<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-QSB/A

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                             EXCHANGE ACT OF 1934.

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005

                                       OR

    [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                             EXCHANGE ACT OF 1934.

                      FOR THE TRANSITION PERIOD FROM     TO

                        COMMISSION FILE NUMBER: 001-31925


                        VASO ACTIVE PHARMACEUTICALS, INC.
        (Exact name of small business issuer as specified in its charter)


                DELAWARE                                    02-0670926
      (State or other jurisdiction             (IRS Employer Identification No.)
    of incorporation or organization)


       99 ROSEWOOD DRIVE, SUITE 260
                  DANVERS, MA                               01923
   (Address of principal executive offices)               (Zip code)

                    ISSUER'S TELEPHONE NUMBER: (978) 750-1991

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

         State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:

    Common stock, Class A, $0.0001 par value        5,828,613 shares outstanding
                                                    on August 22, 2005
    Common stock, Class B, $0.0001 par value        4,500,000 shares outstanding
                                                    on August 22, 2005

<PAGE>

                        VASO ACTIVE PHARMACEUTICALS, INC.

                              INDEX TO FORM 10-QSB/A


                                                                            Page
PART I.  FINANCIAL INFORMATION

ITEM 1 - Condensed Financial Statements (unaudited):

Condensed Balance Sheets as of June 30, 2005 and December 31, 2004 .........   3
Condensed Statements of Operations for the Three-month Periods
   Ended June 30, 2005 and 2004.............................................   4
Condensed Statements of Operations for the Six-month Periods
   Ended June 30, 2005 and 2004.............................................   5
Condensed Statements of Cash Flows for the Six-Month Periods
   Ended June 30, 2005 and 2004.............................................   6
Notes to the Condensed Financial Statements.................................   7

ITEM 2 - Management's Discussion and Analysis of Financial Condition and
         Results of Operations..............................................  12

ITEM 3 - Controls and Procedures............................................  36

PART II. OTHER INFORMATION

ITEM 1 - Legal Proceedings..................................................  37
ITEM 6 - Exhibits...........................................................  40


Signature...................................................................  41

         Unless the context requires otherwise, references in this Quarterly
Report to "Vaso Active," "the Company," "we," "our" and "us" refer to Vaso
Active Pharmaceuticals, Inc. Vaso Active, A-R Extreme(R), Termin8(R),
RepiDerm(R), and our logo are trademarks of the Company. Osteon(R) and
PENtoCORE(R) are registered trademarks of BioChemics, Inc. This Quarterly Report
on Form 10-QSB also contains trademarks and trade names of other parties.


                                       2
<PAGE>

<TABLE>
<S>     <C>
                       VASO ACTIVE PHARMACEUTICALS, INC.
                            CONDENSED BALANCE SHEETS

                                                                  JUNE 30,     DECEMBER 31
                                                                -----------    -----------
                                                                   2005           2004
                                                                -----------    -----------
                                                                (UNAUDITED)
             ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................   $   490,856    $ 2,175,388
Accounts receivable .........................................         1,268            888
Inventory ...................................................       127,967        140,296
Prepaid expenses ............................................        43,482         28,995
                                                                -----------    -----------

     TOTAL CURRENT ASSETS ...................................       663,573      2,345,567

Property and equipment - net ................................        61,306         37,551
                                                                -----------    -----------
                                                                $   724,879    $ 2,383,118
                                                                ===========    ===========

             LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................   $   358,084    $   474,369
Accrued compensation ........................................        37,470         43,805
Other accrued expenses ......................................        69,016        116,045
Obligations under capital leases - short-term portion .......         2,503             --
Due to parent company .......................................        20,519         10,780
                                                                -----------    -----------
   TOTAL CURRENT LIABILITIES ................................       487,592        644,999

LONG-TERM LIABILITIES:
Obligations under capital leases - long-term portion ........        12,644             --
Accrued legal settlement.....................................       750,000
                                                                -----------    -----------
    TOTAL LONG-TERM LIABILITIES .............................       762,644             --

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

                                                                  1,250,236        644,999
                                                                -----------    -----------
STOCKHOLDERS' EQUITY:
Preferred stock - $0.0001 par value; authorized
    10,000,000 shares; issued and outstanding, none .........            --             --
Common stock - $0.0001 par value; authorized
    30,000,000 shares; issued and outstanding, 10,328,613 ...         1,033          1,033
Additional paid-in capital ..................................     8,093,656      8,093,656
Deferred compensation .......................................      (153,575)      (183,777)
Accumulated deficit .........................................    (8,466,471)    (6,172,793)
                                                                -----------    -----------

   TOTAL STOCKHOLDERS' EQUITY ...............................      (525,357)     1,738,119
                                                                -----------    -----------
                                                                $   724,879    $ 2,383,118
                                                                ===========    ===========

           See notes to the unaudited condensed financial statements.


                                       3
<PAGE>

                                        VASO ACTIVE PHARMACEUTICALS, INC.
                                  UNAUDITED CONDENSED STATEMENTS OF OPERATIONS


                                                     THREE-MONTH PERIOD ENDED JUNE 30,    SIX-MONTH PERIOD ENDED JUNE 30,
                                                       ----------------------------        ----------------------------
                                                           2005           2004                 2005             2004
                                                       ------------    ------------        ------------    ------------

Net revenues .......................................   $     11,199    $        862        $     15,796    $      8,009
 Cost of revenues ..................................         13,467          39,853              19,715          45,628
                                                       ------------    ------------        ------------    ------------
      GROSS PROFIT .................................         (2,268)        (38,991)             (3,919)        (37,619)
                                                       ------------    ------------        ------------    ------------

Costs and expenses:
     Marketing, advertising and promotion ..........         31,933          10,595             201,736          76,849
     Selling, general and administrative ...........        458,805       1,050,874           1,142,346       2,588,867
     Research and development ......................         87,407          47,299             177,437         142,466
     Legal settlement ..............................        750,000              --             750,000              --
     Stock based compensation ......................         15,101          15,101              30,202         124,134
                                                       ------------    ------------        ------------    ------------

       Loss from operations ........................     (1,345,514)     (1,162,860)         (2,305,640)     (2,969,935)

Other income (expense), net ........................          4,624          18,895              11,960          22,381
                                                       ------------    ------------        ------------    ------------

NET LOSS ...........................................   $ (1,340,890)   $ (1,143,965)       $ (2,293,678)   $ (2,947,554)
                                                       ============    ============        ============    ============

Net loss per share - basic and diluted (Note 2) ....   $      (0.13)   $      (0.11)       $      (0.22)   $      (0.29)
                                                       ============    ============        ============    ============

Weighted average shares outstanding - basic and
diluted (Note 2) ...................................     10,328,613      10,328,613          10,286,077      10,264,570
                                                       ============    ============        ============    ============

                           See notes to the unaudited condensed financial statements.


                                                       4
<PAGE>

                                VASO ACTIVE PHARMACEUTICALS, INC.
                          UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS


                                                                              SIX-MONTH PERIOD ENDED JUNE 30,
                                                                               --------------------------
                                                                                  2005            2004
                                                                               -----------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss ..................................................................   $(2,293,678)   $(2,947,554)
 Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization ........................................         5,643            522
      Stock-based compensation (Note 4) ....................................        30,202        124,134
       Inventory write-off .................................................        10,632         38,871
      Accrued legal settlement..............................................       750,000        200,000
      Increase (decrease) in cash from change in:
         Accounts receivable ...............................................          (380)         1,048
         Inventory .........................................................         1,697        (49,197)
         Prepaid expenses ..................................................       (14,487)        24,265
         Accounts payable ..................................................      (116,285)       174,025
         Accrued compensation ..............................................        (6,335)      (236,813)
         Other accrued expenses ............................................       (47,029)        66,098
                                                                               -----------    -----------
               Net cash used in operating activities .......................    (1,680,020)      (151,117)
                                                                               -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .........................................       (14,064)        (5,222)
                                                                               -----------    -----------
               Net cash used in investing activities .......................       (14,064)        (5,222)
                                                                               -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Issuance of Class A common stock .........................................            --        450,000
  Issuance of convertible notes ............................................            --      7,500,000
  Repayment of convertible notes ...........................................            --     (7,500,000)
  Obligations under capital leases .........................................          (187)            --
  Due to/from parent company ...............................................         9,739        (56,993)
                                                                               -----------    -----------
               Net cash provided by financing activities ...................         9,552        393,007
                                                                               -----------    -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................    (1,684,532)    (2,216,816)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .............................     2,175,388      6,109,775
                                                                               -----------    -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD ...................................   $   490,856    $ 3,892,959
                                                                               ===========    ===========

 SUPPLEMENTAL DISCLOSURES:
   Interest paid ...........................................................   $        --    $        --
   Income taxes paid .......................................................            --             --

NONCASH DISCLOSURES:
   Issuance of capital leases and acquired equipment .......................   $    15,335    $        --


                See notes to the unaudited condensed financial statements.

                                               5
</TABLE>
<PAGE>

                        VASO ACTIVE PHARMACEUTICALS, INC.

                NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1.   NATURE OF BUSINESS AND BASIS OF PRESENTATION

         THE COMPANY

         Vaso Active Pharmaceuticals, Inc. (the "Company") is an early-stage
company focused on commercializing; marketing and selling over-the-counter
("OTC") pharmaceutical products that incorporate a patented vaso active lipid
encapsulated ("VALE") technology and a proprietary PENtoCORE technology. The
Company is engaged in a single operating segment of the OTC pharmaceutical
industry.

         The Company licenses the VALE patents and PENtoCORE technology from
BioChemics, Inc. ("BioChemics"), a privately owned biopharmaceutical company.
The Company issued 4,500,000 shares of its Class B common stock to BioChemics in
consideration for the exclusive worldwide rights to commercialize market and
sell the VALE technology for OTC pharmaceutical products. These shares were
issued pursuant to authorization by the Company's Board of Directors on June
20, 2003.

         SETTLEMENT OF SECURITIES AND EXCHANGE COMMISSION MATTERS

         On August 17, 2004, the U.S. Securities and Exchange Commission (the
"SEC") filed a civil complaint against us alleging violations of securities laws
stemming from allegedly misleading disclosures in the Company's initial public
offering registration statement, its 2003 annual report and a statement on its
website concerning the Food and Drug Administration's (the "FDA") approval or
qualification of the Company's products. The Company simultaneously agreed with
the SEC to settlement terms without the Company admitting or denying the
allegations of the civil complaint, pursuant to which the Company is permanently
enjoined from violating the anti-fraud provisions of the Securities Act of 1933,
as amended, and the antifraud and reporting provisions of the Securities
Exchange Act of 1934, as amended. The SEC action filed with the United States
District Court for the District of Columbia (the "Court") is styled SECURITIES
AND EXCHANGE COMMISSION V. VASO ACTIVE PHARMACEUTICALS, INC. Civil Action No. 04
CV 01395 (RJL) (D.D.C.).

         In addition, the SEC formally sued John J. Masiz, formerly the
Company's President and Chief Executive Officer, alleging the same violations.
Mr. Masiz agreed to settlement terms without admitting or denying the
allegations of the civil complaint, that likewise enjoin him from violating the
antifraud and reporting provisions, and prevent him from serving as an officer
or director of any public company, including the Company, for a period of five
years. Effective as of August 17, 2004, Mr. Masiz resigned as an executive
officer and a director of the Company. He is, however, permitted to remain an
active employee and/or consultant of the Company. In light of the foregoing, the
Company and Mr. Masiz agreed to terminate his employment agreement and enter
into a new agreement. Pursuant to that agreement, Mr. Masiz is providing
strategic consulting services regarding sales, marketing and business
development to the Company for an initial term through June 30, 2008 and reports
to the Chief Executive Officer of the Company. Our Chief Financial Officer
serves as our President and Acting Chief Executive Officer while the Company
conducts a search for a new Chief Executive Officer.

         On September 13, 2004, the Court for the District of Columbia entered
final judgments against the Company and Mr. Masiz, pursuant to the above
referenced settlement terms.

         PRIVATE LITIGATION

         In April, May, and June 2004, the Company and certain of its officers
(the "Defendants") were sued in several securities class action lawsuits filed
in the United States District Court for the District of Massachusetts. The
complaints, sought equitable and monetary relief, an unspecified amount of
damages, with interest, attorneys' fees and costs, allegedly were filed on


                                       6
<PAGE>

behalf of purchasers of the Company's Class A common stock during the period
December 11, 2003 to March 31, 2004. The complaints alleged that during the
period in question the Defendants violated the federal securities laws by
allegedly failing to make accurate and complete disclosures concerning the
Company, its financial condition, its business operations and future prospects,
the clinical trial and endorsement of the Company's Termin8 anti-fungal product
and the institutional demand for the Company's securities. The majority of these
complaints were consolidated in the United States District Court for the
District of Massachusetts, under the caption IN RE VASO ACTIVE PHARMACEUTICALS
SECURITIES LITIGATION, Civ. No. 04-10708 (RCL), (the "Consolidated Action").

         On June 1, 2005, the Company entered into a Memorandum of Understanding
Concerning Settlement Terms ("MOU") to settle the consolidated securities class
action lawsuit. Under the terms of the MOU, the lead plaintiffs and the settling
defendants agree that the final stipulation will contain a disclaimer of
liability consistent with the MOU. Subject to the terms and conditions set forth
in the MOU, settling defendants will pay into escrow for the benefit of the
class $1,100,000 in cash and $750,000 face amount of 2-year 5% subordinated
callable notes convertible into Class A Common Stock at $1.75 per share within
10 business days of preliminary approval of the settlement by the court. In
consideration of this payment, the parties will fully and finally release and
discharge all claims against each other. The settlement still needs court
approval. The Company's insurance carrier has agreed, subject to execution of a
definitive agreement, to pay the $1,100,000 cash payment in exchange for a
release of its liability under its insurance policy with the Company. The
Company recorded a charge of $750,000 during the three-month period ended June
30, 2005 in connection with this settlement, the corresponding liability has
been recorded as accrued legal settlement on the balance sheet. The Company
intends to record the 2-year 5% subordinated callable notes when it receives a
final settlement by the court.

         The Company has also been named as a nominal defendant in three
shareholder derivative actions filed in the United States District Court for the
District of Massachusetts in April 2004 against the Company's then directors and
certain of its officers and against BioChemics, Inc. is styled JOSEPH
ROSENKRANTZ V. BIOCHEMICS, INC., ET AL., Civ. No. 04-10792 (RCL) (D. Mass.); the
second - filed in June 2004, also against the Company's then directors and
certain of its officers and against BioChemics, Inc. is styled WILLIAM POMEROY
V. BIOCHEMICS INC., ET AL., Civ. No. 04-11399 (RCL) (D. Mass.); and the third -
filed in the Court of Chancery for the State of Delaware in September 2004
against its then directors and certain of its officers is entitled DOUGLAS
WEYMOUTH V. VASO ACTIVE ET AL., Civ. No. 682-N (collectively, the "Complaints").
The Complaints allege, among other things, that the alleged conduct challenged
in the securities cases pending against the Company in Massachusetts (described
above) constitutes a breach of the Defendants' fiduciary duties to the Company.
The Complaints seek equitable and monetary relief, an unspecified amount of
damages, and attorneys and other fees, costs and expenses, ostensibly on behalf
of the Company. On October 29, 2004, the Massachusetts Court approved a joint
motion to consolidate the two Massachusetts derivative actions. The Delaware
court has approved the parties' stipulated stay of all proceedings in the
Delaware derivative action, at least until the resolution of the motion to
dismiss the consolidated securities fraud litigation. The Company has entered
into agreements in principle with the plaintiffs in the derivative actions
pursuant to which the Company will maintain certain corporate governance changes
previously instituted and will adopt certain additional corporate governance
changes. The Company also will pay plaintiffs' attorneys fees in the aggregate
amount of $25,000 in cash and $120,000 face amount 2-year 5% subordinated
callable notes convertible into Class A common stock at $1.75 per share.
Although the Company has been vigorously defending against the Complaints and
now is seeking to settle them, there can be no guarantee as to the ultimate
outcome of these matters. There is also no guarantee that these will be the only
lawsuits brought against the Company with respect to these matters. In addition,
if a substantial amount is payable by the Company with respect to the Complaints
and is not reimbursed through its director and officer insurance policy, this
will have a material adverse effect on the Company's financial position and
liquidity.

         For the six-month periods ended June 30, 2005 and 2004, the Company
recorded approximately $816,300 and $719,000, respectively, in expenses to
defend itself in the SEC and private litigation matters discussed above,
including legal, accounting and other consulting fees. The June 30, 2005 amounts
include the $750,000 charge in connection with the Company's settlement with the
consolidated securities class action lawsuit.


                                       7
<PAGE>

         FOOD AND DRUG ADMINISTRATION MATTERS

         The Company is not aware whether the FDA is contemplating any action
against it. The Company believes that the active ingredients, dosage form and
strengths of its A-R Extreme, Osteon (R) and Termin8(TM) products are covered by
the FDA's OTC Review Program and therefore believe these products are currently
eligible for marketing under the same program. The Company intended to
distribute these products under revised labeling once it was reasonably sure
that the marketing of these products is consistent with the FDA's requirements
and policies. In May 2004, the Company submitted new labels for its previously
marketed products to the FDA and has requested FDA comments on these labels.
There is no regulatory requirement that the FDA review or comment on such
materials and so far, the FDA has not provided any comment relating to the new
labels. Although the Company has not been provided any comment from the FDA, the
Company is now reasonably sure that these new labels are consistent with all FDA
regulations and policies and as a result, the Company resumed marketing and
shipment of its products in September 2004.

         EXCHANGE LISTING MATTERS

         In April 2004, the Listing Investigations staff of The Nasdaq Stock
Market, Inc. ("Nasdaq") notified the Company that it had commenced an inquiry
into the Company's compliance with Nasdaq's continued listing requirements and
requested certain information from the Company relating to the pending
regulatory matters. In light of the substantial administrative and cash burdens
being borne by the Company at the time as well as the substantial legal costs
anticipated with respect to the pending SEC and FDA matters, the Company
determined that it was in the best interest of its shareholders to voluntarily
cease listing of its securities. Therefore, upon the Company's request and
effective on April 8, 2004, the Company's securities ceased to be listed on
Nasdaq. Presently, the Company's securities are being quoted in the Over The
Counter Pink Sheets.

         UNWINDING OF PRIVATE INVESTMENT IN PUBLIC ENTITY

         On March 16, 2004, the Company entered into a private placement
transaction in the amount of $7,500,000 with an institutional investor. The
investment was in the form of an 18 month 2% Convertible Note (the " 2004 Note")
convertible into shares of the Company's Class A common stock at a conversion
rate of $9.00 per share, at the option of the investor. In addition, the Company
issued to the investor warrants to purchase 166,667 shares of Class A common
stock at an exercise price of $8.75 per share.

         Given that the initiation and continuation of the April 1, 2004 trading
suspension by the SEC constituted a breach under the 2004 Note, the Company and
the investor agreed, pursuant to the terms of a settlement agreement entered
into on April 8, 2004, that the Company would immediately repay the investor the
sum of $7,500,000 in cash without penalty, interest, redemption premium or any
other premium or penalty, plus an expense reimbursement in connection with the
settlement agreement in the amount of $15,000 in cash. In consideration of this
repayment, the investor surrendered the 2004 Note and warrants and the parties
mutually terminated all other agreements entered into in connection with the
transaction.

         In connection with this transaction, the Company paid approximately
$600,000 in financing fees, legal, accounting and other various fees to third
parties. These fees were not refunded when the Company repaid the investor.
These fees were recorded as an expense during three-month period ended March 31,
2004.

2.   NET LOSS PER SHARE

         Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding for the period. Diluted net
loss per share reflects, in addition to the weighted average number of common
shares, the potential dilution if stock options and warrants outstanding were
exercised and/or converted into common stock, unless the effect of such
equivalent shares was antidilutive.


                                       8
<PAGE>

         For the three-month and six-month periods ended June 30, 2005 and 2004,
the effect of stock options and other potentially dilutive shares were excluded
from the calculation of diluted net loss per common share as their inclusion
would have been antidilutive.

3.   REVENUE RECOGNITION

         The Company recognizes revenue from product sales in accordance with
generally accepted accounting principles in the United States, including the
guidance in Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition,"
which supersedes SAB No. 101, "Revenue Recognition in Financial Statements," and
Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue
Recognition When Right of Return Exists."

         Revenue from product sales is recognized when there is persuasive
evidence of an arrangement, delivery has occurred, the price is fixed and
determinable, and collectibility is reasonably assured. However, because the
Company's products are sold with limited rights of return, revenue is recognized
when the price to the buyer is fixed, the buyer is obligated to pay the Company
and the obligation to pay is not contingent on resale of the product, the buyer
has economic substance apart from the Company, the Company has no obligation to
bring about the sale of the product and the amount of returns can be reasonably
estimated.

         The Company records allowances for product returns, rebates and
discounts, and reports revenue net of such allowances. The Company must make
judgments and estimates in preparing the allowances that could require
adjustments in the future. For instance, customers have the right to return any
product that is held past the labeled expiration date. The Company bases its
estimates on historic patterns of returns and on the expiration dates of product
currently being shipped, or as a result of an actual event that may give rise to
a significant return amount such as the discontinuance of a product.

         The Company does not recognize revenue unless collectibility is
reasonably assured. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. If the financial condition of our customers were to deteriorate and
result in an impairment of their ability to make payments, additional allowances
may be required.

4.   STOCK-BASED COMPENSATION

         The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method in accordance with Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and complies
with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under the intrinsic value method, compensation associated with
stock awards to employees and non-employee directors is determined as the
excess, if any, of the current fair value of the underlying common stock on the
date compensation is measured over the price an employee or director must pay to
exercise the award. The Company accounts for stock options and awards to
non-employees using the fair value method.

         The Company has an employee stock incentive plan and a non-employee
director compensation plan, which are described more fully in Note 7 to the
Company's Annual Report on Form 10-KSB for the period ended December 31, 2004.

         The following table illustrates the effect on net loss and net loss per
share if the Company had applied the fair-value recognition provisions of SFAS
No. 123, as amended, to options granted under the stock option plans and rights
to acquire stock granted under the Company's stock option plans. For purposes of
this PRO-FORMA disclosure, the value of the options is estimated using a
Black-Scholes option pricing model and amortized ratably to expense over the
options' vesting periods. Because the estimated value is determined as of the
date of grant, the actual value ultimately realized by the employee may be
significantly different.


                                       9
<PAGE>

<TABLE>
                                                                              THREE-MONTH      THREE-MONTH
                                                                                 PERIOD          PERIOD
                                                                                 ENDED           ENDED
                                                                             JUNE 30, 2005   JUNE 30, 2004
                                                                              ------------    ------------

<S>                                                                           <C>             <C>
Net loss, as reported .....................................................   $ (1,340,890)   $ (1,143,965)
Add: stock-based compensation included in the determination of net loss ...         15,101          15,101
Less: stock-based compensation had all options been recorded at fair
   value ..................................................................       (103,544)       (121,129)
                                                                              ------------    ------------
Adjusted net loss .........................................................   $ (1,429,333)   $ (1,249,993)
                                                                              ============    ============

Weighted average shares outstanding, basic and diluted ....................     10,328,613      10,328,613
Net loss per share, basic and diluted, as reported ........................   $      (0.13)   $      (0.11)
Adjusted net loss per share, basic and diluted ............................   $      (0.14)   $      (0.12)

                                                                               SIX-MONTH        SIX-MONTH
                                                                                 PERIOD          PERIOD
                                                                                 ENDED           ENDED
                                                                             JUNE 30, 2005   JUNE 30, 2004
                                                                              ------------    ------------

Net loss, as reported .....................................................   $ (2,293,678)   $ (2,947,554)
Add: stock-based compensation included in the determination of net loss ...         30,202         124,134
Less: stock-based compensation had all options been recorded at fair
   value ..................................................................       (215,502)       (623,043)
                                                                              ------------    ------------
Adjusted net loss .........................................................   $ (2,478,978)   $ (3,455,463)
                                                                              ============    ============

Weighted average shares outstanding, basic and diluted ....................     10,328,613      10,264,570
Net loss per share, basic and diluted, as reported ........................   $      (0.22)   $      (0.29)
Adjusted net loss per share, basic and diluted ............................   $      (0.24)   $      (0.34)
</TABLE>

         In December 2004, the Financial Accounting Standards Board, or FASB,
issued a revision to SFAS No. 123R, "Share-Based Payment," requiring companies
to recognize as compensation expense the fair value of stock options and other
equity-based compensation issued to employees. This revised statement eliminates
the intrinsic value method provided under APB No. 25, which is the method the
Company currently uses to value stock options awarded to its employees. This
revised standard is effective as of the beginning of the first annual reporting
period beginning after December 15, 2005 and is expected to have a material
impact on the Company's results of operations. The Company is evaluating the two
methods of adoption allowed by SFAS 123R; the modified-prospective transition
method and the modified-retrospective transition method.

5.   SUBSEQUENT EVENT

         On August 16, 2005, the Company sold $2,500,000 in aggregate principal
amount of Senior Secured Convertible Notes due May 1, 2007, (the "Notes") to
independent institutional investors. The Notes are convertible at any time into
shares of the Company's Class A common stock at a price of $0.70 per share
(subject to adjustment under certain circumstances). The investors also received
five-year warrants ("Warrants") to purchase a total of 1,298,701 shares of the
Company's Class A common stock at an exercise price of $0.77 per share. In
addition, the


                                       10
<PAGE>

investors received rights ("Rights") to purchase up to $1,875,000 in aggregate
principal amount of additional Notes at any time through the maturity date of
the Notes, together with additional Warrants to purchase a total of 974,026
shares of Class A common stock. The additional Notes are convertible and the
additional Warrants are exercisable at the same respective prices per share as
the Notes and Warrants which the Company issued August 16, 2005.

         The Notes bear interest at the six month LIBOR plus 6.0%, with a floor
of 10.0% and a ceiling of 12.0%. Interest is payable quarterly in either cash or
registered Class A Common Stock at the Company's option. As part of the
agreement, the Company has placed $437,000 into escrow for the purpose of
funding all of the interest to be paid under the Notes (assuming that the Notes
continue to accrue interest at the initial rate of 10% per annum). The fair
value of the detachable warrants will be calculated using the Black-Scholes
valuation model and will be recorded as a discount on the Senior Notes and
accreted over the expected life of the warrants as interest expense.


                                       11
<PAGE>

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

FORWARD-LOOKING INFORMATION

         This Quarterly Report on Form 10-QSB contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and section 21E of the Exchange Act of 1934, as amended, that are based
on management's exercise of business judgment as well as assumptions made by,
and information currently available to management. When used in this document,
the words "may," "will," "anticipate," "believe," "estimate," "intend," and
words of similar import, are intended to identify any forward-looking
statements. You should not place undue reliance on these forward-looking
statements. These statements reflect our current view of future events and are
subject to certain risks and uncertainties as noted below. Should one or more of
these risks and uncertainties materialize, or should underlying assumptions
prove incorrect, our actual results could differ materially from those
anticipated in these forward-looking statements. We undertake no obligation and
do not intend to update, revise or otherwise publicly release any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of any unanticipated events after the
date hereof or to reflect the occurrence of any unanticipated events. Although
we believe that our expectations are based on reasonable assumptions, we can
give no assurance that our expectations will materialize.

         Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read together with our condensed financial statements
and related notes included elsewhere in this Quarterly Report on Form 10-QSB.
This Quarterly Report on Form 10-QSB, including the following discussion,
contains trend analysis and other forward-looking statements within the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Any
statements in this Quarterly Report on Form 10-QSB that are not statements of
historical facts are forward-looking statements. These forward looking
statements made herein are based on our current expectations, involve a number
of risks and uncertainties and should not be considered as guarantees of future
performance.

         At June 30, 2005, the most predominant adverse factor affecting the
Company continued to be its low level of working capital. At June 30, 2005 the
Company had working capital of approximately $176,000. On August 16, 2005, the
Company obtained and closed on additional financing through the issuance of
$2,500,000 Senior Secured Convertible Notes (the "Notes") in the aggregate
principal amount of $2,500,000. In addition, the investors received rights
(Rights) to purchase up to $1,875,000 in aggregate principal amount of
additional Notes at any time through the maturity of the Notes.. At August 19,
2005, the Company had working capital of approximately $1,600,000. The Notes
contain an additional investment right (the "AIR) feature entitling the holder
to purchase additional $1,875,000 of the Notes. See further discussion of this
issue in the "LIQUIDITY AND CAPITAL RESOURCES" sections of the Management's
Discussion and Analysis. Based on our current plans and assumptions relating to
our operations, we believe that the additional working capital from the AIR, if
exercised in full, will be sufficient to satisfy our cash requirements through
December 31, 2006. There can be no assurance that the AIR will be exercised. If
none of the AIR is exercised, we expect, based on our current plans and
assumptions relating to our operations, that our working capital at August 19,
2005, will satisfy our cash requirements through May 31, 2006.

         Factors that could cause actual results to differ materially include
without limitation:

         o    interruptions or cancellation of existing contracts
         o    impact of competitive products and pricing
         o    product demand and market acceptance and risks
         o    the presence of competitors with greater financial resources
         o    product development and commercialization risks
         o    an inability to arrange additional debt or equity financing
         o    our ability to finance our business


                                       12
<PAGE>

         o    our ability to maintain our current pricing model and/or decrease
              our cost of sales
         o    continued availability of supplies or materials used in
              manufacturing at the current prices
         o    adverse regulatory developments in the United States
         o    entrance of competitive products in our markets
         o    the ability of management to execute plans and motivate personnel
              in the execution of those plans
         o    no adverse publicity related to our products or the company itself
         o    no adverse claims relating to our intellectual property
         o    the adoption of new, or changes in, accounting principles; legal
              proceedings
         o    the costs inherent with complying with new statutes and
              regulations applicable to public reporting companies, such as the
              Sarbanes-Oxley Act of 2002
         o    other new lines of business that the Company may enter in the
              future.
         o    our ability to repay our indebtedness, including repayment of the
              Notes issued recently.

         Actual results may differ materially from those set forth in such
forward-looking statements as a result of factors set forth elsewhere in this
Quarterly Report on Form 10-QSB, including under "Risk Factors." More
information about factors that potentially could affect the Company's financial
results is included in the Company's filings with the Securities and Exchange
Commission.

OVERVIEW, KEY BUSINESS CHALLENGES AND RISKS

         Vaso Active Pharmaceuticals, Inc. is an early stage company, which
focuses on commercializing, marketing and selling over-the-counter
pharmaceutical products that incorporate a patented vaso active lipid
encapsulated ("VALE") technology and a proprietary PENtoCORE technology.

         The unique VALE technology is a patchless, lipid-based delivery system
which the Company is formulating into various applications which the Company
hopes to market in the future, subject to receipt of appropriate FDA approvals.
The technology uses an active process, incorporating chemical vasodilators, to
deliver drugs through the skin and into the bloodstream.

         The PENtoCORE technology is a topical formulation, in contrast to the
VALE transdermal technology. The Company is currently marketing three products
that incorporate the proprietary PENtoCORE technology; the Company has one
additional product candidate currently undergoing package design and branding
and multiple additional product candidates at various stages of formulation and
development.

         We began our operations in January 2001, as a division of BioChemics, a
biopharmaceutical company engaged in the development of transdermal and topical
drug delivery systems. BioChemics is based in Danvers, Massachusetts. BioChemics
was founded in 1989 by John J. Masiz and was incorporated in Delaware in 1991.
BioChemics began developing the VALE technology in 1989 and has subsequently
been issued 4 U.S. patents in connection with this technology. BioChemics has
licensed these patents to us.

         As an early stage company, we are subject to a number of risks typical
of early stage companies including, but not limited to, our need to obtain
additional financing and generate profitability and cash flows from operations.
As a company engaged in the pharmaceutical industry, we are subject to a number
of risks typical of biopharmaceutical companies including, but not limited to,
our need to adhere to strict governmental regulations, our ability to withstand
intense competition from larger companies with greater financial resources and
our ability to defend our intellectual property, as licensed from BioChemics.

         Our general business strategy was adversely affected by regulatory and
private securities actions taken against us and our management beginning in
April 2004. At the same time, we suspended the marketing and sale of our
products until we were reasonably sure that our product marketing was consistent
with the FDA's requirements and policies. As a result of our voluntary delisting
and continuation of delisting of our securities from the Nasdaq, the action
taken by the SEC against us, the issues raised by the FDA regarding the
regulatory status of our products, and the significant decline in the market
value of our securities subsequent to these matters, several shareholder actions
were filed against Vaso Active and its officers and directors.


                                       13
<PAGE>

         In August and September 2004, Vaso Active and its former Chief
Executive Officer, John Masiz, settled all SEC matters regarding our alleged
violations of securities laws stemming from allegedly misleading disclosures in
our initial public offering registration statement, our 2003 annual report and a
statement on our website concerning the FDA's approval or qualification of our
products. Both Vaso Active and Mr. Masiz agreed with the SEC to settlement terms
without admitting or denying the allegations of their civil complaint, pursuant
to which both parties are permanently enjoined from violating the anti-fraud
provisions of the 1933 Act, and the antifraud and reporting provisions of the
1934 Act. Our former Chief Executive Officer was also prohibited from serving as
an officer or director of any public company, including Vaso Active, for a
period of five years. He is, however, permitted to remain an active
employee/consultant of Vaso Active. Since August 2004, Mr. Masiz has been
employed by Vaso Active to provide consulting services pursuant to the terms of
his employment agreement with the Company. Also during 2004, together with newly
engaged outside FDA counsel, we revised our product labels and in September 2004
began shipping our products on a limited basis. Although these products are now
on the market, we have not made significant shipments or recorded significant
revenues to date.

         On June 1, 2005, Vaso Active entered into a Memorandum of Understanding
Concerning Settlement Terms ("MOU") to settle the consolidated securities class
action lawsuit styled In Re VASO ACTIVE PHARMACEUTICALS SECURITIES LITIGATION,
Master Docket No. 04-10708-RCL (D. Mass). Under the terms of the MOU, the lead
plaintiffs and the settling defendants agree that the final stipulation will
contain a disclaimer of liability consistent with the MOU. Subject to the terms
and conditions set forth in the MOU, settling defendants will pay into escrow
for the benefit of the class $1,100,000 in cash and $750,000 face amount of
2-year 5% subordinated callable notes convertible at $1.75 per share within 10
business days of preliminary approval of the settlement by the court. In
consideration of this payment, the parties will fully and finally release and
discharge all claims against each other. The settlement still needs court
approval. Our insurance carrier has agreed, subject to execution of a definitive
agreement, to pay the $1,100,000 cash payment in exchange for a release of its
liability under its insurance policy with us. We recorded a charge of $750,000
during the three-month period ended June 30, 2005 in connection with this
settlement. We intend to record the 2-year 5% subordinated callable notes when
upon receipt of a final settlement by the court.

         The above settlement does not cover the three derivative shareholder
actions filed against Vaso Active's directors, certain officers and against
BioChemics. You should refer to "Legal Proceedings" and "Risk Factors" for
additional discussions surrounding these events.

         Many of our resources, including our cash and management time, have
been diverted from our business strategy to address these legal matters. We have
incurred significant costs in defending ourselves. We have primarily used the
cash we raised in our December 2003 initial public offering to pay for these
costs. In addition, in April 2004, we repaid all of the approximately $7.5
million in cash we raised in the private placement during March 2004. We had
initially intended to use the December 2003 and March 2004 offering proceeds to
further our working capital and expand our business and marketing plans.

         The success of our marketing and sales activities will be dependent,
among other things, on our ability to retain and attract qualified marketing and
sales personnel, enter into qualified strategic partnerships, and place our
products into the market, the consumer perception of our products and the
securing of additional financing. Although we believe that our products,
supported by sufficient advertising, will earn retailers acceptance, there be no
assurance that this will happen, or if it does, that it will continue.

         Our independent auditors stated in their "Report of Independent
Registered Public Accounting Firm" on our financial statements as of and for the
years ended December 31, 2004, 2003 and 2002 that we may be unable to continue
as a going concern. On August 16, 2005, we netted approximately $1,700,000 from
the sale of Notes. See "LIQUIDITY AND CAPITAL
RESOURCES" section of Management Discussion and Analysis for further discussion
of the sale of the Notes. We believe that we can resume the commercializing,
marketing and selling of our current products and continue the development of
our current product candidates through May 31, 2006 with the net
proceeds from this financing. Although we believe the proceeds of this financing
will sustain our current operations through May 31, 2006, we believe that
we will require additional capital financing to adequately fund our operations
in the near future. We can provide no assurances that such capital financing
will be available to us or that, if available, will be at commercially
reasonable terms.


                                       14
<PAGE>

TECHNOLOGY OVERVIEW

         Transdermal drug delivery is generally considered to be any process of
delivering drugs through the skin and into the bloodstream without the use of an
invasive instrument such as a needle. We believe that transdermal drug delivery
offers potential advantages over other commonly accepted modes of drug delivery
for the treatment of certain diseases and medical conditions. We believe that
these potential advantages include:

         REDUCTION OF ROUTE-OF-ADMINISTRATION RELATED SIDE EFFECTS. Because hey
         are absorbed through the stomach, some orally administered medicines
         can cause significant gastrointestinal side effects, sometimes leading
         to discontinuation of the medication. There also may be side effects
         associated with the delivery of some drugs through the nasal lining,
         the lungs, and the skin using traditional methods. The goal of the VALE
         transdermal delivery system is to provide effective therapy while
         minimizing side effects.

         IMPROVED DRUG PERFORMANCE. Transdermal formulations may have the
         potential to improve the effectiveness of a drug by avoiding the
         stomach and the first-pass metabolism associated with oral delivery of
         drugs. Transdermal drug delivery also may have the potential to create
         a higher bioavailability index for certain drugs, allowing for the
         desired concentration of the drug molecule to reach the bloodstream
         from a smaller dose of drug applied to the patient. Bioavailability
         index is defined as the fraction of the drug amount administered that
         reaches the central circulation. By definition, bioavailability for a
         drug administered intravenously is 100% and drugs administered by other
         methods will typically have bioavailability indices of less than 100%,
         depending on the efficiency of drug transfer into the blood.

         There are many different technologies used to deliver drugs
transdermally. The most common technologies employed are: (i) patches that
adhere to the skin, holding a drug in place while it is administered over time;
(ii) liposome, or artificially prepared cell-like structures, which are applied
topically and absorbed; or (iii) an outside energy source producing electricity
(iontophoresis), or sound (sonophoresis), to help move the drug through the
various skin layers. We believe all three of these technologies have certain
drawbacks that may limit their utility.

         We believe that Vaso Active's formulation technologies can be applied
to a significant array of currently off-patent drugs for commercialization in
the OTC marketplace. The VALE technology is a transdermal formulation that we
believe may have the potential to introduce drugs through the skin and into the
bloodstream in an efficient and effective manner. The PENtoCORE technology is a
topical formulation that we believe allows for the formation of OTC products
with certain "use advantages" over similar products marketed by our competitors.
"Use advantages" include characteristics such as lack of odor, residue, and
feel.

THE VALE TECHNOLOGY

         The goal behind the development of the VALE technology is to create an
active transdermal drug system that efficiently and effectively delivers drugs
through the skin and into the blood supply without the need of a patch. In order
to accomplish this, a delivery system must be able to overcome three skin
barriers:

         o    the outer layers, or the stratum corneum and the epidermis;
         o    the second layer, or the dermis; and
         o    the walls of individual capillaries.


                                       15
<PAGE>

         The VALE technology is intended to be a patchless, lipid-based delivery
system which uses an active process to deliver drugs through the skin and into
the bloodstream. It is being developed around the unique concept of
incorporating chemical vasodilators into the drug delivery vehicle. These
chemical compounds are intended to act on the network of blood vessels located
near the surface of the skin to elicit the physiologic response of dilating or
relaxing the blood vessels in the immediate area. This, in turn, is designed to
have the effect of increasing the blood flow to the area. The theory behind the
VALE technology is that as blood flow increases and the blood vessels dilate,
the active drug molecules incorporated into the delivery system are transported
actively and efficiently into the bloodstream.

         We believe that the VALE technology has the potential to eliminate the
need for a patch and to allow for the effective delivery of many active
ingredients that may not otherwise be effectively delivered using existing drug
delivery technologies.

THE PENTOCORE TECHNOLOGY

         The PENtoCORE technology is a topical formulation, as opposed to the
VALE transdermal technology. Although the PENtoCORE technology does not achieve
its effect by delivering the drug through the skin and into the bloodstream, we
believe that this technology may enable the formulation of topical products that
are pleasant to use because they do not have the odor, greasy feel or residue
often associated with other topically-applied drug products. In addition, it may
be possible to use the PENtoCORE technology with certain active ingredients to
develop topical formulations that may facilitate a longer-lasting effect.

MANUFACTURING AND DEVELOPMENT AGREEMENT

         In August 2003, we formalized a manufacturing and development agreement
with BioChemics (the "Agreement") with respect to the ongoing manufacturing and
development of our products and product candidates. The Agreement has an initial
term of five years and shall be automatically renewed on each anniversary date
of the agreement for an additional period of 12 months so long as the Agreement
has not been terminated in accordance with its terms and conditions. Under this
agreement, BioChemics has and will continue to research, develop and manufacture
products for us pursuant to specific purchase orders submitted by us from time
to time. BioChemics will charge us a development and manufacturing fee at a rate
of cost plus 10%. The Agreement permits BioChemics to use third party
contractors to manufacture the products that BioChemics provides to us.
Currently, BioChemics uses a privately owned third party company as its sole
contract manufacturer. We do not currently, nor do we intend to, engage in the
manufacturing of, nor conduct any research and development with respect to, any
of our products or product candidates. However, in the event that BioChemics is
unwilling or unable to meet our manufacturing needs in accordance with the terms
of the Agreement with us, we have the right to retain outside third parties to
manufacture our products. Pursuant to this Agreement, during the three-month
periods ended March 31, 2005 and 2004, we incurred research and development
costs of $90,030 and $95,167, respectively, related to the formulation of an
analgesic utilizing the active ingredient ibuprofen. Pre-clinical studies
utilizing animals were conducted and billed as part of this research.

ADMINISTRATIVE AND MANAGERIAL SUPPORT

         Effective September 1, 2003, we entered into an administrative services
Agreement with BioChemics. Under this agreement, BioChemics provides to us, at
our request, administrative support services including secretarial support,
accounting and tax services, data processing services, utilities, designated
office space, designated warehouse and storage space, office supplies, telephone
and computer services and equipment and such other office and corporate support
services as we may reasonably require from time to time. BioChemics charges us
an administrative services fee at a rate of cost plus 10%. This agreement is in
effect for an initial term of 5 years and will be automatically renewable on
each anniversary date for an additional period of 12 months unless sooner
terminated (i) for a material breach by us, not cured within three months, and


                                       16
<PAGE>

upon written notice (ii) upon 30 days written notice by us, (iii) upon 45 days
written notice by either party if BioChemics ceases to own beneficially shares
of our capital stock to which are attached at least 49% of the votes that may be
cast to elect our Directors, or (iv) upon written notice by either party in the
event that we shall have disposed of all or substantially all of our assets.

         Pursuant to this agreement, since BioChemics provides us with
administrative and managerial support, our results of operations include
allocations of certain BioChemics expenses, such as centralized accounting, data
processing, utilities, office space rental, supplies, telephone and other
BioChemics corporate services and infrastructure. These expenses have been
charged back to us as a management fee. The expense allocations have been
determined on the basis that we and BioChemics consider to be reasonable
reflections of the utilization of services provided for the benefit received by
us.


GOVERNMENT REGULATION

         GENERAL The development, testing, manufacture, labeling, marketing, and
promotion of OTC drugs are subject to extensive regulation by the FDA under the
Federal Food, Drug and Cosmetics Act ("FFDCA"), and by the Federal Trade
Commission, or FTC, under the Federal Trade Commission Act ("FTC Act").

         The degree of regulation under the FFDCA is dependent, in part, upon
whether the OTC drug, as formulated, labeled, and promoted, is considered by
qualified experts, based on publicly available scientific data and information,
to be generally recognized as safe and effective ("GRASE"), for its recommended
conditions of use. If an OTC drug as formulated, labeled, and promoted is not
considered GRASE for its recommended conditions of use or, if so considered, if
it has not been used to a material extent or for material time, the drug is
regulated under the FFDCA as a "new drug" which requires pre-market approval in
the form of a New Drug Application, or NDA, before it can be commercially
marketed.

         To determine which OTC drugs are GRASE, the FDA has undertaken a
rulemaking initiative in which it seeks to define by regulation which OTC drugs
can be considered to be GRASE and thus can be marketed without first obtaining
an approved NDA. This rulemaking initiative, referred to as the "OTC Review
Program," was initiated on May 11, 1972, and is ongoing. The OTC Review Program
sets forth in the form of an OTC Drug Monograph for specific categories of OTC
drugs (e.g., Topical Anti-Fungal OTC drugs) the conditions under which
recognized OTC active ingredients can be considered GRASE and not misbranded.
These conditions include the strength of the active ingredient, acceptable
dosage forms, the use of safe and suitable inactive ingredients, and the
recommended conditions of use, including indications, warnings, precautions, and
directions for use.

         If the active ingredient used in an OTC drug is not covered by the OTC
Review Program, or even if it is covered, if the conditions of use (e.g.,
strength, dosage form, indications) deviate from that eligible for GRASE status
under the OTC Review Program, the product is considered by the FDA to be a "new
drug" subject to the NDA pre-market approval requirements. For a full discussion
of these requirements see the discussion below in "NDA Review Process".

         Pending the issuance of a final and effective OTC Drug Monograph for
the category of OTC drug involved (e.g., external analgesic), the FDA has
adopted an enforcement policy of not proceeding against the continued marketing
of OTC drugs subject to the OTC Review Program. This enforcement discretion does
not, however, apply if: (a) the FDA considers the drug product involved as
falling outside of the scope of the OTC Review Program in that the active
ingredient or conditions of use deviate from those eligible for GRASE status


                                       17
<PAGE>

under the OTC Review Program; (b) the product presents a health hazard; or
(c)the active ingredient at the dosage level involved was not available OTC
prior to December 4, 1975. The FDA's willingness to defer enforcement action
generally terminates upon the effective date of the final OTC Drug Monograph
covering the applicable drug product.

         Other requirements or limitations for OTC drugs imposed under the FFDCA
include: (a) a requirement that the drug be manufactured in conformity with
current good manufacturing practices, or cGMPs; (b) a requirement that the
labeling for the product contain adequate directions for use and warnings; (c) a
requirement that the manufacturer of the drug product register with the FDA;
(d)a requirement that all drugs manufactured for commercial distribution be
listed with the FDA; and (e) a prohibition against making any false or
misleading misrepresentations in any particular in any labeling for the product.
As noted above, OTC products marketed in accordance with OTC Drug Monographs do
not require FDA premarket approval prior to marketing. If an OTC product
deviates from an OTC Drug Monograph requirement in active ingredient(s),
intended use, method of administration, dosage form, or labeling, among other
things, then the manufacturer or distributor must obtain pre-market approval in
the form of an NDA before commercial marketing.

         The failure to adhere to the requirements of the FFDCA can result in:
(a) seizure of violative products; (b) injunctions against continued violations
of the FFDCA, including active FDA supervision in instituting appropriate
corrective action and prohibition against continued marketing of the violative
products pending an affirmative determination by the FDA and the courts that the
violations have been adequately rectified; (c) civil penalties in the form of
liquidated damages and/or recovery of profits from illegal activities; and (d)
the imposition of criminal sanctions and penalties against responsible persons.

         The FTC, under the FTC Act, regulates print and broadcast media
advertisements for OTC drugs. The FTC Act requires that advertisements be
neither false nor misleading and that claims for products purportedly based on
scientific data be supported by adequate and well controlled studies and that a
reasonable basis exists in support of all other claims. Claims consistent with
the terms of an OTC Drug Monograph are usually accepted by the FTC as having
been adequately substantiated. The penalties for the failure of an advertised
claim to have adequate substantiation, or for claims that are false and
misleading, include: (a) the FTC initiating administrative action for consumer
redress; (b) FTC seeking a court injunction to prevent further false and
misleading advertising; (c) the imposition by a court of liquidated damages and
equitable relief to recover profits and provide consumer redress from illegal
activity; and (d) the placing of the company in receivership to assure that the
assets of the company are not dissipated pending resolution of FTC claims.

         THE NDA REVIEW PROCESS The FDA has taken the position that insofar as
our products or product candidates use a transdermal technology, the products
fall outside that eligible for GRASE status under the OTC Review Program and
thus the Company must obtain NDA approval of the products before they can be
commercially marketed. Under the FDA's procedures it is generally less
burdensome to obtain NDA approval of a drug product which contains active
ingredient(s): (a) considered GRASE in a final OTC Drug Monograph, or (b)
contained in a drug product eligible for an abbreviated new drug application, or
ANDA, approval, but which differs in certain conditions of use (e.g., dosage
form) from that covered by a final OTC Drug Monograph or eligible for ANDA
approval. However, once a product becomes subject to the NDA requirements, the
general provisions of which are set forth below, there can be no assurance that
a company can generate the additional data and information necessary to support
NDA approval of the proposed variant product or that approval can be obtained
without substantial expenditures and delays.

         The steps ordinarily required before a new drug that is subject to NDA
approval may be marketed in the United States include preclinical laboratory
tests, animal tests and formulation studies, the submission to the FDA of an
investigational new drug application, or IND, which must become effective before
clinical testing may commence, and adequate and well-controlled clinical trials
on human subjects to establish the safety and effectiveness of the drug for each
indication for which FDA approval is sought. Satisfaction of FDA pre-market
approval requirements typically takes several years and the actual time required
may vary substantially based upon the type, complexity and novelty of the
product or the disease or condition for which the new drug is indicated.


                                       18
<PAGE>

Government regulation may delay or prevent marketing of potential products for a
considerable period of time and impose costly procedures upon a manufacturer's
activities. Success in early-stage clinical trials does not assure success in
later stage clinical trials. Data obtained from clinical activities is not
always conclusive and may be susceptible to varying interpretations that could
delay, limit, or prevent regulatory approval. Even if a product receives
regulatory approval, later discovery of previously unknown problems with a
product may result in restrictions on the product or even complete withdrawal of
the product from the market.

         Preclinical tests include laboratory evaluation of product chemistry
and formulation, as well as animal trials to assess the potential safety and
efficacy of the product. The conduct of the preclinical tests and formulation of
compounds for testing must comply with Federal regulations and requirements. The
results of preclinical testing are submitted to the FDA as part of an IND.

         A 30-day waiting period after the filing of each IND is required prior
to the commencement of clinical testing in humans. If the FDA has not commented
on or questioned the IND within this 30-day period, clinical trials may begin.
If the FDA has comments or questions, the questions must be answered to the
satisfaction of the FDA before initial clinical testing can begin. In addition,
the FDA may, at any time, impose a clinical hold on ongoing clinical trials. If
the FDA imposes a clinical hold, clinical trials cannot commence or recommence
without FDA authorization and then only under terms authorized by the FDA. In
some instances, the IND process can result in substantial delay and expense.

         Clinical trials typically involve the administration of the
investigational new drug to volunteers or patients under the supervision of a
qualified investigator. Clinical trials must be conducted in compliance with
Federal regulations and requirements, under protocols detailing the objectives
of the trial, the parameters to be used in monitoring safety and the
effectiveness criteria to be evaluated. Each protocol involving testing on U.S.
subjects must be submitted to the FDA as part of the IND. The study protocol and
informed consent information for patients in clinical trials must also be
approved by the institutional review board at each institution where the trials
will be conducted.

         Clinical trials to support NDAs for marketing approval are typically
conducted in three sequential phases, but the phases may overlap. In Phase I,
the initial introduction of the drug into healthy human subjects or patients,
the drug is tested to assess metabolism, pharmacokinetics and pharmacological
actions and safety, including side effects associated with increasing doses.
Phase II usually involves trials in limited patient populations, to determine
dosage tolerance and optimum dosage, identify possible adverse effects and
safety risks, and provide preliminary support for the efficacy of the drug in
the indication being studied.

         If a compound demonstrates evidence of effectiveness and an acceptable
safety profile in Phase II evaluations, Phase III trials are undertaken to
further evaluate clinical efficacy and to further test for safety within an
expanded patient population, typically at geographically dispersed clinical
trial sites it is possible that Phase I, Phase II, or Phase III testing of
product candidates may not be completed successfully within any specified time
period, if at all.

         After successful completion of the required clinical testing, generally
an NDA is prepared and submitted to the FDA. FDA approval of the NDA is required
before marketing of the product may begin in the United States. The NDA must
include the results of extensive clinical and other testing and a compilation of
data relating to the product's pharmacology, chemistry, manufacture, and
controls. The cost of preparing and submitting an NDA is substantial. Under
federal law, the submission of NDAs are additionally subject to substantial
applications user fees, currently exceeding $500,000, and the manufacturer
and/or sponsor under an approved NDA are also subject to annual product and
establishment user fees, currently exceeding $30,000 per product and $200,000
per establishment. These fees are typically increased annually.


                                       19
<PAGE>

         The FDA has 60 days from its receipt of an NDA to determine whether the
application will be accepted for filing based on the agency's threshold
determination that the NDA is sufficiently complete to permit substantive
review. Once the submission is accepted for filing, the FDA begins an in-depth
review of the NDA. Under federal law, the FDA has agreed to certain performance
goals in the review of NDAs. Most applications for non-priority drug products
are reviewed within ten months. The review process is often significantly
extended by FDA requests for additional information or clarification of
information already provided in the submission. The FDA may also refer
applications for novel drug products or drug products which present difficult
questions of safety or efficacy to an advisory committee, typically a panel that
includes clinicians and other experts, for review, evaluation, and a
recommendation as to whether the application should be approved. The FDA is not
bound by the recommendation of an advisory committee.

         If FDA evaluations of the NDA and the manufacturing facilities and
procedures, which typically involves an FDA on-site inspection, are favorable,
the FDA may issue an approval letter, or, in some cases, an approvable letter
followed by an approval letter. An approvable letter generally contains a
statement of specific conditions that must be met in order to secure final
approval of the NDA. If and when those conditions have been met to the FDA's
satisfaction the FDA will typically issue an approval letter. An approval letter
authorizes commercial marketing of the drug with specific prescribing
information for specific indications. If the FDA's evaluation of the NDA
submission or manufacturing facilities is not favorable, the FDA may refuse to
approve the NDA or issue a not approvable letter. The not approvable letter
outlines the deficiencies in the submission and often requires additional
testing or information in order for the FDA to reconsider the application. Even
with submission of this additional information, the FDA ultimately may decide
that the application does not satisfy the regulatory criteria for approval. With
limited exceptions, FDA may withhold approval of an NDA regardless of prior
advice it may have provided or commitments it may have made to the sponsor. As a
condition of NDA approval, the FDA may require post-approval testing and
surveillance to monitor the drug's safety or efficacy and may impose other
conditions, including labeling restrictions. Such labeling restrictions can
materially impact the potential market and profitability of the drug. Once
granted, product approvals can still be withdrawn if compliance with regulatory
standards is not maintained or problems are identified following initial
marketing.

         Once the NDA is approved, a product will be subject to certain
post-approval requirements, including requirements for adverse event reporting
and submission of periodic reports. Persons responsible for manufacture or
distribution are subject to FDA inspections to assess compliance with applicable
statutory and regulatory requirements.

         Additionally, the FDA also strictly regulates the promotional claims
that may be made about drug products. The FDA requires substantiation of any
claims of superiority of one product over another including, in many cases,
requirements that such claims be proven by adequate and well controlled
head-to-head clinical trials. The FTC Substantiation Standards are very similar
for the advertising of OTC products. To the extent that market acceptance of the
Company's products may depend on their superiority over existing therapies, any
restriction on the Company's ability to advertise or otherwise promote claims of
superiority, or requirements to conduct additional expensive clinical trials to
provide proof of such claims, could negatively affect the sales of the Company's
products and/or the Company's costs.


CURRENT PRODUCT LINE

         We have completed the development and test marketing of our three
primary products. Each of these products uses the PENtoCORE technology. These
products are:

         o    Osteon - an OTC external analgesic designed to provide temporary
              relief from the muscular-skeletal pain associated with arthritis;


                                       20
<PAGE>

         o    A-R Extreme - an OTC external analgesic designed to provide
              temporary relief from the muscle and joint pain associated with
              athletic activity; and

         o    Termin8 - an OTC antifungal lotion designed to effectively treat
              athlete's foot.

         We license the Osteon and PENtoCORE trademarks under our amended
license agreement with BioChemics. We market each of our three current principal
products under the OTC Review Program. You should refer to the discussions in
"Government Regulation" in our 2004 Annual Report on Form 10-KSB filed with the
SEC on March 31, 2005 for more detailed information surrounding impact FDA
regulations have on our business.

PRODUCT CANDIDATES

         In addition to and separate from our A-R Extreme, Osteon and Termin8
products, we have identified and are currently developing, in collaboration with
BioChemics, six additional OTC product candidates that will utilize the VALE
transdermal or PENtoCORE topical technology. Each of these product candidates
are in various stages of development and are not yet available for sale. These
product candidates are as follows:

         o    An analgesic utilizing ibuprofen;
         o    Toenail fungus treatment;
         o    Acne treatment;
         o    First aid treatments;
         o    Hand and body lotions; and
         o    Psoriasis treatment.

         Each of our OTC product candidates are subject to FDA regulations. With
regard to these product candidates, in instances where the active ingredient
(e.g., ibuprofen), dosage form (e.g., VALE transdermal technology), strength,
route of administration, directions for use or indication (e.g., toenail fungus)
of the product candidate is not covered by the OTC Review Program or where the
inactive ingredients used in the product candidate are not recognized as safe
and suitable for their intended OTC use, we cannot market the product candidate
without obtaining pre-market approval in the form of an approved new drug
application, or NDA or an abbreviated new drug application, or ANDA. Conversely,
where we believe the active ingredient, dosage form, strength, route of
administration, directions for use, and indication of the product candidate are
covered by the OTC Review Program and the inactive ingredients used in the
product candidate are safe and suitable for their intended OTC use, the product
candidate could be marketed without obtaining NDA or ANDA clearance, provided it
conforms to the applicable OTC Monograph and is not otherwise adulterated or
misbranded. You should refer to the discussions in "Product Candidates" in our
2004 Annual Report on Form 10-KSB filed with the SEC on March 31, 2005 for more
detailed information surrounding impact FDA regulations have on our product
candidates.

          We have finalized a formulation of our acne treatment utilizing our
PENtoCORE topical technology. We intend to market the acne treatment under the
label RepiDerm(R). The product would contain 10% benzoyl peroxide, or BPO, as an
active ingredient. You should refer to the discussions in "Product Candidates"
in our 2004 Annual Report on Form 10-KSB filed with the SEC on March 31, 2005
for more detailed information surrounding the FDA's concerns surrounding the
safety of BPO and the related impact these concerns have on the future marketing
and sale of RepiDerm.

COMPETITION

         We are engaged in a rapidly evolving field. We compete primarily with
established pharmaceutical companies like Pfizer, Bristol-Myers Squibb
Schering-Plough, and Alza, and emerging biotechnology companies like Cygnus and
Elan, as well as research and academic institutions, among others. Competition
is intense and expected to increase.


                                       21
<PAGE>

         The large and rapidly growing market for transdermal and topical drug
delivery systems is likely to attract new entrants. Numerous biotechnology and
biopharmaceutical companies are focused on developing new drug delivery systems
and most, if not all, of these companies have greater financial and other
resources and development capabilities than we do. Our competitors also have
greater collective experience in undertaking pre-clinical and clinical testing
of products, obtaining regulatory approvals and manufacturing and marketing OTC
and prescription pharmaceutical products. Accordingly, certain of these
competitors may succeed in obtaining approval for products more rapidly than us.
In addition to competing with universities and other research institutions in
the development of products, technologies and processes, we may compete with
other companies in acquiring rights to products or technologies from
universities. There can be no assurance that our products or product candidates
will be more effective or achieve greater market acceptance than competitive
products, or that these companies will not succeed in developing products and
technologies that are more effective than those being developed by us or that
would render our products and technologies less competitive or obsolete.

         Although we consider the PENtoCORE technology proprietary, the
PENtoCORE products, which represent all our current products, do not enjoy any
patent protection. This may allow our competitors to imitate or reverse engineer
our current products and use their greater manufacturing and marketing resources
to rapidly promulgate competing versions. It is our opinion that competing
topical and transdermal delivery technologies using patches, liposomes, and
equipment-assisted deliveries such as iontophoresis and sonophoresis have some
utility with a small group of select drugs. It is our opinion, however, in
general, that these drug delivery systems are not useful for most drugs. Our
success will depend on our ability to leverage the PENtoCORE and VALE
technologies to achieve market share at the expense of our existing and future
competitors who we believe cannot offer products utilizing a delivery system of
comparable performance characteristics.

         In addition to competing with newly developed drug delivery systems, we
will compete with existing products which address the same medical conditions as
our products and product candidates. For instance, Tinactin(R) and Lotrimin(R)
would compete with our Termin8 athlete's foot product, while Advil(R) and
Tylenol(R) would compete with our pain relief products and product candidates.
These and other brands are already offering different delivery systems. For
instance, Pfizer's Ben Gay(R) is now offered in a patch as well as a cream.
These products are manufactured, distributed and marketed by companies with
vastly greater resources than our own. There is no guarantee we will be able to
achieve widespread market acceptance for our products, or that our marketing
efforts will be successful in distinguishing our products from these established
market participants.

DISTRIBUTION

         Recent regulatory events and securities claims brought against us and
our management has placed strains on our management and capital resources. As a
result of the cessation of the marketing and sale of our products in early 2004
and changes in the timing for the retail rollout of our products, we do not
anticipate using any of our 2003 initial public offering proceeds to fund our
advertising, direct mail programs and related promotional activities. You should
refer to the discussions under the caption "Legal Proceedings" for further
discussion on our cessation of marketing and sales activities.

         NEW DEVELOPMENTS - IN early 2004, we suspended the marketing and sale
of our products until we were reasonably sure that our product marketing was
consistent with the FDA's requirements and policies. In May 2004, together with
outside FDA counsel, we revised our product labels and in September 2004 began
shipping our products on a limited basis. Although these products are now on the
market, we have not made significant shipments to date.


                                       22
<PAGE>

         We intend to begin distribution our current products into major retail
and drug store chains, select independent pharmacies and nontraditional
channels, including multilevel marketing, direct marketing, web-sites and
catalogues.

         On July 20, 2005 the Company entered into an exclusive brokerage
agreement with Ferolie Corporation d/b/a Eastern Sales & Marketing (ESM), of
Montvale, New Jersey to sell all of Vaso Active's products across all classes of
retail trade in the Continental United States. In addition, under the agreement,
ESM will be Vaso Active's non-exclusive agent to identify prospective licensees
of its trademarks and trade names. ESM is a full-service sales, marketing and
merchandising agency that provides comprehensive services for consumer packaged
goods manufacturers in various product categories, including food, drug,
specialty and private label. The agreement is effective August 1, 2005 for an
initial period of one year. Excluded from the agreement are direct response
sales, medical and professional sales, and internet sales.

         We expect to begin shipping through ESM channels before the end of
2005. The actual timing of beginning shipments may be delayed because package
design might be changed for our existing products. In addition the timing for
new products to be introduced into retail is dictated by the planning schedule
of the individual chains.

         Early in 2005 we launched a nationwide direct-to-consumer marketing
campaign for Osteon that consisted of two versions of sixty second television
commercials. Due to lack of working capital we suspended purchasing television
commercials. We expect to resume running television commercials in September. In
August we entered into a pay-per-unit of sale arrangement to purchase television
commercials. We are negotiating additional pay-per-unit of sale arrangements.
These arrangements are designed to run our commercials in remnant, or unsold,
television commercial space. The Company pays a predetermined amount per unit of
Osteon sold. In addition we plan to use portions of the proceeds raised from our
August 16, 2005 sale of Notes to purchase additional television commercial space
to augment the pay-per-unit of sale program.

         During 2004, we executed a strategic alliance with Ortho Distribution
Inc. or ODI. In January 2005 ODI's parent company was purchased by an unrelated
third-party. ODI management, under the new ownership, has not pursued the
alliance as strongly as prior management. We are no longer in negotiations with
ODI management. To date we have not made any sales under this relationship and
we do not expect future sales, if any, to be significant. Product previously
manufactured and labeled by the Company for ODI has been written off in the
previous quarter.

         Under our strategic alliance with M2G Media we have been in discussions
with respect to launching our acne product, RepiDerm. These discussions have not
led to an agreement and we presently do not expect any significant sales of our
acne product RepiDerm through M2G Media.

TRANSACTIONS WITH BIOCHEMICS

         In February 2003, BioChemics granted us an exclusive, irrevocable,
worldwide license to use and practice the VALE patents and PENtoCORE technology
in order to commercialize, market and sell OTC pharmaceutical products. The
license agreement with Biochemics is limited to OTC products each costing less
than $1,000,000 to develop. We expect that our OTC topical analgesic utilizing
ibuprofen product candidate will cost more than $1,000,000 to develop. Based on
informal discussions with Biochemics, we expect to amend our licensing agreement
to include OTC ibuprofen regardless of its development cost.


                                       23
<PAGE>

         We have an agreement with BioChemics whereby BioChemics provides to us,
at our request, administrative support including secretarial support, accounting
and tax services, data processing services, utilities, designated warehouse,
office and storage space, office supplies, telephone and computer services and
equipment and such other office and corporate support services we may reasonably
require from time to time. Our administrative services agreement with BioChemics
is set to expire in September 2008 with automatic 12-month renewal terms
provided the agreement is not terminated in accordance with its terms and
conditions.

         We have an agreement with BioChemics whereby BioChemics manufactures
and develops our current products and product candidates. We do not currently,
nor do we intend to, engage in the manufacturing of, nor conduct any research
and development with respect to, any of our products or product candidates. We
are in the business of commercialization, marketing and selling OTC
pharmaceutical products that incorporate topical and transdermal formulation
platforms. Our manufacturing and development agreement with BioChemics is set to
expire in August 2008 with automatic 12-month renewal terms provided the
agreement is not terminated in accordance with its terms and conditions.

         Under both agreements, BioChemics charges us fees at a rate of cost
plus 10%. We believe that the fees charged to us by BioChemics are on terms as
favorable as those available from non-affiliated parties. During the six-month
periods ended June 30, 2005 and 2004, BioChemics charged us approximately
$23,000 and $16,300, respectively, for administrative support services. During
the six-month period ended June 30, 2005 and 2004, BioChemics charged us
approximately $177,500 and $142,500, respectively, for manufacturing and
development. The majority of those costs related to the formulation of an
analgesic utilizing the active ingredient ibuprofen.

OUTLOOK FOR REMAINDER OF 2005

         During 2005, the Company plans to:

         o    Expand distribution through retail channels under our brokerage
              agreement with ESM;
         o    Continue the direct-to-consumer television campaign of our topical
              analgesic marketed under the label Osteon;
         o    Complete package design and branding for our acne product,
              RepiDerm;
         o    Increase staffing, including outbound telemarketers

         Our strategy for Osteon is to create, through telemarketing,
advertising and mailings a customer base of senior women and men suffering from
osteoarthritis. We expect re-order sales of Osteon to carry higher gross profit
margins than initial order sales of Osteon because re-order sales should not
require the same direct media advertising expenditures as do the initial order
sales. To achieve future growth, we plan to offer additional products, to be
determined, that fit the demographic of this customer base.

         Our strategy for AR-Extreme and Termin8 is to achieve market
penetration through wholesale distribution to chain pharmacies, chiropractors,
podiatrists, dermatologists, wellness and fitness centers. We are in the very
early stages of this launch. We plan to use a portion of the net proceeds from
the sale of the Notes to support the retail rollout of our products through ESM
channels.

         Our targeted September rollout of Repiderm has been delayed due to
working capital constraints. We plan to use a portion of the net proceeds from
the sale of the Notes to complete package design and branding for Repiderm. We
previously intended to launch RepiDerm by the end of the third quarter of 2005.
Our new target launch date for RepiDerm is the first quarter of 2006. We plan to
package and market this product under several labels. One label will be targeted
to the teenage and young adult markets and another label will target older
adults. This product is formulated to treat acne based upon regular usage and we
expect to realize a re-order stream with our future customers. We may market
this product as direct to consumer, retail, or both.


                                       24
<PAGE>

CRITICAL ACCOUNTING ESTIMATES

         GOING CONCERN ASSUMPTION - The financial statements do not include any
adjustments relating to the recoverability and classification of assets or the
amounts and classification of liabilities that might be necessary should we be
unable to continue as a going concern. If the financial statements were prepared
on a liquidation basis, the carrying value of our assets and liabilities would
be adjusted to net realizable amounts. In addition, the classification of the
assets and liabilities would be adjusted to reflect the liquidation basis of
accounting.

         REVENUE RECOGNITION - We recognize revenue from product sales in
accordance with generally accepted accounting principles in the United States,
including the guidance in Staff Accounting Bulletin, or SAB, No. 104, "Revenue
Recognition," which superseded SAB No. 101, "Revenue Recognition in Financial
Statements," and Statement of Financial Accounting Standards, or SFAS, No. 48,
"Revenue Recognition When Right of Return Exists."

         Revenue from product sales is recognized when there is persuasive
evidence of an arrangement, delivery has occurred, the price is fixed and
determinable, and collectibility is reasonably assured. However, because our
products are sold with limited rights of return, revenue is recognized when the
price to the buyer is fixed, the buyer is obligated to pay us and the obligation
to pay is not contingent on resale of the product, the buyer has economic
substance apart from the us, we have no obligation to bring about the sale of
the product and the amount of returns can be reasonably estimated.

         We record allowances for product returns, rebates and discounts, and
report revenue net of such allowances. We must make judgments and estimates in
preparing the allowances that could require adjustments in the future. For
instance, our customers have the right to return any product that is held past
the labeled expiration date. We base our estimates on historic patterns of
returns and on the expiration dates of product currently being shipped, or as a
result of an actual event that may give rise to a significant return amount such
as the discontinuance of a product.

         We do not recognize revenue unless collectibility is reasonably
assured. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate and result in an
impairment of their ability to make payments, additional allowances may be
required.

         EXPENSE ALLOCATIONS / MANAGEMENT FEES - BioChemics provides us with
certain administrative, marketing and management services, as well as our
facilities and general corporate infrastructure. Our statement of operations
includes allocations of these costs that BioChemics that we considered to be
reasonable. These costs are included in selling, general and administrative
expenses.

         INCOME TAXES - We account for income taxes and deferred tax assets and
liabilities in accordance with SFAS No. 109, "Accounting for Income Taxes."
Because we project future operating losses in the near term, we have provided a
full valuation allowance against the deferred tax assets created by these
losses.

         STOCK-BASED COMPENSATION - As part of our compensation programs offered
to our employees, we grant stock options. We grant stock options to employees
based on the fair value of the Class A common stock at the grant date. As
allowed under SFAS No. 123, "Accounting for Stock-Based Compensation," and SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
we have adopted the disclosure-only requirements of these accounting standards.
Accordingly, we do not recognize stock-based compensation expense for stock
options granted to employees at their fair value. The fair value of options
granted to non-employees is expensed in accordance with SFAS 123 using the
Black-Scholes option-pricing model. See Note 4 to our condensed financial
statements for the impact on earnings had we fully adopted SFAS 123.


                                       25
<PAGE>

         In December 2004, the FASB issued a revision to SFAS No. 123,
"Share-Based Payment," requiring companies to recognize as compensation expense
the fair value of stock options and other equity-based compensation issued to
employees. This revised statement eliminates the intrinsic value method provided
under Accounting Principles Board, or APB, No. 25, "Accounting for Stock Issued
to Employees," which is the method we currently use to value stock options
awarded to our employees. This revised standard is effective as of the beginning
of the first annual reporting period beginning after December 15, 2005 and is
expected to have a material impact on our results of operations. We are
currently evaluating the two methods of adoption allowed by this revised
standard; the modified-prospective transition method and the
modified-retrospective transition method.

THREE MONTHS ENDED JUNE 30, 2005 AND 2004

          NET REVENUES - On April 8, 2004, we suspended the marketing and sale
of our products until we were reasonably sure that our product marketing was
consistent with the FDA's requirements and policies and that all outstanding
matters had been addressed to the satisfaction of the SEC. See discussion under
"Overview, Key Business Challenges and Risks." In May 2004, together with
outside FDA counsel, we revised our product labels and in September 2004 began
shipping our products on a limited basis. Although these products are now on the
market, we have not made significant shipments to date. Net revenues increased
$10,337 to $11,199 for the three month period ended June 30, 2005 as compared to
$862 in the prior comparable period. However, as a result of the limited
revenues during these periods, we believe net revenue comparisons are not
meaningful.

         COST OF SALES - Cost of sales decreased $26,386 to $13,467 during the
three month period ended June 30, 2005 from $39,853 in the comparable period in
2004. In general, our cost of sales is variable to our net revenues. However,
certain manufacturing events such as inventory adjustments may distort our cost
of sales, and therefore our gross profit, during any particular period. The
$26,386 decrease in cost of sales was due primarily to a one-time charge of
approximately $39,000 we incurred during the three month period ended June 30,
2004. During this period in 2004, we revised our product labels, which required
us to write-off approximately $39,000 in inventory. .

         GROSS PROFIT - Gross profit as a percentage of net revenues for both
the three month period ended June 30, 2005 and June 30, 2004 are negative as a
direct result of the matters discussed under the Cost of Sales discussion above.
We do not believe that any comparison between periods is meaningful in our
current stage of development.

         MARKETING, ADVERTISING AND PROMOTION - Marketing, advertising and
promotion expenses increased by $21,338 to $31,933 for the three-month period
ended June 30, 2005 from $10,595 during the three-month period ended June 30,
2004. This increase was primarily due to costs associated with our launch of a
series of 60 and 120 second television commercials for the Osteon product. Due
to our lack of adequate working capital, we have temporarily suspended future
commercial advertisements. We intend to resume broadcasting these television
commercials when we receive the net proceeds from our August 2005 Senior Note
financing transaction. You should refer to the discussion under "Outlook For
Remainder of 2005."

         SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and
administrative expenses decreased by $592,069 to $458,805 during the three-month
period ended June 30, 2005 as compared to $1,050,874 in the comparable period in
2004. In the comparable prior year period, we incurred significant non-recurring
expenses, including financing fees, legal, accounting and other expenses in
connection with the private placement of convertible notes in early 2004 and the
subsequent unwinding of that transaction. We also incurred the following
expenses in that prior year period: legal and other professional services to
amend a previously filed annual report, represent ourselves to the SEC and FDA
and defend ourselves in the shareholder class action and derivative law suits.
You should refer to the discussions under "Overview, Key Business Challenges and
Risks." We incurred approximately $19,500 in legal fees and $45,500 in business,
financial and other professional services during the three month period ended
June 30, 2005, as compared to approximately $519,000 in legal fees and $142,000
in business, financial and other professional services in the three-month period
ended June 30, 2004. These two changes accounted for the majority of the
decrease in selling, general and administrative expenses.


                                       26
<PAGE>

         During the three months ended June 30, 2005, other selling, general and
administrative expenses we incurred were $193,000 in salaries, wages and related
personnel costs; approximately $51,200 for various insurance premiums typical of
a public company; approximately $42,000 for board of director compensation,
approximately $11,500 in management fees from BioChemics, approximately $12,200
in registered accountant fees, and approximately $10,900 in rent expense. The
remaining selling, general and administrative expenses pertained to our general
operations.

         RESEARCH AND DEVELOPMENT - Research and development expenses increased
by $40,108 to $87,407 for the three-month period ended June 30, 2005 as compared
to $47,299 in the comparable prior period. Beginning in January 2004, we engaged
Biochemics to provide services pursuant to a February 2003 manufacturing and
development agreement. These services related to the formulation of an analgesic
utilizing the active ingredient ibuprofen. Expenses in this area have increased
as a direct result of utilizing more of Biochemics' research and development
resources during the three month period ended June 30, 2005.

         STOCK BASED COMPENSATION - We are required to record stock-based
compensation when we grant options to purchase our common stock to non-employees
in accordance with SFAS 123. The value of these options is calculated using the
Black-Scholes option-pricing model. Stock based compensation for both the
three-month period ended June 30, 2005 and June 30, 2004 was $15,101 and since
no grants were made to non-employees during these periods, the amount recorded
was attributable to the normal amortization of fair value of these awards into
expense over the vesting period of the awards.

         LEGAL SETTLEMENT - On June 1, 2005, we entered into an MOU to settle
the consolidated securities class action lawsuit. We recorded a charge of
$750,000 during the three-month period ended June 30, 2005 in connection with
this settlement. See discussion under "Overview, Key Business Challenges and
Risks."

SIX MONTHS ENDED JUNE 30, 2005 AND 2004

         NET REVENUES - Net revenues increased $7,787 to $15,796 for the six
month period ended June 30, 2005 as compared to $8,009 in the prior comparable
period. However, as a result of the limited revenues during these periods, we
believe net revenue comparisons are not meaningful.

         COST OF SALES - Cost of Sales decreased $25,913 to $19,715 during the
six month period ended June 30, 2005 from $45,628 in the comparable prior
period. In general, our cost of sales is variable to our net revenues. This
decrease was due primarily to one-time charges we incurred in 2004 of $39,000
related to the write-off of unrecoverable inventory.

         GROSS PROFIT - Gross profit as a percentage of net revenues for both
the six month period ended June 30, 2005 and June 30, 2004 are negative as a
direct result of the matters discussed under the Cost of Sales discussion above
related to the expiration of products and submission of new labels to the FDA.
We do not believe that any comparison between periods is meaningful in our
current stage of development.

         MARKETING, ADVERTISING AND PROMOTION - Marketing, advertising and
promotion expenses increased $124,887, or approximately 163%, to $201,736 for
the six-month period ended June 30, 2005 from $76,849 for the six-month period
ended June 30, 2004. This increase was primarily attributable to $103,775 in
costs we incurred in connection with our launch of a series of 60 and 120 second
television commercials for the Osteon product throughout the United States.

         Costs for marketing, advertising and promotion were significantly less
in 2004 as we committed on April 8, 2004 not to market or sell our products
until all outstanding matters have been addressed to the satisfaction of the SEC
and until we were reasonably sure that the marketing and sale of our products
was consistent with the FDA's requirements and policies. See discussion under
"Overview, Key Business Challenges and Risks"


                                       27
<PAGE>

         SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and
administrative expenses decreased by $1,446,521 to $1,142,346 during the
six-month period ended June 30, 2005 as compared to $2,588,867 in the comparable
period in 2004. In the comparable prior year period, we incurred significant
non-recurring expenses, including financing fees, legal, accounting and other
expenses in connection with the private placement of convertible notes in early
2004 and the subsequent unwinding of that transaction. We also incurred the
following expenses in that prior year period: legal and other professional
services to amend a previously filed annual report, represent ourselves to the
SEC and FDA and defend ourselves in the shareholder class action and derivative
law suits. See discussion under "Overview, Key Business Challenges and Risks."
We incurred approximately $145,296 in total combined legal fees and $134,670 in
business, financial and other professional services during the six month period
ended June 30, 2005, as compared to approximately $889,000 in total combined
legal fees, $286,000 in business, financial and other professional services and
$615,000 in professional and settlement fees we incurred in connection with our
March 16, 2004 Private Investment in Public Entity transaction during the
six-month period ended June 30, 2004. These differences accounted for the
majority of the decrease in selling, general and administrative expenses.

         During the six-months ended June 30, 2005, other selling, general and
administrative expenses we incurred were $396,320 in salaries, wages and related
personnel costs; approximately $118,450 for various insurance premiums typical
of a public company; approximately $108,000 for board of director compensation,
approximately $23,000 in management fees from BioChemics, approximately $62,200
in registered accountant fees, approximately $30,000 in computer consulting
services, approximately $36,125 in travel and entertainment and approximately
$21,900 in rent expense. The remaining selling, general and administrative
expenses pertained to our general operations.

         RESEARCH AND DEVELOPMENT - Research and development expenses increased
by $34,971 to $177,437 for the six-month period ended June 30, 2005 as compared
to $142,466 in the comparable prior period. Beginning in January 2004, we
engaged Biochemics to provide services pursuant to a February 2003 manufacturing
and development agreement. These services related to the formulation of an
analgesic utilizing the active ingredient ibuprofen. Expenses in this area have
increased as a direct result of utilizing more of Biochemics' research and
development resources during the six month period ended June 30, 2005.

          STOCK BASED COMPENSATION - We are required to record stock-based
compensation when we grant options or warrants to purchase our common stock to
non-employees in accordance with SFAS 123. The value of these options and
warrants is calculated using the Black-Scholes valuation model. Stock based
compensation for the six-month period ended June 30, 2004 included the award of
a warrant to purchase 225,000 shares of common stock. As this warrant was
completely vested, we recorded a charge of approximately $96,000 during the six
month period ended June 30, 2004. The remainder of the stock-based compensation
in both periods was attributable to the normal amortization of the fair value of
these awards into expense over the vesting period of the awards.

         LEGAL SETTLEMENT - On June 1, 2005, we entered into an MOU to settle
the consolidated securities class action lawsuit. We recorded a charge of
$750,000 during the six-month period ended June 30, 2005 in connection with this
settlement. See discussion under "Overview, Key Business Challenges and Risks."


LIQUIDITY AND CAPITAL RESOURCES

         The Company has incurred substantial operating losses and negative cash
flows from operations since inception. In 2004 and 2005, operations were
financed from the proceeds of our December 2003 initial public offering. Net of
offering costs, we raised approximately $6.4 million. Prior to our receipt of
these proceeds, we relied on BioChemics, together with the proceeds from an
offering of convertible notes in early 2003. as the source of our working
capital. All of the funds raised from this initial public offering have been
exhausted to date.

         At August 19, 2005, we had cash of approximately $1,900,000 and working
capital of approximately $1,600,000. Our financial condition has been materially
and adversely affected by recent regulatory and shareholder actions taken
against us.

         On August 16, 2005, under a Securities Purchase Agreement (the
"Purchase Agreement"), we issued a series of Senior Secured Convertible Notes
(the "Notes") due May 01, 2007 in the aggregate principal amount of $2,500,000.
The company netted approximately $1,700,000 in cash proceeds from financing
after placement fees, legal expenses, other offering costs, and funding of an
escrow. Placement fees, legal expenses and other offering costs paid were
approximately $360,000 and approximately $440,000 was placed into escrow to fund
substantially all of the Company's interest payments on the Notes (assuming that
the Notes continue to accrue interest at the initial rate of 10% per annum).

         The Notes. The Notes have a term of 21 months and the principal of the
Notes is due and payable in a single payment on May 1, 2007. The Notes bear
interest at the six month LIBOR plus 6% with a floor of 10.0% and a ceiling of
12.0%. The Notes presently accrue interest at 10% per annum. Interest is payable
quarterly, in arrears, beginning October 31, 2005, on each July 31, October 31,
January 30 and April 30, until the earlier of the Notes' maturity or conversion
date. Pursuant to the Purchase Agreement the Company has deposited into an
escrow account the total amount of the interest to be paid under the Notes,
i.e., $437,000.

         Amounts scheduled to be paid by the Company under the Notes may be
accelerated upon the occurrence of certain events, including any default in the
payment of interest when due and payable; the default by the Company under other
notes, mortgage, or credit facility; the failure of the Company to perform
certain obligations to deliver certificates for Underlying Shares or to timely
register the Underlying Shares for resale as required under the Purchase
Agreement; and in the event of bankruptcy.

         The Notes are secured by all of the assets of the Company. The Notes
are convertible at any time into shares of the Company's Class A common stock at
a price of $0.70 per share (subject to adjustment under certain circumstances,
e.g., anti-dilution adjustments).

         The Warrants. The investors also received five-year warrants
("Warrants"), which entitle the investors to purchase a total of 1,298,701
shares of the Company's Class A common stock at an exercise price of $0.77 per
share. The number of shares which may be purchased upon exercise of the Warrants
and the exercise price per share of the Warrants are subject to adjustment under
certain circumstances, e.g., anti-dilution adjustments.

         The Additional Investors Rights. In addition, the investors received
AIRs to purchase up to $1,875,000 in aggregate principal amount of additional
Notes at any time through the maturity date of the Notes, together with
additional five-year Warrants to purchase a total of 974,026 shares of Class A
common stock. The additional Notes are convertible and the additional Warrants
are exercisable at the same respective initial prices per share as the Notes and
Warrants issued on August 16, 2005.

         Under the Purchase Agreement, the Company is required to reserve for
issuance a total of 8,522,727 shares of Class A Common Stock, in connection with
the possible conversion of Notes (including the additional Notes) and the
possible exercise of the Warrants (including the additional Warrants). The
Company has a sufficient number of shares of Class A Common Stock authorized to
permit the Company to issue the shares (the "Underlying Shares") issuable upon
conversion of the Notes and Warrants which the Company issued and sold on August
16, 2005. However, the Company does not presently have a sufficient number of
shares of its Class A Common Stock authorized to be issued under its Amended and
Restated Certificate of Incorporation to reserve the full amount of Underlying
Shares. The Company intends to amend its Certificate of Incorporation to
increase the number of authorized shares of its Class A Common Stock to more
than the number of shares which would be required to enable the Company to issue
the full amount of the Underlying Shares. Under the Purchase Agreement, the
Company is required to use its best efforts to effect such increase not later
than October 15, 2005.


                                       29
<PAGE>

         If the AIR exercised in full, we believe, based on our current plans
and assumptions relating to our operations, that the additional working capital
provided by the exercise will be sufficient to satisfy our cash requirements
through December 31, 2006. However, there can be no assurance that any of the
AIR will be exercised. If no portion of the AIR is exercised, we believe that,
based on such plans and assumptions our current working capital will be
sufficient to satisfy our cash requirements through May 31, 2006. We intend to
continue as a going concern.

         There can be no assurance that we will be able to obtain any additional
financing or that, even if we do obtain additional financing, it will be on
terms favorable to us. Further, there can be no assurance that we will be able
to generate profitability and cash flows from operations with our existing
working capital.

         We expect to use portions of our working capital to continue defending
ourselves in the three pending shareholder derivative actions for the balance of
2005. However, we cannot reasonably estimate the total costs to defend ourselves
at this time. Further, we cannot provide any assurances that we will prevail in
defending ourselves from the shareholder derivative actions taken against us. In
addition, our management intends to contest a substantial portion of the
accounts payable shown on the Balance Sheet at June 30, 2005.

         In March 2004, we entered into a private placement transaction with an
institutional investor in the amount of $7,500,000. The investment was in the
form of an 18 month 2% Convertible Note convertible into shares of Class A
common stock at a conversion rate of $9.00 per share, at the option of the
investor. Both principal and interest were payable in cash or in shares of Class
A common stock at our option. Given that the initiation and continuation of the
April 1, 2004 trading suspension by the SEC constituted a breach under the Note,
we and the investor agreed, pursuant to the terms of a settlement agreement
entered into on April 8, 2004, that we would immediately repay the investor the
sum of $7,500,000 in cash without penalty, interest, redemption premium or any
other premium or penalty, plus an expense reimbursement in connection with the
settlement agreement in the amount of $15,000 in cash. In consideration of this
repayment, the investor surrendered the Note and warrants and the parties
mutually terminated all other agreements entered into in connection with the
transaction. We intended to use these proceeds to further our working capital
and expand our business and marketing plans.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

         The following table sets forth our contractual obligations and
commitments for the next five years, as of June 30, 2005.

<TABLE>
                                                  LESS THAN       1 - 3        3 - 5       5 - 7
                                        TOTAL       1 YEAR        YEARS        YEARS       YEARS
                                     ----------   ----------   ----------   ----------   ----------
<S>                                  <C>          <C>          <C>          <C>          <C>
Long-term debt                       $       --   $       --   $       --   $       --   $       --
Capital lease obligations                15,148        2,316        5,070        7,762           --
Operating lease obligations                  --           --           --           --           --
Unconditional purchase obligations           --           --           --           --           --
Employment agreements                 2,336,250      446,250      630,000      630,000      630,000
                                     ----------   ----------   ----------   ----------   ----------

Total                                $2,351,398   $  448,566   $  635,070   $  637,762   $  630,000
                                     ==========   ==========   ==========   ==========   ==========
</TABLE>

         In February 2005, we appointed our Chief Financial Officer, Mr. Joseph
Frattaroli, as our President. Mr. Frattaroli will continue to serve as Chief
Financial Officer and Acting Chief Executive Officer. This table is presented
reflecting the authorized annual salary to Mr. Frattaroli effective March 1,
2005 for one year. The written employment agreements with Mr. Masiz and Dr.
Carter terminate their initial terms on June 30, 2008, but are deemed
automatically extended for successive periods of two years under the terms of
their respective written agreements through 2012. This table is presented
assuming the automatic extensions are reflected.

         Mr. Masiz and Dr. Carter have agreed to waive, in writing, certain
termination payout clauses contained in their respective employment agreements
in the event that the Company becomes insolvent. Mr. Frattaroli has agreed in
principle to a similar waiver, and will execute a similar waiver in writing when
his employment agreement is finalized and executed.


                                       30
<PAGE>

OFF-BALANCE SHEET ARRANGEMENTS

         We have no material off-balance sheet financing such as a facility
lease or other long-term commitments. We have employment agreements with three
key employees. Please refer to "Contractual Obligations and Commitments" for a
summary of the employment agreement obligations.

OWNERSHIP STRUCTURE

         Through our parent company, Biochemics, John J. Masiz controls
approximately 70% of the combined voting power of all classes of stock of the
Company and approximately 44% of the combined equity interest of the Company.
Biochemics owns 100% of the Class B Common Stock of the Company.

RISK FACTORS

WE ARE AN EARLY STAGE COMPANY WITH A BRIEF HISTORY OF LOSSES AND MAY NEVER
ACHIEVE OR SUSTAIN PROFITABILITY.

         We do not have any continuing revenues and we have never been
profitable and we may not achieve profitability in the foreseeable future, if at
all. Our ability to generate profits in the future will depend on a number of
factors, including:

         o    start-up costs relating to the commercialization, sale and
              marketing of our products;
         o    market acceptance of our products and product candidates;
         o    costs of acquiring and developing new product candidates;
         o    ability to bring our products to market;
         o    general and administrative costs relating to our operations;
         o    increases in our research and development costs;
         o    charges related to purchases of technology or other assets;
         o    ability to raise additional capital; and
         o    the favorable resolution of our current litigation (see "Legal
              Proceedings").

         At June 30, 2005, we had an accumulated deficit of approximately $8.5
million. We expect to incur additional operating losses as we expand our
marketing, sales and development efforts. If we are unable to generate
sufficient revenue from our operations to pay expenses or we are unable to
obtain additional financing on commercially reasonable terms, our business,
financial condition and results of operations may be materially and adversely
affected.

WE ARE AN EARLY STAGE COMPANY THAT HAS A LIMITED OPERATING HISTORY.

         We are an early stage company focused on commercializing, marketing and
selling OTC pharmaceutical products. We began our operations as a division of
BioChemics, Inc. in January 2001. We have only operated as an entity independent
of BioChemics since January 2003. Our operating history is therefore limited.
Our Termin8, A-R Extreme and Osteon products, which we license from BioChemics,
are in the early stages of commercialization. Our product candidates are only in
the early stages of development. With the exception of the introduction of
deFEET to the marketplace by BioChemics while we were still a division of
BioChemics, we have not yet recognized significant revenue from product sales.
You should evaluate the likelihood of financial and operational success in light
of the uncertainties and complexities present in an early-stage company, many of
which are beyond our control, including:


                                       31
<PAGE>

         o    our potential inability to market, distribute, and sell our
              products; and
         o    the significant investment of capital and other resources
              necessary to achieve our commercialization, marketing and sales
              objectives.

         Our operations have been limited to organizing and staffing our
company, acquiring our license, developing and testing our revenue distribution
models and test marketing our products. These operations provide a limited basis
for you to assess our ability to commercialize our products and product
candidates and the advisability of investing in us.


OUR INDEBTEDNESS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION

         In August 2005, we completed a private placement of $2,500,000 in
aggregate principal amount of Senior Secured Convertible Notes due May 1, 2007
(the "Notes"). Principal is to be paid in a single payment on May 1, 2007
(interest will be paid from proceeds of the private placement which were placed
in escrow at closing). In addition, the purchasers of the Notes received rights
to purchase up to $1,875,000 in aggregate principal amount of additional Notes
at any time through the maturity date of the Notes. We also anticipate that we
will incur substantial indebtedness (subordinated to the Notes) in connection
with a settlement of various class actions and derivative actions involving the
Company. Our indebtedness could have important consequences for investors. For
example, it could:

     o    require the dedication of a substantial portion of our cash flows from
          operations to the payment of principal of and interest on our
          indebtedness, thereby reducing the availability of capital to fund our
          operations, working capital, capital expenditures, acquisitions and
          other general corporate purposes;

     o    increase our vulnerability to general adverse economic and industry
          conditions;

     o    place us at a competitive disadvantage relative to our competitors;

     o    limit our ability to obtain additional financing;

     o    limit our flexibility in planning for, or reacting to, changes in our
          business and the industry; and

     o    influence our customers and potential customers in doing business with
          the Company.

         Although we have no present plans to do so, except as described above,
we may incur substantial additional debt in the future. While the terms of
private placement of the Notes impose certain limits in our ability to incur
additional debt, we are permitted to incur additional debt subject to compliance
with the terms and conditions set forth in the private placement. If a
significant amount of new debt is added to our current levels, the related risks
described above could intensify.

WE MAY HAVE INSUFFICIENT CASH FLOW TO MEET OUR DEBT OBLIGATIONS WHICH COULD
NEGATIVELY AFFECT OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS.

         We will be required to generate sufficient cash to pay the principal
amount due in the Notes and to conduct our business operations. The notes
require a $2,500,000 (or up to $4,375,000 if additional investment rights are
exercised in full) payment of principal due in May 2007. Our cash, cash
equivalents, marketable securities and long-term investment totaled
approximately $1,900,000 as of August 19, 2005. Assuming our cash, cash
equivalents, marketable securities and long-term investments remain constant
from our August 19, 2005 levels, we will need to generate a minimum of
approximately $600,000 of net cash flow through any combination of normal
operations of our Company, raising of debt and equity capital or assets sales by
May 2007 to meet our principal payment under the Notes. In addition, as noted
above, we also anticipate that we will incur substantial indebtedness
(subordinated to the Notes) in connection with a settlement of various class
actions and derivative actions involving the Company. We have incurred net
losses in the past, and we may not be able to cover our anticipated debt
obligations. This may materially hinder our ability to make principal payments
on the Notes. Concern about our ability to meet our debt obligations could
negatively affect our ability to attract and retain customers. Our ability to
meet our future debt obligations will be dependent upon our future performance,
which will be subject to financial, business and other factors affecting our
operations, many of which are beyond our control.

THERE ARE SIGNIFICANT UNCERTAINTIES ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.

         Our recurring operating losses, liquidity issues and the uncertainties
raised as a result of our legal proceedings raise substantial doubt about our
ability to continue as a going concern. Our ability to continue as a going
concern and the appropriateness of using the going concern basis of accounting
depends upon, among other things on, the ability to generate sufficient cash
from operations and financing sources to meet obligations. On August 16, 2005,
we issued the Notes in the aggregate principal amount of $2,500,000. The Company
netted approximately $1,700,000 in cash proceeds from this financing, after
taking into consideration placement fees, legal expenses, other offering costs,
and funding of an escrow. Placement fees, legal expenses and other offering
costs paid were approximately $360,000 and approximately $440,000 was placed
into escrow to fund all of the Company's interest payments on the Notes
(assuming the Notes continue to accrue interest at the initial rate of 10% per
annum.)

         Under the Purchase Agreement, the Note holders may exercise an AIR to
purchase up to a total of an additional $1,875,000 in principal amount of Senior
Secured Convertible Notes due May 1, 2007 under substantially the same terms and
conditions as the Notes. Net of placement fees, legal expenses, other offering
costs and escrow deposit, we believe that we would to net approximately
$1,300,000 if the AIR is exercised in full. If exercised in full, we anticipate,
based on our current plans and assumptions relating to our operations, that the
additional working capital provided by the exercise will be sufficient to
satisfy our cash requirements through December 31, 2006.

         There can be no assurance that any of the AIR will be exercised. There
can be no assurance that we will be able to obtain any additional financing or
that, even if we do obtain additional financing, it will be on terms favorable
to us. Further, there can be no assurance that we will be able to generate
profitability and cash flows from operations with our existing working capital.

         We intend to continue as a going concern. However, unless we can
generate profitability and cash flows from operations or obtain additional
financing, we may not be able to continue as a going concern. There can be no
assurance that we will be able to generate profitability and cash flows from
operations with our existing working capital. Further, there can be no assurance
that we will be able to obtain such additional financing or that, even if we do
obtain additional financing, it will be on terms favorable to us.

OUR FAILURE TO COMPLY WITH EXTENSIVE GOVERNMENT REGULATION MAY SIGNIFICANTLY
AFFECT OUR OPERATING RESULTS.

         The worldwide marketing of our products and our product candidates are
subject to extensive requirements by foreign, national, state and local
governments. These regulations potentially impact many aspects of our
operations, including testing, research and development, manufacturing,
pre-market labeling, storage, quality control, adverse event reporting, record
keeping, advertising and promotion. Failure to comply with applicable regulatory
requirements could, among other things, result in:


                                       32
<PAGE>

         o    fines;
         o    changes to advertising;
         o    failure to obtain necessary marketing approvals;
         o    revocation or suspension of regulatory approvals of products;
         o    product seizures or recall;
         o    delay, interruption or suspension of product manufacturing,
              distribution, marketing and sale; or
         o    civil or criminal sanctions.

         The discovery of previously unknown problems with our initial and
future products may result in the interruption of marketing, including
withdrawal from the market. In addition, the FDA may revisit and change any
prior determination relating to the safety or efficacy of our products. If
circumstances change, we may be required to change our labeling or cease the
marketing and manufacturing of the product or products at issue. Even prior to
any formal regulatory action, we could voluntarily decide to cease the
distribution and sale or recall any of our future products if concerns about
their safety or efficacy develop.

         In their regulation of all our promotional materials, the FDA and the
Federal Trade Commission, or FTC, may take issue with some advertising or
promotional practices as being false, misleading or deceptive. The FDA or the
FTC may impose a wide array of sanctions on companies for such advertising
practices, which could result in any of the following:

         o    incurring substantial expenses, including fines, penalties, legal
              fees and costs to comply with FDA or FTC requirements;
         o    changing the methods of marketing and selling products;
         o    taking mandated corrective action, which may include placing
              advertisements or sending letters to physicians and marketing
              partners rescinding previous advertisements or promotions; or
         o    disrupting the distribution of products and causing the loss of
              sales until compliance with the FDA's or FTC's position is
              obtained.

         If we become subject to any of the above requirements, it could be
damaging to our reputation, and our business condition could be adversely
affected.

WE CANNOT MARKET OUR PRODUCTS UNLESS THEY HAVE BEEN LISTED WITH THE FDA AND ARE
COVERED BY THE FDA'S OTC REVIEW PROGRAM AND ARE MARKETED IN CONFORMITY WITH THE
APPLICABLE OTC DRUG MONOGRAPH OR HAVE ATTAINED NDA OR ANDA APPROVAL.

         If our topical A-R Extreme, Osteon and Termin8 products are formulated
and promoted in accordance with the OTC Drug Monographs pursuant to the FDA's
OTC Review Program, FDA pre-market approval is not required prior to marketing.
If these or any of our product candidates deviate from an OTC Drug Monograph
requirement in active ingredients, intended use, method of administration,
dosage form, or labeling, among other things, then we or our marketing partners
must obtain New Drug Application, or NDA, pre-market approval from the FDA
before beginning commercial marketing. The FDA has taken the position that
insofar as our product candidates may use the VALE transdermal technology, they
fall outside of those eligible for generally recognized as safe and effective,
or GRASE, status under the OTC Review Program and thus we must obtain, or our
marketing partners must obtain, NDA approval of these product candidates before
they can be commercially marketed.

         Under the FDA's procedures, it is generally less burdensome to obtain
NDA approval of a drug product which contains the same active ingredient(s) as
those: (a) considered GRASE in a final OTC Drug Monograph, or (b) contained in a
drug product eligible for abbreviated new drug application, or ANDA, approval,
but which differs in certain conditions of use (e.g., dosage form) from that


                                       33
<PAGE>

covered by a final OTC Drug Monograph or eligible for ANDA approval. However,
once a product becomes subject to the NDA requirements there can be no assurance
that a company can generate the additional data and information necessary to
support NDA approval of the proposed variant product or that approval can be
obtained without substantial expenditures and delays.

CLINICAL TRIALS MAY FAIL TO DEMONSTRATE THE SAFETY AND EFFICACY OF OUR PRODUCT
CANDIDATES AND COULD PREVENT OR SIGNIFICANTLY DELAY REGULATORY APPROVAL.

         Prior to receiving NDA approval to commercialize any of our product
candidates, we must demonstrate with substantial evidence from well-controlled
clinical trials, and to the satisfaction of the FDA and other regulatory
authorities in the United States and abroad, that the product candidate is both
safe and effective. If these trials or future clinical trials are unsuccessful,
our business and reputation would be harmed and our stock price would be
adversely affected.

         All of our product candidates are prone to the risks of failure. The
results of early-stage clinical trials of our product candidates will not
necessarily predict the results of later-stage clinical trials. Product
candidates in later-stage clinical trials may fail to show desired safety and
efficacy traits despite having progressed through initial clinical testing. Even
if we believe the data collected from clinical trials of our product candidates
are promising, these data may not be sufficient to support approval by the FDA
or any other U.S. or foreign regulatory approval. Preclinical and clinical data
can be interpreted in different ways. Accordingly, FDA officials could interpret
such data in different ways than we do which could delay, limit or prevent
regulatory approval. The FDA, other regulatory authorities, or we may suspend or
terminate clinical trials at any time. Any failure or significant delay in
completing clinical trials for our product candidates, or in receiving
regulatory approval for the sale of any products resulting from our product
candidates, may severely harm our business and reputation.

         Because of these risks, the research and development efforts of our
collaborative partners may not result in any commercially viable products. If a
significant portion of these development efforts is not successfully completed,
required regulatory approvals are not obtained by our partners, or any approved
products are not commercially successful, we are not likely to generate
significant revenues or become profitable.

THERE IS NO ORGANIZED MARKET FOR OUR STOCK; OUR STOCK PRICE HAS BEEN VOLATILE
AND COULD EXPERIENCE SUBSTANTIAL DECLINES.

         Our securities are currently quoted in the Pink Sheets under the
trading symbol "VAPH.PK." The market price of our common stock has experienced,
and may continue to experience, significant volatility. Since the beginning of
2004, the per share closing price of our common stock has ranged from $0.38 to
$14.11. As a result of the temporary suspension of trading in our securities on
April 1, 2004, our press release dated April 7, 2004 advising investors not to
trade in our securities until further disclosure, and our voluntary delisting of
our securities from The Nasdaq Stock Market on April 8, 2004, there is not
currently an organized market in our securities, and there can be no assurance
that such a market will develop. On August 19, 2005 the average bid for a share
of our Class A Common Stock as quoted by the OTC Pink Sheets was $0.67 per
share. The value of our Class A Common Stock may decline regardless of our
operating performance or prospects. Factors affecting our market price include:

         o    the success or failure of our product development efforts,
              especially those related to obtaining regulatory approvals;
         o    technological innovations developed by us or our competitors;
         o    variations in our operating results and the extent to which we
              achieve our key business targets;
         o    differences between our reported results and those expected by
              investors and securities analysts; and
         o    market reaction to any acquisitions or joint ventures announced by
              us or our competitors.


                                       34
<PAGE>

          In addition, in recent years, the stock market in general, and the
market for pharmaceutical companies in particular, have experienced significant
price and volume fluctuations. This volatility has affected the market prices of
securities issued by many companies, often for reasons unrelated to their
operating performance, and it may adversely affect the price of our common
stock. In the past, securities class action litigation has often been instituted
following periods of volatility in the market price of a company's securities. A
number of securities class action lawsuits have been filed against us. See
"Legal Proceedings" for more information.

WE ARE DEFENDANTS IN A NUMBER OF CLASS ACTION LAWSUITS THAT MAY ADVERSELY AFFECT
OUR BUSINESS.

         As discussed in greater detail under "Legal Proceedings," we and
certain of our officers were the defendants in a number of class action lawsuits
filed on behalf of purchasers of Vaso Active's Class A common stock during the
period December 11, 2003 to March 31, 2004, which allege that the defendants
violated the federal securities laws by allegedly failing to make accurate and
complete disclosures concerning Vaso Active, its business operations and future
prospects, the clinical trial and endorsement of our Termin8 anti-fungal product
(previously known as "deFEET") and the institutional demand for Vaso Active
securities. The complaints sought equitable and monetary relief, an unspecified
amount of damages, with interest, attorney's fees and costs.

         On June 1, 2005, Vaso Active entered into a MOU to settle the
consolidated securities class action lawsuit. Under the terms of the MOU, the
lead plaintiffs and the settling defendants agree that the final stipulation
will contain a disclaimer of liability consistent with the MOU. Subject to the
terms and conditions set forth in the MOU, settling defendants will pay into
escrow for the benefit of the class $1,100,000 in cash and $750,000 face amount
of 2-year 5% subordinated callable notes convertible at $1.75 per share within
10 business days of preliminary approval of the settlement by the court. (The
issuance of these convertible notes would require the approval by the purchasers
of the Notes in our August 2005 private placement.) In consideration of this
payment, the parties will fully and finally release and discharge all claims
against each other. The settlement still needs court approval. Vaso Active's
insurance carrier has agreed, subject to execution of a definitive agreement, to
pay the $1,100,000 cash payment in exchange for a release of its liability under
its insurance policy with us.

         BioChemics, our directors and certain of our officers are also parties
to three shareholder derivative actions alleging a breach of the defendants'
fiduciary duties to the Company. The complaints seek equitable and monetary
relief, an unspecified amount of damages, and attorneys and other fees, costs
and expenses, ostensibly on behalf of the Company. The June 1, 2005 MOU does not
cover these derivative actions.

         While a settlement has been agreed to by the lead plaintiffs and the
settling defendants in the consolidated securities class action lawsuit, the
court has not yet approved the settlement. In addition, although we have entered
into agreement in principle to settle the three separate shareholder derivative
actions, those agreement will also require court's approval. These securities
lawsuits, and others which may be filed, could result in:

         o    potential liabilities;
         o    a material adverse financial statement impact
         o    substantial costs for defending these suits; and
         o    a diversion of management's attention and resources.

         If there are adverse developments in the lawsuits against us, or
resolution of our regulatory matters with the SEC and the FDA takes longer than
we expect, our capital resources could be adversely affected. Should these
actions linger for a long period of time, whether ultimately resolved in our
favor or not, or further lawsuits be filed against us, our financial results
will be adversely affected by the need to pay the fees and costs incurred in
defending these suits. Additionally, we may not be able to conclude or settle
such litigation on terms that coincide with our ability to pay any judgment or
settlement. The size of payments for damages and other costs related to these
actions, individually or in the aggregate, could seriously impair our cash
reserves and financial condition. In addition, the continued defense of this
lawsuit also could result in continued diversion of our management's time and
attention away from business operations, which could cause our financial results
to decline. A failure to resolve definitively current or future material
litigation in which we are involved or in which we may become involved in the
future, regardless of the merits of the respective cases, could also cast doubt
as to our prospects in the eyes of our customers, potential customers and
investors, which could cause our revenues and stock price to further decline.


                                       35
<PAGE>

PROVISIONS IN OUR BYLAWS PROVIDE FOR INDEMNIFICATION OF OFFICERS AND DIRECTORS,
WHICH COULD REQUIRE US TO DIRECT FUNDS AWAY FROM OUR BUSINESS OPERATIONS.

         Our bylaws provide for the indemnification of our officers and
directors. We may be required to advance costs incurred by an officer or
director and to pay judgments, fines and expenses incurred by an officer or
director, including reasonable attorneys' fees, as a result of actions or
proceedings in which our officers and directors are involved by reason of being
or having been an officer or director of the Company. Funds paid in satisfaction
of judgments, fines and expenses may be funds we need for the operation of our
business, commercialization of our current products and the development of our
product candidates, thereby affecting our ability to attain profitability.

HISTORICALLY, WE HAVE DEPENDED ON A SMALL NUMBER OF CUSTOMERS FOR THE MAJORITY
OF OUR NET REVENUE.

         As of the date of this report, we are not generating any significant
revenues. We may not be able to generate significant revenues in the future. At
various times, we and BioChemics have marketed Osteon, Athlete's Relief and
deFEET on a "test basis" to experiment with consumer packaging and product
performance receptivity, packaging size, label design along with other criteria.
We consider this information important to deciding on an eventual roll out
strategy for the products. We call these programs "test marketing" because
neither Vaso Active nor its parent, BioChemics, was sufficiently capitalized to
engage in advertising campaigns. In some cases, we terminated test marketing
programs and in other cases, the retailer terminated test marketing programs.

WE DEPEND ON BIOCHEMICS AND THIRD PARTIES TO DEVELOP AND MANUFACTURE OUR
PRODUCTS AND PRODUCT CANDIDATES AND OUR COMMERCIALIZATION OF OUR PRODUCTS COULD
BE STOPPED, DELAYED OR MADE LESS PROFITABLE IF BIOCHEMICS OR THOSE THIRD PARTIES
FAIL TO PROVIDE US WITH SUFFICIENT QUANTITIES AT ACCEPTABLE PRICES.

         We do not possess product development capability. As a result, we
depend on collaborations with third parties, such as BioChemics, for development
of our product candidates. During the six months ended June 30, 2005 and 2004,
we incurred research and development costs of approximately $177,500 and
$142,500, respectively, related to the formulation of an analgesic utilizing the
active ingredient ibuprofen as well as finalization of RepiDerm product
development. These services were incurred pursuant to a February 2003
manufacturing and development agreement with BioChemics. In addition, we have no
manufacturing capability. As a result, we will depend on BioChemics, which in
turn will rely upon third parties to manufacture our products. Although our
strategy is based on leveraging BioChemics' ability to develop and manufacture
our products for commercialization in the OTC marketplace, we will be dependent
on BioChemics' collaborations with drug development and manufacturing
collaborators. If we and BioChemics are not able to maintain existing
collaborative arrangements or establish new arrangements on commercially
acceptable terms, we would be required to undertake product manufacturing and
development activities at our own expense. This would increase our capital
requirements or require us to limit the scope of our development activities.
Moreover, we have limited or no experience in conducting full scale
bioequivalence or other clinical studies, preparing and submitting regulatory
applications, and manufacturing and marketing drug products. There can be no
assurance that we will be successful in performing these activities and any
failure to perform such activities could have a material adverse effect on our
business, financial condition and results of our operations.

         If any of our developmental collaborators, especially BioChemics,
breach or terminate their agreements with us or otherwise fail to conduct their
collaborative activities in a timely manner, the preclinical and/or clinical
development and/or commercialization of our product candidates will be delayed,
and we would be required to devote additional resources to product development


                                       36
<PAGE>

and commercialization or terminate certain development programs. Also, these
relationships generally may be terminated at the discretion of our
collaborators, in some cases with only limited notice to us. The termination of
collaborative arrangements could have a material adverse effect on our business,
financial condition and results of operations. There also can be no assurance
that disputes will not arise with respect to the ownership of rights to any
technology developed with third parties. These and other possible disagreements
with collaborators could lead to delays in the development or commercialization
of our product candidates or could result in litigation or arbitration, which
could be time consuming and expensive and could have a material adverse effect
on our business, financial condition and results of operations.

         Additionally, the failure of any of our contract manufacturers to
manufacture our products in conformity with current good manufacturing
practices, or cGMPs, could result in interruption or halt of the availability of
our products, pending demonstration to the FDA or a court of compliance with
cGMPs. Any such interruption in the availability of our products could have a
material adverse impact upon our financial position and results of operations.

IF WE OR BIOCHEMICS FAIL TO ADEQUATELY PROTECT OR ENFORCE OUR
INTELLECTUAL PROPERTY RIGHTS, WE MAY BE UNABLE TO OPERATE EFFECTIVELY.

         BioChemics owns proprietary technology developed in connection with its
four U.S. patents. In addition, foreign patents have been issued to BioChemics
in 17 foreign countries and are pending in seven others. The PENtoCORE
technology is not covered by patents but is considered proprietary. BioChemics
also owns sixteen registered trademarks, including Osteon, RepiDerm, Termin8,
and PENtoCORE. Our license agreement, as amended, with BioChemics permits us to
commercialize market and sell our products and product candidates using these
patents, proprietary formulations and the Osteon and PENtoCORE trademarks. Our
success and ability to compete are substantially dependent on these patents,
proprietary formulations and trademarks. Although both we and BioChemics believe
that the patents and associated trademarks and licenses are valid, there can be
no assurance that they will not be challenged and subsequently invalidated
and/or canceled. The invalidation or cancellation of any one or all of the
patents or trademarks would significantly damage our commercial prospects.
Further, BioChemics may find it necessary to legally challenge parties
infringing its patents or trademarks or licensed trademarks to enforce its
rights thereto. There can be no assurance that any of the patents would
ultimately be held valid or that efforts to defend any of the patents, trade
secrets, know-how or other intellectual property rights would be successful.

IF WE INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, OUR BUSINESS AND
PROFITABILITY MAY BE ADVERSELY AFFECTED.

         Our commercial success will also depend, in part, on us and BioChemics
not infringing on the patents or proprietary rights of others. There can be no
assurance that the technologies and products used or developed by BioChemics and
marketed and sold by Vaso Active will not infringe such rights. If such
infringement occurs and neither we nor BioChemics is able to obtain a license
from the relevant third party, we will not be able to continue the development,
manufacture, use, or sale of any such infringing technology or product. There
can be no assurance that necessary licenses to third-party technology will be
available at all, or on commercially reasonable terms. In some cases, litigation
or other proceedings may be necessary to defend against or assert claims
of infringement or to determine the scope and validity of the proprietary rights
of third parties. Any potential litigation could result in substantial costs to,
and diversion of, our resources and could have a material and adverse impact on
us. An adverse outcome in any such litigation or proceeding could subject us
and/or BioChemics to significant liabilities, require us to cease using the
subject technology or require us and/or BioChemics to license the subject
technology from the third party, all of which could have a material adverse
effect on our business.

WE OPERATE IN A COMPETITIVE ENVIRONMENT AND THERE CAN BE NO ASSURANCES THAT
COMPETING TECHNOLOGIES WOULD NOT HARM OUR BUSINESS DEVELOPMENT.


                                       37
<PAGE>

         We are engaged in a rapidly evolving field. Competition from numerous
pharmaceutical companies including Pfizer, Bristol-Myers Squibb,
Schering-Plough, and biotechnology companies including, Alza, Cygnus and Elan,
as well as research and academic institutions, is intense and expected to
increase. Such companies have substantially larger research & development,
marketing and promotion resources as well as histories of success in the
marketplace. The market for transdermal and topical drug delivery systems is
large and growing rapidly and is likely to attract new entrants. Numerous
biotechnology and biopharmaceutical companies have focused on developing new
drug delivery systems and most, if not all of these companies; have greater
financial and other resources and development capabilities than we do. They also
have greater collective experience in undertaking pre-clinical and the clinical
testing of products; obtaining regulatory approvals; and manufacturing and
marketing OTC and prescription pharmaceutical products. Accordingly, certain of
our competitors may succeed in obtaining approval for products more rapidly than
us. In addition to competing with universities and other research institutions
in the development of products, technologies and processes, we may compete with
other companies in acquiring rights to products or technologies from
universities. There can be no assurance that our products, existing or to be
developed, will be more effective or achieve greater market acceptance than
competitive products, or that our competitors will not succeed in developing
products and technologies that are more effective than those being developed by
us or that would render our products and technologies less competitive or
obsolete.

TECHNOLOGICAL ADVANCEMENT BY OUR COMPETITORS COULD RESULT IN THE OBSOLESCENCE OF
SOME OR ALL OF OUR PRODUCTS AND MAY HARM BUSINESS DEVELOPMENT.

         The areas in which we are commercializing, distributing, and/or selling
products involve rapidly developing technology. There can be no assurance that
we will be able to establish ourselves in such fields, or, if established, that
we will be able to maintain our position. There can be no assurance that the
development by others of new or improved products will not make our products and
product candidates, if any, superfluous or our products and product candidates
obsolete.

SHOULD PRODUCT LIABILITY CLAIMS BE BROUGHT SUCCESSFULLY AGAINST US EXCEEDING THE
PRODUCT LIABILITY COVERAGE WE CURRENTLY HAVE IN PLACE, THERE CAN BE NO
ASSURANCES THAT SUCH EVENTS WOULD NOT MATERIALLY IMPACT OUR PERFORMANCE AND
VIABILITY.

         The sale of our products may expose us to potential liability resulting
from the sale and use of such products. Liability might result from claims made
directly by consumers or by pharmaceutical companies or by others selling such
items. We currently maintain $5 million of product liability insurance. There
can be no assurance that we will be able to renew our current insurance, renew
it at a rate comparable to what we now pay, or that the coverage will be
adequate to protect us against liability. If we were held liable for a claim or
claims exceeding the limits of our current or future insurance coverage, or if
coverage was discontinued for any reason, it could have a materially adverse
effect on our business and our financial condition.

OUR LIMITED SALES AND MARKETING EXPERIENCE MAY ADVERSELY IMPACT OUR ABILITY TO
SUCCESSFULLY COMMERCIALIZE AND SELL OUR PRODUCTS.

         We have limited sales and marketing experience, particularly with
respect to marketing and selling products in commercial quantities. If we are
unable to expand our sales and marketing capabilities we may not be able to
effectively commercialize our products and product candidates.

IF WE ARE UNABLE TO EFFECTIVELY PROMOTE OUR BRAND AND ESTABLISH A LEADING
POSITION IN THE MARKETPLACE, OUR BUSINESS MAY FAIL.


                                       38
<PAGE>

         Our brand names are new and unproven. If we are unable to effectively
promote our brands and establish a prominent position in the marketplace, our
operations will suffer. We believe that the importance of brand recognition will
increase over time. In order to gain brand recognition, we may increase our
marketing and advertising budgets to create and maintain brand loyalty. We do
not know whether these efforts will lead to greater recognition.

WE DEPEND ON BIOCHEMICS TO PROVIDE US WITH CERTAIN SUPPORT AND SERVICES. THE
LOSS OF SUCH SUPPORT AND SERVICES WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.

         We were originally formed as a division of BioChemics and the viability
and financial strength of BioChemics is critical to our success. Throughout our
development, we have relied on services and financing provided to us by
BioChemics. When we became an independent operating entity, we entered into a
license agreement and, prior to the consummation of our initial public offering,
we entered into a manufacturing and development agreement, with BioChemics. We
presently maintain our executive offices on premises that we share with
BioChemics. We do not have a lease agreement with BioChemics. We believe that we
can obtain suitable alternative space without any material disruption of our
business and that such space will be available to us in the future on
commercially reasonable terms. Since, pursuant to the administrative support
agreement by and between the Company and BioChemics, BioChemics provides us with
administrative and managerial support, our results of operations include
allocations of certain BioChemics expenses, such as centralized accounting, data
processing, utilities, supplies, telephone and other BioChemics corporate
services and infrastructure costs. These expenses have been charged back to us
as a management fee. We recorded approximately $23,000 and $16,320 in these
related-party fees during the six-month periods ended June 30, 2005 and 2004,
respectively. These costs are included in selling, general and administrative
expenses. The expense allocations have been determined on the basis that we and
BioChemics consider to be reasonable reflections of the utilization of services
provided for the benefit received by us. The loss of the services provided by
BioChemics or the loss of the license of the VALE patents or the PENtoCORE
technology under the license agreement would have a material adverse effect on
our business, financial condition and results of operations.

         BioChemics has never been profitable and most likely will not achieve
profitability in the near future, if ever. Although BioChemics was founded in
1989, and incorporated in 1991, it is still a development stage company. It has
generated significant losses through March 31, 2005, has limited revenue, and is
likely to sustain operating losses in the foreseeable future. BioChemics'
operations are subject to all of the risks inherent in the establishment of a
business enterprise. Through December 31, 2004, BioChemics had an unaudited,
consolidated accumulated deficit of approximately $17.7 million, which includes
the operations of Vaso Active. In addition, as of December 31, 2004, BioChemics
was in default under debt obligations in the approximate amount of $10.2
million, which includes accrued interest, that it has issued to private
investors, of which approximately $6.9 million, inclusive of accrued interest,
is held by Mr. Masiz, members of his family and the Chairman of the Board of
Directors of the Company. Although BioChemics is attempting to restructure or
refinance these obligations, there can be no assurance that it will be able to
do so on acceptable terms. If BioChemics is not successful in maintaining its
financial viability, our business, financial condition and results of operations
may be materially and adversely affected. BioChemics anticipates that it will
continue to incur net losses and be unprofitable for the foreseeable future.
There can be no assurance that BioChemics will ever operate at a profit even if
its or our products are commercialized.

         In addition, it is expected that BioChemics will encounter significant
marketing difficulties and will also face significant regulatory hurdles. The
likelihood of success of BioChemics must be considered in light of the problems,
expenses, difficulties, complications and delays frequently encountered in
connection with any non-profitable business enterprise, including but not
limited to the identification and development of new products, difficulties with
corporate partners, vendors, and a very competitive environment. Additionally,
BioChemics itself requires additional capital and/or revenues to continue its
operations and there is no guarantee that it will be able to fund its own
operations or those of Vaso Active.


                                       39
<PAGE>

IF WE FAIL TO ATTRACT, TRAIN AND RETAIN ADDITIONAL HIGHLY QUALIFIED SENIOR
EXECUTIVES AND TECHNICAL AND MANAGERIAL PERSONNEL IN THE NEAR FUTURE, OUR
BUSINESS WILL SUFFER.

         Effective as of August 17, 2004 and in accordance with the terms of the
SEC settlement, Mr. John J. Masiz resigned as President and Chief Executive
Officer of Vaso Active. Vaso Active appointed its current Chief Financial
Officer, Joseph Frattaroli, to serve as President and Acting Chief Executive
Officer while it conducts a search for a new Chief Executive Officer. Due to a
high demand for highly trained executives in our industry, there is no assurance
that we will be able to attract or retain a suitable Chief Executive Officer now
or in the future, and this could have a material adverse effect on our business,
financial condition and results of operations.

         Effective June 18, 2004, Kevin J. Seifert resigned as the Chief
Operating Officer and director of Vaso Active. Vaso Active is not currently
conducting a search for a new Chief Operating Officer. Our former Chief
Executive Officer has assumed Mr. Seifert's former responsibilities.

         Furthermore, several of our other key employees are devoting less than
all their time to the Company. For example, although our Chief Scientific
Officer, Dr. Stephen Carter devotes substantially all his time to our
activities, he is only required to devote approximately 30% under his agreement
with us. For us to pursue our product development, marketing and
commercialization plans, we will need to hire personnel with experience in
clinical testing, government regulation, manufacturing, marketing and finance.

         We may not be able to attract and retain personnel on acceptable terms
given the intense competition for such personnel among high technology
enterprises, including biotechnology, pharmaceutical and healthcare companies,
universities and non-profit research institutions. If we lose any of these
persons, or are unable to attract and retain qualified personnel, our business,
financial condition and results of operations may be materially and adversely
affected.

MR. MASIZ IS MAJORITY STOCKHOLDER OF BIOCHEMICS, WHICH IS OUR PRINCIPAL
STOCKHOLDER. HE HAS SUBSTANTIAL ULTIMATE CONTROL OVER THE COMPANY, POSSIBLY TO
THE DETRIMENT OF OTHER HOLDERS OF OUR CLASS A COMMON STOCK.

         Our principal stockholder, BioChemics, owns 4,500,000 shares of our
Class B common stock, which at June 30, 2005 represented approximately 70% of
the combined voting power of our common stock. Mr. Masiz, as President, Chief
Executive Officer and Chairman of BioChemics and, as the principal stockholder
in BioChemics, will be able to control the outcome of many types of stockholder
votes, including votes concerning the election of our directors, the adoption or
amendment to provisions in our certificate of incorporation or by-laws, the
approval of mergers and/or acquisitions, decisions affecting our capital
structure and other significant corporate transactions. This concentration of
ownership may delay, deter or prevent transactions that would result in a change
of control, which in turn could reduce the value of our common stock.

IN THE EVENT OF A CONFLICT OF INTEREST BETWEEN BIOCHEMICS AND VASO ACTIVE, OUR
STOCKHOLDERS COULD BE NEGATIVELY AFFECTED.

         There are likely to be situations where our best interests and those of
BioChemics will be in conflict. For example, we are a party to a license
agreement, a manufacturing and development agreement and an administrative
services agreement with BioChemics, each of which is critical to our business
operations. To the extent that decisions are made by Mr. Masiz that could
enhance the value of BioChemics versus the value to us, our stockholders
interests could be negatively affected.


                                       40
<PAGE>

ITEM 3.  CONTROLS AND PROCEDURES

         As of the end of the period covered by this quarterly report, our
Acting Chief Executive Officer and Chief Financial Officer (the "Certifying
Officer") conducted evaluations of our disclosure controls and procedures. As
defined under Sections 13a-15(e) and 15d-15(e) of the 1934 Act, the term
"disclosure controls and procedures" means controls and other procedures of an
issuer that are designed to ensure that information required to be disclosed by
the issuer in the reports that it files or submits under the 1934 Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the issuer's
management, including the Certifying Officer, to allow timely decisions
regarding required disclosure. Based on this evaluation, the Certifying Officer
has concluded that our disclosure controls and procedures were effective to
ensure that material information is recorded, processed, summarized and reported
by our management on a timely basis in order to comply with our disclosure
obligations under the 1934 Act, and the rules and regulations promulgated there
under.

         Further, there were no changes in our internal control over financial
reporting during the quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.


                                       41
<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

SEC LITIGATION

         On August 17, 2004, the SEC filed a civil complaint against us alleging
violations of securities laws stemming from allegedly misleading disclosures in
our initial public offering registration statement, our 2003 annual report and a
statement on our website concerning the FDA's approval or qualification of our
products. We simultaneously agreed with the SEC to settlement terms without us
admitting or denying the allegations of the civil complaint, pursuant to which
the company is permanently enjoined from violating the anti-fraud provisions of
the 1933 Act and the antifraud and reporting provisions of the 1934 Act. The SEC
action filed with the United States District Court for the District of Columbia
(the "Court") is styled SECURITIES AND EXCHANGE COMMISSION V. VASO ACTIVE
PHARMACEUTICALS, INC. Civil Action No. 04 CV 01395 (RJL) (D.D.C.).

         In the same action, the SEC sued John J. Masiz, our former President
and Chief Executive Officer, Alleging the same violations. Mr. Masiz agreed to
settlement terms without admitting or denying the allegations of the civil
complaint, that likewise enjoin him from violating the antifraud and reporting
provisions, and prevent him from serving as an officer or director of any public
company, including Vaso Active, for a period of five years. Effective as of
August 17, 2004, Mr. Masiz resigned as an executive officer and a director of
Vaso Active. He is, however, permitted to remain an active employee and/or
consultant of Vaso Active. In light of the foregoing, Vaso Active and Mr. Masiz
agreed to terminate his employment agreement and enter into a new agreement.
Pursuant to that agreement, Mr. Masiz is providing strategic consulting services
regarding sales, marketing and business development to Vaso Active for an
initial term through June 30, 2008 and reports to our Chief Executive Officer.
Our Chief Financial Officer Joseph Frattaroli serves as our President and Acting
Chief Executive Officer while we conduct a search for a new Chief Executive
Officer.

         On September 13, 2004, the Court for the District of Columbia entered
final judgments against Vaso Active and Mr. Masiz, pursuant to the above
referenced settlement terms.

PRIVATE LITIGATION

         In April, May, and June 2004, the Company and certain of its officers
(the "Defendants") were sued in several securities class action lawsuits filed
in the United States District Court for the District of Massachusetts. The
complaints, which sought equitable and monetary relief, an unspecified amount of
damages, with interest, attorneys' fees and costs, allegedly were filed on
behalf of purchasers of Vaso Active Class A common stock during the period
December 11, 2003 to March 31, 2004. The complaints alleged that during the
period in question the Defendants violated the federal securities laws by
allegedly failing to make accurate and complete disclosures concerning the
Company, its financial condition, its business operations and future prospects,
the clinical trial and endorsement of the Company's Termin8 anti-fungal product
(previously known as "deFEET") and the institutional demand for Vaso Active's
securities. These complaints were captioned as follows: DENNIS E. SMITH V. VASO
ACTIVE PHARMACEUTICALS, INC., ET AL. , Civ. No. 04-10708 (RCL) (D.
Mass.);RICHARD SHAPIRO V. VASO ACTIVE PHARMACEUTICALS, INC., ET AL. , Civ. No.
04-10720 (RCL) (D. Mass.); CHRISTOPHER PEPIN V. VASO ACTIVE PHARMACEUTICALS,
INC., ET AL. , Civ. No. 04-10763 (RCL) (D. Mass.); MODHI GUDE, ET AL. V. VASO
ACTIVE PHARMACEUTICALS, INC., ET AL. , Civ. No. 04-10789 (RCL) (D. Mass.); KIM


                                       42
<PAGE>

BENEDETTO, ET AL. V. VASO ACTIVE PHARMACEUTICALS, INC., ET AL. , Civ. No.
04-10808 (RCL) (D. Mass.); DEAN DUMMER V. VASO ACTIVE PHARMACEUTICALS, INC., ET
AL. , Civ. No. 04-10819 (RCL) (D. Mass.); EDWARD TOVREA V. VASO ACTIVE
PHARMACEUTICALS, INC., ET AL. , Civ . No. 04-10851 (RCL); KOUROSH ALIPOR V. VASO
ACTIVE PHARMACEUTICALS, INC., ET AL. , Civ. No. 04-10877 (RCL); PAUL E.
BOSTROMV. VASO ACTIVE PHARMACEUTICALS, INC., ET AL. , Civ. No. 04-10948 (RCL);
IRA A.TURRET SEP-IRA DATED 01/24/02 V. VASO ACTIVE PHARMACEUTICALS, INC., ET
AL., Civ.No. 04-10980 (RCL); RICHARD PAGONA V. VASO ACTIVE PHARMACEUTICALS,
INC., ET AL., Civ. No. 04-11100 (RCL); JAMES KARANFILIAN V. VASO ACTIVE
PHARMACEUTICALS, INC.,ET AL. , Civ. No. 04-11101 (RCL); and CHARLES ROBINSON V.
VASO ACTIVEPHARMACEUTICALS, INC., et. al., Civ. No. 04-11221 (RCL). The Court
consolidated the above-referenced cases, other than the TOVREA and
KARANFILIA complaints in the United States District Court for the District of
Massachusetts, under the caption IN RE VASO ACTIVE PHARMACEUTICALS
SECURITIES LITIGATION , Civ. No. 04-10708 (RCL), (the "Consolidated Action"). On
November 4, 2004, the Court appointed Schiffrin & Barroway LLP as lead counsel
for the Consolidated Action and appointed Shapiro, Haber & Urmy LLP as local
counsel. The Court also appointed Edwin Choi, Richard Ching, and Joe H. Huback
as interim co-lead plaintiffs, pending a determination of whether the
Consolidated Action may proceed as a class action. The Court further ordered
that co-lead plaintiffs file a consolidated amended complaint in the
Consolidated Action by December 4, 2004. On December 3, 2004,
plaintiffs filed the Consolidated Amended Complaint, which added as defendants
the Company's directors at the time of our initial public offering and issuance
of our 2003 Annual Report, and alleged that during the period in question the
Defendants made false and misleading statements concerning FDA approval of its
current products and related misstatements and concerning the clinical trial of
the anti-fungal product. On January 20, 2005, the Defendants filed an Answer to
the Complaint essentially denying the allegations and liability.

         On June 1, 2005, the Company entered into a Memorandum of Understanding
Concerning Settlement Terms ("MOU") to settle the consolidated securities class
action lawsuit. Under the terms of the MOU, the lead plaintiffs and the settling
defendants, which include the Company and its officers and directors at the time
of the alleged violations, agree that the final stipulation will contain a
disclaimer of liability consistent with the MOU. Subject to the terms and
conditions set forth in the MOU, settling defendants will pay into escrow for
the benefit of the class $1,100,000 in cash and $750,000 face amount of 2-year
5% subordinated callable notes convertible into Class A Common Stock at $1.75
per share within 10 business days of preliminary approval of the settlement by
the court. In consideration of this payment, the parties will fully and finally
release and discharge all claims against each other. The settlement still needs
court approval. (The issuance of these convertible notes would require the
approval by the purchasers of the Notes in our August 2005 private placement.
The Company's insurance carrier has agreed, subject to execution of a definitive
agreement, to pay the $1,100,000 cash payment in exchange for a release of its
liability under its insurance policy with the Company.

         The Company has also been named as a nominal defendant in three
shareholder derivative actions, filed in the United States District Court for
the District of Massachusetts in April 2004 against the Company's then directors
and certain of its officers and against BioChemics, Inc., is styled JOSEPH
ROSENKRANTZ V. BIOCHEMICS, INC., ET AL., Civ. No. 04-10792 (RCL) (D. Mass.); the
second - filed in June 2004, also against the Company's then directors and
certain of its officers and against BioChemics, Inc., is styled WILLIAM POMEROY
V. BIOCHEMICS INC., ET AL., Civ. No. 04-11399 (RCL) (D. Mass.); and the third -
filed in the Court of Chancery for the State of Delaware in September 2004
against its then directors and certain of its officers, is entitled DOUGLAS
WEYMOUTH V. JOHN J. MASIZ, ET AL., Civ. No. 682-N (collectively, the
"Complaints"). The Complaints allege, among other things, that the alleged
conduct challenged in the securities cases pending against the Company in
Massachusetts (described above) constitutes, among other things, a breach of the
Defendants' fiduciary duties to Vaso Active. The Complaints seek equitable and
monetary relief, an unspecified amount of damages, and attorneys and other fees,
costs and expenses, ostensibly on behalf of Vaso Active. On October 29, 2004,
the Massachusetts Court approved a joint motion to consolidate the two
Massachusetts derivative actions. On November 19, 2004, the Court issued an
order consolidating the derivative actions in the United States District Court
for the District of Massachusetts and captioned the consolidated action IN RE:
VASO ACTIVE PHARMACEUTICALS, INC. DERIVATIVE LITIGATION, Master Docket No.
04-10792-RCL. On January 12, 2005, the Court entered a Procedural Order of
Dismissal which dismissed the consolidated derivative action, without prejudice,


                                       43
<PAGE>

pending the occurrence of the earlier of (a) the entry of an order in connection
with a motion to dismiss filed in the securities class action lawsuit or (b) the
filing of an answer by all defendants in the securities class action. This order
also stated that the derivative litigation could be restored to the docket after
either of the triggering events mentioned above occurred and a motion was filed
by either party within 30 days after the occurrence of such an event. On
February 3, 2005, plaintiffs in the consolidated derivative action filed an
unopposed motion to restore the action to the docket, which was granted on
February 23, 2005. On March 7, 2005, plaintiffs filed an amended complaint in
this matter, and the defendants filed their answers on March 28, 2005.

         The Company has entered into agreements in principle with the
plaintiffs in the derivative actions pursuant to which the Company will maintain
certain corporate governance changes previously instituted and will adopt
certain additional corporate governance changes. The Company also will pay
plaintiffs' attorneys fees in the aggregate amount of $25,000 in cash and
$120,000 face amount 2-year 5% subordinated callable notes convertible into
Class A common stock at $1.75 per share. (The issuance of these convertible
notes would require the approval by the purchasers of the Notes in our August
2005 private placement.)

         Although the Company has been defending and now is seeking to settle
these cases, there can be no guarantee as to the ultimate outcome of these
matters. There is also no guarantee that these will be the only lawsuits brought
against the Company with respect to these matters. There is also no assurance
that these matters will be resolved in our favor. An unfavorable outcome of
these matters would have a material adverse impact on our business, results of
operations, financial position or liquidity.

         For the six-month periods ended June 30, 2005 and 2004, the Company
recorded approximately $816,300 and $719,000 in expenses to defend itself in the
SEC and private litigation matters discussed above, including legal, accounting
and other consulting fees. The June 30, 2005 amount includes a $750,000 charge
in connection with the Company's settlement with the consolidated securities
class action lawsuit.

FDA MATTERS

         We are not aware whether the FDA is contemplating any action against
us. We believe that the active ingredients, dosage form and strengths of A-R
Extreme, Osteon and Termin8 are covered by the FDA's OTC Review Program and
therefore we believe these products are currently eligible for marketing under
the same program. In early 2004, we intended to distribute these products under
revised labeling once we were reasonably sure that the marketing of these
products was consistent with the FDA's requirements and policies. We submitted
new labels for our previously marketed products to the FDA in May 2004 and
requested comments by the FDA on these labels. There is no regulatory
requirement that the FDA review or comment on such materials and so far, the FDA
has not provided any comment relating to the new labels. Although we were not
provided any comment from the FDA, we are now reasonably sure that these new
labels are consistent with all FDA regulations and policies and as a result, we
resumed marketing and shipment of our products in September 2004.

GENERAL

         Other than described above, we are not a party to any pending legal
proceedings or are aware of any pending legal proceedings against us that,
individually or in the aggregate, would have a material adverse affect on our
business, results of operations or financial condition.


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<PAGE>

ITEM 6.  EXHIBITS

     EXHIBIT
      NUMBER     DESCRIPTION OF EXHIBIT
      ------     ----------------------

        31.1     Certification of Joseph Frattaroli, Acting Chief Executive
                 Officer and Chief Financial Officer, pursuant to Section 302 of
                 the Sarbanes-Oxley Act of 2002.(1)
        32.1     Certification of Joseph Frattaroli, Acting Chief Executive
                 Officer and Chief Financial Officer, pursuant to Section 906 of
                 the Sarbanes-Oxley Act of 2002.(1)

        (1) Filed herewith.



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<PAGE>

                                    SIGNATURE

         In accordance with Section 13 and 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on August 22, 2005

                                VASO ACTIVE PHARMACEUTICALS, INC.

                                By:  /s/ Joseph Frattaroli
                                    --------------------------------------------
                                    Joseph Frattaroli
                                    President and Acting Chief Executive Officer
                                    Chief Financial Officer


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