  limited,   many  have  dose  limiting
side-effects and none is widely used.


                                    4



Treatment with the Delcath System
---------------------------------

The  Delcath  system  is  designed  to  address  the  critical  shortcomings  of
conventional  intravenous chemotherapy delivery. The Delcath system isolates the
liver from the general  circulatory  system during liver cancer  treatments with
chemotherapy  agents and then returns the blood exiting the liver to the general
circulatory  system  only after the  chemotherapy  agent has been  substantially
removed by filtration  outside the body. We believe that the protection from the
side-effects  of chemotherapy to other parts of the body that is provided by the
Delcath  system  allows for higher  chemotherapy  doses to the liver than can be
administered  by  conventional   intravenous   delivery.   By  filtering  out  a
substantial  portion of the  chemotherapy  agent before the blood is returned to
the blood stream,  other organs of the body receive less exposure than the liver
to the  chemotherapy  agent.  Therefore,  these organs are less likely to suffer
from the harmful side-effects of chemotherapy,  including the cumulative harmful
effect that doxorubicin has on the heart muscle.

The Delcath  system kit includes the  following  disposable  components  that we
purchase from third-party suppliers:

         o  Infusion catheter -- a thin-walled arterial infusion catheter
            used to deliver chemotherapy to the liver;

         o  Double balloon catheter -- a  multi-passageway  catheter used
            to isolate and divert the drug-laden blood exiting the liver;

         o  Extracorporeal  filtration  circuit -- a blood tubing circuit
            incorporating  the  disposable  components  used with a blood
            pump to push the isolated blood through the system's  filters
            and guide the cleansed blood back to the patient;

         o  Filters -- activated carbon blood filters used to remove most
            of the  chemotherapy  agent from the isolated  blood after it
            has  flowed  through  the liver and  before it returns to the
            patient's general circulation; and

         o  Return catheter -- a thin-walled blood sheath used to deliver
            the filtered blood from the extracorporeal filtration circuit
            back into one of the major veins returning blood to the right
            atrium of the heart.

The  double  balloon  catheter  has  one  large  passageway  and  three  smaller
passageways.  Each of two  low-pressure  balloons is inflated through one of the
three  smaller  passageways.  Blood  flows  out of the liver  through  the large
passageway  to the  filtration  system.  A separate  access port attaches to the
large passageway and is designed for sampling fluid or flushing the system.  The
third smaller passageway allows blood exiting the legs and kidneys to bypass the
liver and return to the heart.

The Delcath system involves a series of three catheter insertions, each of which
is made  through the skin.  During test  procedures,  patients  are treated with
intravenous  sedation and local anesthesia at catheter  insertion sites. In some
cases general  anesthesia  has been used. An infusion  catheter is inserted into
the artery through which blood normally flows to the liver. A second catheter --
the Delcath  double  balloon  catheter -- is inserted  through the inferior vena
cava, a major vessel of the heart . The balloons on the double balloon  catheter
are then  inflated.  This  procedure  prevents the normal flow of blood from the
liver to the heart through the inferior vena cava because the inferior vena cava
has been blocked.  A  chemotherapy  agent is then infused into the liver through
the infusion catheter. The infused blood is prevented from flowing to the heart,
but leaves the liver through  perforations  on the double  balloon  catheter and
flows  through this  catheter out of the body where the infused  blood is pumped
through activated charcoal filters to remove most of the chemotherapy agent. The
filtered  blood is returned to the patient  through the jugular vein which leads
to the superior vena cava, another major vessel of the heart, thus restoring the
cleansed blood to normal circulation.  Infusion is administered over a period of
thirty  minutes.  Filtration  occurs  during  infusion  and for  thirty  minutes
afterward.  The catheters  are removed and manual  pressure is maintained on the
catheter puncture sites for approximately  fifteen minutes. The entire procedure
takes approximately two to three hours to administer.

During Phase I and Phase II clinical trials,  patients  remained in the hospital
overnight for observation  after  undergoing  treatment with the Delcath system.
Once physicians become familiar with using the Delcath system, we


                                    5



expect the  procedure to be performed on an outpatient  basis,  with the patient
resuming normal activities the day after the procedure is performed. We expect a
patient to undergo an average of four  treatments,  one every three weeks. A new
Delcath system kit is used for each treatment.

Integral  to our  research  and  development  efforts is our program of clinical
research with  prominent  researchers  and  physicians  that is being  conducted
presently at The National Cancer Institute and was previously  conducted at Yale
University,  M.D.  Anderson  Cancer  Center and Wright Patterson Air Force Base.

Our Phase III Clinical Trials
-----------------------------

Phase III  clinical  trials are a  prerequisite  for FDA  approval of  Delcath's
pre-marketing  application.  During these trials,  administration of doxorubicin
through  the  Delcath  system  must be proven to be safe and  effective  for the
treatment of liver cancer.  The FDA requires us to demonstrate  that  delivering
doxorubicin  using the Delcath system results in patient survival times that are
longer than those obtained from administering chemotherapy agents intravenously.

We have conducted  Phase I and II clinical trials at three United States medical
centers under  investigational  device and  investigational  new drug exemptions
granted  by the FDA.  The trials  were  designed  to  demonstrate  the  system's
"functionality,"  or its ability to  administer  to and  extract  from the liver
approved and marketed  chemotherapy agents.  Forty-four patients participated in
the  trials.  Twenty-one  of these test  subjects  had primary  liver  cancer or
melanoma  which had spread to the liver and were treated with  doxorubicin.  The
remaining  twenty-three  test subjects suffered from other forms of liver cancer
and/or  were  treated  with  another  chemotherapy  agent,  5-FU.  These  trials
demonstrated that the Delcath system was capable of extracting approximately 70%
to 85% of the  chemotherapy  agent  administered  to the liver.  Therefore,  the
Delcath system permits the delivery of higher dosages of chemotherapy  agents to
the cancer site while at the same time minimizing damage to healthy tissue.

We believe the results of the clinical  trials we have  conducted  indicate that
the Delcath system delivered:

         o  more chemotherapy agent to the tumor site; and

         o  less  chemotherapy  agent  to the  general  circulation  than
            delivered by  administration  of the same dose by intravenous
            means.

In  addition,  clinicians  involved in the Phase I and Phase II clinical  trials
observed:

         o  reduction in tumor size; and

         o  the  safety  of  the  system  at  higher   dosage  levels  of
            chemotherapy  than  those  used in  conventional  intravenous
            chemotherapy delivery.

Further,  though not demonstrated in a statistically  significant manner because
of the limited number of patients tested,  clinicians observed survival times of
patients  treated  with the  Delcath  system  which  exceeded  those  that would
generally  be expected  in patients  receiving  chemotherapy  treatment  through
conventional intravenous means of delivery.

Based on the results of our Phase I and Phase II clinical  trials,  we submitted
to the FDA our application for pre-marketing approval of the Delcath system as a
medical device.  In response to our application,  the FDA classified the Delcath
system as a drug  delivery  system which  requires us to obtain  approval of new
labeling  for the drug being used in the clinical  trials.  The  application  to
change the labeling must be filed by a drug manufacturer holding an existing new
drug  application  or an  abbreviated  new drug  application.  We have reached a
preliminary verbal  understanding  with a drug manufacturer  holding an existing
license for  doxorubicin  to submit an application to the FDA supporting the new
labeling  based on data from the Phase III  clinical  trial.  The  pre-marketing
approval and drug relabeling  applications must demonstrate the clinical utility
of a particular drug when administered  through the Delcath system. To do so, we
must  demonstrate,  in a statistically  meaningful  manner,  that  administering
chemotherapy  agents  with the  Delcath  system  results  in  survival  times of
patients  that are longer than those  obtained from  administering  chemotherapy
agents intravenously.


                                    6



In December  2002, we filed a  registration  statement  with the  Securities and
Exchange  Commission for an  underwritten  public  offering of securities in the
form of units.  Each unit will consist of shares of common stock and warrants to
purchase shares of common stock. With a substantial portion of the proceeds that
we receive  from our planned  public  offering,  we intend to conduct  Phase III
clinical trials designed to demonstrate that administering  doxorubicin with the
Delcath system to treat malignant  melanoma that has spread to the liver results
in patient survival times that are longer than those obtained from administering
chemotherapy agents intravenously.

In December  1999,  the FDA approved our protocols for  conducting the Phase III
clinical trials.

We expect the Phase III  clinical  trials to be  conducted  at  several  medical
centers,  such as the NCI and the Sydney Cancer Centre, and to involve a minimum
of 122 test subjects who will be treated for malignant  melanoma that has spread
to the liver.  Half of these test  subjects  will be  treated  with  doxorubicin
administered  using the Delcath  system and the other half,  the control  group,
will be treated  with  either of two  specified  chemotherapy  agents  delivered
intravenously.  Trials will commence upon approval of a budget by the respective
institutions.  Once a budget is  approved,  the  trials  will  commence  at that
institution.  We expect that the trials will begin in 2003. The Ethics Committee
of the Sydney  Melanoma Unit,  which is a part of the Sydney Cancer Centre,  has
given us approval to start our Phase III  clinical  trial  there.  However,  our
timetable is subject to  uncertainty  and we cannot  assure you that we can meet
our planned schedule.  We do not know whether all of the medical centers we have
identified  will be available  to conduct the  clinical  trials when we are in a
position to have them  commence or that we will be ready to commence  the trials
within any particular time period.

We intend to hire a contract  research  organization  ("CRO")  to conduct  these
trials.  The CRO represents  the clinical  trial  sponsor.  They ensure that the
principal  investigator  follows  the  established  protocol  and  collects  the
clinical  data. We have not begun  negotiations  with a CRO and we cannot assure
you that we will be able to  engage  an  organization  on  acceptable  terms and
conditions  in a timely  manner or at all. The CRO and  principal  investigators
conducting  the  clinical  trials are not our  employees.  As a result,  we have
limited  control over their  activities and can expect that only limited amounts
of their time will be dedicated to our  clinical  trials.  They may fail to meet
their  contractual  obligations  or  fail to meet  regulatory  standards  in the
performance of their  obligations,  and we may not be able to prevent or correct
their failures. Failure of the CRO to perform as expected or required, including
failure of the principal investigators to enroll a sufficient number of patients
for our  trials,  could  result in the  failure of the  clinical  trials and the
failure to obtain FDA  pre-marketing  approval.  We believe that we will acquire
sufficient data to seek FDA pre-marketing  approval of the Delcath system within
twelve to eighteen months of the commencement of the last patient enrolled.

We do not know how long the FDA may take to evaluate  our  submission,  and they
may require that additional trials be conducted or may not grant approval.

The  FDA  pre-marketing   approval  we  are  currently  seeking  is  limited  to
administration  of  doxorubicin  with  our  Delcath  system  to  treat  patients
suffering  from  metastatic  melanoma  which has spread to the liver.  If we are
granted this approval,  we plan to seek additional FDA  pre-marketing  approvals
for using the Delcath  system with other  chemotherapy  agents for  treatment of
other liver cancers and with  anti-viral  drugs for treatment of other diseases,
such as hepatitis. In many instances,  the process of applying for and obtaining
regulatory  approvals involves rigorous  pre-clinical and clinical testing.  The
time,  resources  and  funds  required  for  completing  necessary  testing  and
obtaining approvals is significant,  and FDA pre-marketing approval may never be
obtained for some medical devices or drug delivery systems.  If we fail to raise
the additional capital required or enter into strategic  partnerships to finance
this  testing  or if we fail to obtain the  required  approvals,  our  potential
growth and the expansion of our business would likely be limited.


                                    7

Our Clinical Trial and Agreement with The National Cancer Institute
-------------------------------------------------------------------

In June 2001, the Company  announced that The National  Institutes of Health/The
National Cancer Institute  approved a clinical study protocol for  administering
escalating doses of another chemotherapy agent,  melphalan,  through the Delcath
system to patients with unresectable cancer of the liver.

The Phase I clinical trial  conducted at The National Cancer  Institute  ("NCI")
began in September  2001 and involved a total of 24 patients,  all  experiencing
metastatic  liver cancer.  The goal of a Phase I clinical  trial is to determine
the maximum  tolerated  dose of  melphalan  that can be  administered  before it
becomes toxic to the patient's system.

This clinical trial, which will also include a Phase II study, is subject to the
terms and conditions of the Cooperative Research and Development  Agreement (the
"CRADA")  between us and NCI.  We obtained  FDA  approval to conduct the Phase I
clinical trial;  however,  further FDA approval is necessary to conduct Phase II
studies.  We have  not yet  requested  such  approval.  The  goal of a Phase  II
clinical trial is to determine  various factors such as the appropriate  dosage,
the  timing  of each  dose and the  efficacy  of the  proposed  dose.  We cannot
estimate how long it will be until we receive FDA approval to commence the Phase
II study. The scope of the Phase I and Phase II studies is:

         o  To develop a Delcath  system-based Phase I treatment protocol
            for the regional  therapy of the liver using escalating doses
            of melphalan delivered through the utilization of the Delcath
            system; and

         o  To develop Delcath  system-based Phase II treatment protocols
            as a follow-up to the Phase I study.  The Phase II study will
            involve  patients with specific  histologies  (diseases)  who
            have  unresectable  cancers  confined  to the liver using the
            maximum  tolerated dose of melphalan  administered  using the
            Delcath system.

The  patients  will be treated  with up to four series of  infusions  based upon
toxicity  and  response  to  treatment.  The Phase II study is expected to begin
shortly  after  completion  of the Phase I study and to take  twelve to eighteen
months from the time that the FDA approves the Phase II study protocol.

The CRADA  commits NCI to perform the research  necessary  under the Phase I and
Phase II protocols  approved by the FDA with Delcath acting as the sponsor,  and
NCI providing the principal investigator. Delcath will provide funding to NCI in
the amount of $918,750 payable in quarterly installments over the five-year term
of the  agreement  unless  the  CRADA is  terminated  early.  The  CRADA  can be
terminated at any time by either party. In the event of an early termination, we
would be responsible for unfunded costs incurred prior to the  termination  date
and all reasonable termination costs. The term of the CRADA is intended to allow
for what the parties expect to be the potential maximum amount of time necessary
to complete and evaluate Phase I and Phase II trials.  An amendment to the CRADA
would be necessary if the parties decide to initiate  additional clinical trials
using  another  chemotherapy  agent.  We are using  money  raised in our initial
public offering and will use a portion of the net proceeds of our planned public
offering to fund this project. If the results of the Phase I and Phase II trials
are successful, we will probably need additional capital to pay for the expenses
associated with a Phase III clinical trial.

Research for Hepatitis Treatment
--------------------------------

Another  disease that  attacks the liver is viral  hepatitis.  The  incidence of
viral hepatitis in the United States and worldwide is increasing. The long-range
effects of some forms of  hepatitis  can include  massive  death of liver cells,
chronic  active  hepatitis,  cirrhosis and hepatoma.  The current  treatment for
viral  hepatitis  is limited and includes  long-term  injections  of  interferon
alpha, which is similar to chemotherapy in its toxicity and dosage  limitations.
We plan to seek a strategic  partner to conduct clinical trials to determine the
feasibility  of  using  the  Delcath  system  to  administer  anti-viral  drugs,
including  interferon  alpha, in the treatment of viral  hepatitis.  We have not
entered into any  arrangements,  understandings  or  agreements  with  potential
strategic partners.

Sales and Marketing
-------------------

We intend to focus our marketing  efforts on the sixty-one NCI designated Cancer
Centers in the United  States  recognized by NCI,  beginning  with the hospitals
participating  in the  Phase  III  clinical  trials,  as  well  as  key  foreign

                                    8

institutions  including  the Sydney  Melanoma  Unit of the  University of Sydney
Sydney  Cancer  Centre.  We will focus these  efforts on two distinct  groups of
medical specialists in these comprehensive cancer centers:

         o  oncologists who have primary  responsibility for the patient;
            and

         o  interventional  radiologists  who are members of the hospital
            staff and work with catheter-based systems.

Upon diagnosis of cancer, a patient is usually referred to a medical oncologist.
This physician  generally  provides  palliative  treatments  (non-curative)  and
refers the patient to a surgical  oncologist if surgery appears to be an option.
Both medical and  surgical  oncologists  will be included in our target  market.
Generally,  oncologists  do not  position  catheters.  This is done either by an
interventional radiologist or a surgeon.

We plan to hire a marketing  director  at such time as we receive an  indication
from the FDA that approval of the Delcath system is forthcoming  and then hire a
sales manager and four sales  representatives to market the system in the United
States.

In addition, if we can establish foreign testing and marketing relationships, we
plan to utilize one or more corporate  partners to market  products  outside the
United States. We believe distribution or corporate partnering arrangements will
be cost  effective,  will be implemented  more quickly than a direct sales force
established  by us in such  countries  and will enable us to capitalize on local
marketing expertise in the countries we target.

Since we plan to sell the  Delcath  system to a large  number of  hospitals  and
physician  practices,  we do  not  expect  to be  dependent  upon  one  or a few
customers.

Market acceptance of the Delcath system will depend upon:

         o  the ability of our clinical trials to demonstrate against the
            control  group a  statistically  measurable  increase in life
            expectancy  for  the  kinds  of  cancers  treated  at a  cost
            effective price;

         o  our  ability to educate  physicians  on the use of the system
            and its benefits  compared to other  treatment  alternatives;
            and

         o  our  ability to  convince  healthcare  payors that use of the
            Delcath  system  results  in  reduced   treatment   costs  of
            patients.

This will require substantial efforts and expenditures.

Nissho Agreement
----------------

In December 1996, we entered into an agreement with Nissho Corporation,  a large
manufacturer  and  distributor of medical devices and  pharmaceuticals  based in
Osaka,  Japan  which  grants to Nissho the  exclusive  right to  distribute  the
Delcath system in Japan,  China,  Korea, Hong Kong and Taiwan until December 31,
2004. Nissho, at that time, invested $1,000,000 in Delcath.

Products  covered by the agreement  include the Delcath system for the treatment
of cancer in the liver and the lower  extremities,  as well as new products that
may be added by mutual  agreement.  Nissho is required to purchase products from
Delcath  in  connection  with  clinical  trials  and for resale in its market at
prices  to be  determined  by  mutual  agreement.  Nissho  has  agreed,  in  its
territory,  not to engage in the  business  of  manufacturing,  distributing  or
selling  systems  similar to the Delcath system for the liver or other organs or
body regions.


                                    9

Third-Party Reimbursement
-------------------------

Because  the  Delcath  system  is  characterized  by the FDA as an  experimental
device,  its use is not now reimbursable in the United States.  We will not seek
to have  third-party  payors,  such as  Medicare,  Medicaid  and private  health
insurance plans, reimburse the cost of the Delcath system until after its use is
approved by the FDA.

We believe that the Delcath system will provide significant cost savings in that
it  should  reduce  treatment  and  hospitalization  costs  associated  with the
side-effects of chemotherapy.  Our planned  wholesale price to the hospitals for
the Delcath system kit is approximately  $4,000.  A patient  normally  undergoes
four treatments  with the Delcath system,  each requiring a new system kit. Each
treatment with the Delcath system,  including the cost of the treatment kit, has
an estimated  cost of  approximately  $12,000,  resulting  in a total  estimated
treatment cost of approximately $48,000. This compares to a total estimated cost
of conventional  aggressive  chemotherapy treatment of approximately $160,000 to
$180,000, which includes the hospitalization and treatment costs associated with
the side-effects of the systemic delivery of chemotherapy agents.

Manufacturing
-------------

We plan to utilize  contract  manufacturers to manufacture the components of the
Delcath system.  In order to maintain quality control,  we plan to perform final
assembly and packaging in our own facility.  If we undertake  these  operations,
our  facility  will be  required  to comply  with the FDA's  good  manufacturing
practice and quality system requirements.  If we sell the Delcath system in some
foreign markets, our facility will also need ISO 9000 approval from the European
Union which is a required approval that European  manufacturers must obtain from
the International Organization for Standardization.

The double balloon catheter is being manufactured domestically by the Burron OEM
division of B. Braun Medical,  Inc. of Germany. The double balloon catheter must
be manufactured in accordance with manufacturing and performance  specifications
that are on file with the FDA.  Burron has  demonstrated  that the components it
manufactures meet these specifications.  Burron's  manufacturing facility is ISO
9000 approved,  which will allow the use of the catheter in European markets. B.
Braun has experience in obtaining  regulatory  approval for medical  products in
European  markets and has  indicated  informally  that it will assist us in this
process. We have not entered into a written agreement with Burron to manufacture
the catheter either for the clinical trials or for commercial sale.

Medtronic USA, Inc.  manufactures the components of the blood filtration circuit
located  outside of the body,  including  the  medical  tubing  through  which a
patient's blood flows and various  connectors,  as well as the blood  filtration
pump head.  Medtronic is a manufacturer  of components  used for  extracorporeal
blood  circulation  during  cardiac  surgery.  The  components  manufactured  by
Medtronic  have  been  cleared  by the  FDA  for  other  applications  and  can,
therefore, be sourced off the shelf. These components, however, must comply with
manufacturing and performance  specifications for the Delcath system that are on
file  with  the  FDA.   Medtronic  has  demonstrated   that  the  components  it
manufactures meet these specifications.  Medtronic's  manufacturing  facility is
also ISO 9000 approved and, thus, the components it manufactures  may be used in
European markets.

Currently, we purchase the activated charcoal filters used in the Delcath system
from  Asahi  Medical  Products  of  Japan.  Asahi has  informed  us that it will
discontinue  manufacturing  these filters in the near future.  We have ordered a
final  shipment of filters from Asahi which we expect will be sufficient to meet
our  needs  for at  least  the  next  twelve  months.  However,  as  part of our
application  process with the FDA, we obtained  approval to utilize filters from
any manufacturer that falls within certain performance  parameters and meets the
specifications  on file  with  the FDA.  Therefore,  we are  currently  actively
seeking an alternative filter  manufacturer that is capable of providing us with
the quality of filters that are required to meet the specifications on file with
the FDA in the quantity that we will require to conduct future  clinical  trials
and to market the Delcath system  commercially.  We have already  identified one
potential supplier in the United States.


                                   10

Competition
-----------

The healthcare  industry is characterized by extensive  research efforts,  rapid
technological  progress and intense  competition  from  numerous  organizations,
including  biotechnology  firms and academic  institutions.  Competition  in the
cancer treatment industry,  and specifically the markets for systems and devices
to improve the outcome of  chemotherapy  treatment  for cancer,  is intense.  We
believe  that the primary  competitive  factors for products  addressing  cancer
include safety,  efficacy,  ease of use,  reliability and price. We also believe
that  physician  relationships,  especially  relationships  with  leaders in the
interventional  radiology and oncology  communities,  are important  competitive
factors.

The Delcath system  competes with all forms of liver cancer  treatments that are
alternatives to resection  including  radiation,  intravenous  chemotherapy  and
chemotherapy through implanted infusion pumps, liver transplants,  embolization,
cryosurgery,  radiowave ablation and the use of biological response  modulators,
monoclonal  antibodies  and  liposomes.   Many  of  Delcath's  competitors  have
substantially  greater  financial,  technological,   research  and  development,
marketing and personnel  resources.  In addition,  some of our competitors  have
considerable  experience  in  conducting  clinical  trials and other  regulatory
approval  procedures.  Our  competitors  may  develop  more  effective  or  more
affordable products or treatment methods, or achieve earlier product development
or patent protection,  in which case our chances to achieve meaningful  revenues
or profitability will be substantially reduced.

Many large  pharmaceutical  companies and research  institutions  are developing
systems and devices to improve the outcome of chemotherapy treatment for cancer.
Arrow  International  currently markets an implantable  infusion pump, which has
been successful in facilitating  regional drug delivery.  However,  Arrow's pump
lacks a means of preventing the entry of these agents into the patient's general
circulation after they pass through the liver. Other companies,  including Merck
& Co., Inc., are developing various  chemotherapy  agents with reduced toxicity,
while  other  companies  are  developing  products  to reduce the  toxicity  and
side-effects of chemotherapy treatment. In addition, gene therapy,  vaccines and
other   minimally   invasive   procedures  are  currently   being  developed  as
alternatives to chemotherapy.

Technological  developments  are  expected  to  continue at a rapid pace in both
industry and academia  which could result in a short  product life cycle for our
Delcath system.

Government Regulation
---------------------

General.  The  manufacture  and sale of medical devices and drugs are subject to
extensive  governmental  regulation in the United States and in other countries.
The Delcath  system is regulated in the United States as a drug delivery  system
by the FDA under the Federal  Food,  Drug and Cosmetic Act. As such, it requires
approval  by  the  FDA  of  a  pre-marketing  application  prior  to  commercial
distribution.

Doxorubicin,  the  drug  that we are  initially  seeking  to have  approved  for
delivery by the Delcath  system,  is a widely used  chemotherapy  agent that has
been approved by the FDA. Melphalan,  the drug that will be administered through
the Delcath system in the NCI-sponsored  study, is a chemotherapy agent that has
also been approved by the FDA. Like all approved  drugs,  the approved  labeling
includes  indications  for use,  method  of  action,  dosing,  side-effects  and
contraindications.  Because the Delcath system  delivers  doxorubicin  through a
mode of administration  and at a dose strength that differs from those currently
approved,  approval for revised  labeling of doxorubicin and melphalan  products
permitting  their use with the Delcath system must be obtained.  The application
to change the labeling must be filed by a drug manufacturer  holding an existing
new drug application or an abbreviated new drug application. We are currently in
discussions  with  a  drug  manufacturer  who  holds  an  existing  license  for
doxorubicin  for the  manufacturer  to submit an application  supporting the new
labeling,  assuming data from the Phase III clinical trial is favorable.  We are
also currently in discussions with the drug  manufacturers  that hold a new drug
application or an abbreviated new drug  application and plan actively to solicit
one of  them  to  file  an  application  for  new  labeling  with  the  FDA  for
doxorubicin.

Under  the  Federal  Food,   Drug  and  Cosmetic  Act,  the  FDA  regulates  the
pre-clinical and clinical testing, design, manufacture,  labeling, distribution,
sales, marketing, post-marketing reporting, advertising and promotion of

                                   11

medical  devices and drugs in the United States.  Noncompliance  with applicable
requirements could result in different sanctions such as:

         o  suspension or withdrawal of clearances or approvals;

         o  total or  partial  suspension  of  production,  distribution,
            sales and marketing;

         o  fines;

         o  injunctions;

         o  civil penalties;

         o  recall or seizure of products; and

         o  criminal  prosecution  of a  company  and  its  officers  and
            employees.

Our contract manufacturers are also subject to numerous federal, state and local
laws  relating  to  such  matters  as  safe  working  conditions,  manufacturing
practices,  environmental  protection,  fire  hazard  control  and  disposal  of
hazardous or potentially hazardous substances.

MEDICAL  DEVICES.  The Delcath system is a Class III medical  device.  Class III
medical  devices are those which are  subject to the most  stringent  regulatory
controls because  insufficient  information exists to assure safety and efficacy
solely  through  general  or special  controls  such as  labeling  requirements,
mandatory  performance  standards and  post-market  surveillance.  As such,  FDA
pre-marketing  approval is required for Class III medical devices. It is subject
to the most stringent  controls applied by the FDA to assure  reasonable  safety
and effectiveness.  An application for pre-marketing  approval must be supported
by data  concerning the device and its components,  including the  manufacturing
and labeling of the device and the results of animal and laboratory  testing and
human clinical  trials.  The conduct of Phase III clinical  trials is subject to
regulations  and to  continuing  oversight  by  institutional  review  boards at
hospitals  and research  centers  that sponsor the trials and by the FDA.  These
regulations  include required reporting of adverse events from use of the device
during  the  trials.   Before   commencing   clinical  trials,  we  obtained  an
investigational  device  exemption  providing  for the  initiation  of  clinical
trials. We also obtained  approval of our  investigational  plan,  including the
proposed  protocols  and informed  consent  statement  that patients sign before
undergoing treatment with the Delcath system, by the institutional review boards
at the sites where the trials were conducted.  Under the Federal Food, Drug, and
Cosmetic Act, clinical studies for "significant  risk" Class III devices require
obtaining such approval by  institutional  review boards and the filing with the
FDA  of  an  investigational  device  exemption  at  least  thirty  days  before
initiation of the studies.

Given the short life expectancy of patients  suffering from metastatic  melanoma
of the  liver,  we  believe  the FDA  will  review  our  pre-market  application
expeditiously and respond to our submission of the Delcath system for commercial
sale within  three  months.  However,  approval  of the Delcath  system may take
longer if the FDA requests substantial  additional information or clarification,
or if any major  amendments to the application  are filed. In addition,  the FDA
may refer this matter to an advisory  committee of experts to obtain views about
the Delcath  system.  This process is referred to as a "panel review," and could
delay the  approval  of the Delcath  system.  The FDA will  usually  inspect the
applicant's  manufacturing  facility to ensure  compliance  with quality systems
regulations  prior to  approval  of an  application.  The FDA  also may  conduct
bio-research  monitoring  inspections  of  the  clinical  trial  sites  and  the
applicant  to ensure data  integrity  and that the  studies  were  conducted  in
compliance with the applicable FDA regulations, including good clinical practice
regulations.

If  the  FDA's  evaluations  of  the  application,   clinical  study  sites  and
manufacturing  facilities are  favorable,  the FDA will issue either an approval
letter or an "approvable  letter" containing a number of conditions that must be
met in order to secure approval of an application.  If and when those conditions
have been  fulfilled  to the  satisfaction  of the FDA, the agency will issue an
order approving the application,  authorizing commercial marketing of the device
under specified  conditions of use. If the FDA's  evaluation of the application,
the clinical study sites or the manufacturing  facilities is not favorable,  the
FDA will deny approval of the  application or issue a "not  approvable  letter."
The FDA may  also  determine  that  additional  pre-clinical  testing  or  human
clinical trials are necessary before  approval,  or that  post-approval  studies
must be conducted.

                                   12

The FDA's regulations  require agency approval of an application  supplement for
changes to a device if they affect the safety and  effectiveness  of the device,
including new  indications  for use;  labeling  changes;  the use of a different
facility or establishment to manufacture, process or package the device; changes
in vendors supplying components for the device; changes in manufacturing methods
or quality control systems; and changes in performance or design specifications.
Changes in manufacturing procedures or methods may be implemented and the device
distributed  thirty days after the FDA is provided  with notice of these changes
unless the FDA advises the pre-market approval  application holder within thirty
days of receipt of the notice that the notice is inadequate or that pre-approval
of an application supplement is required.

Approved medical devices remain subject to extensive regulation. Advertising and
promotional  activities  are subject to regulation by the FDA and by the Federal
Trade Commission. Other applicable requirements include the FDA's medical device
reporting  regulations,  which require that we provide information to the FDA on
deaths or serious  injuries that may have been caused or  contributed  to by the
use of marketed devices, as well as product malfunctions that would likely cause
or contribute to a death or serious injury if the malfunction  were to recur. If
safety or efficacy problems occur after the product reaches the market,  the FDA
may  take  steps  to  prevent  or  limit  further   marketing  of  the  product.
Additionally,  the FDA actively enforces  regulations  prohibiting  marketing or
promoting of devices or drugs for indications or uses that have not been cleared
or approved by the FDA. Further,  the Food, Drug and Cosmetic Act authorizes the
FDA to impose post-market surveillance  requirements with respect to a Class III
device which is reasonably  likely to have a serious adverse health  consequence
or which is intended to be implanted in the human body for more than one year or
to be a life  sustaining  or life  supporting  device used outside a hospital or
ambulatory treatment center.

The  Food,  Drug and  Cosmetic  Act  regulates  a device  manufacturer's  design
control,   quality  control  and  manufacturing   procedures  by  requiring  the
manufacturer  to  demonstrate  and  maintain  compliance  with  quality  systems
regulations including good manufacturing practices and other requirements. These
regulations require, among other things, that:

         o  design  controls,  covering initial design and design changes
            be in place;

         o  the  manufacturing  process  be  regulated,   controlled  and
            documented by the use of written procedures; and

         o  the ability to produce devices which meet the  manufacturer's
            specifications be validated by extensive and detailed testing
            of every aspect of the process.

The FDA monitors  compliance  with quality systems  regulations,  including good
manufacturing  practice  requirements,  by conducting  periodic  inspections  of
manufacturing  facilities. If violations of the applicable regulations are found
during FDA inspections,  the FDA will notify the manufacturer of such violations
and the FDA,  administratively or through court enforcement action, can prohibit
further manufacturing, distribution, sales and marketing of the device until the
violations are cured. If violations are not cured within a reasonable  length of
time  after  the  FDA  provides  notification  of  such  violations,  the FDA is
authorized to withdraw approval of the pre-marketing approval application.

Investigational  devices that require FDA  pre-marketing  approval in the United
States  but have  not  received  such  approval  may be  exported  to  countries
belonging to the European Union, European Economic Area and some other specified
countries,  provided  that the device is  intended  for  investigational  use in
accordance  with the laws of the importing  country,  has been  manufactured  in
accordance  with the FDA's good  manufacturing  practices or ISO  standards,  is
labeled on the outside of the shipping  carton "for export only," is not sold or
offered for sale in the United  States and complies with the  specifications  of
the   foreign   purchaser.   The  export  of  an   investigational   device  for
investigational  use to any other country requires prior  authorization from the
FDA.  An  investigational  device may be  exported  for  commercial  use only as
described below, under "Foreign Regulation."

DRUGS.  A  manufacturer  of a  chemotherapy  agent must obtain an amendment of a
supplemental new drug application for a chemotherapy  product  providing for its
use with the  Delcath  system  before the system may be  marketed  in the United
States to deliver  that agent to the liver or any other site.  The  FDA-approved
labeling for both  doxorubicin  and melphalan  does not provide for its delivery
with the Delcath system. We must partner with


                                   13

the holders of an approved new drug application for doxorubicin and melphalan to
make this change to the labeling of both agents.  We are seeking to partner with
drug  companies  for this  purpose,  but we have no assurance  that we will find
partners  or that the FDA will  approve  the  application.  If this  approval is
obtained,  it would not have a negative  effect on the  manufacturers  of either
doxorubicin  or  melphalan.   Rather,  the  drug  manufacturer  would  have  the
opportunity  to expand the use of the drugs as a result of changing  their label
to include the Delcath labeling.

Phase III clinical trial protocols using  doxorubicin  have been approved by the
FDA under our investigational new drug application. FDA regulations also require
that  prior  to  initiating   the  trials  the  sponsor  of  the  trials  obtain
institutional  review board  approval from each  investigational  site that will
conduct the trials.  We are seeking the approval of institutional  review boards
at several  medical  centers by assembling and providing  them with  information
with respect to the trials.

The FDA requires that, in order to obtain  approval to re-label  doxorubicin for
delivery using the Delcath system,  we demonstrate  that delivering  doxorubicin
using the system  results in patient  survival  times that are longer than those
obtained from administering chemotherapy agents intravenously.

The approved Phase III clinical trial  protocols are designed to obtain approval
of both new drug labeling and a pre-marketing approval application providing for
the use of  doxorubicin  with the  Delcath  system.  The  trial  protocols  were
approved by both the FDA division  that approves new drugs and the division that
reviews  applications  to market new devices.  All of the data  generated in the
trials will be submitted to both of these FDA  divisions.  The  foregoing  facts
will also apply if our clinical trial using melphalan is successful in Phases I,
II and III.

If we successfully complete the clinical trials with both agents, we believe the
manufacturers of doxorubicin and melphalan will submit to the FDA an application
to deliver the agent to the liver  through the Delcath  system.  Under the Food,
Drug and Cosmetic Act, the Delcath  system cannot be marketed until the new drug
application, or supplemental new drug application and the pre-marketing approval
application are approved, and then only in conformity with any conditions of use
set forth in the approved labeling.

FOREIGN  REGULATION.  In order for Nissho or any other foreign strategic partner
to market  our  products  in Asia,  Europe,  Latin  America  and  other  foreign
jurisdictions,  they must obtain required regulatory approvals or clearances and
otherwise comply with extensive  regulations  regarding safety and manufacturing
processes  and  quality.  These  regulations,  including  the  requirements  for
approvals or clearances to market, may differ from the FDA regulatory scheme. In
addition,  there may be foreign  regulatory  barriers  other than  pre-marketing
approval or clearance.

In April 1996,  legislation  was enacted  that  permits a medical  device  which
requires FDA pre-marketing  approval but which has not received such approval to
be exported to any country for commercial use, provided that the device:

         o  complies with the laws of that country;

         o  has valid marketing  authorization or the equivalent from the
            appropriate  authority  in any of a  list  of  industrialized
            countries including  Australia,  Canada,  Israel,  Japan, New
            Zealand,  Switzerland,  South  Africa  and  countries  in the
            European Economic Union; and

         o  meets  other  regulatory   requirements  regarding  labeling,
            compliance with the FDA's good manufacturing practices or ISO
            manufacturing standards, and notification to the FDA.

In order for us to market and sell the Delcath system in the European Community,
we must obtain a CE mark, which is the official marking required by the European
Community for all electric and  electronic  equipment that will be sold anywhere
in the  European  Union,  except for  limited  use as a clinical  trial  device.
Supplemental  device  approvals  also might be  required  to market and sell the
Delcath system.

Patents, Trade Secrets and Proprietary Rights
---------------------------------------------

Our  success  depends in large part on our ability to obtain  patents,  maintain
trade secret protection and operate without infringing on the proprietary rights
of third  parties.  Because of the length of time and  expense  associated  with
bringing  new  products  through  development  and  regulatory  approval  to the
marketplace, the health care

                                   14

industry has traditionally placed considerable  emphasis on obtaining patent and
trade  secret  protection  for  significant  new   technologies,   products  and
processes.  We hold the following seven United States patents,  as well as three
corresponding foreign patents in Canada, Europe and Japan:

Summary Description of Patents                                     Patent No.
------------------------------                                     ----------
Isolated perfusion method for cancer treatment                   U.S. #5,069,662
Isolated perfusion device -- catheter for use in
 isolated perfusion in cancer treatment                          U.S. #5,411,479
Device and method for isolated pelvic perfusion                  U.S. #5,817,046
Catheter design to allow blood flow from renal veins
 and limbs to bypass occluded segment of IVC                     U.S. #5,893,841
Balloon inside catheter to restrict blood flow or
 prevent catheter from moving                                    U.S. #5,897,533
Catheter with slideable balloon to adjust isolated segment       U.S. #5,919,163
Isolated perfusion method for kidney cancer                      U.S. #6,186,146

We plan to enforce our intellectual property rights vigorously.  In addition, we
will conduct searches and other activity  relating to the protection of existing
patents and the filing of new applications.

In  addition  to patent  protection,  we rely on  unpatented  trade  secrets and
proprietary  technological  expertise.  We  rely,  in part,  on  confidentiality
agreements  with  our  marketing  partners,  employees,  advisors,  vendors  and
consultants  to  protect  our  trade  secrets  and   proprietary   technological
expertise.  These  agreements  may  not  provide  meaningful  protection  of our
proprietary  technologies or other intellectual  property if unauthorized use or
disclosure occurs.

Employees
---------

As of  February  28,  2003 we had 5  full-time  employees.  We intend to recruit
additional personnel in connection with the research, development, manufacturing
and marketing of our products.  None of our employees are represented by a union
and we believe relationships with our employees are good.

In addition to our  full-time  employees,  we engage the services of medical and
scientific consultants.

ITEM 2. DESCRIPTION OF PROPERTIES.

We  currently  occupy  approximately  3,600  square feet of office space at 1100
Summer  Street,  Stamford,  Connecticut,  pursuant  to a lease  that  expires on
December 22, 2003,  and we have the option to extend until December 21, 2006. We
have occupied  these  facilities  since 1992,  and the space is adequate for our
current needs.  If we require  additional  space in the future,  we believe that
satisfactory space will be available at commercially reasonable rates in or near
our  current  facility,  although  there  can be no  assurance  that  additional
facilities and equipment will be available upon reasonable or acceptable  terms,
if at all. We believe that our properties are adequately covered by insurance.

We believe that our  facilities  and  equipment  are in good  condition  and are
suitable for our  operations  as  presently  conducted  and for our  foreseeable
future operations.

ITEM 3.  LEGAL PROCEEDINGS.

We are not a party to any litigation other than routine litigation incidental to
our business.

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

Not applicable.

                                   15

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's Common Stock traded on the Nasdaq National Market under the symbol
"DCTHU" from October 19, 2000, the effective date of our registration statement,
filed on Form SB-2 under the Securities Act of 1933 (no.  333-39470) relating to
our initial  public  offering of our Common  Stock,  until  October 19, 2001. In
accordance with the terms of our initial public offering,  effective October 22,
2001,  the Company's  common shares and warrants were  decoupled  from the units
issued October 19, 2000 and commenced separate trading.  Our common shares trade
on the NASDAQ Small Cap market  under the symbol  "DCTH" and on the Boston Stock
Exchange  under the symbol "DCT." Our warrants  trade under the symbol  "DCTHW."
The following  table sets forth the per share range of high and low sales prices
of our Common  Stock for the periods  indicated  as reported on the Nasdaq Small
Cap Market:

                            Common Stock Price Range
                            ------------------------

                                                   2002
                                          High                Low
Quarter ended March 31, 2002             $2.90               $0.94
Quarter ended June 30, 2002               1.90                0.68
Quarter ended September 30, 2002          1.11                0.63
Quarter ended December 31, 2002           2.66                0.31



                                                   2001
                                          High                Low
Quarter ended December 31, 2001
  (Since October 19 only)               $1.795               $0.56


                                Unit Price Range
                                ----------------

                                                   2001
Quarter ended March 31, 2001             $5.69               $2.19
Quarter ended June 30, 2001               3.20                1.25
Quarter ended September 30, 2001          2.92                1.26
October 1, 2001- October 19, 2001         1.35                1.00

     As of February 28, 2003, there were approximately 81 stockholders of record
of our Common Stock and  approximately  686 additional  beneficial owners of our
Common Stock.

Dividend Policy
---------------

We have never paid cash  dividends  on our Common Stock and  anticipate  that we
will  continue  to retain our  earnings,  if any,  to finance  the growth of our
business.


                                       16

Equity Compensation Plan Information
------------------------------------



Plan category                        Number of securities    Weighted average exercise    Number    of     securities
                                     to be issued upon       price of outstanding         remaining   available   for
                                     exercise of             options, warrants and        future    issuance    under
                                     outstanding options,    rights                       equity  compensation  plans
                                     warrants and rights                                  (excluding       securities
                                                                                          reflected in column (a))
                                              (a)                       (b)                             (c)

                                                                                              
Equity compensation plans
approved by security holders               1,145,684                   $2.43                           371,858


Equity compensation plans
not approved by security holders                -                         -                                -
                                           ---------                   -----                            -------
Total                                      1,145,684                   $2.43                            371,858


Use of Proceeds of Initial Public Offering
------------------------------------------

As noted above, the effective date of our first registration statement, filed on
Form SB-2  under the  Securities  Act of 1933 (no.  333-39470)  relating  to our
initial  public  offering of our Common Stock,  was October 19, 2000. A total of
1,200,000  units were sold for $6.00 per unit, each unit consisting of one share
of our Common  Stock and one  redeemable  warrant to  purchase  one share of our
Common  Stock for $6.60 per share until  October 18,  2005.  The initial  public
offering  resulted  in gross  proceeds  of $7.2  million,  $720,000 of which was
applied  toward  the  underwriting  discount.  Cash  expenses  relating  to  the
offering, including a non-accountable expense reimbursement to the underwriters,
totaled  approximately $1.45 million. Net proceeds to Delcath were approximately
$5.4  million.  From the  time of  receipt  through  December  31,  2002 the net
proceeds were applied toward:



                                                                                    Approximate
Application of Net Proceeds                                                        Dollar Amount
---------------------------                                                        -------------

                                                                                  
Research and development:
   Phase III clinical  trials using the Delcath system with  doxorubicin .......     $2,009,000
   Phase I  clinical  trials  using  the  Delcath  system  with melphalan ......        901,000
   Research and development  stage clinical trials for other chemotherapy agents         87,000
Repayment of indebtedness ......................................................        270,000
Working capital and general corporate purposes .................................        671,000
                                                                                     ----------
Total ..........................................................................     $3,938,000



The remaining net proceeds are being held in temporary investments in short term
commercial paper and certificate of deposit.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

(a) Plan of Operation

Since our founding in 1988 by a team of  physicians,  we have been a development
stage company engaged primarily in developing and testing the Delcath system for
the treatment of liver cancer. A substantial  portion of our historical expenses
have been for the  development of our medical device and the clinical  trials of
our  product,  and the  pursuit of patents  worldwide,  which now total ten.  We
expect to continue to incur significant losses from costs for


                                       17



product development,  clinical studies, securing patents, regulatory activities,
manufacturing  and establishment of a sales and marketing  organization  without
any  significant  revenues.  A  detailed  description  of the cash  used to fund
historical  operations is in the  financial  statements  and the notes  thereto.
Without an  FDA-approved  product and commercial  sales,  we will continue to be
dependent  upon  existing  cash and the sale of  equity  or debt to fund  future
activities  over at least the next three  years.  While the amount of future net
losses and time required to reach  profitability  are uncertain,  our ability to
generate significant revenue and become profitable will depend on our success in
commercializing our device.

During 2001,  Delcath  initiated  the clinical  trial of the system for isolated
liver perfusion using the chemotherapeutic agent,  melphalan.  The Phase I trial
at the National Cancer  Institute  marked an expansion in the potential  labeled
usage  beyond  doxorubicin,  the  chemotherapeutic  agent  used  in our  initial
clinical  trials.  Enrollment  of new  patients  in the Phase I trial  continued
throughout  2002.

NCI is  currently  preparing a clinical  trial  protocol for a Phase II trial of
melphalan,  based on the data collected in the Phase I study. Enrollment in this
Phase II study is expected to begin during 2003. The Principal  Investigator  at
the NCI has  informed the Company  that he plans to publish  and/or  present his
findings in  appropriate  medical  forums once  treatment  within Phase I of the
trial is completed.

We also announced that the Ethics  Committee of the Sydney  Melanoma Unit of the
University  of Sydney Sydney Cancer Centre has given us approval to proceed with
a Phase III study of the Delcath drug delivery  system for inoperable  cancer in
the  liver.  Other  potential  sites  are not as far  along as  Sydney  in their
preparations to participate in this clinical trial.

Our management continued to speak to potential investors and investment analysts
at a series of meetings in several major U. S. cities and in Europe. On April 3,
2002 we raised $267,500 upon completion of a private placement of 243,181 shares
of common stock with an investment group.

Over the next 12 months,  we expect to  continue to incur  substantial  expenses
related to the research and development of our  technology,  including Phase III
clinical  trials using  doxorubicin  with the Delcath  system and Phase I and II
clinical trials using melphalan with the Delcath system.  Additional funds, when
available,  will be committed to pre-clinical and clinical trials for the use of
other  chemotherapy  agents with the Delcath  system for the  treatment of liver
cancer, and the development of additional products and components.  We will also
continue  efforts to qualify  additional  sources of the key  components  of our
device,  in an  effort  to  further  reduce  manufacturing  costs  and  minimize
dependency on a single source of supply.

Liquidity and Capital Resources
-------------------------------

Without raising any additional funds, we currently anticipate that our available
funds will be sufficient to meet our  anticipated  needs for working capital and
capital  expenditures  through at least the next 12 months.  The  Company is not
projecting any capital expenditures that will significantly affect the Company's
liquidity during the next 12 months.

Our future liquidity and capital  requirements  will depend on numerous factors,
including  the  progress  of our  research  and  product  development  programs,
including clinical studies; the timing and costs of making various United States
and  foreign  regulatory   filings,   obtaining  approvals  and  complying  with
regulations;   the  timing  and   effectiveness  of  product   commercialization
activities,  including  marketing  arrangements  overseas;  the timing and costs
involved in preparing, filing, prosecuting, defending and enforcing intellectual
property  rights;   and  the  effect  of  competing   technological  and  market
developments.

The Company's future results are subject to substantial risks and uncertainties.
The  Company  expects to require  additional  working  capital in the future and
there can be no  assurance  that  such  working  capital  will be  available  on
acceptable terms, if at all.

                                       18



Future Capital Needs; Additional Future Funding
-----------------------------------------------

The Company's future results are subject to substantial risks and uncertainties.
The  Company has  operated at a loss for its entire  history and there can be no
assurance of it ever achieving consistent profitability. The Company had working
capital at December 31, 2002 of $1,360,469.  The Company will require additional
working  capital in the future and there can be no  assurance  that such working
capital will be  available  on  acceptable  terms,  if at all. In addition,  the
Company  will need  additional  capital  in the  future to fully  implement  its
business strategy as set forth herein.

In December  2002, we filed a  registration  statement  with the  Securities and
Exchange  Commission for an  underwritten  public  offering of securities in the
form of units.  Each unit will consist of shares of common stock and warrants to
purchase shares of common stock. We plan to use the net proceeds to fund a Phase
III  clinical  trial using  doxorubicin  and the Phase II clinical  trial at The
National Cancer Institute using melphalan. We also anticipate using a portion of
the net proceeds to hire an additional employee to serve as Director of Research
and Development.

Forward Looking Statements
--------------------------

Certain  statements  in  this  Form  10-KSB,  including  statements  of our  and
management's expectations,  intentions, plans, objectives and beliefs, including
those contained in or implied by  "Management's  Discussion and Analysis or Plan
of Operation," are  "forward-looking  statements"  within the meaning of Section
21E of the Securities  Exchange Act of 1934, that are subject to certain events,
risks and uncertainties that may be outside our control.  These  forward-looking
statements   may  be   identified  by  the  use  of  words  such  as  "expects,"
"anticipates,"   "intends,"  "plans"  and  similar  expressions.   They  include
statements  of our future plans and  objectives  for our future  operations  and
statements of future economic  performance,  information regarding our expansion
and possible results from expansion, our expected growth, our capital budget and
future capital  requirements,  the availability of funds and our ability to meet
future  capital  needs,  the  realization  of our deferred  tax assets,  and the
assumptions described in this report underlying such forward-looking statements.
Actual results and developments  could differ materially from those expressed in
or implied by such  statements  due to a number of  factors,  including  without
limitation,  those described in the context of such forward-looking  statements,
our  expansion  and  acquisition  strategy,  our  ability to  achieve  operating
efficiencies,   industry  pricing  and  technology  trends,   evolving  industry
standards,  domestic and international  regulatory matters, general economic and
business  conditions,  the strength and financial  resources of our competitors,
our ability to find and retain  skilled  personnel,  the  political and economic
climate  in which we conduct  operations,  the risks  discussed  in Item 1 above
under  "Description  of Business" and other risk factors  described from time to
time in our other  documents and reports filed with the  Securities and Exchange
Commission (the  "Commission").  We do not assume any responsibility to publicly
update any of our  forward-looking  statements  regardless  of  whether  factors
change as a result of new information, future events or for any other reason. We
advise you to review any additional disclosures we make in our Form 10-QSB, Form
8-K and Form 10-KSB reports filed with the Commission.

Application of Critical Accounting Policies
-------------------------------------------

The  Company's  financial  statements  have been  prepared  in  accordance  with
accounting  principles  generally  accepted  in the  United  States of  America.
Certain accounting policies have a significant impact on amounts reported in the
financial statements.  A summary of those significant accounting policies can be
found in Note 1 to the  Company's  financial  statements  included  herein.  The
Company has not adopted  any  significant  new  accounting  policies  during the
twelve months ended  December 31, 2002, but has  reclassified  its Statements of
Operations to reflect cost and expense  accounts on a functional  basis for 2002
and prior.

(b) Management's  Discussion and Analysis of Financial  Condition and Results of
    Operation.

Not applicable.

                                       19



ITEM 7. FINANCIAL STATEMENTS.

Please  refer to pages F-1 through F-17  Independent  Auditors'  Report  Balance
Sheet as of December 31, 2002
Statements  of  Operations  for the years ended  December  31, 2002 and 2001 and
cumulative  from inception  (August 5, 1988) to December 31, 2002  Statements of
Stockholders'  Equity  for the  years  ended  December  31,  2002  and  2001 and
cumulative from inception (August 5, 1988) to
December 31, 2002
Statements  of Cash Flows for the years  ended  December  31,  2002 and 2001 and
cumulative  from  inception  (August  5,  1988) to  December  31,  2002 Notes to
Financial Statements

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE.

Information  in response to Item 304 of  Regulation  S-B is not included  herein
because such  information  has been  "previously  reported,"  as defined in Rule
12b-2 under the Exchange Act.


                                    PART III


ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT.

The information  required by Items 401 and 405 of Regulation S-B is incorporated
by  reference  into this Form 10-KSB by reference  to the  Company's  definitive
proxy statement (the "Definitive  Proxy  Statement") for its 2003 Annual Meeting
of Stockholders

ITEM 10. EXECUTIVE COMPENSATION

The information required by Item 402 of Regulation S-B is incorporated into this
Form 10-KSB by reference to the Definitive Proxy Statement.

ITEM 11.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
          RELATED STOCKHOLDER.

The  information  required by Item 201(d) of Regulation  S-B is included in this
form 10-KSB under Item 5. The information required by Item 403 of Regulation S-B
is  incorporated  into this form 10-KSB by  reference  to the  Definitive  Proxy
Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 404 of Regulation S-B is incorporated into this
form 10-KSB by reference to the Definitive Proxy Statement.


                                       20



ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a)  Exhibits
     Exhibit No.     Description
     -----------     -----------
       3.1           Amended  and  Restated   Certificate  of  Incorporation  of
                     Delcath Systems, Inc., as amended to January 31, 2003.
       3.2           Amended  and  Restated  By-Laws  of Delcath  Systems,  Inc.
                     (incorporated  by reference to Exhibit 3.2 to Amendment No.
                     1 to  Registrant's  Registration  Statement  on  Form  SB-2
                     (Registration No. 333-39470)).
       4.4           Warrant  Agreement,  dated  January 5, 2001, by and between
                     Delcath  Systems,  Inc. and Euroland  Marketing  Solutions,
                     Ltd.  (incorporated  by  reference  to  Exhibit  4.5 to the
                     Registrant's  Annual  Report  on Form  10-KSB  for the year
                     ended December 31, 2000 (Commission File No. 001-16133)).
       4.5           Warrant No. W-2 to purchase up to 150,000  units granted to
                     Euroland   Marketing   Services,   Ltd.   (incorporated  by
                     reference to Exhibit 4.6 to the Registrant's  Annual Report
                     on Form  10-KSB  for  the  year  ended  December  31,  2000
                     (Commission File No. 001-16133)).
       4.6           Rights  Agreement,  dated  October 30, 2001, by and between
                     Delcath  Systems,  Inc. and American Stock Transfer & Trust
                     Company,  as Rights  Agent  (incorporated  by  reference to
                     Exhibit 4.7 to  Registrant's  Form 8-A dated  November  12,
                     2001 (Commission File No. 001-16133)).
       4.7           Form of Warrant  Agreement by and between Delcath  Systems,
                     Inc.  and  Whale  Securities  Co.,  L.P.  (incorporated  by
                     reference to Exhibit 4.2 to Amendment No. 5 to Registrant's
                     Registration  Statement  on  Form  SB-2  (Registration  No.
                     333-39470)).
       4.8           Form of Warrant  Agreement  by and between  American  Stock
                     Transfer  &  Trust  Company,   as  warrant   agent,   Whale
                     Securities   Co.,   L.P.   and   Delcath   Systems,    Inc.
                     (incorporated  by reference to Exhibit 4.3 to Amendment No.
                     5 to  Registrant's  Registration  Statement  on  Form  SB-2
                     (Registration No. 333-39470)).
       10.1          1992 Incentive Stock Option Plan (incorporated by reference
                     to Exhibit 10.1 to Registrant's  Registration  Statement on
                     Form SB-2 (Registration No. 333-39470)).
       10.2          1992  Non-Incentive  Stock  Option  Plan  (incorporated  by
                     reference  to  Exhibit  10.2 to  Registrant's  Registration
                     Statement on Form SB-2 (Registration No. 333-39470)).
       10.3          2000  Stock  Option  Plan  (incorporated  by  reference  to
                     Exhibit 10.3 to Registrant's Registration Statement on Form
                     SB-2 (Registration No. 333-39470)).
       10.4          2001  Stock  Option  Plan  (incorporated  by  reference  to
                     Exhibit  10.12 to Amendment  No. 1 to  Registrant's  Annual
                     Report on Form 10-KSB for the year ended  December 31, 2001
                     (Commission File No. 001-16133)).
       10.5          Employment Agreement, dated April 30, 1996, between Delcath
                     Systems,  Inc. and M.S.  Koly, as amended on April 30, 1999
                     (incorporated  by reference to Exhibit 10.4 to Registrant's
                     Registration  Statement  on  Form  SB-2  (Registration  No.
                     333-39470)).
       10.6          Employment Agreement, dated April 30, 1996, between Delcath
                     Systems, Inc. and Samuel Herschkowitz,  M.D., as amended on
                     April 30, 2000  (incorporated  by reference to Exhibit 10.4
                     to  Registrant's   Registration   Statement  on  Form  SB-2
                     (Registration No. 333-39470)).
       10.7          Distributorship  Agreement,  dated as of December 27, 1996,
                     by and between Delcath Systems, Inc. and Nissho Corporation
                     (incorporated  by reference to Exhibit 10.6 to Registrant's
                     Registration  Statement  on  Form  SB-2  (Registration  No.
                     333-39470)).

                                       21




     Exhibit No.     Description
     -----------     -----------
       10.8          Consulting  Services  Agreement,  between Delcath  Systems,
                     Inc. and Euroland Marketing Solutions,  Ltd.  (incorporated
                     by  reference to Exhibit  10.9 to the  Registrant's  Annual
                     Report on Form 10-KSB for the year ended  December 31, 2000
                     (Commission File No. 001-16133)).
       10.9          Amendment to Key  Employment  Agreement,  dated October 30,
                     2001, by and between Delcath  Systems,  Inc. and M. S. Koly
                     (incorporated by reference to Exhibit 10.10 to Registrant's
                     Quarterly   Report  on  Form  10-Q  for  the  period  ended
                     September 30, 2001 (Commission File No. 001-16133)).
       10.10         Amendment to Key  Employment  Agreement,  dated October 30,
                     2001,  by and  between  Delcath  Systems,  Inc.  and Samuel
                     Herschkowitz (incorporated by reference to Exhibit 10.11 to
                     Registrant's  Quarterly  Report on Form 10-Q for the period
                     ended September 30, 2001 (Commission File No. 001-16133)).
       99.1          Certification  of Chief  Executive  Officer  Pursuant to 18
                     U.S.C.  Section  1350 As Adopted  Pursuant o Section 906 of
                     the Sarbanes-Oxley Act of 2002
       99.2          Certification  of Chief  Financial  Officer  Pursuant to 18
                     U.S.C.  Section  1350 As Adopted  Pursuant o Section 906 of
                     the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

1. The  Company  filed a  Current  Report  on Form 8-K  dated  October  1,  2002
reporting  under  Item 5 its  issuance  of a press  release  on October 1, 2002,
announcing  that its board of  directors  approved  a stock  repurchase  program
whereby the Company is authorized to repurchase a portion of its common stock.

2. The  Company  filed a  Current  Report  on Form 8-K  dated  December  9, 2002
reporting  under Item 5 its  issuance  of a press  release on  December 9, 2002,
announcing  it has  filed a  registration  statement  with  the  Securities  and
Exchange  Commission for an  underwritten  public  offering of securities in the
form of units.  Each unit will consist of shares of common stock and warrants to
purchase shares of common stock.

ITEM 14. CONTROLS AND PROCEDURES

Based on an  evaluation  of the  Company's  disclosure  controls and  procedures
performed  by the  Company's  Chief  Executive  Officer and its Chief  Financial
officer  within  90 days of the  filing  of this  report,  the  Company's  Chief
Executive  Officer and its Chief Financial  Officer concluded that the Company's
disclosure controls and procedures have been effective.

As used herein,  "disclosure  controls and procedures"  means controls and other
procedures of the Company that are designed to ensure that information  required
to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act are recorded, processed,  summarized and reported within
the time periods  specified in the rules and forms issued by the  Securities and
Exchange  Commission.   Disclosure  controls  and  procedures  include,  without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Securities  Exchange  Act is  accumulated  and  communicated  to  the  Company's
management,  including  its  principal  executive  officer or  officers  and its
principal   financial  officer  or  officers,   or  persons  performing  similar
functions,   as  appropriate  to  allow  timely  decisions   regarding  required
disclosure.

Since the date of the  evaluation  described  above,  there were no  significant
changes  in the  Company's  internal  controls  or in other  factors  that could
significantly  affect these controls,  and there were no corrective actions with
regard to significant deficiencies and material weaknesses.


                                       22



                                   SIGNATURES
                                   ----------

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

                                    /s/ M. S. Koly
                                    ----------------------------
                                    M. S. Koly, President
                                    March 12, 2003


Each  person  whose  signature   appears  below  appoints  M.  S.  Koly  as  his
attorney-in-fact, with full power of substitution and resubstitution to sign any
and all amendments to this report on Form 10-KSB of Delcath Systems, Inc. and to
file the same,  with all  exhibits  thereto and other  documents  in  connection
therewith,  with the Securities and Exchange  Commission,  hereby  ratifying and
confirming  all  that  said  attorney-in-fact  and  agent or his  substitute  or
substitutes may lawfully do or cause to be done by virtue hereof.

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

Signature                        Title                            Date
---------                        -----                            ----

 /s/ M. S. Koly                  resident, Chief Executive        March 12, 2003
-----------------------------    fficer, Treasurer and Director
M. S. Koly                       Principal Executive Officer)


/s/ Thomas S. Grogan             Chief Financial Officer          March 12, 2003
-----------------------------    (Principal Financial Officer
Thomas S. Grogan                 and Principal Accounting Officer)



/s/ Samuel Herschkowitz, M.D.    Chairman of the Board            March 12, 2003
-----------------------------
Samuel Herschkowitz, M.D.


/s/ Mark Corigliano              Director                         March 12, 2003
-----------------------------
Mark A. Corigliano


/s/ Daniel Isdaner               Director                         March 12, 2003
-----------------------------
Daniel Isdaner


/s/ Victor Nevins                Director                         March 12, 2003
-----------------------------
Victor Nevins


                                       23




                                  CERTIFICATION
                           BY CHIEF EXECUTIVE OFFICER
                             PURSUANT TO RULE 13a-14

            I, M. S. Koly, certify that:

         1. I have  reviewed  this  annual  report  on Form  10-KSB  of  DELCATH
SYSTEMS, 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 officer and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

            (a) designed such disclosure  controls and procedures to ensure that
material  information  relating to the  registrant is made known to us by others
within the  registrant,  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  officer 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  officer and I have indicated in
this  annual  report  whether  there were any  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.

Date: March 12, 2003


                                      /s/  M. S. Koly
                                      ------------------------------------------
                                      M. S. Koly
                                      Chief Executive Officer
                                      (Principal executive officer)


                                       24





                                  CERTIFICATION
                           BY CHIEF FINANCIAL OFFICER
                             PURSUANT TO RULE 13a-14

            I, Thomas S. Grogan, certify that:

         1. I have  reviewed  this  annual  report  on Form  10-KSB  of  DELCATH
SYSTEMS, 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 officer and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

            (a) designed such disclosure  controls and procedures to ensure that
material  information  relating to the  registrant is made known to us by others
within the  registrant,  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  officer 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  officer and I have indicated in
this  annual  report  whether  there were any  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.

Date: March 12, 2003


                                      /s/ Thomas S. Grogan
                                      ------------------------------------------
                                      Thomas S. Grogan
                                      Chief Financial Officer
                                      (Principal financial officer)


                                       25




                              DELCATH SYSTEMS, INC.
                          (A Development Stage Company)


                          Index to Financial Statements
                          -----------------------------


                                                                           Page
                                                                           ----

Independent Auditors' Report                                               F-2

Balance Sheet as of December 31, 2002                                      F-3

Statements of Operations for the years ended December 31,
   2002 and 2001 and cumulative from inception
   (August 5, 1988) to December 31, 2002                                   F-4

Statements of Stockholders' Equity for the years ended
   December 31, 2002 and 2001 and cumulative from
   inception (August 5, 1988) to December 31, 2002                         F-5

Statements of Cash Flows for the years ended December 31,
   2002 and 2001 and cumulative from inception
   (August 5, 1988) to December 31, 2002                                   F-6

Notes to Financial Statements                                              F-7




                                      F-1



                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Delcath Systems, Inc.:


We have  audited the  accompanying  balance  sheet of Delcath  Systems,  Inc. (a
development  stage company) as of December 31, 2002, and the related  statements
of operations, stockholders' equity, and cash flows for each of the years in the
two-year  period ended  December 31, 2002 and for the period from August 5, 1988
(inception)  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 audits.

We conducted our audits 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 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  audits  provide  a
reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly, in all
material  respects,   the  financial  position  of  Delcath  Systems,   Inc.  (a
development  stage  company) as of  December  31,  2002,  and the results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 2002 and for the period from August 5, 1988 (inception) to December
31, 2002, in conformity with  accounting  principles  generally  accepted in the
United States of America.


Eisner LLP

New York, NY
February 6, 2003



                                      F-2




                              DELCATH SYSTEMS, INC.

                          (A Development Stage Company)

                                  Balance Sheet

                                                                                    December 31,
                                                                                        2002
                                                                                    -----------

                                   Assets

Current assets:
                                                                                
     Cash and cash equivalents .................................................   $  1,063,650
     Certificate of deposit ....................................................        370,000
     Interest receivable .......................................................          5,406
     Prepaid insurance .........................................................         96,583
                                                                                   ------------
                       Total current assets ....................................      1,535,639

Furniture and fixtures, net ....................................................         13,750
Deferred costs in connection with a proposed
     financing transaction .....................................................        238,571
Due from affiliate .............................................................         24,000
                                                                                   ------------

                       Total assets ............................................   $  1,811,960
                                                                                   ============

                  Liabilities and Stockholders' Equity

Current liabilities:
     Accounts payable and accrued expenses .....................................   $    175,170
                                                                                   ------------
                       Total current liabilities ...............................        175,170
                                                                                   ------------

Stockholders' equity:
     Preferred stock, $.01 par value; 10,000,000 shares
        authorized; no shares issued and outstanding ...........................           --
     Common stock, $.01 par value; 15,000,000 shares authorized;
        4,146,997 shares issued and 4,118,897 outstanding ......................         41,189
     Additional paid-in capital ................................................     19,049,406
     Deficit accumulated during development stage ..............................    (17,453,805)
                                                                                   ------------

                    Total stockholders' equity .................................      1,636,790
                                                                                   ------------

                    Total liabilities and stockholders' equity .................   $  1,811,960
                                                                                   ============


See accompanying notes to financial statements


                                      F-3




                                                 DELCATH SYSTEMS, INC.

                                             (A Development Stage Company)

                                               Statements of Operations


                                                                                               Cumulative
                                                                                             from inception
                                                          Year ended December 31,           (August 5, 1988)
                                                    -----------------------------------            to
                                                          2002               2001           December 31, 2002
                                                    ----------------------------------- --------------------------

Costs and expenses:

                                                                               
     General and administrative expenses ........ $         723,763  $         953,652  $               5,303,309
     Research and development costs .............         1,173,275          1,115,004                 11,410,881
                                                    ----------------------------------- --------------------------

        Total costs and expenses ................         1,897,038          2,068,656                 16,714,190
                                                    ----------------------------------- --------------------------

        Operating loss ..........................        (1,897,038)        (2,068,656)               (16,714,190)

Other income (expense):
     Interest income ............................            89,992            208,220                    930,463

     Interest expense ...........................            --                (15,571)                  (171,473)
                                                    ----------------------------------- --------------------------

        Net loss ................................ $      (1,807,046) $      (1,876,007) $             (15,955,200)
                                                    ================  ================= ==========================

Common share data:
     Basic and diluted loss per share ........... $           (0.44) $           (0.48)
                                                    ================  =================

     Weighted average number of basic
           and diluted common shares
           outstanding ..........................         4,085,049          3,903,816
                                                    ================  =================


See accompanying notes to financial statements.



                                      F-4




                                                         DELCATH SYSTEMS, INC.
                                                     (A Development Stage Company)

                                                  Statements of Stockholders' Equity

                                              Years ended December 31, 2002 and 2001 and
                                    cumulative from inception (August 5, 1988) to December 31, 2002



                                                             Common stock $.01 par value                            Preferred Stock
                                        --------------------------------------------------------------------------  ----------------
                                                  Issued                  In treasury             Outstanding       $.01 par value
                                        -------------------------  ---------------------    ----------------------  ----------------
                                           No. of                   No. of                     No. of                No. of
                                           shares       Amount      shares       Amount        shares       Amount   shares  Amount
                                        ------------   --------   ---------    ----------    ----------    --------  ------  ------
                                                                                                      
Shares issued in connection with the
     formation of the Company as of
     August 22, 1988 ...............      621,089  $      6,211          --    $       --         621,089  $    6,211   --    $ --
Sale of preferred stock,
     August 22, 1988 ...............         --            --            --            --            --          --     --      --
Shares returned as of March 8, 1990          --            --        (414,059)       (4,141)     (414,059)     (4,141)  --      --
Sale of stock, October 2, 1990 .....         --            --          17,252           173        17,252         173   --      --
Sale of stock, January 23, 1991 ....         --            --          46,522           465        46,522         465   --      --
Sale of stock, August 30, 1991 .....         --            --           1,353            14         1,353          14   --      --
Sale of stock, December 31, 1992 ...         --            --         103,515         1,035       103,515       1,035   --      --
Sale of stock, July 15, 1994 .......         --            --         103,239         1,032       103,239       1,032   --      --
Sale of stock, December 19, 1996 ...         --            --          39,512           395        39,512         395   --      --
Shares issued in connection with
     conversion of short-term
      borrowings as of
     December 22, 1996 .............       58,491           585        98,388           984       156,879       1,569   --      --
Sale of stock, December 31, 1997 ...       53,483           535          --            --          53,483         535   --      --
Exercise of stock options ..........       13,802           138         3,450            35        17,252         173   --      --
Shares issued as compensation ......        2,345            23           828             8         3,173          31   --      --
Amortization of compensatory
     stock options granted .........         --            --            --            --            --          --     --      --
Forfeiture of stock options ........         --            --            --            --            --          --     --      --
Shares issued in connection with
     exercise of warrants ..........       21,568           216          --            --          21,568         216   --      --
Sale of stock,  January 16, 1998 ...       34,505           345          --            --          34,505         345   --      --
Sale of stock, September 24, 1998 ..        3,450            35          --            --           3,450          35   --      --
Shares returned, April 17, 1998 ....       (3,450)          (35)         --            --          (3,450)        (35)  --      --
Amortization of compensatory
     stock options granted .........         --            --            --            --            --          --     --      --
Forfeiture of stock options ........         --            --            --            --            --          --     --      --
Exercise of stock options ..........        8,626            86          --            --           8,626          86   --      --
Sale of stock, June 30, 1999 .......       46,987           470          --            --          46,987         470   --      --
Amortization of compensatory
     stock options granted .........         --            --            --            --            --          --     --      --
Forfeiture of stock options ........         --            --            --            --            --          --     --      --
Shares issued in connection with
     exercise of warrants ..........        2,300            23          --            --           2,300          23   --      --
Sale of stock, April 14, 2000 ......      230,873         2,309          --            --         230,873       2,309   --      --
Dividends paid on preferred stock ..      690,910         6,909          --            --         690,910       6,909   --      --
Conversion of preferred stock ......      833,873         8,339          --            --         833,873       8,339   --      --
Sale of stock, October 19, 2000 ....    1,200,000        12,000          --            --       1,200,000      12,000   --      --
Shares issued as compensation
     for stock sale ................       85,000           850          --            --          85,000         850   --      --
Stock options issued as
     compensation ..................         --            --            --            --            --          --     --      --
Deficit accumulated from inception
     to December 31, 2000 ..........         --            --            --            --            --          --     --      --
                                     ------------  ------------  ------------  ------------  ------------  ----------  -----   ----

Balance at December 31, 2000 .......    3,903,852        39,039          --            --       3,903,852      39,039   --      --

Sum of fractional common shares
     cancelled after year 2000
     stock splits ..................          (36)           (1)         --            --             (36)         (1)  --      --
Stock warrants issued as
     compensation ..................         --            --            --            --            --          --     --      --
Net loss for year ended
     December 31, 2001 .............         --            --            --            --            --          --     --      --
                                     ------------  ------------  ------------  ------------  ------------  ----------   --    -----
Balance at December 31, 2001 .......    3,903,816        39,038          --            --       3,903,816  $   39,038   --    $ --

Sale of stock on April 3, 2002 .....      243,181         2,432          --            --         243,181       2,432   --      --
Repurchases of stock, November .....         --            --         (28,100)         (281)      (28,100)       (281)  --      --
     and December 2002
Net loss for year ended ............         --            --            --            --            --          --     --      --
     December 31, 2002 .............         --            --            --            --            --          --     --      --
                                     ------------  ------------  ------------  ------------  ------------  ----------   --    -----
Balance at December 31, 2002 .......    4,146,997  $     41,470     (28,100)    $      (281)    4,118,897  $   41,189   --    $ --
                                     ============  ============  ============  ============  ============  ==========   ==    =====




                                             Class A                       Class B
                                          preferred stock              preferred stock
                                      -----------------------      ----------------------                  Deficit
                                          $.01 par value                 $.01 par value                  accumulated
                                      -----------------------      ----------------------    Additional     during
                                        No. of                       No. of                    paid-in    development
                                        shares        Amount        shares      Amount        capital       stage         Total
                                      ----------    ----------    ----------  ----------   ------------  -----------  -------------
                                                                                                  
Shares issued in connection with the
     formation of the Company as of
     August 22, 1988 ...............        --    $       --           --    $       --    $     (5,211) $       --    $      1,000
Sale of preferred stock,
     August 22, 1988 ...............   2,000,000        20,000         --            --         480,000          --         500,000
Shares returned as of March 8, 1990         --            --           --            --           4,141          --            --
Sale of stock, October 2, 1990 .....        --            --           --            --          24,827          --          25,000
Sale of stock, January 23, 1991 ....        --            --        416,675         4,167     1,401,690          --       1,406,322
Sale of stock, August 30, 1991 .....        --            --           --            --           9,987          --          10,001
Sale of stock, December 31, 1992 ...        --            --           --            --       1,013,969          --       1,015,004
Sale of stock, July 15, 1994 .......        --            --           --            --       1,120,968          --       1,122,000
Sale of stock, December 19, 1996 ...        --            --           --            --         999,605          --       1,000,000
Shares issued in connection with
     conversion of short-term
      borrowings as of
     December 22, 1996 .............        --            --           --            --       1,703,395          --       1,704,964
Sale of stock, December 31, 1997 ...        --            --           --            --         774,465          --         775,000
Exercise of stock options ..........        --            --           --            --          30,827          --          31,000
Shares issued as compensation ......        --            --           --            --          34,454          --          34,485
Amortization of compensatory
     stock options granted .........        --            --           --            --       2,496,347          --       2,496,347
Forfeiture of stock options ........        --            --           --            --        (279,220)         --        (279,220)
Shares issued in connection with
     exercise of warrants ..........        --            --           --            --         234,182          --         234,398
Sale of stock,  January 16, 1998 ...        --            --           --            --         499,655          --         500,000
Sale of stock, September 24, 1998 ..        --            --           --            --          56,965          --          57,000
Shares returned, April 17, 1998 ....        --            --           --            --          (4,965)         --          (5,000)
Amortization of compensatory
     stock options granted .........        --            --           --            --       1,166,418          --       1,166,418
Forfeiture of stock options ........        --            --           --            --        (407,189)         --        (407,189)
Exercise of stock options ..........        --            --           --            --          67,414          --          67,500
Sale of stock, June 30, 1999 .......        --            --           --            --         775,722          --         776,192
Amortization of compensatory
     stock options granted .........        --            --           --            --          98,186          --          98,186
Forfeiture of stock options ........        --            --           --            --        (554,371)         --        (554,371)
Shares issued in connection with
     exercise of warrants ..........        --            --           --            --          24,975          --          24,998
Sale of stock, April 14, 2000 ......        --            --           --            --         499,516          --         501,825
Dividends paid on preferred stock ..        --            --           --            --         992,161    (1,498,605)     (499,535)
Conversion of preferred stock ......  (2,000,000)      (20,000)    (416,675)       (4,167)       15,828          --            --
Sale of stock, October 19, 2000 ....        --            --           --            --       5,359,468          --       5,371,468
Shares issued as compensation
     for stock sale ................        --            --           --            --            (850)         --            --
Stock options issued as
     compensation ..................        --            --           --            --           3,800          --           3,800
Deficit accumulated from inception
     to December 31, 2000 ..........        --            --           --            --            --     (12,272,147)  (12,272,147)
                                    ------------  ------------  -----------  ------------  ------------  ------------  ------------

Balance at December 31, 2000 .......        --            --           --            --      18,637,159   (13,770,752)    4,905,446

Sum of fractional common shares
     cancelled after year 2000
     stock splits ..................        --            --           --            --               1          --            --
Stock warrants issued as
     compensation ..................        --            --           --            --         198,000          --         198,000
Net loss for year ended
     December 31, 2001 .............        --            --           --            --            --      (1,876,007)   (1,876,007)
                                    ------------  ------------  -----------  ------------  ------------  ------------  ------------
Balance at December 31, 2001 .......        --    $       --           --    $       --    $ 18,835,160  $(15,646,759) $  3,227,439

Sale of stock on April 3, 2002 .....        --            --           --            --         265,068          --         267,500
Repurchases of stock, November .....        --            --           --            --         (50,822)         --         (51,103)
     and December 2002
Net loss for year ended ............        --            --           --            --            --      (1,807,046)   (1,807,046)
     December 31, 2002 .............        --            --           --            --            --            --            --
                                    ------------  ------------  -----------  ------------  ------------  ------------  ------------
Balance at December 31, 2002 .......        --    $       --           --    $       --    $ 19,049,406  $(17,433,805) $  1,636,790
                                    ============  ============  ===========  ============  ============  ============  ============





                                      F-5





                                                    DELCATH SYSTEMS, INC.

                                               (A Development Stage Company)

                                                 Statements of Cash Flows


                                                                                                         Cumulative
                                                                                                       from inception
                                                                 Year ended December 31,              (August 5, 1988)
                                                           -----------------------------------               to
                                                                 2002               2001              December 31, 2002
                                                           ----------------   ----------------  -----------------------------

Cash flows from operating activities:
                                                                                       
    Net loss ..........................................    $ (1,807,046)       $ (1,876,007)    $                 (15,955,200)
    Adjustments to reconcile net loss to
      net cash used in operating activities:
        Stock option compensation expense .............            --                  --                           2,520,170
        Stock and warrant compensation expense
          issued for consulting services ..............            --               198,000                           236,286
        Depreciation expense ..........................           6,410               5,014                            21,174
        Amortization of organization costs ............            --                  --                              42,165
    Changes in assets and liabilities:
        (Increase) decrease in prepaid expenses .......         (26,916)               (501)                          (96,583)
        Decrease (increase) in interest receivable ....          47,882             (20,920)                           (5,406)
        Due from affiliate ............................            --                  --                             (24,000)
        (Decrease) increase in accounts
          payable and accrued expenses ................            (910)           (622,835)                          175,170
                                                            ------------       ------------     -----------------------------
            Net cash used in operating activities .....      (1,780,580)         (2,317,249)                      (13,086,224)
                                                            ------------       ------------     -----------------------------

Cash flows from investing activities:
    Purchase of furniture and fixtures ................          (6,664)            (13,260)                          (34,924)
    Purchase of short-term investments ................        (370,000)         (1,500,000)                       (2,900,000)
    Proceeds from maturities of short-term
      investments .....................................       1,500,000                --                           2,530,000
    Organization costs ................................            --                  --                             (42,165)
                                                           ------------        ------------     -----------------------------
            Net cash provided by (used in)
                  investing activities ................       1,123,336          (1,513,260)                         (447,089)
                                                           ------------        ------------     -----------------------------

Cash flows from financing activities:
    Deferred costs in connection with a proposed
      financing transaction ...........................        (238,571)               --                            (238,571)
    Net proceeds from sale of stock and exercise
      of stock options and warrants ...................         267,500                --                          13,681,208
    Repurchases of outstanding common stock ...........         (51,103)               --                             (51,103)
    Dividends paid ....................................            --                  --                            (499,535)
    (Repayments of) proceeds from short-term borrowings            --              (230,000)                        1,704,964
                                                           ------------        ------------     -----------------------------
            Net cash (used in) provided by financing
            activities ................................         (22,174)           (230,000)                       14,596,963
                                                           ------------        ------------     -----------------------------

            (Decrease) increase in cash and cash
                 equivalents ..........................        (679,418)         (4,060,509)                        1,063,650

Cash and cash equivalents at beginning of period ......       1,743,068           5,803,577                              --
                                                           ------------        ------------     -----------------------------

Cash and cash equivalents at end of period ............    $  1,063,650        $  1,743,068     $                   1,063,650
                                                           ============        ============     =============================

Cash paid for interest ................................    $       --          $     36,141     $                     171,473
                                                           ============        ============     =============================

Supplemental non-cash activities:
    Conversion of debt to common stock ................    $       --          $       --          $                1,704,964
                                                           ============        ============     =============================

    Common stock issued for preferred stock dividends .    $       --          $       --          $                  999,070
                                                           ============        ============     =============================

    Conversion of preferred stock to common stock .....    $       --          $       --          $                   24,167
                                                           ============        ============     =============================

    Common stock issued as compensation
      for stock sale ..................................    $       --          $       --          $                  510,000
                                                           ============        ============     =============================

See accompanying notes to financial statements





                                                             F-6







                              DELCATH SYSTEMS, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements

                           December 31, 2002 and 2001



(1)    Description of Business and Summary of Significant Accounting Policies

       (a)    Description of Business

              Delcath  Systems,  Inc. (the  "Company")  is a  development  stage
              company  which was founded in 1988 for the  purpose of  developing
              and  marketing  a  proprietary  drug  delivery  system  capable of
              introducing  and  removing  high  dose  chemotherapy  agents  to a
              diseased  organ system while greatly  inhibiting  their entry into
              the general  circulation  system.  It is hoped that the  procedure
              will result in a  meaningful  treatment  for  cancer.  In November
              1989,  the  Company  was  granted an IDE  (Investigational  Device
              Exemption)  and an IND status  (Investigational  New Drug) for its
              product by the FDA (Food and Drug Administration).  The Company is
              seeking to complete  clinical  trials in order to obtain  separate
              FDA  pre-marketing  approvals  for the use of its delivery  system
              using doxorubicin and melphalan, chemotherapeutic agents, to treat
              malignant melanoma that has spread to the liver.

       (b)    Basis of Financial Statement Presentation

              The  accounting  and financial  reporting  policies of the Company
              conform to accounting  principles generally accepted in the United
              States of America.  The  preparation  of financial  statements  in
              conformity with accounting  principles  generally  accepted in the
              United States of America  requires  management to make assumptions
              and   estimates   that  impact  the  amounts   reported  in  those
              statements.  Such  assumptions and estimates are subject to change
              in the future as additional  information  becomes  available or as
              circumstances are modified. Actual results could differ from these
              estimates.

       (c)    Furniture and Fixtures

              Furniture  and  fixtures  are  recorded  at  cost  and  are  being
              depreciated  on a straight  line basis over the  estimated  useful
              lives  of the  assets  of  five  years.  Accumulated  depreciation
              amounted to $21,074 at December 31, 2002.

       (d)    Income Taxes

              The Company  accounts  for income  taxes  following  the asset and
              liability   method  in  accordance  with  Statement  of  Financial
              Accounting  Standards  (SFAS)  No.  109,  "Accounting  for  Income
              Taxes." Under such method, deferred tax assets and liabilities are
              recognized  for  the  future  tax  consequences   attributable  to
              differences  between the financial  statement  carrying amounts of
              existing assets and  liabilities  and their  respective tax bases.
              The Company's income tax returns are prepared on the cash basis of
              accounting. Deferred tax assets and liabilities are measured using
              enacted tax rates expected to apply to taxable income in the years
              that the  asset  is  expected  to be  recovered  or the  liability
              settled.


                                      F-7



                              DELCATH SYSTEMS, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements

                           December 31, 2002 and 2001

       (e)    Stock Option Plan

              The Company has  historically  accounted  for its  employee  stock
              option  plans in  accordance  with the  provisions  of  Accounting
              Principles  Board ("APB")  Opinion No. 25,  "Accounting  for Stock
              Issued  to  Employees,"  and  related  interpretations.  As  such,
              compensation  expense is recorded on the date of grant only if the
              current  fair market  value of the  underlying  stock  exceeds the
              exercise price.  Fair market values of the Company's  Common Stock
              at the dates  options were granted,  prior to the Company's  stock
              becoming publicly traded, were based on third party sales of stock
              at or around the dates options were granted,  or in the absence of
              such  transactions,  based  on a  determination  by the  board  of
              directors  based on current  available  information.  Such cost is
              then  recognized  over the period the  recipient  is  required  to
              perform services to earn such compensation. If a stock option does
              not  become  vested  because  an  employee  fails  to  fulfill  an
              obligation,  the  estimate  of  compensation  expense  recorded in
              previous periods is adjusted by decreasing compensation expense in
              the period of forfeiture.

              In 1996,  the Company  adopted  Statement of Financial  Accounting
              Standards   (SFAS)   No.   123,    "Accounting   for   Stock-Based
              Compensation," which permits entities to recognize as expense over
              the vesting period the fair value of all stock-based awards on the
              date of grant. Alternatively, SFAS No. 123 also allows entities to
              continue to apply the provisions of APB Opinion No. 25 and provide
              pro forma net  income  (loss)  and pro forma  earnings  (loss) per
              share  disclosures  for  employee  stock  option  grants as if the
              fair-value-based  method defined in SFAS No. 123 had been applied.
              The Company has elected to continue to apply the provisions of APB
              Opinion No. 25 and provide the pro forma disclosure  provisions of
              SFAS No. 123.

              Had  compensation  cost for the Company's stock option grants been
              determined  based on the fair value at the grant dates  consistent
              with the  methodology  of SFAS No. 123, the Company's net loss and
              net loss per share for the years ended  December 31, 2002 and 2001
              would have been  increased to the pro forma  amounts  indicated as
              follows:




                                                                2002                  2001
                                                          --------------        --------------
                                                                          
              Net loss                                    $  (1,807,046)        $  (1,876,007)
              Stock-based employee compensation
              expense included in net loss, net of
              related tax effects
                                                                      0                     0
              Stock-based employee compensation
              determined under the fair value based
              method, net of related tax effects
                                                                (44,769)             (133,263)
              Pro forma net loss                             (1,851,815)           (2,009,270)
              Loss per share (basic and diluted):
               As reported                                $       (0.44)        $       (0.48)
               Pro forma                                          (0.45)                (0.51)



                                      F-8



                              DELCATH SYSTEMS, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements

                           December 31, 2002 and 2001

              The per share weighted average fair value of stock options granted
              during 2002 and 2001 was $.28 and $.30, respectively, estimated on
              the date of grant  using the  Black-Scholes  option-pricing  model
              with  the  following  weighted-average  assumptions  used  for the
              grants for 2002 and 2001 , respectively:  risk free interest rates
              of 2.84% and  3.6%-4.95%  respectively,  and volatility of 41% and
              26.7% - 36.3%, respectively,  while no dividend yield and expected
              lives of five years were assumed for both years.

       (f)    Loss Per Share

              The Company follows the provisions of SFAS No. 128,  "Earnings Per
              Share",  which  requires  presentation  of both basic and  diluted
              earnings  per  share  (EPS)  on  the  face  of the  Statements  of
              Operations. Basic EPS excludes dilution, and is computed using the
              weighted  average number of common shares  outstanding  during the
              period.  The diluted EPS  calculation  assumes all dilutive  stock
              options or  contracts  to issue  Common  Stock were  exercised  or
              converted into Common Stock at the beginning of the period.

              For the years  ended  December  31, 2002 and 2001,  the  following
              potential  common  shares were excluded  from the  computation  of
              diluted EPS because their effects would be antidilutive:

                                                             2002         2001
                                                             ----         ----
              Shares issuable upon exercise of options    1,145,684      902,936
              Shares issuable upon exercise of warrants   1,516,985    1,626,938
              Common stock purchase rights issuable
               only in the event that a non-affiliated
               person or group acquires 15% of the
               Company's then outstanding Common
               Stock                                      6,781,566    6,408,690
                                                          ---------    ---------
              Totals                                      9,444,235    8,938,564


       (g)    Research and Development Costs

              Research and  development  costs  include the costs of  materials,
              personnel, outside services and applicable indirect costs incurred
              in development of the Company's  proprietary drug delivery system.
              All such costs are charged to expense when incurred.

       (h)    Statements of Cash Flows

              For  purposes  of  the  statements  of  cash  flows,  the  Company
              considers  highly liquid debt instruments with maturities of three
              months or less at date of acquisition to be cash  equivalents.  At
              December  31,  2002 cash  equivalents  excluded a  certificate  of
              deposit in the amount of $370,000.


                                      F-9


                              DELCATH SYSTEMS, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements

                           December 31, 2002 and 2001


        (i)   Reclassifications

              Reclassifications  have  been  made to  reflect  cost and  expense
              accounts  on a  functional  basis  for  2001 and  prior,  which is
              consistent with the Company's current presentation.

              Operating costs and expenses were previously presented as follows:

                                                                   Cumulative
                                                                 from inception
                                                Year            (August 5, 1988)
                                               Ended                    to
                                            December 31,           December 31,
                                                2001                   2001
                                           -------------         --------------

Legal, consulting and accounting fees      $   1,034,025         $    6,025,255
Stock option compensation expense                --                  2,520,170
Compensation and related expenses                557,087              3,304,703
Other operating expenses                         477,544              2,967,024
                                           -------------         --------------

     Total costs and expenses              $   2,068,656         $   14,817,152
                                           -------------         --------------


          (j)  Stock Splits

               All share and per share amounts give retroactive  effect to stock
               splits effected by the Company.

(2)    Stockholders' Equity

              (a) Stock Issuances

              BGH Medical Products, Inc. (name later changed to Delcath Systems,
              Inc.),  a Delaware  corporation  (BGH -  Delaware),  was formed on
              August 5, 1988. As of August 22, 1988, BGH Medical Products, Inc.,
              a  Connecticut  corporation  (BGH - Conn.),  was  merged  into BGH
              -Delaware,  the surviving corporation.  As of the merger date, the
              authorized capital stock of BGH - Conn.  consisted of 5,000 shares
              of common stock,  par value $.01 per share,  of which 1,000 shares
              were issued and  outstanding.  Upon the  merger,  each BGH - Conn.
              Common Share outstanding was exchanged into 621.089 BGH - Delaware
              Common  Shares.  As a result  of the  conversion,  BGH -  Delaware
              issued  621,089  shares of  Common  Stock at $.01 par  value.  The
              aggregate amount of the par value of all Common Shares issued as a
              result of the exchange,  $6,211,  was credited as the Common Stock
              capital of BGH - Delaware,  and the  difference  in respect to the
              capital  account  deficiency  was  charged to  additional  paid-in
              capital.


                                      F-10



                              DELCATH SYSTEMS, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements

                           December 31, 2002 and 2001

              On  August  22,  1988,  BGH -  Delaware  then  sold  in a  private
              placement  2,000,000 shares of Class A Preferred Stock, with a par
              value of $.01,  to two  affiliated  venture  capital  funds for an
              aggregate amount of $500,000 in cash.

              On March 8, 1990,  414,059 shares of Common Stock were returned to
              the  Company  by certain  stockholders  as  treasury  stock due to
              relevant technology milestones not being fully achieved within the
              specified  time  period,   in  accordance  with  provisions  of  a
              stockholders' agreement.

              Effective  May 7, 1990,  the  Company  changed its name to Delcath
              Systems, Inc.

              On October 2,  1990,  the  Company  sold  17,252  shares of Common
              Treasury  Stock,  $.01  par  value,  for an  aggregate  amount  of
              $25,000.

              On January 23, 1991,  the Company  offered in a private  placement
              shares of Common Stock and/or Class B Preferred Stock at $7.39 and
              $2.55 per share  respectively  for an aggregate  maximum amount of
              $2,000,000.  Under  the  terms of the  private  placement,  46,522
              shares of Common  Treasury  Stock  and  416,675  shares of Class B
              Preferred Stock were sold, yielding net proceeds to the Company of
              $1,406,322. The Common Stock and Class B Preferred Stock sold each
              has a par value of $.01,  resulting  in an increase in  additional
              paid-in  capital of $1,401,690 The two affiliated  venture capital
              funds that owned the Class A Preferred Shares purchased 117,650 of
              the Class B Preferred Shares sold in the private placement.

              On August 30, 1991, the Company sold an additional 1,353 shares of
              Common Treasury Stock at $7.39 per share, yielding proceeds to the
              Company of $10,001. The shares have a par value of $.01, resulting
              in an additional paid-in capital amount of $9,987.

              In a December  1992  private  placement,  the Company sold 103,515
              shares of Common  Stock held in its  treasury  at $10.14 per share
              for a total placement of $1,050,000  ($1,015,004  after expenses).
              The  shares  issued  have a par  value  of $.01,  resulting  in an
              additional paid-in capital amount of $1,048,965  ($1,013,969 after
              expenses). The two affiliated venture capital funds that owned the
              Class A Preferred  Shares  purchased 27,604 of the Common Treasury
              Shares sold.

              Effective  January 1, 1994,  the Company  issued  1,725  shares of
              Common  Treasury  Stock at $1.45 per  share  for a total  price of
              $2,500 upon the  exercise  of stock  options by an employee of the
              Company.

              During  the first  quarter  of 1994,  the  Company  increased  its
              authorized number of Common Shares from 5,000,000 to 15,000,000.

              On July 15, 1994,  the Company  sold  through a private  placement
              offering,  units  at a  price  of  $51,000  per  unit.  Each  unit
              consisted of 4,693 Common Shares and 469  Warrants,  each of which
              entitled  the  holder to  purchase  one share of Common  Stock for
              $10.87. In connection therewith,  the Company sold twenty-two (22)
              units (103,239 Common Shares and 10,324  Warrants  expiring August
              30, 1997) for total  proceeds of  $1,122,000.  The two  affiliated
              venture  capital  funds  that owned the Class A  Preferred  Shares
              purchased six (6) of the units sold. During


                                      F-11



                              DELCATH SYSTEMS, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements

                           December 31, 2002 and 2001

              August 1997, the holders of Warrants  exercised  8,916 Warrants to
              purchase  8,916 Common Shares at $10.87 each for total proceeds of
              $96,900. The remaining Warrants expired unexercised.

              Effective  January 1, 1995,  the Company  issued  1,725  shares of
              Common  Treasury  Stock at $1.45 per  share  for a total  price of
              $2,500 upon the  exercise  of stock  options by an employee of the
              Company.

              Effective January 1, 1996, the Company issued 828 shares of Common
              Stock,  valued at  $10.87  per  share  for a total of  $9,000,  as
              compensation for consulting services.

              On  December  19,  1996,   the  Company  sold  through  a  private
              transaction  39,512  shares of Common Stock for total  proceeds of
              $1,000,000.   In  connection  with  the  offering,  the  purchaser
              obtained sole  distribution  rights for the Company's  products in
              Japan,  Korea,  China,  Taiwan, and Hong Kong through December 31,
              2004.  No value was  attributed  to the  distribution  rights.  In
              addition, under certain conditions, the purchaser will be required
              to buy certain products from the Company.

              On April 26, 1996, the Company entered into  short-term  borrowing
              agreements  with 26 investors  under which it borrowed  $1,704,964
              bearing  interest  at  10.25%  per  annum.  Under the terms of the
              agreements,  on December 22, 1996, the short-term  borrowings were
              converted  into  156,879  shares  of  Common  Stock,  based  on  a
              conversion  price  of  $10.87  per  share,  and  78,438  Warrants,
              expiring April 25, 1999,  entitling the holders to purchase 78,438
              additional  shares of Common  Stock at $10.87 per  share.  The two
              affiliated venture capital funds discussed above provided $250,000
              of the short-term  loan,  converting that debt into  approximately
              23,003 shares of Common Stock and 11,502 Warrants.  From April 26,
              1996 through  December 22, 1996,  interest of $114,948  accrued on
              the  borrowings.  Such interest was paid in January  1997.  During
              September  1997, the holders of Warrants  exercised 1,150 Warrants
              to purchase  1,150 Common Shares at $10.87 each for total proceeds
              of $12,499.  During  December  1997,  the two  affiliated  venture
              capital funds  exercised  their 11,502 Warrants to purchase 11,502
              Common  Shares at  $10.87  each for total  proceeds  of  $124,999.
              During  April  1999,  the  holders  of  Warrants  exercised  2,300
              Warrants to purchase  2,300 Common Shares at $10.87 each for total
              proceeds of $24,998. The remaining Warrants expired unexercised.

              In 1997, the Company  issued 2,345 shares of Common Stock,  valued
              at $10.87 per share based on a 1996 agreement, for a total cost of
              $25,485, as compensation for consulting services.

              From  September  1997  through  December  31,  1997,  the  Company
              received $775,000 and issued 53,483 shares of Common Stock. During
              January  1998,  the Company  received an  additional  $500,000 and
              issued another 34,505 shares of Common Stock. In April 1998, under
              the terms of restricted stock sale agreements,  the Company issued
              to the  purchasers  of the 87,988  shares of Common  Stock  11,732
              three-year  Warrants  entitling  the  holders to  purchase  11,732
              Common  Shares  at  $10.87  per  share.   These  Warrants  expired
              unexercised in April 2001.


                                      F-12



                              DELCATH SYSTEMS, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements

                           December 31, 2002 and 2001

              In  December  1997,  the  holder of  non-incentive  stock  options
              exercised  13,802  options to purchase  13,802  restricted  Common
              Shares at $1.88 each for total proceeds of $26,000.

              In  April  1998,   a  venture   capital   firm   exercised   8,626
              non-incentive  stock options to purchase 8,626  restricted  Common
              Shares at $7.83 each for total proceeds of $67,500.

              In April 1998, in connection with the settlement of a dispute with
              a former  director,  the Company  cancelled 3,450 shares of Common
              Stock  previously  held by the former director in return for $1.45
              per share, the price originally paid by the former director.

              In September  1998,  the Company  sold 3,450 shares of  restricted
              Common  Stock to an  individual  for $16.52  per  share,  yielding
              proceeds to the Company of $57,000.

              In June 1999,  the Company  sold 46,987  shares of Common Stock to
              individual  investors for $16.52 per share and Warrants  entitling
              the holders to purchase  5,218  Common  Shares at $14.87 per share
              (which warrants expired April 30, 2002),  yielding proceeds to the
              Company of $776,192.

              In April 2000, the Company sold 230,873 Common Shares at $2.17 per
              share  to  existing  stockholders  in a rights  offering  yielding
              proceeds to the Company of $501,825.

              The  Company  completed  an  initial  public  offering  ("IPO") on
              October 19, 2000 of 1,200,000  units for $6.00 per unit, each unit
              consisting of one share of Common Stock and one redeemable Warrant
              to  purchase  one share of Common  Stock at a price of $6.60 until
              October 18, 2005. In connection with the initial public  offering,
              the Company received  $7,200,000 before offering costs ($5,371,468
              after  expenses).  The  Company  also  issued  to the  underwriter
              Warrants to purchase  120,000 units for $6.60 per unit,  each unit
              consisting  of one  Common  Share and one  redeemable  Warrant  to
              purchase  one  share of Common  Stock at a price of  $10.50  until
              October 18, 2005.  The Company also issued 85,000 shares of Common
              Stock valued at $510,000 for legal services provided in connection
              with the offering.

              Also, in connection with the initial public offering,  the holders
              of the  2,000,000  outstanding  shares  of the  Company's  Class A
              Preferred  Stock  and  the  416,675   outstanding  shares  of  the
              Company's  Class B Preferred  Stock agreed to convert their shares
              into Common Stock prior to the closing of the  offering.  Upon the
              conversion  of the  Company's  Class  A  Preferred  Stock  and the
              Company's  Class B Preferred  Stock into 833,873  shares of Common
              Stock,  the holders of the Class A and Class B shares  received an
              aggregate  of $499,535 in cash and 690,910  shares of Common Stock
              valued at $999,070 in payment of declared dividends.

              In December 2000, the Company issued 1,720 Common Stock options at
              an exercise price of $3.31,  fair valued at $2.21 per option for a
              total of $3,800, and 1,720 Warrants to purchase Common Stock at an
              exercise  price  of  $6.00,  fair  valued  at $0 per  Warrant,  as
              compensation  for  consulting  services.   Both  the  options  and
              Warrants expire December 1, 2005.

              The Company issued the following common stock warrants in 2001 for
              consulting services:


                                      F-13



                              DELCATH SYSTEMS, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements

                           December 31, 2002 and 2001

              (1) 150,000  fully vested  warrants to purchase  150,000  units at
              $7.00 per unit,  through  January 4, 2005, each unit consisting of
              one fully-paid and  non-assessable  share of common stock, and one
              Common Stock Purchase Warrant entitling the holder to purchase one
              share of Common Stock for $6.60 per share.  None of these warrants
              have been exercised as of December 31, 2002. Such warrants, valued
              at $175,000, were recognized as an expense in the first quarter of
              2001.

              (2) 150,000  warrants  to purchase up to 150,000  shares of Common
              Stock, through April 30, 2005, for $6.60 per share. 25,000 of such
              warrants vested in 2001 and the remaining  125,000  warrants would
              have  vested  if the share  price of the  Company's  Common  Stock
              exceeded  certain  share price  levels  above the IPO price by May
              2002. As of May 2002, none of the thresholds had been met, and the
              125,000 remaining  warrants did not vest and were forfeited.  None
              of the 25,000  vested  warrants had been  exercised as of December
              31, 2002.  The 25,000  vested,  non-contingent  warrants have been
              valued at $23,000,  and were recognized as an expense in the first
              quarter  of 2001.  The  expenses,  as noted in (1) and (2)  above,
              recognized with these two warrant issues are non-cash expenses.

              The  values of the above  warrants  were  $1.17  per  warrant  for
              warrants  described  in (1) above,  and $ .90 per  warrant for the
              25,000  warrants that vested  immediately  described in (2) above,
              and were  estimated  on the date of grant using the  Black-Scholes
              option-pricing   model   with   the   following   weighted-average
              assumptions,  respectively:  risk free interest rates of 4.95% and
              5.9%,  volatility of 26.7% and 22.9%, expected lives of four years
              and four and one half  years,  with no  dividend  yield for either
              issue.

              In 2001,  the  Company  cancelled  a total of 36  shares of Common
              Stock which  represented the total of fractional  shares resulting
              from stock splits during  September and October 2000 in connection
              with the Company's initial public offering.

              On October 30, 2001, the Company  entered into a Rights  Agreement
              with  American   Stock  Transfer  &  Trust  Company  (the  "Rights
              Agreement") in connection with the implementation of the Company's
              stockholder  rights plan (the "Rights Plan").  The purposes of the
              Rights Plan are to deter,  and protect the Company's  shareholders
              from,  certain  coercive and otherwise unfair takeover tactics and
              to enable the Board of  Directors  to  represent  effectively  the
              interests of shareholders in the event of a takeover attempt.  The
              Rights  Plan  does  not  deter  negotiated   mergers  or  business
              combinations  that the Board of Directors  determines to be in the
              best interests of the Company and its  shareholders.  To implement
              the Rights Plan, the Board of Directors declared a dividend of one
              Common Stock  purchase  right (a "Right") for each share of Common
              Stock of the  Company,  par value  $0.01 per  share  (the  "Common
              Stock")  outstanding at the close of business on November 14, 2001
              (the "Record Date") or issued by the Company on or after such date
              and prior to the earlier of the Distribution  Date, the Redemption
              Date or the Final  Expiration  Date (as such terms are  defined in
              the Rights  Agreement).  The rights expire October 30, 2011.  Each
              Right entitles the registered  holder to purchase from the Company
              one share of Common Stock, at a price of $5.00 per share,  subject
              to adjustment (the "Purchase Price") in the event that a person or
              group announces that it has acquired,  or intends to acquire,  15%
              or more of the Company's outstanding Common Stock.


                                      F-14


                              DELCATH SYSTEMS, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements

                           December 31, 2002 and 2001


              On April 3, 2002,  the Company  received  $267,500 by completing a
              private  placement  of  243,181  shares  of its  Common  Stock and
              warrants  to purchase  up to 20,265  shares of Common  Stock at an
              exercise price of $1.32 per share that expire on April 3, 2005.

       (b)    Common Stock Repurchases

              Pursuant  to a  stock  repurchase  plan  approved  in  2002 by the
              Company's  Board of  Directors,  the  Company  repurchased  28,100
              shares of common stock for $51,103  during  2002.  The Company has
              been  authorized by the Board of Directors to purchase up to seven
              percent of its outstanding Common Stock.

       (c)    Stock Option Plans

              The  Company   established  an  Incentive  Stock  Option  Plan,  a
              Non-Incentive  Stock Option  Plan,  the 2000 Stock Option Plan and
              the 2001 Stock Option Plan (collectively, the "Plans") under which
              stock  options  may be  granted.  Additionally,  the  Company  has
              entered into separate  contracts  apart from the Plans under which
              options to purchase Common Stock have been granted. A stock option
              grant  allows the holder of the option to  purchase a share of the
              Company's  Common Stock in the future at a stated price. The Plans
              are  administered  by  the  Compensation  Committee  of  Board  of
              Directors  which  determines  the  individuals to whom the options
              shall be  granted  as well as the  terms  and  conditions  of each
              option grant, the option price and the duration of each option.

              The Company's  Incentive and Non-Incentive Stock Option Plans were
              approved and became effective on November 1, 1992. During 2000 and
              2001,  respectively,  the 2000 and 2001 Stock  Option Plans became
              effective.  Options  granted under the Plans vest as determined by
              the Company and expire over varying terms,  but not more than five
              years from the date of grant. Stock option activity for the period
              January 1, 2001 through December 31, 2002 is as follows:

                                  The Plans              Other Option Grants
                             ---------------------      ---------------------
                                          Weighted                   Weighted
                                          Average                    Average
                                          Exercise                   Exercise
                             Shares        Price        Shares        Price
                             ------        -----        ------        -----
Outstanding at
   December 31, 2000        689,684      $  3.82       17,252      $   2.90

Granted during 2001         280,000          .83         --             --

Expired during 2001         (84,000)        3.31         --             --
                          ----------                  -------

Outstanding at
   December 31, 2001        885,684         2.94       17,252          2.90

Granted during 2002         260,000          .71         --             --



                                      F-15



                              DELCATH SYSTEMS, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements

                           December 31, 2002 and 2001


                                  The Plans              Other Option Grants
                             ---------------------      ---------------------
                                          Weighted                   Weighted
                                          Average                    Average
                                          Exercise                   Exercise
                             Shares        Price        Shares        Price
                             ------        -----        ------        -----

Expired during 2002            --                     (17,252)         2.90
                          ----------                  -------

Outstanding at
   December 31, 2002      1,145,684      $  2.43         --        $    --
                          ==========                  =======


     The  following  summarizes  information  about shares  subject to option at
December 31, 2002:



                                Options outstanding                                       Options exercisable
    ----------------------------------------------------------------------------     -------------------------------
                                                                     Weighted
                                                  Weighted            average                            Weighted
           Number            Range of              average           remaining         Number             average
         outstanding      exercise prices      exercise price      life in years     exercisable      exercise price
     -----------------  -------------------  ------------------  ----------------    -----------    ----------------
                                                                                        
          100,000           $   .60              $     .60             3.92             50,000            $  .60
          260,000               .71                    .71             4.25                                  .71
          150,000               .85                    .85             4.00              66,000              .85
           30,000              1.53                   1.53             3.67              7,500              1.53
          172,525              2.90                   2.90             2.00              172,525            2.90
          164,020              3.31                   3.31             2.95              164,020            3.31
          269,139              4.93                   4.93             1.00              269,139            4.93
          -------                                                                        -------

        1,145,684           $ .60 - $4.93            $2.43             2.88              729,184           $3.38
        =========           =============            =====             ====              =======           =====


     At December  31, 2001,  options for 622,936  shares were  exercisable  at a
weighted average exercise price of $3.89 per share.

(3)    Income Taxes

            As of  December  31,  2002,  the  Company  had  net  operating  loss
            carryforwards  for  federal  income tax  purposes  of  approximately
            $12,882,000  which may be available to offset future federal taxable
            income,  if  any,  through  2022.  The  use  of net  operating  loss
            carryforwards  is subject to  limitation in the event of a change in
            the  Company's   ownership,   as  defined  by  Federal   income  tax
            regulations.  The net  operating  loss  carryforwards  resulted in a
            deferred tax asset of approximately  $4,380,000 at December 31, 2002
            ($3,777,000  at December 31, 2001).  Management  does not expect the
            Company  to be taxable in the near  future  and  established  a 100%
            valuation  allowance  against the deferred tax asset  created by the
            net operating loss  carryforwards at December 31, 2002 and 2001. The
            valuation allowance increased $603,000


                                      F-16



                              DELCATH SYSTEMS, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements

                           December 31, 2002 and 2001

            during the year ended  December  31, 2002,  and $568,000  during the
            year ended December 31, 2001.

(4)    Due From Affiliate

            The Company sublet office space from a corporation  controlled by an
            officer  of the  Company  (the  "affiliate"),  whose  lease with the
            landlord expired August 1997. Thereafter, the Company's occupancy of
            the premises  continued pursuant to an informal  arrangement,  under
            which the Company remitted  monthly rental payments  directly to the
            landlord.   Rent  expense  incurred  pursuant  to  this  arrangement
            amounted to $87,376 for 2001. The informal  arrangement was replaced
            as of January 1, 2002 with a lease agreement between the Company and
            the landlord (see Note 6). In  connection  with its  occupancy,  the
            Company paid the affiliate  $24,000 which the affiliate then paid to
            the landlord as a deposit on the lease.


(5)      Deferred Costs in Connection with a Proposed Financing Transaction

            On  December  5, 2002 the  Company  filed  with the  Securities  and
            Exchange  Commission a  registration  statement  for the issuance of
            units,  each  unit to  consist  of common  shares  and  warrants  to
            purchase common shares.  The Company has incurred  $238,571 of costs
            associated with the transaction.  These costs will be netted against
            the proceeds from the stock offering and charged to additional  paid
            in  capital,  or  charged  to  expense  if  the  transaction  is not
            consummated.  As of December 31,  2002,  $21,705 of these costs were
            accrued.

(6)      Rents

            On April 1, 2002,  the Company  executed an  Amendment of Lease (the
            "Amendment") directly with the landlord.  The Amendment is effective
            January 1, 2002 and expires December 22, 2003, and can be renewed by
            the Company for an additional  three years.  Rent expense under this
            lease for the year  ended  December  31,  2002 was  $89,082.  Future
            minimum  rent  under  this  lease is  $91,055  for the  year  ending
            December 31, 2003.

(7)      Subsequent Event

            On January 31, 2003, the stockholders  voted to approve an amendment
            to the  Company's  certificate  of  incorporation  to  increase  the
            authorized  number of shares of Common  Stock,  par value  $0.01 per
            share, from 15 million to 35 million.



                                      F-17