<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 SEPTEMBER 30, 2004

                                       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
                          (State or other jurisdiction
                        of incorporation or organization)

                                   02-0670926
                      (I.R.S. Employer Identification No.)

                 99 Rosewood Drive, Suite 260, DANVERS, MA 01923
                    (Address of principal executive offices)

                                 (978) 750-1991
                           (Issuer's telephone number)

         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:

<TABLE>
<S>                                          <C>
Common stock, Class A, $0.0001 par value:    5,828,613 shares outstanding as of November 12, 2004
Common stock, Class B, $0.0001 par value:    4,500,000 shares outstanding as of November 12, 2004
               Transitional Small Business Disclosure Format: Yes [ ] No [X]

</TABLE>


<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 September 30, 2004
   and December 31, 2003 (audited).............................................3
Condensed Statements of Operations for the Three and
   Nine-Month Periods Ended September 30, 2004 and 2003........................4
Condensed Statements of Cash Flows for the Nine-Month
   Periods Ended September 30, 2004 and 2003...................................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 and Reports on Form 8-K.....................................39

Signatures....................................................................41

                                       2


<PAGE>

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

                                                                   SEPTEMBER 30,    DECEMBER 31,
                                                                   ------------     ------------
                                                                       2004             2003
                                                                   ------------     ------------
                                                                   (UNAUDITED)
            ASSETS

<S>                                                                <C>              <C>
CURRENT ASSETS:
Cash and cash equivalents ....................................     $ 3,016,793      $ 6,109,775
Accounts receivable ..........................................           1,846            1,357
Inventory ....................................................         125,512           60,826
Prepaid expenses .............................................         104,644          145,684
                                                                   ------------     ------------
     TOTAL CURRENT ASSETS ....................................       3,248,795        6,317,642

Property and equipment - net .................................          36,763               --
                                                                   ------------     ------------
                                                                   $ 3,285,558      $ 6,317,642
                                                                   ============     ============

                   LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable .............................................     $   387,617      $   125,029
Accrued compensation .........................................          54,009          278,438
Other accrued expenses .......................................          13,637          197,564
Due to parent company ........................................          77,667           89,507
                                                                   ------------     ------------
   TOTAL CURRENT LIABILITIES .................................         532,930          690,538

Commitments and contingencies (Note 1) .......................         200,000
                                                                   ------------     ------------
                                                                       732,930          690,538
                                                                   ------------     ------------
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
    September 30, 2004; and 10,103,613 December 31, 2003 .....           1,033            1,011
Additional paid-in capital ...................................       8,093,656        7,305,565
Deferred compensation ........................................        (198,878)              --
Accumulated deficit ..........................................      (5,343,183)      (1,679,472)
                                                                   ------------     ------------
   TOTAL STOCKHOLDERS' EQUITY ................................       2,552,628        5,627,104
                                                                   ------------     ------------
                                                                   $ 3,285,558      $ 6,317,642
                                                                   ============     ============

                    See notes to the unaudited condensed financial statements.

                                                3

</TABLE>


<PAGE>

<TABLE>
                                            VASO ACTIVE PHARMACEUTICALS, INC.
                                       UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

                                                            THREE-MONTH PERIOD                 NINE-MONTH PERIOD
                                                            ENDED SEPTEMBER 30,                ENDED SEPTEMBER 30,
                                                     -------------------------------     -------------------------------
                                                          2004              2003              2004              2003
                                                     -------------     -------------     -------------     -------------
<S>                                                  <C>               <C>               <C>               <C>
Net revenues ...................................     $      2,632      $    (29,798)     $     10,641      $     51,876
Cost of revenues ...............................            2,743           (13,622)           48,371            31,279
                                                     -------------     -------------     -------------     -------------
      GROSS PROFIT .............................             (111)          (16,176)          (37,730)           20,597
                                                     -------------     -------------     -------------     -------------
Costs and expenses:
     Marketing, advertising and promotion ......           79,796            24,079           156,645            87,125
     Management fee ............................           19,672            42,958            35,992            99,000
     Selling, general and administrative .......          557,662            45,147         3,130,209           197,538
     Research and development ..................           57,459                --           199,925                --
     Stock based compensation ..................           15,101                --           139,235                --
                                                     -------------     -------------     -------------     -------------
       Loss from operations ....................         (729,801)         (128,360)       (3,699,736)         (363,066)

Other income (expense), net ....................           13,644            28,119            36,025            13,115
                                                     -------------     -------------     -------------     -------------
 NET LOSS ......................................     $   (716,157)     $   (100,241)     $ (3,663,711)     $   (349,951)
                                                     -------------     -------------     -------------     -------------
 Net loss per share - basic and
   diluted (Note 2) ...........................      $      (0.07)     $      (0.02)     $      (0.36)     $      (0.64)
                                                     -------------     -------------     -------------     -------------
Weighted average shares outstanding -
   basic and diluted (Note 2) .................       10,328,613         4,500,000        10,286,077           549,451
                                                     -------------     -------------     -------------     -------------

                                See notes to the unaudited condensed financial statements.

                                                4
</TABLE>


<PAGE>

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

                                                                                   NINE-MONTH PERIOD ENDED
                                                                                        SEPTEMBER 30,
                                                                                -----------------------------
                                                                                    2004             2003
                                                                                ------------     ------------
<S>                                                                             <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................................     $(3,663,711)     $  (349,951)
Adjustments to reconcile net loss to net cash
   used in operating activities:
     Depreciation and amortization ........................................           1,331               --
     Stock-based compensation (Note 4) ....................................         139,235               --
     Inventory write-off ..................................................          38,871               --
     Commitments and contingencies (Note 1) ...............................         200,000               --
     Increase (decrease) in cash from change in:
         Accounts receivable ..............................................            (489)          53,437
         Inventory ........................................................        (103,557)         (33,936)
         Prepaid expenses .................................................          41,040            4,304
         Accounts payable .................................................         262,588          147,550
         Accrued interest .................................................              --           28,083
         Accrued compensation .............................................        (224,429)            (604)
         Other accrued expenses ...........................................        (183,927)              --
                                                                                ------------     ------------
                  Net cash used in operating activities ...................      (3,493,048)        (151,117)
                                                                                ------------     ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........................................         (38,094)              --
                                                                                ------------     ------------
                  Net cash used in investing activities ...................         (38,094)              --
                                                                                ------------     ------------

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               --
 Repayment of convertible notes ...........................................      (7,500,000)              --
 Net proceeds from issuance of 10% convertible promissory notes ...........              --          500,000
 Prepaid public offering costs ............................................              --         (613,940)
 Due to/from parent company ...............................................         (11,840)         423,183
                                                                                ------------     ------------
                  Net cash provided by financing activities ...............         438,160          309,693
                                                                                ------------     ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................      (3,092,982)         158,576

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

CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................     $ 3,016,793      $   158,576
                                                                                ------------     ------------

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

                          See notes to the unaudited condensed financial statements.

                                                      5
</TABLE>


<PAGE>

                        VASO ACTIVE PHARMACEUTICALS, INC.

                NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1.       NATURE OF BUSINESS AND BASIS OF PRESENTATION

THE COMPANY

         Vaso Active Pharmaceuticals, Inc. (the "Company") is an early-stage
company established for the purpose of commercializing, marketing and selling
over-the-counter, or OTC, pharmaceutical products that incorporate the vaso
active lipid encapsulated ("VALE") technology or proprietary PENtoCORE (R)
technology. The patents covering the VALE technology are held by BioChemics,
Inc. ("BioChemics"), a privately-owned biopharmaceutical company. While the
Company considers the PENtoCORE technology proprietary, it is not covered by
patents. In February 2003, BioChemics granted the Company an exclusive,
irrevocable, worldwide license to use and practice the VALE patents and
PENtoCORE technology in order to commercialize, market and sell OTC
pharmaceutical products. At September 30, 2004, BioChemics owned approximately
44% of the Company's combined classes of issued and outstanding common stock and
70% of the voting power of the Company's combined classes of issued and
outstanding common stock.

         The Company began its operations in January 2001, as a division of
BioChemics, a biopharmaceutical company engaged in the development of
transdermal and topical drug delivery systems. In January 2003, the Company
incorporated in Delaware and became an independent subsidiary of BioChemics,
focused on the further commercialization of its existing OTC products and the
development of new OTC product candidates.

         BioChemics provides the Company with certain management and
administrative services including accounting, corporate services, data
processing, telephone, office space and other corporate services and
infrastructure. The financial statements of the Company include expense
allocations on bases that the Company and BioChemics consider to be reasonable
reflections of the utilization of services provided for the benefit received by
the Company. In addition, for the three and nine-month periods ended September
30, 2003, the Company's marketing, advertising and promotion expenses include
expenses related to the commercialization, marketing and distribution of
BioChemics' athlete's foot preparation product, then called deFEET(R), the
revenues of which are realized by the Company through an assignment of
BioChemics' ownership interests in such revenues.

         The Company has a limited operating history and has incurred net losses
since its inception. The Company's principal risks are the possibility of a
material adverse effect from the actions and risks summarized under "SEC and FDA
Matters," "Litigation" and "Risk Factors" sections of this Quarterly Report on
Form 10-QSB.

     The accompanying unaudited financial statements have been prepared on the
same basis as the annual financial statements included in the Company's Annual
Report on Form 10-KSB/A filed with the United States Securities and Exchange
Commission, or SEC, for the period ended December 31, 2003. In the opinion of
management, all significant adjustments, which are normal, recurring in nature
and necessary for a fair presentation of the financial position, cash flows and
results of the operations of the Company, have been consistently recorded. The
operating results for the interim periods presented are not necessarily
indicative of expected performance for the entire year.

     Certain amounts from the prior year have been reclassified to conform to
the current year presentation.

         The unaudited information should be read in conjunction with the
audited financial statements of the Company and the notes thereto for the year
ended December 31, 2003 included in the Company's Annual Report on Form 10-KSB/A
filed with the SEC for that period.

                                       6


<PAGE>

INITIAL PUBLIC OFFERING

         On December 15, 2003 the Company completed an initial public offering
of 1,667,500 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. Except where
otherwise noted, all share and per share information contained in this Quarterly
Report on Form 10-QSB have been adjusted to reflect the results of this
dividend.

SETTLEMENT OF SEC MATTERS

         On August 26, 2004, the U.S. Securities and Exchange Commission ("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 ("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 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 the Company, for a period of five years. Effective as of August 17,
2004, Mr. Masiz resigned as an executive officer and a director of the Company.
He is, however, permitted to remain an active employee and/or consultant of the
Company. In light of the foregoing, the Company and Mr. Masiz agreed to
terminate his employment agreement and enter into a new agreement. Pursuant to
that agreement, Mr. Masiz 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 Joseph Frattaroli
to serve as its Acting President and CEO while the Company conducts a search for
a new CEO. 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.

                                       7


<PAGE>

FDA 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 Athlete's Relief, Osteon (R) and Termin8(TM) products are
covered by the FDA's OTC Review Program and therefore we believe these products
are currently eligible for marketing under the same program. The Company
previously stated that it 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 has 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 cease
voluntarily the listing of its securities from Nasdaq. 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 OTC Pink Sheets under the symbol "VAPH.PK." The closing price for
the Company's securities as quoted in the Pink Sheets on November 12, 2004 was
$0.50. 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 so successful, that it will be able to maintain the listing or quotation of
its securities on such exchange or quotation system.

LITIGATION MATTERS

         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 (previously
known as "deFEET") and the institutional demand for the Company'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 KARANFILIAN
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 liason and local
counsel. The Court also appointed Ewin 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.

         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

                                       8


<PAGE>

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 on
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 MARCH 16, 2004 PRIVATE INVESTMENT IN PUBLIC EQUITY.

         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, or 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 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.

         In connection with this transaction, on March 16, 2004 the Company paid
approximately $600,000 in fees to various third parties. These fees were not
refunded when the Company repaid the investor and, accordingly, have been
recorded as expense as of March 16, 2004 and are included in the expense caption
"selling, general and administrative" for the nine-month period ended September
30, 2004.

                                       9
<PAGE>

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 and nine-month periods ended September 30, 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.

         On a pro forma basis, net loss per share (basic and diluted) would have
been $0.02 and $0.07, respectively for the three and nine-month periods ended
September 30, 2003. This pro forma loss per share was calculated as if (i) the
4,500,000 shares of Class B common stock which were issued to BioChemics in June
2003 had been issued to BioChemics on January 1, 2003, and (ii) the 10%
convertible promissory notes which were issued in April 2003 and converted into
601,113 shares of Class A common stock in December 2003 had been converted into
601,113 shares of Class A common stock on January 1, 2003.

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

                                       10


<PAGE>

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.

         The Company has an employee stock incentive plan and a non-employee
director compensation plan, which are described more fully in Note 6 to the
Company's Annual Report on Form 10-KSB/A for the period ended December 31, 2003.

         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.

                                                 THREE-MONTH        NINE-MONTH
                                                 PERIOD ENDED      PERIOD ENDED
                                                 SEPTEMBER 30,     SEPTEMBER 30,
                                                      2004             2004
                                                 -------------     -------------
Net loss, as reported ......................     $   (716,157)     $ (3,663,711)
Add: stock-based compensation included
  in the determination of net loss .........           15,101           139,235
Less: stock-based compensation had all
  options been recorded at fair value ......         (105,176)         (737,219)
                                                 -------------     -------------
Adjusted net loss ..........................     $   (806,232)     $ (4,261,695)
                                                 -------------     -------------
Weighted average shares outstanding,
  basic and diluted ........................       10,328,613        10,286,077
Net loss per share, basic and diluted,
  as reported ..............................     $      (0.07)     $      (0.36)
                                                 -------------     -------------
Adjusted net loss per share,
  basic and diluted ........................     $      (0.08)     $      (0.41)
                                                 -------------     -------------

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

FORWARD-LOOKING STATEMENTS

         Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read together with our unaudited 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 current expectations of the Company,
involve a number of risks and uncertainties and should not be considered as
guarantees of future performance. The factors that could cause actual results to
differ materially include: interruptions or cancellation of existing contracts,
impact of competitive products and pricing, product demand and market
acceptance, risks, the presence of competitors with greater financial resources
than the Company, product development and commercialization risks, changing

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<PAGE>

economic conditions in developing countries, and an inability to arrange
additional debt or equity financing. 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, including its Annual Report on Form 10-KSB
for the year ended December 31, 2003.

OVERVIEW

FORMATION

         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. In January 2003, we incorporated in Delaware and became a
wholly owned subsidiary of BioChemics, focused on the further commercialization
of our existing OTC products and the development, through BioChemics and other
potential collaboration partners, of new OTC product candidates. We continue to
rely on BioChemics to provide us with administrative support services,
manufacturing and product development services and vaso active lipid
encapsulated ("VALE") and proprietary PENtoCORE(R) technology licenses.

         On December 15, 2003, we completed an initial public offering of
5,002,500 shares of our Class A common stock at a price of $1.67 per share
raising approximately $6.4 million, net of issuance costs. Effective March 5,
2004, we completed a 200% stock dividend to holders of record of both our Class
A and B common stock on February 23, 2004. Except where noted, all share and per
share information contained in this Quarterly Report on Form 10-QSB have been
adjusted to reflect the effects of this dividend.

TECHNOLOGY
         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.

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<PAGE>

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

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

         The goal behind the development of the VALE technology system 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 skin's outer layer, or epidermis;

         o        the second layer, the dermis, which is composed of connective
                  tissue, glands and hair; and

         o        the walls of individual capillaries, tiny, thin-walled blood
                  vessels that transport blood to the larger veins and arteries
                  of the body.

         The VALE system 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 system 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 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 toresearch, 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

                                       13


<PAGE>

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 and
nine-month periods ended September 30, 2004, we incurred research and
development costs of $57,459 and $199,925, respectively, related to the
formulation of an analgesic utilizing the active ingredient ibuprofen.
Pre-clinical studies utilizing animals were conducted and billed as part of this
research.

ADMINISTRATIVE AND MANAGERIAL SUPPORT

         Effective September 1, 2003, we entered into an administrative services
Agreement with BioChemics. Under this agreement, BioChemics provides to us, at
our request, administrative support services including secretarial support,
accounting and tax services, data processing services, utilities, designated
office space, designated warehouse and storage space, office supplies, telephone
and computer services and equipment and such other office and corporate support
services as we may reasonably require from time to time. BioChemics charges us
an administrative services fee at a rate of cost plus 10%. This agreement is in
effect for an initial term of 5 years and will be automatically renewable on
each anniversary date for an additional period of 12 months unless sooner
terminated (i) for a material breach by us, not cured within three months, and
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. In addition, during the nine-month
period ended September 30, 2003, BioChemics provided financing to us in the
amount of $445,822 to fund our operating losses incurred during that nine-month
period as well as fund the up front costs of a private placement closed in May
2003, see discussion under "Liquidity and Capital Resources." This amount was
reimbursed to BioChemics as a portion of the amount paid to BioChemics upon the
closing of our initial public offering in December 2003. 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.

                                       14


<PAGE>

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

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

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

                                       15


<PAGE>

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

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

                                       16


<PAGE>

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

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

         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.

                                       17


<PAGE>

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

         TREATMENT OF THE COMPANY'S PRODUCTS AND PRODUCT CANDIDATES We believe
that the active ingredients, dosage form and strengths of our Athlete's Relief,
Osteon and Termin8 products, licensed from BioChemics, are covered by the OTC
Review Program and therefore are eligible for marketing under the OTC Review
Program. In addition, we believe the revised labeling for these products is
consistent with FDA laws and regulations. Accordingly, in September 2004, we
introduced these products, with the revised labeling, to the market. Although
these products are now on the market, there have not been significant shipments
to date.

         With regard to product candidates that use the VALE transdermal
technology or otherwise require new drug approval, we will seek to secure a
partnership with a larger marketing partner specifically for those products.
Further, it is expected that the actual development work will be done by
BioChemics which will be required to follow the more extensive regulations
imposed by the FDA, including the NDA requirements, and other regulatory
authorities in the United States and other countries regarding research and
development, pre-clinical studies and clinical trials and ultimately
manufacturing of drug products subject to "new drug" status.

         All of our OTC products and product candidates, whether subject to the
OTC Review Program or NDA requirements, are required to be labeled, promoted,
and manufactured to avoid the misbranding and adulteration provisions of the
FFDCA, including the prohibition against false and misleading representations
and manufacturing in violation of cGMPs.

STRATEGY

         Our general strategy is to commercialize, market and sell transdermal
and topical OTC drugs that we believe can be delivered in an efficient and
reliable manner and have certain use advantages by utilizing both the VALE and
PENtoCORE technologies.

         The development and test marketing of our three primary products which
we license from BioChemics, has been completed. Each of these products uses
PENtoCORE topical formulations. We are marketing each of our three current
products with revised labeling under the OTC Review Program. These products are:

         o        Athlete's Relief -- an OTC external analgesic designed to
                  provide temporary relief from the muscle and joint pain
                  associated with athletic activity; and

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

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

         We license the Osteon and PENtoCORE trademarks under our amended
license agreement with BioChemics. In addition, we have applied for U.S.
trademark protection for the mark "Termin8."

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<PAGE>

         In addition to and separate from our Athlete's Relief, Osteon and
Termin8 products, we have identified and are currently developing, in
collaboration with BioChemics, six additional OTC product candidates that will
utilize either 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.

         We have finalized a formulation of our acne treatment utilizing our
PENtoCORE topical technology. We intend to eventually market the acne treatment
under the label RepiDerm(R). The product would contain 10% benzoyl peroxide
(BPO) as an active ingredient.

         There is a final OTC Monograph for acne drug products. The final
Monograph does not, however, currently include BPO as an active ingredient. In
its tentative final Monograph for OTC acne drug products, 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 unable to state that BPO is generally recognized as safe.
Accordingly, FDA published an amended tentative final monograph for OTC topical
acne drug products in which it reclassified BPO from Category I (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, 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 percent) 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.

                                       19


<PAGE>

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 when we are confident that RepiDerm is covered by the OTC Review
Program and its marketing is consistent with FDA's policies regarding products
that are being reviewed under the Program, specifically including BPO products.
We do not expect to begin to market RepiDerm until after the first quarter of
2005.

         In September 2004, we introduced our new marketing and sales strategy
and began shipping our products with revised labeling. We anticipate executing
our marketing and sales strategy in two phases, as discussed below. We believe
this two-phase approach is the most efficient and cost effective manner to
quickly re-introduce our products to the market place.

         In the first phase of our rollout strategy, we believe the most
efficient and economical means of obtaining market penetration is through
strategic alliances. Accordingly, this is where we have placed our immediate
focus. Typically under these alliances, our prospective partners will control
and assume all the costs of marketing and distribution. We will assume all the
costs of manufacturing. This model eliminates many prohibitive costs such as
mass-media advertising and the development of large sales and distribution
channels. We will attempt to leverage the already established market visibility,
presence and experience of our prospective partners as well as their
distribution networks. We believe that these factors and our decision to
outsource all our product manufacturing allows us to operate with minimal direct
labor and other business costs.

         In January 2004, we executed our first strategic alliance with Ortho
Distribution Inc., or ODI, a wholly owned subsidiary of OrthoRehab, Inc. of
Tempe, Arizona. OrthoRehab has an extensive distribution network, across the
United States and in approximately 50 other countries. We and ODI expect to
launch our external analgesic product through ODI's distribution network by the
end of 2004. To that end we have recently met with ODI's management to discuss
the most efficient and expeditious manner in which to distribute product through
its distribution system, especially their expanding international network.

         In March 2004, in furtherance of the first phase of our rollout
strategy, we entered into an exclusive, direct to consumer media based,
strategic alliance with M2G Media of Irvine, California, a marketing and
distribution company that utilizes direct to consumer media and television as
its primary form of marketing medium. M2G Media will market privately labeled
versions of our current products specifically targeting the over the counter
topical analgesic arthritis and pain relief markets. We expect M2G Media to
commence infomercial filming by the end of 2004 and to launch product through
its channels of distribution in the first quarter of 2005. However, there can be
no assurance that this alliance will continue, or if continued, that it will be
successful.

         In the second phase of our rollout strategy, we intend to pursue
opportunities to launch our products into retail market chains, but not before
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 appointed
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. Our plan is focused on the systematic rollout
of our current products into major retail and drug store chains, select

                                       20


<PAGE>

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 following the initiation
of the SEC trading suspension on April 1, 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 before 2005. There can be no assurance that
any of the initial public offering proceeds will be used for this purpose.

         Although we believe 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 believe that the systematic and multi-phased launch for each of our
three current products, as well as the commercialization of RepiDerm, as
described above, will allow us to maintain control over the required costs
associated with these launches and will maximize the return on investment for
the advertising and marketing expenditures.

         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 and on the consumer perception of our products.

CRITICAL ACCOUNTING POLICIES

          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 and we considered to be reasonable.

                                       21


<PAGE>

         DEFERRED 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. See Note 4 to our unaudited
condensed financial statements for the impact on earnings had we fully adopted
SFAS 123.

         OFF-BALANCE SHEET ARRANGEMENTS We do not have off-balance sheet
arrangements, financings or other relationships with unconsolidated entities
known as "special purpose entities."

         COST OF SALES Our costs of sales primarily consist of manufacturing
costs charged by outside contractors including BioChemics which, pursuant to our
manufacturing and development agreement charges us the cost of such
manufacturing and development plus 10%. We expect to continue to use outside
contract manufacturers for the production of our products. As a result, all of
our inventory balances are in the form of finished goods and direct labor
initiatives are minimal.

         MARKETING, ADVERTISING AND PROMOTION EXPENSES Our marketing,
advertising and promotion expenses include such costs of print, Internet and
costs associated with our attendance and presentation at industry tradeshows and
other marketing and sales programs.

         RESEARCH AND DEVELOPMENT EXPENSES Our research and development consists
primarily of costs charged by BioChemics which, pursuant to our August 2003
Agreement, charges us the cost of such manufacturing and development plus 10%.

OUTLOOK

         On December 10, 2003, our Registration Statement on Form SB-2
(registration no. 333-106785) for the sale of 5,002,500 shares of our Class A
common stock, which included 652,500 shares of Class A common stock to cover
underwriter over-allotments, at a price of $1.67 per share, became effective. We
completed this initial public offering on December 15, 2003. All of the shares
sold in this offering were from our authorized pool of Class A common stock.
Kashner Davidson Securities Corp. functioned as the representative of the
underwriters for this public offering. Net of offering costs of approximately
$1.9 million, we received approximately $6.4 million in proceeds, which we
estimated would be allocated as follows:

         o        Approximately $1.1 million to fund our continued development,
                  commercialization and sale of our products and product
                  candidates;

         o        Approximately $1.9 million to implement our strategic
                  marketing and commercialization plan.

         o        $200,000 to recruit and hire individuals for key senior
                  management positions;

         o        $350,000 to cover the cost of providing sales incentives,
                  product samples and discounts;

         o        To repay, without interest, BioChemics approximately $640,200
                  for management fees and other operational charges paid by
                  BioChemics to third-parties on our behalf prior to the initial
                  public offering.

         o        Approximately $2.2 million to provide working capital for
                  general and corporate purposes.

                                       22


<PAGE>

         The events that led to the SEC's temporary suspension in the trading of
our securities have impacted the above estimates significantly. (See "Recent
Events -- Trading Suspension" in the Company's amended Annual Report on Form
10-KSB/A, filed July 21, 2004, which is incorporated herein by reference, and
"Recent Events -- Trading suspension" in the Company's Quarterly Report on form
10-QSB for the quarter ended March 31, 2004, filed on July 20, 2004, which is
incorporated herein by reference). To date, approximately $2.0 million has been
incurred on professional services, of which more than $1.0 million has been
incurred in legal and accounting costs and $615,000 incurred in investment
banking fees, most of which relate the Company's expenses addressing the matters
that led to the SEC suspension. Additionally, immediately upon the initiation of
this suspension we voluntarily suspended the marketing and sale of Athlete's
Relief, Osteon and Termin8 products until we were reasonably sure that the
marketing of these products was consistent with the FDA's requirements and
policies. As a result, we delayed the second phase of our rollout marketing
strategy described below until at least mid to late 2005. Accordingly,
approximately $1.2 million of the $1.9 million in strategic marketing expenses
that was estimated above and budgeted for radio advertising has been allocated
to working capital to help fund the cost of the professional services incurred
to date as well as those we expect to incur in future periods.

         We anticipate, based on our current plans and assumptions relating to
our operations, that our current working capital together will be sufficient to
satisfy our cash requirements through September 30, 2005. We have no current
plans, agreements or commitments with respect to any acquisitions or additional
financing.

         As a result of our voluntary suspension of marketing efforts, we are no
longer able to provide meaningful guidance on what our 2004 or 2005 revenues
will be, therefore our projections of March 26, 2004 should not be relied upon
for any purpose.

         In September 2004, we introduced our new marketing and sales strategy
and began shipping our products with revised labeling. See "Strategy". There
have not been significant shipments as of November 12, 2004.

THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003

         NET REVENUES Net revenues for the three-month period ended September
30, 2004 were $2,632. In the comparable period in 2003, we recorded negative
revenues of $29,798. As a result of the re-branding of our athlete's foot
product to Termin8 in 2003, our then largest customer, Walgreens, returned most
of its unsold deFEET product in their possession to us. We recorded a $30,000
charge to net revenues during the three-month period ended September 30, 2003
upon notification by Walgreens to us of this product return. Excluding the
effects of this one-time event, net revenues increased $2,430 during 2004 from
the comparable period in 2003.

         COST OF SALES In general, our cost of sales is variable to our net
revenues. However, 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. In 2003, our
largest customer, Walgreens, returned most of its unsold inventory of deFEET to
us. As a result, we recorded a benefit to cost of sales in the three-month
period ended September 30, 2003 when we returned these products into our
inventory. Excluding the effects of this one-time event, cost of sales in the
three-month period ended September 30, 2003 would have been $81.

         MARKETING, ADVERTISING AND PROMOTION EXPENSES Marketing, advertising
and promotion expenses increased approximately 231% to $79,796 for the
three-month period ended September 30, 2004 from $24,079 for the comparable
period in 2003. This increase was primarily attributable to approximately
$75,000 in professional marketing and consulting fees we incurred as we initiate
our product rollout strategy.

                                       23


<PAGE>

         MANAGEMENT FEE Management fee decreased approximately 54% to $19,672
for the three-month period ended September 30, 2004 from $42,958 for the
comparable period in 2003. In prior periods, certain expenses that we currently
pay directly on our own behalf were paid by BioChemics. As the Company has
become a stand alone entity, our management fees have decreased.

         SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative
expenses increased by $512,515 to $557,662 during the three-month period ended
September 30, 2004 as compared to $45,147 in the comparable period in 2003. The
increase is due primarily to our increased operations and significant legal and
other professional expenses we incurred in connection with our recent SEC,
Nasdaq, and FDA matters and shareholder class actions. See Part II Item 1 "Legal
Proceedings."

         During the three months ended September 30, 2004, we incurred
approximately $186,000 in legal and professional fees to amend our previously
filed Annual Report, prepare our previous quarterly report, for representation
before the SEC and FDA and to defend the Company in the shareholder class
actions; approximately $200,000 in salaries, wages and other related
compensation costs; approximately $90,000 in business, financial and other
professional services; and approximately $53,500 for various insurance premiums
typical of a public company. The remaining selling, general and administrative
expense, are related to the general expansion of our operations.

         RESEARCH AND DEVELOPMENT Research and development expenses incurred for
the three-month period ended September 30, 2004 were $57,459. Beginning in
January 2004, funded from proceeds of our December 2003 initial public offering,
we engaged Biochemics to provide services pursuant to our August 2003 Agreement.
These services 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. Due to lack of funding, no such charges were
incurred during the comparable period in 2003.

         STOCK BASED COMPENSATION We are required to record stock-based
compensation when we grant options to purchase our common stock to non-employees
in accordance with SFAS 123. The value of these options is calculated using the
Black-Scholes option-pricing model. Stock based compensation for the three-month
period ended September 30, 2004 was $15,101. There were no common stock options
granted to non-employees prior to September 30, 2003, accordingly there was no
stock-based compensation recorded in the comparable period in 2003.

NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003

         NET REVENUES Net revenues decreased approximately 79% to $10,641 for
the nine-month period ended September 30, 2004 from $51,876 for the comparable
period in 2003. This decrease was primarily a result of two specific causes.
First, in response to our decision to re-brand our athlete's foot product deFEET
to Termin8 in September 2003, Walgreens returned most of the deFEET product that
it had in its possession. Second, we did not launch the re-branded product,
Termin8, due to our determination on April 8, 2004 not to market or sell our
products until all outstanding matters have been addressed to the satisfaction
of the SEC and until we were reasonably sure that the marketing and sale of our
products were consistent with the FDA's requirements and policies. See
discussion under Part II, Item 1, LEGAL PROCEEDINGS, of this report. In August
2004, we determined that we were reasonably sure that the marketing and sale of
our products was consistent with FDA requirements and policies. Accordingly in
September 2004, we resumed our marketing and sales strategy and began shipping
our products.

         COST OF SALES In general, our cost of sales is variable to our net
revenues. However, 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. As a result of the
regulatory matters discussed further under Part II, Item 1, LEGAL PROCEEDINGS,
of this report, such an adjustment occurred during the nine-month period ended
September 30, 2004. More specifically, we submitted new labels for our

                                       24


<PAGE>

previously marketed products to the FDA and requested that the FDA comment on
these revised labels. There is no regulatory requirement that the FDA review or
provide comment on such materials and accordingly, to date, we have not received
any comments or recommendations for improvement from the FDA based on its
review. We are, however, reasonably sure that our revised labels are consistent
with all FDA regulations and policies. As a result of this process, we
determined that approximately $39,000 of products were not recoverable under our
revised label format. Accordingly, we recorded a charge for this amount in cost
of sales during this period. In the corresponding period in 2003, cost of sales
solely represented the cost of the products we sold.

         MARKETING, ADVERTISING AND PROMOTION EXPENSES Marketing, advertising
and promotion expenses increased approximately 80% to $156,645 for the
nine-month period ended September 30, 2004 from $87,125 for comparable period in
2003. This increase was primarily attributable to approximately $135,000 in
professional marketing and consulting fees we incurred as we initiate our
product rollout strategy.

         MANAGEMENT FEE Management fee decreased approximately 64% to $35,992
for the nine-month period ended September 30, 2004 from $99,000 for the
comparable period in 2003. In prior periods, certain expenses that we currently
pay directly on our own behalf we paid by BioChemics. As we have become a stand
alone entity, our management fees have decreased.

         SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative
expenses increased by $2,932,671 to $3,130,209 during the nine-month period
ended September 30, 2004 as compared to $197,538 in the comparable period in
2003. The increase is due primarily to our increased operations, non-refundable
fees we incurred in connection with our March 16, 2004 Private Investment in
Public Entity transaction and significant legal and other professional expenses
we continue to incur in connection with our recent SEC, Nasdaq, and FDA matters
and shareholder class actions. See "Legal Proceedings."

         During the nine months ended September 30, 2004, we incurred
approximately $870,000 in legal and professional fees to amend our previously
filed annual report, for representation before the SEC and FDA and to defend
ourselves in the shareholder class actions; approximately $615,000 in
professional and settlement fees we incurred in connection with our March 16,
2004 Private Investment in Public Entity transaction; approximately $170,000 in
general corporate legal fees; approximately $676,500 in salaries, wages and
related compensation costs; approximately $376,000 in business, financial and
other professional services; and approximately $117,500 for various insurance
premiums typical of a public company. The remaining selling, general and
administrative expense pertained to our general expansion of our operations.

         RESEARCH AND DEVELOPMENT Research and development expenses incurred for
the nine-month period ended September 30, 2004 were $199,925. Beginning in
January 2004, funded from proceeds of our December 2003 initial public offering,
we engaged Biochemics to provide services pursuant to our August 2003 Agreement.
These services 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. Due to lack of funding, no such charges were
incurred in the comparable period in 2003.

         STOCK BASED COMPENSATION We are required to record stock-based
compensation when we grant options to purchase our common stock to non-employees
in accordance with SFAS 123. The value of these options is calculated using the
Black-Scholes option-pricing model. Stock based compensation for the nine-month
period ended September 30, 2004 was $139,235. During this nine-month period the
Company granted 165,000 options to non-employees pursuant to its Stock Incentive
Plan. In addition, 225,000 options were granted to a consultant, which were
separately registered by the Company by filing a Form S-8 with the SEC in
February 2004. There were no common stock options granted to non-employees prior
to September 30, 2003, accordingly there was no stock-based compensation
recorded in the comparable period in 2003.

                                       25


<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         Historically, while we were a division of BioChemics, cash was managed
on a centralized basis. Cash receipts associated with our business were
transferred to BioChemics directly upon receipt and in turn BioChemics provided
funds to cover our disbursements. Accordingly, BioChemics made cash
contributions to our capital in the three and nine-month periods ended September
30, 2003 to cover our deficits incurred during that period and to fund the
initial costs of a private placement, discussed below which closed in May 2003.

         In accordance with our plan to obtain independent financing as a
stand-alone entity, we initiated a private placement of our 10% convertible
subordinated pay-in-kind promissory notes in the aggregate principal amount of
$500,000. The private placement closed in May 2003. The proceeds from the sale
of these notes were used to fund certain expenses related to our initial public
offering, as well as for general administrative and operating expenses, which is
discussed further below. In December 2003, we repurchased $35,000 principal
amount of these notes at cost, without interest, from an unrelated third party
investor.

         On December 15, 2003, we completed an initial public offering of
5,002,500 shares of our Class A common stock at a price of $1.67 per share,
raising approximately $6.4 million, net of issuance costs. At September 30,
2004, we had approximately $3.0 million remaining from these proceeds for our
working capital needs. Concurrently with the completion of our initial public
offering, we converted our 10% convertible subordinated pay-in-kind promissory
notes into an aggregate of 601,113 shares of Class A common stock.

         In the nine-month period ended September 30, 2004, we received an
aggregate of $450,000 from the exercise of warrants in February 2004 and March
2004 by the founder of Commotion LLC, a marketing company. These warrants were
issued on January 16, 2004 (please see "Outlook" for more information on our
agreement with Commotion, LLC).

         On March 16, 2004, we entered into a private placement transaction with
an institutional investor in the amount of $7.5 million. 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. In addition, we issued to the investor warrants to
purchase 166,667 shares of our 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, 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. In connection with this transaction, we paid approximately $600,000
in fees to various third parties. These fees were not refunded when we repaid
the investor and, accordingly, were recorded as an expense during the nine-month
period ended September 30, 2004.

         We do not expect our marketing efforts with M2G Media and ODI to
provide us with significant revenues or cash flow in 2004.

         In addition, our financial condition has been affected by the
administrative costs and legal fees associated with both the SEC and FDA
regulatory matters, as well as the preliminary aspects of our pending
litigation. Please see "Legal Proceedings" and "SEC and FDA Regulatory Matters"
for more information on the underlying claims in the lawsuits against us and the
SEC's trading suspension. We expect to use our working capital, in part, to
defray those costs for the foreseeable future. We believe we have sufficient
cash to execute our business plan through September 30, 2005. However, if there
are adverse developments in the pending class action lawsuits or if the Company
experiences increases in the level of its operations, the Company could require
additional capital. There is no assurance that the Company would be able to
obtain any such additional working capital, or even if it does obtain such
capital, it will be on favorable terms to the Company. If the Company requires
such additional working capital and is unable to obtain it, its business
operations could be adversely affected. The Company has no current plan in place
for additional financing.

                                       26


<PAGE>

OFF-BALANCE SHEET ARRANGEMENTS

         We have no off balance sheet financing or financing that is not
disclosed in our unaudited condensed financial statements included in this
Quarterly Report.

QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

         INTEREST RATE SENSITIVITY

         As of September 30, 2004, we had cash and cash equivalents of
$3,016,793 that consisted of highly liquid money market instruments with
maturities less than 90 days. Because of the short maturities of these
instruments, a sudden change in market interest rates would not have a material
impact on the fair value of the portfolio. Accordingly we do not expect our
operating results or cash flows to be affected to any significant degree by the
effect of a sudden change in market interest rates on our portfolio.

         EQUITY SECURITY PRICE RISK

         We do not own any equity investments. Therefore, we do not currently
have any direct equity price risk.

         MARKET/PRICE RISK

         We are exposed to market risk in the normal course of business
operations. We face competition and must offer our products and services at
prices the market will bear. We believe that price risk will not affect our
operating results to any significant degree. However, should the prices of our
products be less than anticipated, this may adversely affect our future
profitability and competitiveness.

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").

                                       27


<PAGE>

         At September 30, 2004, we had an accumulated deficit of approximately
$5.3 million. We expect to incur additional operating losses as we expand our
marketing, sales and development efforts. If we are unable to generate
sufficient revenue from our operations to pay expenses or we are unable to
obtain additional financing on commercially reasonable terms, our business,
financial condition and results of operations may be materially and adversely
affected.

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

         We are an early stage company focused on commercializing, marketing and
selling over-the-counter, or 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, Athlete's Relief 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
commercialized, marketed or sold any products or 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.

OUR FAILURE TO COMPLY WITH EXTENSIVE GOVERNMENTAL 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.

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<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, ARE
COVERED BY THE FDA'S OTC REVIEW PROGRAM, AND ARE MARKETED IN CONFORMITY WITH THE
APPLICABLE OTC DRUG MONOGRAPH OR UNLESS THEY HAVE ATTAINED NDA OR ANDA APPROVAL.

         If our topical Athlete's Relief, 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 a 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 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 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 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.

                                       29


<PAGE>

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

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

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

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

         The market price of our common stock has experienced, and may continue
to experience, significant volatility. During 2003 and the first nine months of
2004, the per share closing price of our common stock ranged from $0.40 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 was made by us, 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 November 12, 2004 the
average bid for a share of our Class A Common Stock as quoted by the OTC Pink
Sheets was $0.50. 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 the Company.
See "Legal Proceedings" for more information.

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<PAGE>

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 the Company's Class A common stock during the
period December 11, 2003 to March 31, 2004 which allege that the defendants
violated the federal securities laws by allegedly failing to make accurate and
complete disclosures concerning the Company, 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 the Company's 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.

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 LITIGATION AGAINST
THE COMPANY OR 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 the Company with respect
to any of the claims asserted in any of the litigation summarized under
"Litigation" 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, the Company 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.

                                       31


<PAGE>

WE HAVE DEPENDED ON A SMALL NUMBER OF CUSTOMERS FOR THE MAJORITY OF OUR GROSS
REVENUE. AS OF THE DATE OF THIS REPORT, WE ARE NOT GENERATING ANY SIGNIFICANT
REVENUES. WE MAY NOT BE ABLE TO GENERATE SIGNIFICANT FUTURE REVENUES.

         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 the Company nor its parent, BioChemics, were 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 Walgreens 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 have, as discussed previously, established two strategic marketing
and distribution alliances. If these two strategic alliances are not successful
and if other strategic alliances or retail distribution agreements are not
established, this could result in a material adverse impact on our revenues.

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 and nine-month periods ended
September 30, 2004, we incurred research and development costs of approximately
$57,459 and $199,925 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. These services were
incurred pursuant to a February 2003 manufacturing and development agreement
with BioChemics (see Manufacturing and Development agreement filed on September
9, 2003 as an exhibit to Amendment 1 of our Registration Statement). 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 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

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<PAGE>

collaborative arrangements could have a material adverse effect on our business,
financial condition and results of operations. There also can be no assurance
that disputes will not arise with respect to the ownership of rights to any
technology developed with third parties. These and other possible disagreements
with collaborators could lead to delays in the development or commercialization
of our product candidates or could result in litigation or arbitration, which
could be time consuming and expensive and could have a material adverse effect
on our business, financial condition and results of operations.

         Additionally, the failure of any of our contract manufacturers to
manufacture our products in conformity with current Good Manufacturing Practices
(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.
CGMPs are a system of manufacturing that insures the quality, reproducibility,
and traceability of drug products intended for human use. 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. These are: Patent No. 5,460,821, issued on October 24, 1995
and expiring June 23, 2013; Patent No. 5,645,854, issued on July 8, 1997 and
expiring June 23, 2013; Patent No. 5,853,751, issued on December 29, 1998 and
expiring June 23, 2013; and Patent No.6,635,274, issued on October 21, 2003 and
expiring October 27, 2020. BioChemics has licensed these patents to us. 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 fifteen registered
trademarks, including Osteon 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.

                                       33


<PAGE>

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

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

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

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

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

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

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

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

         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.

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<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 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 costs. These expenses have been charged back to us as a
management fee. We recorded approximately $19,700 and $36,000 respectively in
these related-party fees in the three-month periods ended September 30, 2004 and
2003. In addition during the year ended December 31, 2003 BioChemics provided
financing to us in the amount of approximately $518,200 to fund our operating
losses incurred during the period of time up to the initial public offering as
well as fund the up front costs of a private placement closed in May 2003, see
discussion at "Liquidity and Capital Resources. This was reimbursed as a portion
of the amount paid to BioChemics upon the closing of our initial public offering
in December 2003. 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 December 31, 2003, 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, 2003, BioChemics had an unaudited,
consolidated accumulated deficit of approximately $12.8 million, which includes
the operations of Vaso Active. In addition, as of December 31, 2003, BioChemics
was in default under debt obligations in the approximate amount of $8.0 million,
which includes accrued interest, that it has issued to private investors, of
which approximately $5.3 million, inclusive of accrued interest, is held by Mr.
Masiz, members of his family and other related parties. 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.

                                       35


<PAGE>

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

         Effective as of August 17, 2004 and in accordance with the terms of the
SEC settlement (which is discussed further), Mr. John J. Masiz resigned as
President and CEO of Vaso Active. The Company appointed its current CFO, Joseph
Frattaroli, to serve as Acting President and CEO while it conducts a search for
a new CEO. 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 of the Company and as a director of the Company. The Company
is not currently conducting a search for a new Chief Operating Officer. We
anticipate that our new Chief Executive Officer will assume Mr. Seifert's former
responsibilities.

         Furthermore, several of our other senior officers 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 the Company. 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 November 12, 2004 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 US, 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.

ITEM 3.  CONTROLS AND PROCEDURES

         As of the end of the period covered by this interim report on Form
10-QSB, the Company carried out, under the supervision of, and with the
participation of Joseph Frattaroli, the Company's Acting Chief Executive Officer
and Chief Financial Officer (the "Certifying Officer"), an evaluation of the
effectiveness of the Company's "disclosure controls and procedures" (as defined
under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange
Act of 1934, as amended). Based on this evaluation, the Certifying Officer has

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<PAGE>

concluded that the Company's disclosure controls and procedures were effective
to ensure that material information required to be disclosed in the Company's
filings under the Exchange Act with respect to the Company and its consolidated
subsidiaries is recorded, processed, summarized and reported on a timely basis
in order to comply with the Company's disclosure obligations under the Exchange
Act and the rules and regulations promulgated thereunder.

         Further, there were no changes in the Company's internal control over
financial reporting during the Company's third fiscal quarter that materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.

                           PART II - OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

SETTLEMENT OF SEC MATTERS

         On August 26, 2004, the U.S. Securities and Exchange Commission ("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 ("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 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 the Company, for a period of five years. Effective as of August 17,
2004, Mr. Masiz resigned as an executive officer and a director of the Company.
He is, however, permitted to remain an active employee and/or consultant of the
Company. In light of the foregoing, the Company and Mr. Masiz agreed to
terminate his employment agreement and enter into a new agreement. Pursuant to
that agreement, Mr. Masiz 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 Joseph Frattaroli
to serve as its Acting President and CEO while the Company conducts a search for
a new CEO. On September 13, 2004, the Court entered final judgments against the
Company and Mr. Masiz, pursuant to the above referenced settlement terms.

FDA 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 Athlete's Relief, Osteon (R) and Termin8(TM) products are
covered by the FDA's OTC Review Program and therefore we believe these products
are currently eligible for marketing under the same program. The Company
previously stated that it 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 has resumed marketing and shipment of its products in September
2004.

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<PAGE>

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 cease
voluntarily the listing of its securities from Nasdaq. 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 OTC Pink Sheets under the symbol "VAPH.PK." The closing price for
the Company's securities as quoted in the Pink Sheets on November 12, 2004 was
$0.50. 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 so successful, that it will be able to maintain the listing or quotation of
its securities on such exchange or quotation system.

LITIGATION MATTERS

         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 (previously
known as "deFEET") and the institutional demand for the Company'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 KARANFILIAN
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 laison and 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.

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         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 on
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.

ITEM 6.  EXHIBITS

    (a)  EXHIBITS

EXHIBIT
NUMBER            DESCRIPTION OF EXHIBIT
------            ----------------------
10.1              Employment Agreement with John J. Masiz dated August 12, 2004.

31.1              Officer Certification of J. Frattaroli, Acting Chief Executive
                  Officer and Chief Financial Officer, pursuant to Section 302
                  of the Sarbanes-Oxley Act of 2002.

32.1              Officer Certification of J. Frattaroli, Acting Chief Executive
                  Officer and Chief Financial Officer, pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002.

     (b) REPORTS ON FORM 8-K

         1. On August 27, 2004, the Company filed a Current Report on Form 8-K
(Items 8.01 and 9.01) on containing a press release announcing certain executive
management changes and the settlement of the SEC actions.

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<PAGE>

         2. On September 17, 2004, the Company filed a Current Report on Form
8-K (Items 5.02, 8.01 and 9.01) announcing the appointment of new directors and
that on September 13, 2004, the United States District Court for the District of
Columbia entered final judgments against the Company and John J. Masiz pursuant
to their settlements with the SEC filed with the Court.

No financial statements were included in the foregoing Current Reports.

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<PAGE>

                                   SIGNATURES

         In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

                        VASO ACTIVE PHARMACEUTICALS, INC.

Date: November 15, 2004      By:  /s/ Joseph Frattaroli
                             -------------------------------------------------
                                 Joseph Frattaroli
                                 Acting President and Chief Executive Officer
                                 (principal executive offcier)
                                 Chief Financial Officer, (principal financial
                                 officer)

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