<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-QSB

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

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
                                                May 13, 2005

Common stock, Class B, $0.0001 par value        4,500,000 shares outstanding on
                                                May 13, 2005





<PAGE>


                        VASO ACTIVE PHARMACEUTICALS, INC.

                              INDEX TO FORM 10-QSB


                                                                            page
PART I.  FINANCIAL INFORMATION

ITEM 1 - Condensed Financial Statements (unaudited):

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

ITEM 2 - Management's Discussion and Analysis of Financial Condition and
         Results of Operations................................................11

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

PART II . OTHER INFORMATION

ITEM 1 - Legal Proceedings....................................................37
ITEM 6 - Exhibits.............................................................39


Signatures....................................................................40


     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>

                                    VASO ACTIVE PHARMACEUTICALS, INC.
                                        CONDENSED BALANCE SHEETS

                                                                    MARCH 31,       DECEMBER 31
                                                                  -----------       -----------
                                                                      2005              2004
                                                                  -----------       -----------
                                                                    (UNAUDITED)
<S>                                                               <C>               <C>
                                     ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................      $ 1,199,249       $ 2,175,388
Accounts receivable ........................................            1,113               888
Inventory ..................................................          140,871           140,296
Prepaid expenses ...........................................           38,909            28,995
                                                                  -----------       -----------

     TOTAL CURRENT ASSETS ..................................        1,380,142         2,345,567

Property and equipment - net ...............................           46,340            37,551
                                                                  -----------       -----------
                                                                  $ 1,426,482       $ 2,383,118
                                                                  ===========       ===========


                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ...........................................      $   387,896       $   474,369
Accrued compensation .......................................           41,774            43,805
Other accrued expenses .....................................          173,655           116,045
Due to parent company ......................................           22,725            10,780
                                                                  -----------       -----------

   TOTAL CURRENT LIABILITIES ...............................          626,050           644,999

Commitments and contingencies (Note 1)
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 at
    March 31, 2005 and December 31, 2004 ...................            1,033             1,033
Additional paid-in capital .................................        8,093,656         8,093,656
Deferred compensation ......................................         (168,676)         (183,777)
Accumulated deficit ........................................       (7,125,581)       (6,172,793)
                                                                  -----------       -----------

   TOTAL STOCKHOLDERS' EQUITY ..............................          800,432         1,738,119
                                                                  -----------       -----------
                                                                  $ 1,426,482       $ 2,383,118
                                                                  ===========       ===========


                          See notes to the unaudited condensed financial statements.
</TABLE>

                                                     -3-




<PAGE>
<TABLE>

                             VASO ACTIVE PHARMACEUTICALS, INC.
                       UNAUDITED CONDENSED STATEMENTS OF OPERATIONS


                                                     THREE-MONTH PERIOD ENDED MARCH 31,
                                                      -------------------------------
                                                          2005               2004
                                                      ------------       ------------
<S>                                                   <C>                <C>
Net revenues ...................................      $      4,597       $      7,147
Cost of revenues ...............................             6,248              5,775
                                                      ------------       ------------
      GROSS PROFIT .............................            (1,651)             1,372
                                                      ------------       ------------

Costs and expenses:
     Marketing, advertising and promotion ......           169,803             66,254
     Selling, general and administrative .......           683,541          1,537,993
     Research and development ..................            90,030             95,167
     Stock based compensation ..................            15,101            109,033
                                                      ------------       ------------
       Loss from operations ....................          (960,126)        (1,807,075)

Other income (expense), net ....................             7,338              3,486
                                                      ------------       ------------

 NET LOSS ......................................      $   (952,788)      $ (1,803,589)
                                                      ============       ============

 Net loss per share - basic and diluted (Note 2)      $      (0.09)      $      (0.18)
                                                      ============       ============

Weighted average shares outstanding - basic and
diluted (Note 2) ...............................        10,328,613         10,200,536
                                                      ============       ============

</TABLE>

                See notes to the unaudited condensed financial statements.

                                           -4-




<PAGE>
<TABLE>

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

                                                                                 THREE-MONTH PERIOD ENDED MARCH 31,
                                                                                  --------------------------------
                                                                                      2005                2004
                                                                                  ------------       -------------
<S>                                                                               <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss ..................................................................      $   (952,788)      $ (1,803,589)
 Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization ........................................             2,274                261
      Stock-based compensation (Note 4) ....................................            15,101            109,033
      Commitments and contingencies (Note 1) ...............................                --            200,000
      Increase (decrease) in cash from change in:
         Accounts receivable ...............................................              (225)              (883)
         Inventory .........................................................              (575)           (21,004)
         Prepaid expenses ..................................................            (9,914)            12,040
         Accounts payable ..................................................           (86,473)           114,867
         Accrued compensation ..............................................            (2,031)          (220,165)
         Other accrued expenses ............................................            57,610            (83,284)
                                                                                  ------------       -------------
                        Net cash used in operating activities ..............          (977,021)        (1,692,724)
                                                                                  ------------       -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property and equipment ........................................           (11,063)            (5,222)
                                                                                  ------------       -------------
                        Net cash used in investing activities ..............           (11,063)            (5,222)
                                                                                  ------------       -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Issuance of Class A common stock .........................................                --            450,000
  Issuance of Class B common stock to parent ...............................                --                450
  Issuance of convertible notes ............................................                --          7,500,000
  Due to/from parent company ...............................................            11,945              2,702
                                                                                  ------------       -------------
                        Net cash provided by financing activities ..........            11,945          7,952,702
                                                                                  ------------       -------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .......................          (976,139)         6,254,756

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

CASH AND CASH EQUIVALENTS, END OF PERIOD ...................................      $  1,199,249       $ 12,364,531
                                                                                  ============       ============
 SUPPLEMENTAL DISCLOSURES:

   Interest paid ...........................................................                --                 --
                                                                                  ============       ============


                               See notes to the unaudited condensed financial statements.
</TABLE>

                                                          -5-




<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 the vaso active lipid
encapsulated ("VALE") technology and the 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 from the Company's Board of Directors on June
20, 2003.

         INITIAL PUBLIC OFFERING

         On December 15, 2003, the Company completed an initial public offering
of 5,002,500 shares of Class A common stock at a price of $1.67 per share
raising approximately $6.4 million, net of issuance costs.

         STOCK SPLIT

         On February 20, 2004, the Company announced a three-for-one stock split
on all classes of common equity in the form of a 200% stock dividend paid on
March 5, 2004 to stockholders of record on February 23, 2004. All share and per
share information have been restated to give retroactive effect to this stock
split.

         SETTLEMENT OF SECURITIES AND EXCHANGE COMMISSION MATTERS

         On August 26, 2004, the U.S. Securities and Exchange Commission (the
"SEC") formally approved the terms of a settlement regarding alleged 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 has
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 approved the terms of a settlement with
John J. Masiz, formerly the Company's President and Chief Executive Officer,
without him admitting or denying the allegations of the civil complaint, that
likewise enjoins him from violating the antifraud and reporting provisions, and
prevents 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


                                      -6-


<PAGE>

that agreement, Mr. Masiz will provide strategic consulting services regarding
sales, marketing and business development to the Company for an initial term
through June 30, 2008 and will report to the Chief Executive Officer of the
Company. The Company has appointed its Chief Financial Officer to serve as its
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.

         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.

         The Company intends to seek listing of its securities on an exchange or
other automated quotation system. However, there is no assurance that the
Company will be successful in securing such listing or quotation or, even if it
is successful, that it will be able to maintain the listing or quotation of its
securities on such exchange or quotation system.

         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 seek equitable and monetary relief, an unspecified amount of
damages, with interest, attorneys fees and costs, allegedly were filed on behalf
of purchasers of the Company's Class A common stock during the period December
11, 2003 to March 31, 2004. The complaints allege 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
November 4, 2004, the Court appointed a lead counsel for the Consolidated
Action.

                                      -7-


<PAGE>

         The Company has also been named as a nominal defendant in three
shareholder derivative actions. The first action was filed in the United States
District Court for the District of Massachusetts in April 2004 against the
Company's directors and certain of its officers and against BioChemics, Inc.
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
directors and certain of its officers and against BioChemics, Inc. styled
WILLIAM POMEROY V. BIOCHEMICS INC., ET AL., Civ. No. 04-11399 (RCL) (D. Mass.);
and the third - in the Court of Chancery for the State of Delaware in September
2004 against its directors and certain of its officers entitled DOUGLAS WEYMOUTH
V. VASOACTIVE 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.

         Although the Company intends to vigorously defend against 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.

         Because of the uncertainty of estimating the potential financial
statement impact of any of these actions with any reasonable degree of accuracy,
at this time the Company has not reserved for any potential liability or costs
that may arise as a result of this litigation except for $200,000 recorded
during the three-month period ended March 31, 2004, which represents the
insurance deductible that the Company cannot expect to recover. While the cases
are in preliminary stages and the outcomes are not predictable, if a substantial
amount is payable by the Company and is not reimbursed through its director and
officer liability insurance policy, this will have a material adverse effect on
the Company's financial position and liquidity.

         On August 3, 2004, the Company's insurer notified the Company that,
based on its coverage evaluation, it intends to reject liability to reimburse
the Company with respect to any of the claims asserted in any of the
above-described litigation against the Company or its officers or directors for
a substantial majority of the policy coverage and that it may seek to rescind
the policy with respect to the balance of the policy coverage. The Company
intends to vigorously contest the insurer's positions regarding this matter.

         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 "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 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 Note and warrants and the parties
mutually terminated all other agreements entered into in connection with the
transaction.

                                      -8-

<PAGE>

         In connection with this transaction, the Company paid approximately
$600,000 in fees to various 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.

         For the three-month periods ended March 31, 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 supercedes 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 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 must pay to exercise the award. The Company accounts
for stock options and awards to non-employees using the fair value method.

                                      -9-

<PAGE>

         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.

<TABLE>
                                                                              THREE-MONTH        THREE-MONTH
                                                                                 PERIOD             PERIOD
                                                                                 ENDED              ENDED
                                                                             MARCH 31, 2005     MARCH 31, 2004
                                                                             --------------     --------------
<S>                                                                          <C>                <C>
Net loss, as reported .................................................      $   (952,788)      $ (1,803,589)

Add: stock-based compensation included in the determination of net loss            15,101            109,033
Less: stock-based compensation had all options been recorded at fair
   value ..............................................................          (111,958)          (510,914)
                                                                             ------------       ------------
Adjusted net loss .....................................................      $ (1,049,645)      $ (2,205,470)
                                                                             ============       ============

Weighted average shares outstanding, basic and diluted ................        10,328,613         10,200,536
Net loss per share, basic and diluted, as reported ....................      $      (0.09)      $      (0.18)
Adjusted net loss per share, basic and diluted ........................      $      (0.10)      $      (0.22)
Net loss, as reported..................................................      $   (952,788)      $ (1,803,589)

</TABLE>

                                      -10-

<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.

         The most predominant adverse factor affecting the future of the Company
is its level of working capital. At March 31, 2005, we had working capital of
approximately $750,000, which based on our current plans and assumptions
relating to our operations, will be sufficient to satisfy our cash requirements
through August 31, 2005. Our efforts to attract and obtain additional financing
are significantly hampered by the shareholder and derivative actions involving
our Company. See further discussion of this issue in the "CAPITAL AVAILABITY"
and "LIQUIDITY AND CAPITAL RESOURCES" sections of the Management's Discussion
and Analysis.

         Additional 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
     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.

         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.

                                      -11-




<PAGE>

OVERVIEW, KEY BUSINESS CHALLENGES AND RISKS

          We are an early-stage company established for the purpose of
commercializing, marketing and selling over-the-counter, or OTC, pharmaceutical
products that incorporate topical and transdermal formulation platforms. 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. We are also based
in Danvers, Massachusetts. In January 2003, we incorporated in Delaware and
became an independent subsidiary of BioChemics, focused on the further
commercialization of our existing OTC products and the development of new OTC
product candidates.

          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
have been filed against the company and its officers and directors.

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

          In August and September 2004, Vaso Active and its former Chief
Executive Officer, John Masiz, settled all SEC and U.S. District Court 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 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. You should refer to "Legal Proceedings,"
and "Risk Factors" for additional discussions surrounding these events.

                                      -12-




<PAGE>

          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, 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. We anticipate that we have enough working capital to
continue our current operations through August 2005. We will require additional
financing to continue as a going concern. We are currently investigating
financing options. We cannot provide any assurances that financing will be
available to us, or even if we do obtain such financing, on favorable terms. We
cannot provide any assurances that BioChemics will extend us additional
financing or incur costs on our behalf.

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:

     o    REDUCTION OF ROUTE-OF-ADMINISTRATION RELATED SIDE EFFECTS. Because
          they 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.

     o    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.

                                      -13-




<PAGE>

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.

          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 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 acccordance 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.

                                      -14-




<PAGE>

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
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".

                                      -15-




<PAGE>

         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
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.

                                      -16-




<PAGE>

         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.
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.

                                      -17-




<PAGE>

         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.

         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 our products
and/or our costs.

                                      -18-




<PAGE>

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;

     o    A-R Extreme - an OTC external analgesic designed to provide temporary
          relief from the muscle and joint pain associated with athletic
          activity (formerly branded as Athlete's Relief); and

     o    Termin8 - an OTC antifungal lotion designed to effectively treat
          athlete's foot (formerly branded under the name deFEET(R)).

          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, witch is discussed in more detail under
"Government Regulations".

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.

          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 information described under
the caption "Government Regulation" for further discussion surrounding NDA,
ANDA, OTC Review Program and OTC Monograph programs.

         We have finalized a formulation of our acne treatment utilizing our
PENtoCORE topical technology. We intend to market eventually the acne treatment
under the label RepiDerm(R). The product would contain 10% benzoyl peroxide, or
BPO, as an active ingredient. There is a final OTC monograph for acne drug
products: however, the final monograph does not currently include BPO as an
active ingredient.

         In its tentative final Monograph for OTC acne drug products, the Food
and Drug Administration, or FDA, proposed monograph status for BPO. However,
following this proposal, the agency became aware of a study that raised a safety
concern regarding BPO. FDA evaluated this study and other data submitted by a
drug manufacturer association and, in 1991, the agency concluded that it was


                                      -19-




<PAGE>

unable to state that BPO is generally recognized as safe. Accordingly, the FDA
published an amended tentative final monograph for OTC topical acne drug
products in which it reclassified BPO from Category 1 (generally recognized as
safe and effective and not misbranded) to Category III (available data are
insufficient to classify as safe and effective, and further testing is
required).

         In light of the Category III status, the FDA subsequently concluded
that the marketing under the OTC review program of BPO as an active ingredient
in topical OTC acne drug products would be allowed to be continued (under the
conditions set forth in the tentative final monograph, i.e. BPO at levels of 2.5
to 10%) while additional studies are conducted to answer the unresolved safety
questions. However, the agency also tentatively determined that consumers who
choose to use products containing BPO need to be provided additional information
about the safe use of such products in the form of label warning statements
regarding concomitant sunscreen use. There are numerous OTC acne treatment
products containing 10% BPO that are currently being marketed under the OTC
Review Program.

         We believe that the active ingredients, dosage form, route of
administration, directions for use, and indications of our RepiDerm acne
treatment are covered by the OTC Review Program and, like similarly situated
products on the market, can at this time be marketed under the OTC Review
Program. We will begin marketing this product when we are confident that
RepiDerm is covered by the OTC Review Program and its marketing is consistent
with the FDA's policies regarding products that are being reviewed under the
Program, specifically including BPO products. We expect to begin to market
RepiDerm by the end of the third quarter of 2005.

COMPETITION

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

         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.

                                      -20-




<PAGE>

         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

         During 2004, we executed strategic alliances with Ortho Distribution
Inc. or ODI and M2G Media.

         In January 2005 ODI's parent company was purchased by an unrelated
third-party. We are in ongoing discussions with the new ODI management and
expect to continue the relationship. However, there can be no assurance that the
strategic alliance will continue or that it will provide us with the results
intended under the original agreement with ODI. We do not expect the new ODI
management to pursue the alliance as strongly as prior management.

         Regarding M2G Media, in late 2004, we were unable to reach mutually
agreed upon product minimums with respect to the arthritis and pain relief
markets and have since removed the arthritis and pain relief products from the
M2G strategic alliance. We are currently negotiating with M2G Media with respect
to launching our acne product, Repiderm.

         Recent regulatory events and securities claims brought against us and
our management has placed strains on our management and capital resources. 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. You should refer to the discussions under the
caption "Legal Proceedings" for further discussion on this matter.

         We intend to pursue opportunities to launch our products into retail
market chains sometime during late 2005. We believe that because retail sales
efforts typically require large economic outlays and long sales cycles, they
produce less of an immediate impact on operations than strategic alliances.
Therefore, we have categorized this as part of the second phase of our rollout
strategy. In January 2004, we engaged Commotion LLC, or Commotion, of Golden,
Colorado, a strategic product marketing company, to assist us in establishing
direct brand recognition and strategic retail rollout for our products. Since
January 2004, Commotion has provided design input into our Company logos,
stationary, business cards, product information and displays as well as for the
revised labeling for our A-R Extreme, Osteon, Termin8, and RepiDerm products.
Although the agreement is still in effect, we do not require additional design
work at this time. Therefore in April 2005 we suspended our monthly retainer
payment to Commotion until further notice.

         Our plan is focused on the systematic rollout of 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. However, 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 initial public
offering proceeds to fund our advertising, direct mail programs and related
promotional activities. There can be no assurance that any of the initial public
offering proceeds will be used for this purpose. You should refer to the
discussions under the caption "Legal Proceedings" for further discussion on our
cessation of marketing and sales activities.

                                      -21-




<PAGE>

OUTLOOK FOR 2005

          During 2005, the Company plans to:

     o    Raise additional capital in order to continue the direct-to-consumer
          television campaign of its topical analgesic marketed under the label
          Osteon,
     o    expand retail distribution of its topical analgesic being marketed
          under the label AR-Extreme,
     o    begin retail distribution of its topical anti-fungal under the label
          Termin8, with its revised packaging,
     o    increase staffing, including outbound telemarketers and a senior
          marketing person with a background in retail launches, and
     o    introduce its new acne product under the label RepiDerm to the
          marketplace

          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, which is constrained by our limited resources. We
plan to allocate a portion of our planned future capital raise to hire
additional personnel to accelerate this area of planned growth.

          Our strategy for RepiDerm is to launch the product by the end of the
third quarter of 2005. We plan to package and market this product under several
labels. One label targeted to the teenage and young adult markets and another
label targeted to older adults. This product is formulated to treat acne based
upon regular usage and we expect to realize a re-order stream with any future
customers. We are currently in negotiations with M2G Media to launch the product
through either long or short form direct to consumer television media.
Negotiations are ongoing and the details are not yet determined. If we are
unable to reach a deal with M2G or with another strategic partner and if we are
unable to raise additional capital, our planned launch of RepiDerm for the end
of the third quarter of 2005 will be delayed.

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.

                                      -22-




<PAGE>

          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 supercedes 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 are 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.

          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 have not yet
determined the impact that the revised statement will have on its financial
condition and results of operations.

                                      -23-




<PAGE>

THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004

          NET REVENUES - Net revenues for the three-month period ended March 31,
2005 decreased $2,550 to $4,597 from $7,147 in the comparable period in 2004.
This period to period decrease was primarily a result of the regulatory and
private securities actions taken against us beginning in April 2004 and our
decision to suspend 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. Since re-introducing our products to the marketplace
in September 2004, with revised labeling, we have not generated significant
revenues. No single customer represented more than 10% of net revenues in either
period. All of our revenues during each of the periods were generated from the
sale of our three OTC products.

          COST OF SALES - In general, our cost of sales is variable to our net
revenues. However, we maintain fixed manufacturing expenses. Also, certain
manufacturing events such as inventory adjustments or product returns may
significantly affect the consistency of our cost of sales, and therefore our
gross profit, during any particular period. Cost of sales increased $473 to
$6,248 from $5,775 in the comparable period in 2004. This increase in cost of
sales was attributable to higher fixed manufacturing costs in 2005 versus 2004.

          MARKETING, ADVERTISING AND PROMOTION - Marketing, advertising and
promotion expenses increased $103,549, or 156%, to $169,803 for the three-month
period ended March 31, 2005 from $66,254 in the comparable period in 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. We will
continue marketing Osteon in this manner in additional markets throughout the
United States. We are seeking to buy additional television spots via a pay per
unit sale deal, which links the amount we pay for television advertising to the
actual amount of product purchased by consumers through these television spots.
If we are unable to secure this pay per unit sale deal and instead must rely on
fixed rate advertising alone, we will need to raise additional capital. We can
provide no assurance that we will be able to secure a pay per unit sale deal or
obtain additional capital.

          SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and
administrative expenses decreased by $854,452 to $683,541 during the three
months ended March 31, 2005 as compared to $1,537,993 in the comparable period
in 2004. This decreased is due primarily to one-time charges we recorded in the
three-month period ended March 31, 2004 of approximately $615,000 for fees paid
to third parties in connection with our March 2004 private placement transaction
(see Note 1 to our condensed financial statements) and $200,000 recorded as a
general contingency which is the amount of the director and officers liability
policy insurance deductible we could not expect to recover from the insurance
carrier.

          We continue to devote significant capital to defend ourselves against
the civil complaints described more fully under the caption "Legal Proceedings"
in this Quarterly Report on Form 10-QSB. During the three-month period ended
March 31, 2005, we recorded approximately $57,700 in legal and professional fees
to address these complaints.

          RESEARCH AND DEVELOPMENT - Research and development expenses decreased
$5,137, or 5%, to $90,030 from $95,167 in the comparable period in 2004. We
continue to develop in collaboration with BioChemics an analgesic utilizing the
active ingredient ibuprofen. Costs incurred related to this development have
been consistent from period to period. Other research and development costs
incurred relate to the formulation for our acne product, Repriderm.

                                      -24-




<PAGE>

          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 three-month period ended March 31, 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
three month period ended March 31, 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.

CAPITAL AVAILABILITY

         At March 31, 2005, we had working capital of approximately $750,000. We
anticipate, based on our current plans and assumptions relating to our
operations, that our current working capital will be sufficient to satisfy our
cash requirements through August 31, 2005. We intend to continue as a going
concern. However, unless we can obtain additional financing or generate
profitability and cash flows from operations, we may not be able to continue as
a going concern. Our efforts to attract and obtain such additional financing are
significantly hampered by the shareholder and derivative actions involving our
company. 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. Further, there can be no assurance that we will be
able to generate profitability and cash flows from operations with our existing
working capital.

LIQUIDITY AND CAPITAL RESOURCES

          The Company has incurred substantial operating losses and negative
cash flows from operations since inception. In 2004, 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 as the source of our working capital.

          At March 31, 2005, we had approximately $1.2 million in cash remaining
from the initial public offering and working capital of approximately $750,000.
Our financial condition has been materially and adversely affected by recent
regulatory and shareholder actions taken against us. We expect to use portions
of our working capital to continue defending ourselves in 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 actions taken against us. In addition,
our management intends to contest a substantial portion of the accounts payable
shown on the Balance Sheet at March 31, 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 March 31, 2005.

<TABLE>

DESCRIPTION                                 2005        2006 - 2007      2008-2009       THEREAFTER        TOTAL
<S>                                     <C>             <C>             <C>             <C>             <C>
Long-term debt ...................      $       --      $       --      $       --      $       --      $       --

Capital leases ...................              --              --              --              --              --

Operating leases .................              --              --              --              --              --

Unconditional purchase obligations              --              --              --              --              --

Employment agreements ............         367,500         659,167         630,000         315,000       1,971,667
                                        ----------      ----------      ----------      ----------      ----------
Total contractual obligations ....      $  367,500      $  659,167      $  630,000      $  315,000      $1,971,667
                                        ==========      ==========      ==========      ==========      ==========
</TABLE>

                                      -25-




<PAGE>

         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. The terms and provisions
of this appointment are being finalized in writing and will be disclosed when
the agreement is completed in a form approved by the Board of Directors. 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. This table is presented reflecting
the effects of the deemed automatic extensions and it reflects $315,000 beyond
2009. This amount, $315,000, will be the annual ongoing obligation of the
Company if the agreements for Mr. Masiz and Dr. Carter do in fact extend under
the present agreements.

          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.

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 March 31, 2005, we had an accumulated deficit of approximately $7.1
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.

                                      -26-




<PAGE>

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:

     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.

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. At March 31, 2005, we
had working capital of approximately $750,000. We anticipate, based on our
current plans and assumptions relating to our operations, that our current
working capital will be sufficient to satisfy our cash requirements through
August 31, 2005. We intend to continue as a going concern. However, unless we
can obtain additional financing or generate profitability and cash flows from
operations, we may not be able to continue as a going concern. Our efforts to
attract and obtain such additional financing are significantly hampered by the
shareholder and derivative actions involving our company. 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.
Further, there can be no assurance that we will be able to generate
profitability and cash flows from operations with our existing working capital.

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:

     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.

                                      -27-




<PAGE>

          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
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
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.

                                      -28-




<PAGE>

          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 April 29, 2005 the average bid for a share
of our Class A Common Stock as quoted by the OTC Pink Sheets was $0.65 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.

          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 are 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


                                      -29-




<PAGE>

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 seek equitable and monetary relief, an unspecified
amount of damages, with interest, attorney's fees and costs.

          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 securities class action 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.

OUR INSURER NOTIFIED US THAT IT REJECTS ITS LIABILITY TO REIMBURSE US WITH
RESPECT TO ANY OF THE CLAIMS ASSERTED IN ANY OF THE CURRENT LEGAL PROCEEDINGS
AGAINST US, OUR OFFICERS OR DIRECTORS. IF THE INSURER PREVAILS REGARDING THIS
EVALUATION, IT MAY ADVERSELY AFFECT OUR BUSINESS.

          We rely on our director and officer liability insurance policy to
provide us with sufficient coverage to reimburse us for the cost of defense and,
up to its coverage limit, to offset any unfavorable outcome which may result
from class action lawsuits or derivative actions filed against us or our
directors and officers. Our insurer has notified us that based on a coverage
evaluation, it intends to reject liability to reimburse us with respect to any
of the claims asserted in any of the litigation summarized under "Legal
Proceedings" for a substantial majority of the policy coverage and that it may
seek to rescind the policy with respect to the balance of the policy coverage.
The Company intends to vigorously contest the insurer's positions. If the
insurer prevails, it may adversely affect our capital resources and our business
and, if the insurer prevails, we will bear responsibility for legal fees.

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.

                                      -30-




<PAGE>

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. In
connection with the test marketing program with Walgreen's to sell deFEET in
mid-2003, we could not provide sufficient funding for an advertising program
that would be acceptable to Walgreen's. Our efforts were complicated by our need
to change the product name from deFEET to Termin8. Because of our inability to
undertake an acceptable advertising campaign, we and Walgreen's terminated this
test marketing program. Although management believes that our products,
supported by sufficient advertising, will earn retailers acceptance, there can
be no assurance that this will happen, or if it does, that it will continue.

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 three months ended March 31, 2005 and
2004, we incurred research and development costs of approximately $90,000 and
$95,000 respectively related to the formulation of an analgesic utilizing the
active ingredient ibuprofen as well as finalization of RepiDerm product
development. Pre-clinical studies utilizing animals were conducted and billed as
part of the ibuprofen research. 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
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,


                                      -31-




<PAGE>

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
and PENtoCORE. We have applied for U.S. Trademark protection for the mark
"Termin8." 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.

          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


                                      -32-




<PAGE>

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.

          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.

                                      -33-




<PAGE>

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 $11,000, and $8,000 in these
related-party fees for the three month periods ended March 31, 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 $16.9 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.

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.

                                      -34-




<PAGE>

          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 CONTROL OVER OUR AFFAIRS, 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 March 31, 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 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.

                                      -35-




<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.

                                      -36-




<PAGE>

                           PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

SEC MATTERS

          On April 1, 2004, the SEC temporarily suspended trading of our
securities. In its announcement of the trading suspension, the SEC stated that
it temporarily suspended trading in our securities because of questions
regarding the accuracy of our assertions, and others', in press releases, the
2003 annual report, our registration statement and public statements to
investors concerning, among other things, the FDA approval of certain key
products and the regulatory consequences of the future application of our
primary product.

          In August 2004, the SEC formally approved the terms of a settlement
regarding 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. We 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") on August 17, 2004 is styled SECURITIES
AND EXCHANGE COMMISSION V. VASO ACTIVE PHARMACEUTICALS, INC. Civil Action No. 04
CV 01395 (RJL) (D.D.C.).

          Also in August 2004, the SEC formally approved the terms of a
settlement with John J. Masiz, our former President and Chief Executive Officer,
without Mr. Masiz admitting or denying the allegations of the civil complaint,
that likewise enjoins him from violating the antifraud and reporting provisions,
and prevents 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 will provide strategic consulting services regarding sales,
marketing and business development to Vaso Active for an initial term through
June 30, 2008 and will report to our Chief Executive Officer. We have appointed
our Chief Financial Officer Joseph Frattaroli to serve as our Acting 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.

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.

                                      -37-




<PAGE>

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 seek equitable and monetary relief, an unspecified amount of
damages, with interest, attorney's 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 allege 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 are 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
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. BOSTROM
V. 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 ACTIVE
PHARMACEUTICALS, INC., et. al., Civ. No. 04-11221 (RCL). The Court has
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 no later than
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.

          The Company has also been named as a nominal defendant in three
shareholder derivative actions. The first action was filed in the United States
District Court for the District of Massachusetts in April 2004 against the
Company's directors and certain of its officers and against BioChemics, Inc.
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
directors and certain of its officers and against BioChemics, Inc., styled
WILLIAM POMEROY V. BIOCHEMICS INC., ET AL., Civ. No. 04-11399 (RCL) (D. Mass.);
and the third - in the Court of Chancery for the State of Delaware in September
2004 against its directors and certain of its officers, 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 thinds, 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


                                      -38-




<PAGE>

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,
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.

          Although the Company has been defending and intends to continue to
vigorously defend against 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.

          Because of the uncertainty of estimating the potential financial
statement impact of any of these actions with any reasonable degree of accuracy,
at this time we have not reserved for any potential liability or costs that may
arise as a result of this litigation except for $200,000 recorded on March 31,
2004, which represents the insurance deductible that we cannot expect to
recover. While the cases are in preliminary stages and the outcomes are not
predictable, if a substantial amount is payable by us and is not reimbursed
through our director and officer liability insurance policy, this will have a
material adverse effect on our financial position and liquidity.

          On August 3, 2004, our insurer notified us that, based on its coverage
evaluation, it intends to reject liability to reimburse us with respect to any
of the claims asserted in any of the above-described litigation against Vaso
Active or its officers or directors for a substantial majority of the policy
coverage and that it may seek to rescind the policy with respect to the balance
of the policy coverage. We intend to vigorously contest the insurer's positions
regarding this matter.

          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.


ITEM 6 (a).  EXHIBITS

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

     3(i) Amended and Restated Certificate of Incorporation. (1)
     3(ii) Amended and Restated Bylaws. (1)
     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.
     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)  Previously filed as an exhibit to our registration statement on Form SB-2/A
     filed on September 12, 2003.


                                      -39-




<PAGE>


                                   SIGNATURES

         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 May 13, 2005.

                                    VASO ACTIVE PHARMACEUTICALS, INC.

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






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