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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended May 31, 2004 [  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 For the transition period from            to Commission file number 000-28385 Protalex, Inc.  New Mexico
(State or other jurisdiction of
Incorporation or organization)
    
    91-2003490
(I.R.S. Employer Identification No.)
 145 Union Square Drive
    
    New Hope, PA 18938(Address of principal executive offices)
    
    (Zip Code)
 Issuers telephone number
    
    (215) 862-9720
 Securities registered under Section 12(b) of the Exchange Act: Title of each class
    
    Name of each exchange on which registeredNone
    
    None
 Securities registered under Section 12(g) of the Exchange Act: Common Stock
(Title of Class) 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  [  ] Check if there is no disclosure of delinquent files in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [  ] State issuers revenues for its most recent fiscal year. $ 0 State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as
of a specified date within the past 60 days. (See definition of affiliate in
Rule 12b-2 of the Exchange Act.) $43,639,526 as of August 11, 2004. Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated. State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date. 16,784,433 as of August 5,
2004.




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TABLE OF CONTENTS  ITEM 1  DESCRIPTION OF BUSINESSITEM 2  DESCRIPTION OF PROPERTYITEM 3  LEGAL PROCEEDINGSITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 5  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERSITEM 6  PROTALEX INC.  MANAGEMENTS DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATIONITEM 7  FINANCIAL STATEMENTSBALANCE SHEETSSTATEMENTS OF OPERATIONSSTATEMENTS OF CHANGES IN STOCKHOLDERS EQUITYSTATEMENTS OF CASH FLOWSNOTES TO FINANCIAL STATEMENTSITEM 8  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;ITEM 10  EXECUTIVE COMPENSATIONITEM 11  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 12  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 13  INDEX TO EXHIBITSITEM 14  CONTROLS AND PROCEDURESITEM 15  (RESERVED)ITEM 16  PRINCIPAL ACCOUNTANT FEES AND SERVICESSIGNATURESFORM OF WARRANT ISSUED IN 2003CERTIFICATION OF CHIEF EXECUTIVE OFFICERCERTIFICATION OF CHIEF FINANCIAL OFFICERCERTIFICATION OF CEO, SECTION 906CERTIFICATION OF CFO, SECTION 906    Table of Contents  Transitional Small Business Disclosure Format (check one): Yes  [  ]  No [X] Documents Incorporated by Reference Portions of the Definitive Proxy Statement for the 2004 Annual Meeting of
Stockholders (which will be filed within 120 days after the close of the
Companys fiscal year ended May 31, 2004) are incorporated by reference. With
the exception of those portions which are specifically incorporated by
referenced in this 10-KSB Annual Report, the Proxy Statement for the 2004
Annual Meeting of Stockholders is not deemed to be filed as a part of this
Report. 
 ITEM 1  DESCRIPTION OF BUSINESS Overview Protalex, Inc. (Protalex or the Company) is a development stage company
engaged in developing a novel class of biopharmaceutical drugs for treating
autoimmune and inflammatory diseases. The Companys lead product has
demonstrated effectiveness in preclinical studies in regulating the immune
system with persisting effects. The autoimmune disease initially targeted by
the Company is Rheumatoid Arthritis. It currently has no product on the
market. Rheumatoid Arthritis is an autoimmune disease that causes the
inflammation of the membrane lining multiple joints, resulting in pain,
stiffness, warmth, redness and swelling. The inflamed joint lining, the
synovium, can invade and damage bone and cartilage. Inflammatory cells release
enzymes and cytokines that may damage bone and cartilage. The involved joint
can lose its shape and alignment, resulting in pain and loss of movement.
Rheumatoid Arthritis affects approximately 2.1 million Americans. Protalexs bioregulatory compounds are based on the principle of normalizing
the activities of immune cells at a more basic level than traditional
pharmaceutical agents, which act upon the end products of complex metabolic
pathways. In autoimmune disease models, the Companys lead product, PRTX-100
has reversed the pathologic process resulting in a restoration of tissue
integrity and function. PRTX-100 is a natural compound produced by bacterial
fermentation. The Company intends to bring this biotechnology to bear on a
range of serious autoimmune diseases that affect millions of sufferers
worldwide. These diseases include but are not limited to Systemic Lupus
Erythematosus, Psoriasis, Immune Thrombocytopenic Purpura, Inflammatory Bowel
Disease (Crohns disease and Ulcerative colitis), Insulin-independent Diabetes
Mellitus, Multiple Sclerosis, and others. The Company is currently conducting pre-clinical studies with PRTX-100 and
anticipates filing an Investigational New Drug (IND) application with the
Federal Drug Administration (FDA) by the end of 2004. This will be followed
immediately by Phase I human clinical trials in 2005. The Company is also
broadening its intellectual property and developing the corporate base for
commercialization of its products. The Companys business and laboratory
operations are located in New Hope, Pennsylvania. The Company also outsources
some of it activities to premier contract organizations and facilities. For
example, the Company has completed the manufacturing of its lead product,
PRTX-100 under Good Manufacturing Practices (GMP) and is ready to utilize this
in upcoming human clinical trials. Early lots were manufactured under Good
Laboratory Practices (GLP). The Company also plans to contract with a premier
site management organization to run its clinical trials in the USA. The Companys in-house research includes demonstrating the efficacy of PRTX-100
in well established and characterized animal models of Rheumatoid Arthritis and
other autoimmune diseases. For example, the Company is testing PRTX-100 in
murine collagen induced arthritis (CIA) model of human Rheumatoid Arthritis.
This is the model that was used to test the efficacy of the FDA approved drug,
etanercept (EnbrelTM). PRTX-100 has also demonstrated its efficacy in an
animal model of Systemic Lupus Erythematosus. The Company scientists are also
elucidating the mechanism of action and developing a second-generation class of
compounds. Laboratory staff are also developing analytical methods to screen
derivative compounds for bioactivity, measure drug concentrations in the blood,
and measure systemic effects to be used in evaluating the efficacy and safety
data in human clinical trials. Pre-clinical safety studies for PRTX-100 are being conducted and so far no
evidence of abnormal clinical reactions or toxicity has been observed. These
studies and the pre-clinical efficacy studies will lay the foundation for the
IND for treating Rheumatoid Arthritis (RA) to be submitted to the FDA in fourth
quarter of calendar year 2004. IND-related activities include manufacturing
and formulation of PRTX-100 for animal toxicity testing and for Phase I and II
human clinical trials, arranging for packaging and testing, designing clinical
trial protocols, and planning the clinical trials with physicians who will be
investigators in the trials. These IND-related activities are currently
ongoing. The Company has concluded five prior private placements of its common stock,
raising $16.1 million and carrying the Company through early research and
Pre-Clinical Trials. The most recent placement in September 2003 raised $12.7
million through a private placement. This financing is anticipated to satisfy
the Companys cash needs through 2005. The proceeds of this private placement
will be used to fund FDA Phase I and Phase II clinical trials, execute a
broader patent strategy and continue research into other autoimmune disease
indications. In the area of intellectual property and derivative drug development,
Protalexs patent was filed in April 2002, and prosecution of this patent issue
is ongoing. The Company is currently involved in patent application for its
novel manufacturing process for PRTX-100 and the next generation of Protalex
compounds is currently being made and tested in our R&D program. The Company expects that, if it is granted all regulatory approvals, its novel
products will be competitive throughout the global market. As its lead product
moves closer to the marketing stage, the Company has the option to enter into
collaborative arrangements with larger strategic partners to market and sell
the Companys products in the United States and in foreign markets. The
Company anticipates that these partners could be responsible for funding or
reimbursing all or a portion of the costs of pre-clinical and clinical trials
required to obtain regulatory approval. In return for such payments, the
Company could grant these partners rights to market certain of its products in
particular geographical regions. The Company is also evaluating the
alternative approach of pursuing its programs independently with the intention
of becoming a fully integrated biopharmaceutical company.




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About Bioregulation The immune system exists to protect the body from foreign agents such as
bacteria and viruses. In a normal functioning system, a complex set of
interactions results in the destruction of these outside bodies. An important
aspect of this process is the ability to recognize self (normal tissue) from
non-self (foreign agents). Autoimmune diseases such as Rheumatoid Arthritis,
Lupus, Crohns, Insulin-Dependent Diabetes, and Multiple Sclerosis result when
this self-recognition goes awry and the immune system mistakenly identifies
normal tissue as foreign. In Rheumatoid Arthritis the dysregulation of the
immune system causes the joint lining to form invasive tissue that degrades
cartilage and bone. With the current treatments available, prevention of
long-term damage in Rheumatoid Arthritis requires ongoing indefinite drug
therapy. The vast majority of FDA approved drugs for the treatment of
Rheumatoid Arthritis carry significant side effects such as potential
infections and development of cancer. They generally target specific products
of the immune response that are formed well after the system has lost its
ability to self-regulate. Protalexs bioregulatory compound, PRTX-100, on the
other hand, addresses the fundamental immune dysregulation at its source such
that the initial abnormal immune responses are corrected. Protalex has discovered a method of restoring the immune system through the
use of a natural compound called PRTX-100, which has been shown to have no side
effects at treatment dosages. It also has been shown to work very early in the
immune response to prevent the activation of lymphoid cells and the secretion
of pathogenic cytokines. In the animal model specifically designed to evaluate
the efficacy of anti-arthritic drugs, PRTX-100 has not only inhibited the
development of inflammation, but also repaired and/or reversed the tissue
damage caused by inflammatory response. Animal Studies Protalexs lead candidate PRTX-100 has proven effective in two clinical
standard mouse autoimmune models: Collagen-Induced Arthritis  PRTX-100 has demonstrated reproducible efficacy in
a well-established animal model of Rheumatoid Arthritis. Mice received two
injections of collagen in order to stimulate an inflammatory response. One
group was treated with various doses of PRTX-100, a second group received
EnbrelTM, a leading commercially available treatment for Rheumatoid Arthritis
and the control group was injected with vehicle saline solution. The mice were
observed for clinical symptoms, joint size and loss of function. The results
showed that very low doses of PRTX-100 and standard doses of EnbrelTM
suppressed clinical symptoms including joint swelling over the first two to
three weeks of treatment, and slowed disease progression as compared with the
control group. Thereafter, the PRTX-100-treated mice continued to remain
disease-free, whereas the mice treated with EnbrelTM showed a resumption of
joint inflammation and tissue damage. This response to EnbrelTM was expected
because the mice developed immune response to it because it is a foreign
protein. Overall, these results indicate that PRTX-100 is a potential
treatment for Rheumatoid Arthritis in humans. The data from these studies will
be used to serve as a rationale for conducting clinical trials in patients. BXSB Mice - These animals are genetically predisposed to autoimmune diseases,
and this model is used to evaluate drugs for autoimmune diseases such as Lupus,
Crohns disease and other autoimmune diseases. This genetic model more closely
approximates the human condition in that it is complex, multi-factorial and
usually treated by multiple drug regimens. In these studies mice were treated
with PRTX-100 and sacrificed at regular intervals. Their organs were weighed
and sectioned for histological analysis and their spleens were used for
immunological assays. Spleen enlargement (splenomegaly) was significantly
reduced in treated animals compared with the controls at almost every time
point, demonstrating the ability of PRTX-100 to delay the onset and severity of
this disease. Treatment with PRTX-100 also reduced non-specific immunoglobulin
production and specific autoantibody production and restored the number and
function of immune cells known as T and B lymphocytes. These results represent
improvement in a whole animal setting in this complex disease syndrome. Ongoing pre-clinical safety studies in animals have shown no drug-related
toxicity. The studies were conducted in rabbits. Rabbits are a very sensitive
model to show any potential toxicity of immuno-modulatory drugs such as
PRTX-100. All animals survived to scheduled euthanasia. No differences were
observed in body weight gain or food consumption, nor in hematology, clinical
chemistry, urinalysis, or organ weight data in animals treated with drug
compared with controls treated with vehicle. These study results will be a
crucial component of Protalexs IND Application with the FDA. Manufacturing: Protalex has contracted the manufacturing of its lead drug substance PRTX-100
to a reputable company in Belgium. The formulation, stability testing and
packaging of the final product for clinical supplies are conducted at another
reputable FDA-approved company in the USA. These companies have provided the
product for both toxicological testing and clinical supplies. The manufacturing
process of PRTX-100 is simple, novel, and is wholly owned by Protalex. The
drug is produced by bacterial fermentation under Good Manufacturing Practices
(GMP). The process is scaleable to commercial production. Markets Rheumatoid Arthritis (RA) will be the first autoimmune disease targeted and is
the primary and immediate focus of the Company. RA was chosen as a target
disease because it represents a well-defined, rapidly growing market for which
currently available treatments are expensive, and many patients may not benefit
from the existing drugs which can also cause serious side effects. Therefore,
there is a significant unmet need in the RA patients who need novel alternative
treatments. If approved, PRTX-100 will provide these patients with a choice of
therapy that is efficacious, cost-effective, and has little or no side
effects. RA is a serious autoimmune disorder that causes the bodys immune system to
mistakenly produce antibodies that attack the lining of the joints, resulting
in inflammation and pain. RA can lead to joint deformity or destruction, organ
damage, disability and premature death. More than 2.1 million Americans suffer
from RA, with the global number estimated at greater than 5 million.
Pharmaceuticals for RA represent approximately a $12 billion market with a
projected growth rate of 10% per year through the end of the decade.




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Currently, no uniformly effective treatment for RA exists. Current treatments
are costly, and in most cases must be continued for decades. In contrast, the
Company believes that bioregulator therapy such as PRTX-100 will be much more
cost-effective and efficacious. The Company anticipates that its products will initially be used to treat
patients with severe cases of RA, and particularly those individuals for whom
other treatments have failed. Additionally, the Company believes that its
experience with this class of patients will prove the efficacy and safety of
its products, and will encourage the use of its products in less severely
affected individuals in earlier stages of the disease. The second major goal is the development of second-generation compounds to add
to the Companys pharmaceutical product portfolio. The characterization of the
new compounds is underway and the patent application process is ongoing. The third goal of the Company is to pursue FDA approval to treat other
autoimmune diseases, where its drugs ability to decrease the inflammatory
response will abrogate the underlying disease processes. The BXSB animal model
is a generalized autoimmune model, so efficacy in pre-clinical trials shows
promise in treating other conditions such as Systemic Lupus Erythomatosus. The
Company is planning pre-clinical studies in Lupus and Crohns Disease during
2004 and 2005, upon completion of significant milestones in the RA trials. Competition Because of the small treatment dosages and relatively simple production
process, Protalexs compound, PRTX-100, has a potential competitive advantage.
Current RA treatments are characterized by complex manufacturing methods, and
have resulted in an average annual retail cost of $13,000 to $30,000 per
patient. A number of pharmaceutical agents are currently being used, with
varying degrees of success, to control the symptoms of RA and slow its
progression. Available treatment options include:  
    
    Analgesic/anti-inflammatory preparations, ranging from simple aspirin to the recently introduced COX-2 inhibitors;  
    
    Immunosuppressive/antineoplastic drugs, including azathioprine and methotrexate;  
    
    TNF (Tumor Necrosis Factor) inhibitors, also known as anti-TNF
therapy, currently represented by etanercept (Enbrel), infliximab
(Remicade), and adalimumab (Humira).  
    
    Soluble Interleukin1 (IL1) Receptor Therapy, Anakinra (Kineret).
Anakinra, a human recombinant IL1 receptor antagonist (hu rIL-1ra) is
approved by the FDA for the treatment of RA.  
    
    Immunoadsorption Therapy, also known as Prosorba®, now in limited
use in Europe and the United States, entailing weekly sessions during
which a patients blood is separated and passed through a molecular
filter. The use of such extreme treatment modalities emphasizes the
unmet need for a new treatment for patients who cannot respond to
existing therapies. In all, at least a dozen large and small pharmaceutical companies are active in
this market, with Amgen (and Johnson & Johnson, Inc. dominating the market with
their respective products, Enbrel and Remicade. Enbrel is a soluble
receptor construct that is administered subcutaneously. Launched in 1998, it
generated revenue of $1.3 billion in 2003. Remicade, a chimeric monoclonal
antibody administered by intravenous infusion, generated revenue of $1.73
billion in 2003. Abbots Humira, a recent entry into the RA market, generated
revenue of $280 million during its first year of sales. Another recent
entrant into the RA market is a less well-known product by Amgen Corporation,
Anakinra (Kineret). Despite intense media attention and significant sales,
the long-term efficacy of these compounds remains to be evaluated.
Post-marketing experience has indicated an enhanced risk for serious and
opportunistic infections in patients treated with Remicade or Enbrel.
Disseminated tuberculosis due to reactivation of latent disease was also seen
commonly with TNF inhibitor treatment. In some of the clinical trials,
lymphomas were more commonly observed in patients treated with TNF inhibitors
compared to placebo controls. TNF inhibitors are not recommended in patients
with demyelinating disease or with congestive heart failure. Transient
neutropenia or other blood dyscrasias have been reported with Enbrel and the
other TNF inhibitors. Findings such as these indicate that new and safe
treatments for autoimmune diseases such RA are needed. Protalexs PRTX-100 and
other products will provide such opportunity. Government Regulation The Companys ongoing research and development activities, and its future
manufacturing and marketing activities, are subject to extensive regulation by
numerous governmental authorities, both in the United States and in other
countries. In the United States, the FDA regulates the approval of the
Companys products under the authority of the Federal Food, Drug and Cosmetics
Act. In order to obtain FDA approval of the Companys drugs, extensive pre-clinical
and clinical tests must be conducted and a rigorous clearance process must be
completed. Final approval by the FDA for safety and efficacy may take several
years and require the expenditure of substantial resources. Clinical studies are typically conducted in three sequential phases, although
these phases may overlap. In Phase I trials, a drug is tested for safety in one
or more doses in a small number of patients or volunteers. In Phase II trials,
efficacy and safety are tested in up to several hundred patients. Phase III
trials involve additional safety, dosage and efficacy testing in an expanded
patient population at multiple test sites. The results of the pre-clinical and clinical trials are submitted to the FDA in
the form of a New Drug Application (NDA). The approval of an NDA may take
substantial time and effort. In addition, upon approval of an NDA, the FDA may
require post marketing testing and surveillance of the approved product, or
place other conditions on their approvals.




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Sales of new drugs outside the United States are subject to foreign regulatory
requirements that differ from country to country. Foreign regulatory approval
of a product must generally be obtained before that product may be marketed in
those countries. Risks Related To The Companys Business This 10KSB Statement Contains Forward-Looking Statements Which May Differ From
The Companys Actual Future Results.This 10KSB contains forward-looking
statements that involve substantial risks and uncertainties. These statements
are identified by forward-looking words such as may, will, expect,
anticipate, believe, estimate, and continue or similar words.
Statements that contain these words should be read carefully because they
discuss the Companys future expectations, contain projections of the Companys
future results of operations or of the Companys financial condition, and state
other forward-looking information. The Company believes it is important to
communicate its expectations. However, there may be events in the future that
the Company is not able to accurately predict which the Company has no control. The risk factors listed in this section, as well as any other cautionary
language appearing in this 10KSB, provide examples of risks, uncertainties and
events that may cause the Companys actual results to differ materially from
the expectations described in the Companys forward-looking statements.The
occurrence of the events described in these risk factors and elsewhere in this
10KSB could have an adverse effect on the Companys business, results of
operations and financial condition. The Company may not be able to continue as a going concern if it does not
attract investment capital or generate operating revenue.The Company is a
development stage enterprise and does not have operating revenue, nor does it
anticipate generating operating revenue in the foreseeable future. The ability
of the Company to continue as a going concern is dependent initially on its
ability to raise sufficient investment capital to fund all necessary operations
and product development activities. Thereafter, in order to generate operating
revenue the Company must develop products that gain regulatory approval and
market acceptance. There can be no assurance that the Company will be able to
raise sufficient investment capital or successfully develop and market its
products. The Company has a history of losses and will continue to incur losses until
sales of its bioregulator products generate sufficient revenues to fund its
continuing operations.Accumulated losses of the Company as of May 31, 2004
is $ 6,739,474. The Company does not expect to report revenue in the near
future. The Company is uncertain whether its bioregulator products can be developed
successfully, and it may have to incur additional expenses if it experiences
problems in development.The Company does not know whether bioregulator
products can be successfully developed for administration as human medications.
The Companys failure to demonstrate the safety and/or efficacy of its
bioregulator product, at the human trial stage, would necessitate potentially
expensive and time-consuming additional research. The Companys bioregulator product is currently limited to a single disease,
which means the Companys prospects may be limited if its product does not
successfully treat the disease.The Company is focused on the treatment of one
disease, rheumatoid arthritis. If the results from the Companys animal studies
and/or the human clinical trials related to that disease are inconclusive or
show results no better than a substance with no medical effect, the Company
would not have a commercially viable product. In this case, a great deal of
additional research would be required, and it is unlikely that the Company
would be able to attract further capital. The Companys bioregulator products may not be accepted by the medical
community, which would result in poor product sales.The Companys bioregulator
product may be safe and effective for its intended use, but may not show
sufficient superiority to other treatments currently in use to gain a
significant share of the market. Additionally, the novelty of this form of
treatment or its mode of administration may make bioregulator therapy less
appealing than existing treatments to prescribing physicians or to their
patients. Inadequate medical acceptance would result in poor product sales and
decreased profitability, and could impair the Companys ability to continue to
operate. The Company is uncertain whether its existing bioregulator products can be
extended to treat diseases other than rheumatoid arthritis.While the Company
will initially focus on the treatment of rheumatoid arthritis, its long-term
plans call for the extension of bioregulator therapy to other types of human
disease, such as cancer. The development of new bioregulator products (or
expanding the indications for existing products to the treatment of new
diseases) will be subject to many of the same hazards and risks discussed in
this Risk Factors section. The Company is exposed to significant costs and risks related to the regulatory
approval of bioregulator products, and is at a competitive disadvantage due to
its need to complete the regulatory process.Before the Companys products can
be manufactured, marketed and sold to the public, the requirements of the FDA
and similar governmental agencies in foreign countries must be met. The
approval process typically entails considerable time and expense, and may delay
marketing of the Companys products for a considerable period. The Company
cannot predict when regulatory applications might be submitted, nor when final
regulatory approval will be obtained. Also, the FDA could approve only certain
uses of the Companys products or subject its products to additional testing or
surveillance programs. Failure to obtain timely FDA approval will require the
Company to spend more resources on additional applications, and would delay the
generation of income from sales of the Companys products. In addition, the FDA
approval process presents a competitive advantage to some of the Companys
competitors who have already received FDA approval for their products. The Company may not be able to manufacture its bioregulator products in
commercial quantities and may have to incur significant costs to meet its
manufacturing requirements.Currently, the Company does not possess the
facilities or equipment to manufacture its products. The Company intends to
contract with a third party or parties to manufacture its products for
commercial distribution. However, although production processes for the key
compounds are thoroughly documented, such third party or parties could
encounter problems manufacturing sufficient quantities of the Companys
products for these purposes. Therefore, the Company may have to make
significant investments to construct or lease facilities sufficient to meet its
long-term manufacturing requirements. The Company may not be able to protect or maintain the security of its patents
or other proprietary information.The Company has filed for one patent, and
intends file additional patents and to prosecute and maintain patents for this
technology. Conceivably, the Company may be




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unsuccessful in obtaining additional patents and in avoiding infringements of
patents granted to others. Even if patents are granted to the Company, the
enforceability of patents issued to biotechnology and pharmaceutical firms is
often highly uncertain, and existing law may not protect the Companys patents. Without patent protection, it is unlikely that the Company could successfully
market its bioregulator products. Lacking a proprietary advantage, the Company
would be unable to prevent marketing of its bioregulator products by more
well-established competitors who would be able to dominate the market.In
addition, the Company could incur substantial costs in defending any patent
litigation brought against it or in asserting its patent rights in a suit
against another party. The Company relies on trade secrets, know-how and continuing technological
advancement to develop and maintain its competitive position. The Company
requires that each of its employees, consultants, and contract laboratories
enter into a confidentiality agreement that contains provisions prohibiting the
disclosure of confidential information to anyone outside the Company. However,
these confidentiality agreements may not be honored and the Company may be
unable to protect its rights to its unpatented trade secrets. Dissemination of
this proprietary information might allow others to develop bioregulator
products that would compete with those of the Company, diminishing the
Companys sales and market share. The Companys business could be harmed by new research efforts and product
development by the Companys competitors, most of whom have greater resources
than the Company.The Company is engaged in a sector of the economy
characterized by extensive research efforts and rapid technological
development. New drug discoveries are to be expected, including those directed
at the disease the Company has targeted. A number of the Companys competitors
have substantially more capital, research and development, regulatory,
manufacturing, marketing, human and other resources and experience than the
Company. Such competitors may develop products that are more effective or less
costly than any of the Companys current or future products and also may
produce and market their products more successfully than the Company.
Large-scale successful competition would reduce the Companys market share and
profitability, and might jeopardize the Companys ability to stay in business. The Company is exposed to significant liability associated with its
bioregulator products, and may not be able to secure insurance to cover these
risks on acceptable terms, if at all.While the Company believes that its
bioregulator product will be safe compared to other drugs, the Company still
may incur significant product liability exposure. When the Company develops a
product suitable for human administration, it intends to secure adequate
product liability coverage. However, insurers may not offer the Company product
liability insurance, may raise the price of such insurance or may limit the
coverage of such insurance. In addition, the Company may not be able to
maintain such insurance in the future on acceptable terms and such insurance
may not provide the Company with adequate coverage against potential
liabilities either for clinical trials or commercial sales. Successful product
liability claims in excess of the Companys insurance would affect the
Companys ability to continue to operate as a going concern. The Company is dependent upon key personnel for its growth. The success of the
Companys operations during the foreseeable future will depend largely upon the
continued services of the following individuals: Mr. Steven Kane, the Companys
President, and Dr. Hector Alila, the Companys .Senior Vice President of Drug
Development. The loss of the services of Mr. Kane or Dr. Alila could have a
material adverse impact on the Company. The Companys success will also depend in part on its ability to manage,
attract and retain qualified technical, management and sales personnel.
Competition for such personnel is intense.There can be no assurance that the
Company will be successful in attracting and retaining the personnel it
required to conduct its operations successfully. The Companys results of
operations could be adversely affected if the Company were unable to attract,
manage and retain these personnel or if its revenues fail to increase at a rate
sufficient to absorb the resulting increase in expenses. Recently enacted and proposed changes in securities laws and regulations are
likely to increase Company costs. The Sarbanes-Oxley Act of 2002 that became
law in July 2002 requires changes in some of the Companys corporate
governance, public disclosure and compliance practices. The Act also requires
the SEC to promulgate new rules on a variety of subjects. The Company expects
these developments to increase its legal and financial compliance costs. These
developments may make it more difficult and more expensive to obtain director
and officer liability insurance, and the Company may be required to accept
reduced coverage or incur substantially higher costs to obtain coverage. These
developments could make it more difficult to attract and retain qualified
members of Protalexs board of directors, particularly to serve on the audit
committee, and qualified executive officers. The Company is presently
evaluating and monitoring regulatory developments and cannot estimate the
timing or magnitude of additional costs. The Companys public shares are illiquid and their price is subject to
potential volatility.The market price of the shares of the Companys common
stock is highly volatile, mainly due to the limited public market for the
shares. Factors, such as fluctuations in the Companys operating results, the
introduction of new products or services by the Company or its competitors, and
general market conditions may also have a significant effect on the market
price of the Companys common stock. The Company needs additional funding.The Company is dependent upon equity
financing to fund research and development and commercialization of the drug.
The Company does not know if additional financing will be available when
needed, or if it is available, if it will be available on acceptable terms.
Insufficient funds may prevent the Company from implementing its business
strategy or may require the Company to delay, scale back or eliminate certain
components of its business plan. Employees The Company currently has six full-time employees.None of the Companys
employees are represented by an organized labor union. The Company believes its
relationship with its employees is very good and it has never experienced an
employee-related work stoppage. The Company will need to hire and retain highly
qualified experienced technical, management and sales personnel in order to
execute its business plan, carry out product development and secure advantages
over its competitors. No assurances can be given that the Company will be able
to pay the higher salaries necessary to retain such skilled employees.




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##### Table of Contents



ITEM 2  DESCRIPTION OF PROPERTY The Company rents 3,731 square feet of office space at 145 Union Square Drive,
New Hope, Pennsylvania 18938. The Company leases this property pursuant to a
three-year lease agreement, which ends February 2007, with options to extend
for an additional one or two years. 
 ITEM 3  LEGAL PROCEEDINGS The Company is not a party to any pending legal proceedings. The Company is not
aware of threatened legal proceedings to which any person, officer, affiliate
of Protalex or any owner of more than 5% of Protalex stock is an adverse party
to or has a material interest adverse to Protalex. 
 ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders in the fourth
quarter of the fiscal year ended May 31, 2004. 
 ITEM 5  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Companys common stock is traded on the Over-The-Counter Bulletin Board
under the symbol PRTX. The following table sets forth, for the fiscal periods indicated, the high and
low closing bid prices for the common stock of Protalex for the last two fiscal
years. The Companys fiscal year-end is May 31. The quotations are taken from
Internet quotation sources. The quotations may reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not necessarily
represent actual transactions. Average daily volume was 3,656 and the annual
average closing price was $2.76 for the year ended May 31, 2004. High
    
    LowFiscal Year 2003First Quarter
    
    
    2.85
    
    
    
    1.17Second Quarter
    
    
    1.91
    
    
    
    1.21Third Quarter
    
    
    3.05
    
    
    
    1.35Fourth Quarter
    
    
    3.25
    
    
    
    1.22Fiscal Year 2004First Quarter
    
    
    3.50
    
    
    
    1.50Second Quarter
    
    
    5.70
    
    
    
    2.10Third Quarter
    
    
    2.90
    
    
    
    2.11Fourth Quarter
    
    
    2.55
    
    
    
    1.45
 At May 31, 2004 the Company had 16,784,433 shares of common stock outstanding,
which were held by 308 holders of record. The transfer agent for the Companys
common stock is Standard Register Transfer Agency, Albuquerque, NM. Effective
July 1, 2004, the Company changed its transfer agent to Wachovia Bank,
Charlotte, NC. Dividend Policy - No dividends have been declared or paid to date on any
capital stock of the Company. The Company currently anticipates that it will
retain all future earnings for use in the operation and expansion of its
business and does not anticipate paying any cash dividends in the foreseeable
future. Recent Sales of Unregistered Securities. On June 15, 2003, the Company issued 8,334 shares of common stock to Steven
Kane for compensation. Also during the quarter, 12,093 shares were repurchased
from a former employee. On July 1, 2003, the Company issued options to purchase up to 40,000 shares of
restricted common stock of the Company to Barry Sherman, a consultant of the
Company, at an exercise price of $1.50 a share, in exchange for his services as
a consultant of the Company. The options were issued pursuant to a stand-alone
Option Agreement and vest over a forty eight month period. The options will
expire on July 1, 2013. On August 13, 2003, the Company issued options to purchase up to 100,000 shares
of restricted common stock of the Company to Steven H. Kane, a director and the
president of the Company, at an exercise price of $1.50 a share, in exchange
for his services as a director and the president of the Company. The options
were issued pursuant to a stand-alone Option Agreement and vested immediately.
The options will expire on August 13, 2013. On September 18, 2003, the Company closed a private placement, raising a total
of $12,657,599 in exchange for 7,445,646 shares of common stock and 2,605,976
warrants exercisable at $2.40 per share, expiring on September 18, 2008. In
addition, 558,423 warrants, exercisable at $2.40 per share, were issued to
Merriman and Company, as part of their fee for acting as placement agent. On September 19, 2003, the Company issued options to purchase up to 584,333
shares of restricted common stock of the Company to G. Kirk Raab, the Chairman
of the Company at an exercise price of $1.50 a share, in exchange for his
services as the chairman of the Company. The options were issued pursuant to a
stand-alone Option Agreement. The options vested as follows 100,000 vested
immediately with the remaining 484,333 vesting over a forty- eight month
period. The options will expire on July 14, 2013.




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##### Table of Contents



On September 19, 2003, the Company repurchased and retired 2,994,803 shares of
common stock from former Chief Scientific Officer Paul Mann and family members
for $300,000. In December 2003, the Company terminated several employees, including its Chief
Financial Officer, when it officially moved its headquarters to New Hope,
Pennsylvania. The Employment Termination Agreement provided for severance pay,
generally for three months, and the issuance of 39,399 shares of the Companys
common stock. On January 1, 2004, the Company issued options to purchase up to 50,000 shares
of restricted common stock of the Company to John E. Doherty, a director of the
Company, at an exercise price of $1.96 a share, in exchange for his services as
a director of the Company. The options were issued pursuant to a stand-alone
Option Agreement and vest over a forty eight month period. The options will
expire on January 1, 2014. On January 1, 2004, the Company issued options to purchase up to 30,000 shares
of restricted common stock of the Company to G. Kirk Raab, the Chairman of the
Company, at an exercise price of $1.96 a share, in exchange for his services as
a director and the chairman of the Company. The options were issued pursuant to
a stand-alone Option Agreement and vest over a forty eight month period. The
options will expire on January 1, 2014. On January 1, 2004, the Company issued options to purchase up to 10,000 shares
of restricted common stock of the Company to Arthur D. Bankhurst, a director of
the Company, at an exercise price of $1.96 a share, in exchange for his
services as a director of the Company. The options were issued pursuant to a
stand-alone Option Agreement and vest over a forty- eight month period. The
options will expire on January 1, 2014. On January 1, 2004, the Company issued options to purchase up to 30,000 shares
of restricted common stock of the Company to Thomas P. Stagnaro, a director of
the Company, at an exercise price of $1.96 a share, in exchange for his
services as a director of the Company. The options were issued pursuant to a
stand-alone Option Agreement and vest over a forty- eight month period. The
options will expire on January 1, 2014. On January 1, 2004, the Company issued options to purchase up to 30,000 shares
of restricted common stock of the Company to Frank M. Dougherty, a director of
the Company, at an exercise price of $1.96 a share, in exchange for his
services as a director of the Company. The options were issued pursuant to a
stand-alone Option Agreement and vest over a forty -eight month period. The
options will expire on January 1, 2014. On January 1, 2004, the Company issued options to purchase up to 75,000 shares
of restricted common stock of the Company to Steven H. Kane, a director and the
president of the Company, at an exercise price of $1.96 a share, in exchange
for his services as a director and the president of the Company. The options
were issued pursuant to a stand-alone Option Agreement and vested immediately.
The options will expire on January 1, 2014. On March 1, 2004, the Company issued options to purchase up to 150,000 shares
of restricted common stock of the Company to Hector Alila, as part of his
agreement for employment, at an exercise price of $2.17 a share, in exchange.
The options were issued pursuant to the Companys 2003 Stock Option Plan and
vest over a forty- eight month period. The options will expire on March 1,
2014. On March 1, 2004, the Company issued 50,000 shares of restricted common stock
to Hector Alila, as part of his agreement for employment. 
 ITEM 6  PROTALEX
INC. - MANAGEMENTS DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATION Plan of Operation Favorable Pre-clinical safety and efficacy studies for Protalexs lead
compound, PRTX-100, lay the foundation for the Investigational New Drug (IND)
Application for treating Rheumatoid Arthritis (RA) to be submitted to the FDA
in fourth quarter of calendar year 2004. IND-related activities include
manufacturing and formulation of Protalexs drug for Phase I and II clinical
trials, arranging for packaging and testing, designing clinical trial
protocols, and completing additional toxicology studies utilizing the companies
manufactured drug. These IND and Clinical Trial-related activities will occur
during the next 12 months. Additionally the company will be conducting
research and pre-clinical activities with PRTX-100 and other compounds in
Rheumatoid Arthritis, Systemic Lupus Erythematosus (Lupus), and other related
indications. In the area of intellectual property and derivative drug development,
Protalexs patent was filed in April, 2002, and additional patent filings
relating to the manufacturing process of PRTX-100 and new compounds are
currently in process. Staffing plans for the coming fiscal year include hiring a Chief Financial
Officer, Project Manager of Clinical Operations, and additional Research &
Development (R&D) Scientists and Laboratory Technicians. Continued growth in
staffing is anticipated in the Companys business plan, and specialized
staffing requirements in the areas of management, scientific and FDA regulatory
affairs will call for competitive salaries to attract and retain qualified
personnel. The Company anticipates that it will need to expand its current laboratory
space to accommodate the additional staffing. This will be accomplished
through the redesign & remodeling of its current facility in New Hope, PA.
Remodeling should be completed in the fourth quarter of calendar year 2004.
Further expansion of laboratory space is anticipated with further growth of the
Company. Research and Development (R&D) costs increased from the previous year from
$909,246 to $1,339,190. This increase was due largely to increased expenses to
outside contract labs for pre-clinical trials, product manufacturing, and
product qualification related costs. Monthly R&D costs are expected to continue
to increase in the coming fiscal year, driven by larger payments to vendors and
labs performing drug manufacture, FDA consultation and clinical trial site
management. Administrative expenses increased over the prior year from $640,927 to
$1,393,347 due to increased staffing and the expansion and upgrade of the
clinical consultant team associated with the company. There was also increased
R & D activity related to the successful implementation of the companys
strategy for timely completion of its IND. Additional expenses include
directors and officers insurance, costs associated with raising




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##### Table of Contents



funds, and the addition of scientific personnel, including Dr. Hector Alila as
senior Vice President of Drug Development. The Company has also recruited
well-respected opinion leaders into its newly created Scientific Advisory
Board. The major factor in the increased administrative costs is the use of
stock-based compensation to attract and reward qualified employees, consultants
and board members. The Company believes that it will be able to satisfy its cash requirements for
at least the next twelve months. Off Balance Sheet Arrangements The Company does not have any off balance sheet arrangements. Critical Accounting Policies and Estimates Our financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America. Note B to the financial
statements describes the significant accounting policies and methods used in
the preparation of our financial statements. We have identified the policies below as some of the more critical to our
business and the understanding of our results of operations. These policies may
involve a higher degree of judgment and complexity in their application and
represent the critical accounting policies used in the preparation of our
financial statements. Although we believe our judgments and estimates are
appropriate and correct, actual future results may differ from our estimates.
If different assumptions or conditions were to prevail, the results could be
materially different from our reported results. The impact and any associated
risks related to these policies on our business operations is discussed
throughout this report where such policies affect our reported and expected
financial results. Use of Estimates The preparation of our financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and equity and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. These estimates have a material impact on
our financial statements, and are discussed in detail throughout this report. As part of the process of preparing our financial statements we are required to
estimate our income taxes in each of the jurisdictions in which we operate.
This process involves us estimating our actual current tax expense together
with assessing temporary differences resulting from differing treatment of
items, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within our balance sheet. We
must then assess the likelihood that our deferred tax assets will be recovered
from future taxable income and to the extent we believe that recovery is not
likely, we must establish a valuation allowance. In the event that we determine
that we would be able to realize deferred tax assets in the future in excess of
the net recorded amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made. Significant management judgment is required in determining the valuation
allowance recorded against our net deferred tax assets, which consist of net
operating loss carry forwards. We have recorded a valuation allowance of
$2,696,000 as of May 31, 2004, due to uncertainties related to our ability to
utilize our deferred tax assets before they expire. The valuation allowance is
based on our estimates of taxable income by jurisdiction in which we operate
and the period over which our deferred tax assets will be recoverable.




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##### Table of Contents



ITEM 7  FINANCIAL STATEMENTS FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM PROTALEX, INC.
(A COMPANY IN THE DEVELOPMENT STAGE) May 31, 2004 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors
Protalex, Inc. We have audited the accompanying balance sheets of Protalex, Inc. (a New Mexico
Corporation in the development stage) as of May 31, 2004 and
2003, and the
related statement of operations, changes in stockholders equity, and cash
flows for the years then ended and for the cumulative period
from inception through May 31, 2004, as it relates to the fiscal
years ended May 31, 2004 and 2003. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Protalex, Inc. as of May 31,
2004 and 2003, and the results of its operations and its cash flows for the
years then ended, and for the cumulative period from inception
through May 31, 2004, as it relates to the fiscal years ended
May 31, 2004 and 2003, in conformity with accounting principles generally accepted in
the United States of America. Grant
Thornton LLP
Philadelphia, Pennsylvania
July 23, 2004




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##### Table of Contents



Protalex, Inc.
(A Company in the Development Stage) 
 BALANCE SHEETS May 31, 2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    9,292,783
    
    
    $
    280,052Employee advances
    
    
    11,493
    
    
    
    Prepaid expenses
    
    
    10,548
    
    
    
    6,872Total current assets
    
    
    9,314,824
    
    
    
    286,924EQUIPMENT:Lab equipment
    
    
    260,425
    
    
    
    248,706Office and computer equipment
    
    
    153,266
    
    
    
    134,387Furniture and fixtures
    
    
    25,556
    
    
    
    21,268Leasehold improvements
    
    
    5,540
    
    
    
    10,685444,787
    
    
    
    415,046Less accumulated depreciation
    
    
    (342,723
    )
    
    
    (288,231
    )102,064
    
    
    
    126,815OTHER ASSETS:Deposits
    
    
    7,590
    
    
    
    Intellectual technology property, net of
accumulated amortization of $4,653 in 2004 and
$3,638 in 2003
    
    
    15,647
    
    
    
    16,662Total other assets
    
    
    23,237
    
    
    
    16,662TOTAL
    
    $
    9,440,125
    
    
    $
    430,401LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current maturities of capital lease obligation
    
    $
    20,487
    
    
    $
    21,341Accounts payable
    
    
    377,100
    
    
    
    115,494Payroll taxes payable
    
    
    24,560
    
    
    
    8,816Interest payable
    
    
    
    
    
    
    15Total current liabilities
    
    
    422,147
    
    
    
    145,666Capital lease obligation, less current maturities
    
    
    20,046
    
    
    
    41,165Other
    
    
    1,544
    
    
    
    Total liabilities
    
    
    443,737
    
    
    
    186,831STOCKHOLDERS EQUITY:Common stock, no par value,
authorized 40,000,000 shares,
16,784,433 and 12,247,950 shares issued and
outstanding as of May 31, 2004 and 2003,
respectively
    
    
    14,683,854
    
    
    
    3,758,315Common stock, contra
    
    
    
    
    
    
    (368,547
    )Additional paid in capital
    
    
    1,052,008
    
    
    
    603,912Deficit accumulated during the development stage
    
    
    (6,739,474
    )
    
    
    (3,750,110
    )Total stockholders equity
    
    
    8,996,388
    
    
    
    243,570TOTAL
    
    $
    9,440,125
    
    
    $
    430,401
 The accompanying notes are
an integral part of these financial statements.




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##### Table of Contents



Protalex, Inc.
(A Company in the Development Stage) 
 STATEMENTS OF OPERATIONS For the years ended May 31, 2004 and 2003, and From
Inception (September 17, 1999) through May 31, 2004 From InceptionYear Ended
    
    Year Ended
    
    ThroughMay 31, 2004
    
    May 31, 2003
    
    May 31,2004REVENUES
    
    $
    
    
    
    $
    
    
    
    $
    OPERATING EXPENSES:Research and development
    
    
    (1,339,190
    )
    
    
    (909,246
    )
    
    
    (3,682,906
    )Administrative
    
    
    (1,393,347
    )
    
    
    (640,927
    )
    
    
    (2,356,746
    )Professional fees
    
    
    (288,077
    )
    
    
    (71,548
    )
    
    
    (565,293
    )Depreciation and amortization
    
    
    (5,486
    )
    
    
    (41,167
    )
    
    
    (140,995
    )Operating Loss
    
    
    (3,026,100
    )
    
    
    (1,662,888
    )
    
    
    (6,745,940
    )OTHER INCOME (EXPENSE):Interest income
    
    
    44,618
    
    
    
    9,389
    
    
    
    84,285Interest expense
    
    
    (6,321
    )
    
    
    (2,572
    )
    
    
    (67,239
    )Loss on disposal
    
    
    (1,561
    )
    
    
    (9,019
    )
    
    
    (10,580
    )NET LOSS
    
    $
    (2,989,364
    )
    
    $
    (1,665,090
    )
    
    $
    (6,739,474
    )Weighted average number of common
shares outstanding
    
    
    15,384,933
    
    
    
    12,197,325
    
    
    
    11,868,938Loss per common share basic and diluted
    
    $
    (.19
    )
    
    $
    (.14
    )
    
    $
    (.57
    )
 The accompanying notes are an integral part of these financial statements.




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##### Table of Contents



Protalex, Inc.
(A Company in the Development Stage) 
 STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY From Inception (September 17, 1999) through May 31, 2004 DeficitAccumulatedAdditional
    
    Common
    
    In TheCommon Stock
    
    Paid in
    
    Stock-
    
    DevelopmentShares
    
    Amount
    
    Capital
    
    Contra
    
    Stage
    
    TotalSeptember 17, 1999  initial issuance
of 10,000 shares for intellectual
technology license at $.03 per share
    
    
    10,000
    
    
    $
    300
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    300September 30, 1999  cost of public
shell acquisition over net assets
acquired to be accounted for as a
Recapitalization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250,000
    )
    
    
    
    
    
    
    (250,000
    )October 27, 1999  issuance of 84
shares to individual for $25,000
    
    
    84
    
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000November 15, 1999  reverse merger
transaction with Enerdyne
Corporation, net transaction amounts
    
    
    8,972,463
    
    
    
    118,547
    
    
    
    
    
    
    
    (118,547
    )
    
    
    
    
    
    
    November 18, 1999  February 7, 2000
 issuance of 459,444 shares to
various investors at $0.36 per share
    
    
    459,444
    
    
    
    165,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    165,400January 1, 2000  issuance of 100,000
shares in exchange for legal services
    
    
    100,000
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000May 1 - 27, 2000  issuance of 640,000
shares to various investors at $1.00
per share
    
    
    640,000
    
    
    
    640,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    640,000May 27, 2000  issuance of 1,644 shares
to individual in exchange for interest
Due
    
    
    1,644
    
    
    
    1,644
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,644Net loss for the year ended May 31, 2000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250,689
    )
    
    
    (250,689
    )Balance, May 31, 2000
    
    
    10,183,635
    
    
    
    965,891
    
    
    
    
    
    
    
    (368,547
    )
    
    
    (250,689
    )
    
    
    346,655December 7, 2000  issuance of 425,000
shares to various investors at $1.00
per share
    
    
    425,000
    
    
    
    425,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    425,000May 31, 2001  Forgiveness of debt owed
to shareholder
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    40,000Net loss for the year ended May 31, 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (553,866
    )
    
    
    (553,866
    )Balance, May 31, 2001
    
    
    10,608,635
    
    
    
    1,390,891
    
    
    
    40,000
    
    
    
    (368,547
    )
    
    
    (804,555
    )
    
    
    257,789August 13, 2001  Contribution by
Shareholders
    
    
    
    
    
    
    
    
    
    
    143,569
    
    
    
    
    
    
    
    
    
    
    
    143,569November 7, 2001  issuance of 881,600
Shares at $1.25 per share
    
    
    881,600
    
    
    
    1,102,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,102,000




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DeficitAccumulatedAdditional
    
    Common
    
    In TheCommon Stock
    
    Paid in
    
    Stock-
    
    DevelopmentShares
    
    Amount
    
    Capital
    
    Contra
    
    Stage
    
    TotalNovember 26, 2001  options issued to
board member
    
    
    
    
    
    
    
    
    
    
    133,000
    
    
    
    
    
    
    
    
    
    
    
    133,000Net loss for the year ended May 31, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,280,465
    )
    
    
    (1,280,465
    )Balance, May 31, 2002
    
    
    11,490,235
    
    
    
    2,492,891
    
    
    
    316,569
    
    
    
    (368,547
    )
    
    
    (2,085,020
    )
    
    
    355,893July 5, 2002  issuance of 842,000 shares
at $1.50 per share
    
    
    842,000
    
    
    
    1,263,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,263,000July 1, 2002 - May 1, 2003  purchase
of common stock from shareholder at
$.70 per share
    
    
    (130,955
    )
    
    
    (91,667
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (91,667
    )January 15, 2003 - May 15, 2003 
common stock issued to Company
president
    
    
    41,670
    
    
    
    82,841
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,841May 14, 2003  common stock issued to
employee
    
    
    5,000
    
    
    
    11,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,250June 1, 2002 - May 31, 2003  options
issued to board members and employees
    
    
    
    
    
    
    
    
    
    
    287,343
    
    
    
    
    
    
    
    
    
    
    
    287,343Net loss for the year ended May 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,665,090
    )
    
    
    (1,665,090
    )Balance, May 31, 2003
    
    
    12,247,950
    
    
    
    3,758,315
    
    
    
    603,912
    
    
    
    (368,547
    )
    
    
    (3,750,110
    )
    
    
    243,570June 15, 2003, common stock issued to Company
president
    
    
    8,334
    
    
    
    16,418
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,418June 15, 2003, purchase of common stock
from shareholder
    
    
    (12,093
    )
    
    
    (8,333
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,333
    )September 18, 2003  issuance of 7,445,646
of common stock issued in private placement
At $1.70 per share, net of transaction costs
    
    
    7,445,646
    
    
    
    11,356,063
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,356,063September 19, 2003  repurchase and retired
2,994,803 shares for $300,000
    
    
    (2,994,803
    )
    
    
    (300,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (300,000
    )December 12, 2003  issuance of 39,399 shares
to terminated employees at $2.60 per share
    
    
    39,399
    
    
    
    102,438
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102,438March 1, 2004  common stock issued to
employee at $2.55 per share
    
    
    50,000
    
    
    
    127,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127,500May 31, 2004  reclassify common stock contra
to common stock
    
    
    
    
    
    
    (368,547
    )
    
    
    
    
    
    
    368,547
    
    
    
    
    
    
    
    June 1 , 2003  May 31, 2004  options issued
to board members, employees and consultants
    
    
    
    
    
    
    
    
    
    
    448,096
    
    
    
    
    
    
    
    
    
    
    
    448,096Net loss for the year ended May 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,989,364
    )
    
    
    (2,989,364
    )Balance, May 31, 2004
    
    
    16,784,433
    
    
    $
    14,683,854
    
    
    $
    1,052,008
    
    
    
    
    
    
    $
    (6,739,474
    )
    
    $
    8,996,388
 The accompanying notes are an integral part of these financial statements.




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##### Table of Contents



Protalex, Inc.
(A Company in the Development Stage) 
 STATEMENTS OF CASH FLOWS For the years ended May 31, 2004 and 2003, and From Inception
(September 17, 1999) through May 31, 2004 From InceptionYear Ended
    
    Year Ended
    
    ThroughMay 31, 2004
    
    May 31, 2003
    
    May 31, 2004CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (2,989,364
    )
    
    $
    (1,665,090
    )
    
    $
    (6,739,474
    )Adjustments to reconcile net loss to net cash and cash equivalents
used in operating activities:Loss on disposal of equipment
    
    
    1,561
    
    
    
    9,019
    
    
    
    10,580Depreciation and amortization
    
    
    64,631
    
    
    
    108,641
    
    
    
    369,897Non cash compensation expense
    
    
    694,452
    
    
    
    381,434
    
    
    
    1,208,886Non cash expenses
    
    
    
    
    
    
    
    
    
    
    16,644Increase in advances, prepaid expenses and deposits
    
    
    (22,759
    )
    
    
    (5,270
    )
    
    
    (29,631
    )Increase in accounts payable
    
    
    261,606
    
    
    
    59,389
    
    
    
    377,100Increase in payroll and related liabilities
    
    
    15,744
    
    
    
    6,471
    
    
    
    24,560Increase in other liabilities
    
    
    1,544
    
    
    
    
    
    
    
    1,544Decrease in interest payable
    
    
    (15
    )
    
    
    (538
    )
    
    
    Net cash and cash equivalents used in operating activities
    
    
    (1,972,600
    )
    
    
    (1,105,944
    )
    
    
    (4,759,894
    )CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of intellectual technology license  fee portion
    
    
    
    
    
    
    
    
    
    
    (20,000
    )Acquisition of equipment
    
    
    (40,426
    )
    
    
    (15,236
    )
    
    
    (331,307
    )Excess of amounts paid for Public Shell over assets acquired to be
accounted for as a recapitalization
    
    
    
    
    
    
    
    
    
    
    (250,000
    )Proceeds from disposal of equipment
    
    
    
    
    
    
    6,000
    
    
    
    6,000Net cash and cash equivalents used in investing activities
    
    
    (40,426
    )
    
    
    (9,236
    )
    
    
    (595,307
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from stock issuance
    
    
    11,356,063
    
    
    
    1,263,000
    
    
    
    14,976,464Principal payment on installment purchase payable
    
    
    (21,973
    )
    
    
    (37,968
    )
    
    
    (254,878
    )Contribution by shareholders
    
    
    
    
    
    
    
    
    
    
    183,569Principal payment on note payable individual
    
    
    
    
    
    
    
    
    
    
    (225,717
    )Issuance of note payable to individual
    
    
    
    
    
    
    
    
    
    
    368,546Acquisition of common stock
    
    
    (308,333
    )
    
    
    (91,667
    )
    
    
    (400,000
    )Net cash and cash equivalents provided by financing
activities
    
    
    11,025,757
    
    
    
    1,133,365
    
    
    
    14,647,984NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    9,012,731
    
    
    
    18,185
    
    
    
    9,292,783Cash and cash equivalents, beginning
    
    
    280,052
    
    
    
    261,867
    
    
    
    Cash and cash equivalents, ending
    
    $
    9,292,783
    
    
    $
    280,052
    
    
    $
    9,292,783Interest paid
    
    $
    6,336
    
    
    $
    2,558
    
    
    $
    64,028Taxes paid
    
    $
    
    
    
    $
    
    
    
    $
    50
 The accompanying notes are an integral part of these financial statements.




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##### Table of Contents



Protalex, Inc.
(A Company in the Development Stage) 
 NOTES TO FINANCIAL STATEMENTS From Inception (September 17, 1999) through May 31, 2004 NOTE A  DESCRIPTION OF OPERATIONS AND DEVELOPMENT STAGE STATUS Protalex, Inc. (the Company or Protalex) is a development stage enterprise
incorporated on September 17, 1999 in Albuquerque, New Mexico.
The Companys headquarters are located in New Hope, Pennsylvania. The Company
was formed to take all necessary steps to fully develop and bring to commercial
realization certain bioregulator technology for the treatment of human
diseases. The Company has no operating revenue. The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. The Company is a
development stage enterprise and does not anticipate generating operating
revenue for the foreseeable future. The ability of the Company to continue as a
going concern is dependent upon developing products that are regulatory
approved and market accepted. There is no assurance that these plans will be
realized in whole or in part. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties. NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  1.
    
    Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
Company to make estimates and assumptions affecting the reported amounts of
assets, liabilities, revenues and expense, and the disclosure of contingent
assets and liabilities. Estimated amounts could differ from actual results.  2.
    
    Loss per Common Share The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 128 Earnings Per Share (SFAS No. 128)
which is effective for periods ending after December 15, 1997. SFAS No. 128
provides for the calculation of Basic and Diluted earnings per share.
Basic earnings per share includes no dilution and is computed by dividing
loss to common shareholders by the weighted average number of common shares
outstanding for the period. All potentially dilutive securities have been
excluded from the computations since they would be antidilutive. However,
these dilutive securities could potentially dilute earnings per share in the
future. As of May 31, 2004, the Company had a total of 6,762,654 potentially
dilutive securities. 3. Stock Based Compensation The Company adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 148 (SFAS No. 148), Accounting for Stock-Based
Compensation  Transition and Disclosure. The Company does not plan to
adopt the fair value method of accounting of Statement of Financial
Accounting Standards No. 123 (SFAS No. 123) for stock issued to employees.
The company accounts for those options granted to employees using the
intrinsic value recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. In
accordance with APB 25, the Company records compensation cost as the
difference between the exercise price of the options and the fair market
value of the Company stock on the measurement (grant) date. These costs are
amortized to expense over the options vesting period. Options to
non-employees are accounted for using the fair value method, which
recognizes the value of the option as an expense over the related service
period with a corresponding increase to paid-in capital. The following table illustrates the effect on net loss and earnings per share
if the Company applied the fair value recognition provision of SFAS No. 123
to stock-based employee compensation. From InceptionYear Ended
    
    Year Ended
    
    ThroughMay 31, 2004
    
    May 31, 2003
    
    May 31, 2004Net loss, as reported
    
    $
    (2,989,364
    )
    
    $
    (1,665,090
    )
    
    $
    (6,739,474
    )Add: stock-based employee compensation
expense included in reported net loss
    
    
    306,969
    
    
    
    287,343
    
    
    
    594,312Deduct: stock-based employee compensation
Expense determined under fair-value
method for all awards
    
    
    (1,087,701
    )
    
    
    (817,233
    )
    
    
    (1,904,934
    )Pro forma net loss
    
    $
    (3,770,096
    )
    
    $
    (2,194,980
    )
    
    $
    (8,050,096
    )Loss per
common share, as reported  basic and diluted
    
    $
    (.19
    )
    
    $
    (.14
    )
    
    $
    (.57
    )Proforma
loss per common share  basic and diluted
    
    $
    (.25
    )
    
    $
    (.18
    )
    
    $
    (.68
    )




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##### Table of Contents



The fair value of the options are estimated on the date of the grant using
the Black-Scholes option pricing model with the following assumptions: From InceptionYear Ended
    
    Year Ended
    
    ThroughMay 31, 2004
    
    May 31, 2003
    
    May 31, 2004Dividends per year
    
    
    0
    
    
    
    0
    
    
    
    0Volatility percentage
    
    
    95%-102
    %
    
    
    85
    %
    
    
    90%-131
    %Risk free interest rate
    
    
    2.07%-4.78
    %
    
    
    4.25
    %
    
    
    2.07%-5.11
    %Expected life (years)
    
    
    4
    
    
    
    3-4
    
    
    
    3-5
  4.
    
    Cash and Cash EquivalentsFor the purposes of reporting cash flows, the Company considers all cash
accounts, which are not subject to withdrawal restrictions or penalties, and
highly liquid investments with original maturities of 90 days or less to be
cash and cash equivalents.5.
    
    Equipment, Intellectual Technology Property, Depreciation and AmortizationEquipment is carried at cost. Depreciation has been provided by the Company in
order to amortize the cost of equipment over their estimated useful lives,
which is estimated to be over three to five years. The Company uses the
straight-line method for all classes of assets for book purposes.
Depreciation expense is $63,616, $107,626 and $365,244 for the years ended May
31, 2004, 2003 and from inception through May 31, 2004, respectively.
Depreciation included in research and development expense totaled $59,145,
$67,474 and $288,047 for the years ended May 31, 2004 and 2003 and from
inception to May 31, 2004, respectively.The Companys intellectual technology property was originally licensed from a
former related party. This intellectual technology property was then assigned
to the Company upon the dissolution of the related party. The cost of the
intellectual technology property is being amortized over a 20-year period.
Amortization expense is $1,015, $1,015 and $4,653 for the years ended May 31,
2004, 2003 and from inception through May 31, 2004, respectively. The Company
reviews the intellectual property for impairment on at least an annual basis
in accordance with SFAS No. 142 Goodwill and Other Intangible Assets.
Amortization expense for the intellectual property will be $1,015 for each of
the next five years.6.
    
    Income TaxesIncome taxes are recognized using enacted tax rates, and are composed of taxes
on financial accounting income that is adjusted for the requirement of current
tax law and deferred taxes. Deferred taxes are accounted for using the asset
and liability method. Under this method, deferred tax assets and liabilities
are recognized based on the difference between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. The Company does not expect to have current income taxes payable or
deferred tax balances for the foreseeable future.7.
    
    Other Comprehensive IncomeFrom September 17, 1999 (inception) through May 31, 2004, the Company had no
changes in equity which constitute components of other comprehensive income.8.
    
    Research and Development  Research and development costs are expensed as
incurred and also includes depreciation as reported above.9.
    
    Fair Value of Financial Instruments  The fair value of the Companys
financial instruments, principally cash and debt, approximates their
carrying value.10.
    
    Recent Accounting Pronouncements In November 2002, FASB Interpretation 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company previously did not record a
liability when guaranteeing obligations unless it became probable that the
Company would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees the Company issues or modifies subsequent to December 31, 2002,
but has certain disclosure requirements effective for interim and annual
periods ending after December 15, 2002. The Company has not historically issued
guarantees and, as such, the adoption of FIN 45 did not have a material effect
on the Companys financial statements. In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation
of Variable Interest Entities. FIN 46 clarifies the application of Accounting
Research Bulletin 51, Consolidated Financial Statements, for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of a controlling
financial interest (variable interest entities). Variable interest entities
within the scope of FIN 46 are required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entitys
expected losses, receives a majority of its expected returns, or both. FIN 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period




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##### Table of Contents



beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The adoption of this statement did not have a significant impact on the
Companys financial position, results of operations, or cash flows since the
Company currently has no VIEs. In December 2003, the FASB issued FIN 46R with
respect to VIEs created before January 31, 2003, which, among other things,
revised the implementation date to the first fiscal year or interim period
ending after March 15, 2004, with the exception of Special Purpose Entities
(SPE). The consolidation requirements apply to all SPEs in the first fiscal
year or interim period ending after December 15, 2003. The Company adopted the
provision of FIN46R effective February 27, 2004, and such adoption did not have
a material impact on the financial statements since the Company currently has
no SPEs. On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS No. 150 affects the
issuers accounting for three types of freestanding financial instruments:  
    
    mandatorily redeemable shares, which the issuing company is
obligated to buy back in exchange for cash or other assets;  
    
    instruments that do or may require the issuer to buy back some of
its shares in exchange for cash or other assets, including put
options and forward purchase contracts; and  
    
    obligations that can be settled with shares, the monetary value of
which is fixed, tied solely or predominantly to a variable such as
a market index, or varies inversely with the value of the issuers shares. SFAS No. 150 does not apply to features embedded in a financial instrument that
is not a derivative in its entirety. Most of the guidance in SFAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a
material effect on the Companys financial position, results of operations or
cash flows.  11.
    
    Reclassifications Certain amounts in the 2003 financial statements have been reclassified to
conform to the 2004 presentation. NOTE C  REVERSE MERGER On November 15, 1999, Enerdyne Corporation ( Enerdyne or Public Shell) acquired
all of the outstanding common stock of Protalex, Inc. (Protalex) in exchange
for the issuance of additional shares of Enerdyne stock. The ratio of exchange
was 822 shares of Enerdyne stock issued for each share of Protalex stock
received. For accounting purposes, the acquisition has been treated as an
acquisition of Enerdyne by Protalex and as a recapitalization of Protalex
(Reverse Merger). The historical financial statement of operations presented
herein include only those of the accounting acquirer and the retained earnings
(deficit) of only the accounting acquirer carries over consistent with the
requirements of reverse merger accounting. Concurrently with the share
exchange, Enerdyne changed its name to Protalex, Inc. The details of the reverse merger transaction are as follows: Enerdyne
    
    Transaction
    
    Balance Sheet atAccount Description
    
    Protalex, Inc.
    
    Corporation
    
    Adjustments
    
    November 16, 1999Cash
    
    $
    23,531
    
    
    $
    
    
    
    $
    
    
    
    $
    23,531Note receivable shareholder
    
    
    
    
    
    
    118,547
    
    
    
    
    
    
    
    118,547License
    
    
    20,300
    
    
    
    
    
    
    
    
    
    
    
    20,300Investment in Enerdyne
    
    
    368,547
    
    
    
    
    
    
    
    (368,547
    )
    
    
    Other current assets
    
    
    8,212
    
    
    
    
    
    
    
    
    
    
    
    8,212Other current liabilities
    
    
    (17,555
    )
    
    
    
    
    
    
    
    
    
    
    (17,555
    )Accounts payable Alex
    
    
    (40,000
    )
    
    
    
    
    
    
    
    
    
    
    (40,000
    )Note payable
    
    
    (368,546
    )
    
    
    
    
    
    
    
    
    
    
    (368,546
    )Common stock
    
    
    (25,300
    )
    
    
    (833,459
    )
    
    
    714,912
    
    
    
    (143,847
    )Additional paid in capital
    
    
    
    
    
    
    (1,105,014
    )
    
    
    1,105,014
    
    
    
    Treasury stock
    
    
    
    
    
    
    430,424
    
    
    
    (430,424
    )
    
    
    Accumulated deficit
    
    
    30,811
    
    
    
    1,389,502
    
    
    
    (1,389,502
    )
    
    
    30,811Common stock  contra
    
    
    
    
    
    
    
    
    
    
    368,547
    
    
    
    368,547$
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 Additional information in connection with stock amounts and number of shares
issued is as follows:




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##### Table of Contents



Enerdyne CorporationProtalex, Inc.
    
    
    
    
    
    SharesAccount Description
    
    Shares
    
    Amount
    
    Outstanding
    
    Treasury
    
    AmountCommon stock
    
    $
    10,084
    
    
    $
    25,300
    
    
    $
    1,578,907
    
    
    $
    238,500
    
    
    $
    833,459822 to 1 stock recapitalization
    
    
    (10,084
    )
    
    
    
    
    
    
    8,289,048
    
    
    
    
    
    
    
    Cancellation
of shares formerly held by Protalex in Enerdyne
    
    
    
    
    
    
    
    
    
    
    (885,408
    )
    
    
    
    
    
    
    Increase to record net assets of Enerdyne
    
    
    
    
    
    
    118,547
    
    
    
    
    
    
    
    
    
    
    
    Cancellation
of common stock amounts for Enerdyne
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (833,459
    )Name change to Protalex, Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    143,847
    
    
    $
    8,982,547
    
    
    $
    238,500
    
    
    $
    


NOTE D  INCOME TAXES

The provision for income taxes for the years ended May 31, 2004 and 2003
consist of the following. Total income tax benefit differs from the amounts
computed by applying the statutory tax rate to loss before income taxes.

Years endedMay 31, 2004
    
    May 31, 2003Statutory federal and state statutory rates
of 40%
    
    $
    1,195,746
    
    
    $
    666,036Increase in valuation allowance
    
    
    (1,195,746
    )
    
    
    (666,036
    )Actual tax benefit
    
    $
    
    
    
    $
    


For the years ended May 31, 2004 and 2003, the components of income tax
(benefit) expense consist of the following:

Current:Federal
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    Deferred:Federal
    
    
    926,000
    
    
    
    618,000State
    
    
    163,000
    
    
    
    109,000Valuation allowance
    
    
    (1,089,000
    )
    
    
    (727,000
    )Income tax benefit
    
    $
    
    
    
    $
    


The components of the net deferred tax asset as of May 31, 2004 and 2003
are as follows:

Assets:Net operating losses
    
    $
    2,311,000
    
    
    $
    1,459,000Vacation accrual
    
    
    6,000
    
    
    
    3,000Warrants and options
    
    
    411,000
    
    
    
    169,000Deferred tax assets
    
    
    2,728,000
    
    
    
    1,631,000Liability,Equipment
    
    
    (32,000
    )
    
    
    (24,000
    )Net deferred tax asset
    
    
    2,696,000
    
    
    
    1,607,000Less valuation allowance
    
    
    (2,696,000
    )
    
    
    (1,607,000
    )Deferred tax asset, net of valuation allowance
    
    $
    
    
    
    $
    


The net deferred taxes have been fully offset by a valuation allowance since
the Company cannot currently conclude that it is more likely than not that the
benefits will be realized. The net operating loss carryforward for income tax
purposes of approximately $5,779,000 as of May 31, 2004 expires beginning
in 2014 through 2019. Internal Revenue Code Section 382 places a limitation on
the amount of taxable income that can be offset by carryforwards after a change
in control (generally greater than a 50% change in ownership). As a result of
these provisions, utilization of the NOL and tax credit carryforwards may be
limited.

NOTE E  RELATED PARTIES

During the year ended May 31, 2004, the Company incurred $10,505 of expenses
related to air travel to a partnership principally owned by the
President of the Company. In addition, the Company incurred $15,238 of expenses
related to legal services paid to a law firm, which employs one of the Companys board members. The Company also has an agreement
with its Chairman to pay $12,500 per month for his services. During the year
ended May 31, 2004 the Company incurred $122,177 related to these services.





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##### Table of Contents



NOTE F
CAPITAL LEASE OBLIGATIONS Protalex leases certain equipment under a capital lease. As of May 31, 2004 and
2003, the recorded amount of assets, net of related accumulated depreciation
was $40,767 and $61,151, respectively. Future minimum lease payments and the related present value of the future
obligation under the capital lease at May 31, 2004 are as follows: 2005
    
    $
    22,6222006
    
    
    20,736Total minimum obligations
    
    
    43,358Interest
    
    
    (2,825
    )Present value of minimum capital lease obligations
    
    
    40,533Current portion
    
    
    (20,487
    )Long-term capital lease obligations
    
    $
    20,046
 NOTE G  STOCK OPTIONS Prior to January 22, 2004, all options were issued as stand alone options.
On January 22, 2004, the board of directors of the Company approved the
Protalex, Inc. 2003 Stock Option Plan., which provides for incentive and
non-qualified stock options to purchase a total of 1,500,000 shares of the
Companys Common Stock. Under the terms of the plan, incentive options may not
be granted for less than the fair market value of the Common Stock at the date
of the grant and non-qualified options shall not be granted for less than 85%
of the fair market value of the Common Stock at the date of the grant. Vesting
generally occurs ratably over four years and is exercisable over a period no
longer than ten years after the grant date. As of May 31, 2004, options to
purchase 150,000 shares of the Companys Common Stock were granted, with no
options being exercisable. A summary of the common stock option activity for employees, directors and
officers as of May 31, 2004 is as follows: WeightedAverageExerciseOptions
    
    Prices
    
    ExercisableBalance, September 17, 1999
    
    
    
    
    
    $
    
    
    
    
    Granted, April 28, 2000
    
    
    40,000
    
    
    
    0.36
    
    
    
    40,000Granted, November 26, 2001
    
    
    100,000
    
    
    
    1.25
    
    
    
    100,000Expired, April 28, 2002
    
    
    (40,000
    )
    
    
    .036
    
    
    
    (40,000
    )Granted, June 1, 2002
    
    
    125,000
    
    
    
    1.50
    
    
    
    125,000Granted, July 18, 2002
    
    
    100,000
    
    
    
    1.50
    
    
    
    100,000Granted, October 24, 2002
    
    
    100,000
    
    
    
    1.45
    
    
    
    100,000Granted, December 16, 2002
    
    
    863,242
    
    
    
    1.50
    
    
    
    419,632Granted, December 16, 2002
    
    
    50,000
    
    
    
    1.70
    
    
    
    50,000Granted, March 15, 2003
    
    
    130,000
    
    
    
    1.50
    
    
    
    Granted, April 1, 2003
    
    
    40,000
    
    
    
    1.50
    
    
    
    9,167Granted, July 1, 2003
    
    
    40,000
    
    
    
    1.50
    
    
    
    8,332Granted, August 13, 2003
    
    
    100,000
    
    
    
    1.50
    
    
    
    100,000Granted, September 19, 2003
    
    
    584,333
    
    
    
    1.50
    
    
    
    185,767Granted, January 1, 2004
    
    
    225,000
    
    
    
    1.96
    
    
    
    90,625Forfeited, January 22, 2004
    
    
    (130,000
    )
    
    
    1.50
    
    
    
    Granted, March 1, 2004
    
    
    150,000
    
    
    
    2.17
    
    
    
    2,477,575
    
    
    
    
    
    
    
    1,288,523




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##### Table of Contents



The following summarizes certain information regarding stock options at May 31,
2004: Total
    
    ExercisableExercise Price
    
    
    
    
    
    Weighted Average
    
    Weighted Average
    
    
    
    
    
    Weighted Average
    
    Weighted AverageRange
    
    Number
    
    Exercise Price
    
    Remaining Life (yrs)
    
    Number
    
    Exercise Price
    
    Remaining Life$1.25 - 1.75
    
    
    2,102,575
    
    
    $
    1.49
    
    
    
    8.64
    
    
    
    1,197,898
    
    
    $
    1.48
    
    
    
    8.64$1.75  2.25
    
    
    375,000
    
    
    $
    2.04
    
    
    
    9.58
    
    
    
    90,625
    
    
    $
    1.96
    
    
    
    9.582,477,575
    
    
    
    
    
    
    
    
    
    
    
    1,288,523
 NOTE H DESCRIPTION OF LEASING ARRANGEMENTS The Company leases its office space under a non-cancellable operating lease.
The lease term is for three years, with an option to extend for one or two
years beyond the initial term. Rent expense for the years ended May 31, 2004
and 2003 were $37,571 and $23,870, respectively. Future minimum lease payments are as follows: Year ending May 31,2005
    
    $
    91,0362006
    
    
    95,5882007
    
    
    65,816Total
    
    $
    252,440
 NOTE I  SALE AND REPURCHASE OF COMMON STOCK On September 18, 2003, the Company closed a private placement, raising a total
of $11,356,063, net of transaction costs in exchange for 7,445,646 shares of
common stock and 2,605,976 warrants exercisable at $2.40 per share, expiring on
September 18, 2008. In addition, 558,423 warrants, exercisable at $2.40 per
share, were issued to Merriman and Company, as part of their fee for acting as
placement agent. On September 19, 2003, the Company repurchased and retired 2,994,803 shares of
common stock from former Chief Scientific Officer Paul Mann and family members
for $300,000. NOTE J  TERMINATION AGREEMENTS In December 2003, the Company terminated several employees, including its Chief
Financial Officer, when it officially moved its headquarters to New Hope,
Pennsylvania. The Employment Termination Agreement provided for severance pay,
generally for three months, and the issuance of 39,399 shares of the Companys
common stock. 
 ITEM 8  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On February 24, 2003, the Companys prior principal independent accountant,
Atkinson & Co. resigned. Atkinson & Company completed the audit of the
Companys May 31, 2001 and the May 31, 2002 year end financial statements.
Their audit opinion on those final statements, dated August 11, 2001 and August
15, 2002, respectively, included an explanatory paragraph regarding the
Companys ability to continue as a going concern. Otherwise, the audit reports
of Atkinson & Company on the Registrants financial statements for the fiscal
year ended May 31, 2001 and 2002 did not contain any adverse opinion or
disclaimer of opinion, nor were they modified as to audit scope or accounting
principles. The Company had no disagreements with its prior accountants. The
Companys audit committee has approved Atkinson & Co.s decision to resign and
the engagement of Grant Thornton LLP on February 24, 2003. 
 ITEM 9  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The information required as to this Item is incorporated herein by reference
from the data under the caption Information Concerning Nominees and Continuing
Directors and Executive Officers in the Proxy Statement to be used in
connection with the solicitation of proxies to be voted at our Annual Meeting
of Stockholders. 
 ITEM 10  EXECUTIVE COMPENSATION The information required as to this Item is incorporated herein by reference
from the data under the captions Executive Compensation and Other
Information, Report on Executive Compensation and Employment Agreements in
the Proxy Statement to be used in connection with the solicitation of proxies
to be voted at our Annual Meeting of Stockholders. 
 ITEM 11  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT




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##### Table of Contents



The information required as to this Item is incorporated herein by reference
from the data under the caption Security Ownership of Certain Beneficial
Owners and Management in the Proxy Statement to be used in connection with the
solicitation of proxies to be voted at our Annual Meeting of Stockholders. 
 ITEM 12  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required as to this Item is incorporated herein by reference
from the data under the caption Certain Relationships and Related
Transactions in the Proxy Statement to be used in connection with the
solicitation of proxies to be voted at our Annual Meeting of Stockholders. 
 ITEM 13  INDEX TO EXHIBITS 2.1
    
    Stock Purchase Agreement among
Protalex, Inc., Don Hanosh and
Enerdyne Corporation
    
    Incorporated by reference, to
the Companys 10-SB filing
December 3, 19992.2
    
    Merger Agreement and Plan of
Re-organization between Protalex,
Inc. and Enerdyne Corporation
    
    Incorporated by reference, to
the Companys 10-SB filing
December 3, 19993.1
    
    Articles of Incorporation
of the Company, as amended
    
    Incorporated by reference, to
the Companys 10-SB filing
December 3, 19993.2
    
    Bylaws of the Company
    
    Incorporated by reference, to
the Companys 10-KSBA filing
September 24, 20034.1*
    
    Form of Warrant issued in 2003
    
    Attached10.1
    
    Continuing and Unconditional
Guaranty executed by
John E. Doherty
    
    Incorporated by reference, to
the Companys 10-SB filing
December 3, 199910.2
    
    Continuing and Unconditional
Guaranty executed by
James K. Strattman
    
    Incorporated by reference, to
the Companys 10-SB filing
December 3, 199910.3
    
    Form of Confidential Disclosure
Agreement
    
    Incorporated by reference, to
the Companys 10-SB filing
December 3, 199910.4
    
    Executed offers of
Employment and Board
appointment of Kirk Raab
    
    Incorporated by reference, to
the Companys 10-KSBA filing
September 24, 200310.5
    
    Contracts: Laboratory Lease
Agreement, Equipment Lease
Agreement, and Product
Formulation Contracts
    
    Incorporated by reference, to
the Companys 10-KSBA filing
September 24, 200310.6
    
    Option Agreement Form
    
    Incorporated by reference, to
the Companys 10-KSBA filing
September 24, 200310.7
    
    Promissory notes with
two Directors
    
    Incorporated by reference, to
the Companys 10-KSBA filing
September 24, 200310.8
    
    Intellectual property assignments
    
    Incorporated by reference, to
the Companys 10-KSBA filing
September 24, 200310.9
    
    Agreement with placement agent
    
    Incorporated by reference, to
the Companys 10-KSBA filing
September 24, 2003




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##### Table of Contents



10.10
    
    Stock Redemption Agreement
    
    Incorporated by reference, to
the Companys 10-KSBA filing
September 24, 200310.11
    
    Agreement Regarding International
Patent Applications
    
    Incorporated by reference, to
the Companys 10-KSBA filing
September 24, 200331.1*
    
    Certification of Chief
Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act31.2*
    
    Certification of Chief
Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act32.1*
    
    Certification of Chief
Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act32.2*
    
    Certification of Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
 * Filed herewith. Reports on Form 8-K. A report on Form 8-K was filed on February 24, 2003 which detailed a change in
the Companys certifying accountants. 
 ITEM 14  CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, Protalex carried out an
evaluation, under the supervision and with the participation of our management,
including our President and Chief Financial Officer, of the effectiveness of
the design and operation of the Companys disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the President
and Chief Financial Officer concluded that the Companys disclosure controls
and procedures are effective in a timely matter in alerting them to material
information required to be included in our periodic filings with the Securities
and Exchange Commission. There have been no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the previously mentioned evaluation. 
 ITEM 15  (RESERVED) 
 ITEM 16  PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required as to this Item is incorporated herein by reference
from the data under the captions Audit Fees, Audit-Related Fees, Tax Fees
and All Other Fees in the Proxy Statement to be used in connection with the
solicitation of proxies to be voted at our Annual Meeting of Stockholders. The Company has adopted a code of ethics and will provide a copy of such code
without any charge to the person requesting the copy by written request to the
Chief Financial Officer of the Company. 
 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. Date: August 30, 2004 PROTALEX, INC. By: Steven H. Kane   SIGNATURE
    
    TITLE
    
    DATESteven H. Kane
    
    President and Director
    
    August 30, 2004Steven H. KaneFrank Dougherty
    
    Director
    
    August 30, 2004Frank DoughertyDinesh Patel
    
    Director
    
    August 30, 2004Dinesh PatelArthur D. Bankhurst
    
    Director
    
    August 30, 2004Arthur D. Bankhurst,Thomas Stagnaro
    
    Director
    
    August 30, 2004Thomas Stagnaro




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##### Table of Contents



SIGNATURE
    
    TITLE
    
    DATEJohn Doherty
    
    Director
    
    August 30, 2004John DohertyKirk Raab
    
    Chairman and Director
    
    August 30, 2004Kirk Raab