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UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-K

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|--------|------------------------------------------------------------------------------------|
|   | ANNUAL REPORT PURSUANTTO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 |

For the fiscal year ended December  31,2005

OR

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|--------|----------------------------------------------------------------------------------------|
|   | TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 |

Forthe transition periodfrom                    to                    

CommissionFile Number 000-26534

VION PHARMACEUTICALS, INC.

(Exact name of registrant as specified inits charter)

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|---------------------------------------------------------------|--|--------------------------------------|--|--|--|--|
| Delaware                                                      |  | 13-3671221                           |
| (Stateor other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.) |
| 4Science ParkNew Haven, Connecticut                           |  | 06511                                |
| (Addressof principal executive offices)                       |  | (ZipCode)                            |
|                                                               |

Registrant’s telephone number,including area code:    (203) 498-4210

Securities registered pursuant to Section 12(b) of theAct: None

Securities registered pursuant toSection 12(g) of the Act:Title of ClassCommonStock, $0.01 par value (together with associated Common Stock PurchaseRights)

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.

Yes     No

Indicate by check mark if the registrantis not required to file reports pursuant to Section 13 or Section 15(d)of the Act.

Yes     No 

Indicate by check mark whether the registrant (1)has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  No 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§229.405 of thischapter) is not contained herein, and will not be contained, to thebest of registrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or non-acceleratedfiler. See definition of ‘‘accelerated filer and largeaccelerated filer’’ in Rule 12b-2 of the Exchange Act).(Check one):

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|------------------------|--|-------------------|--|-----------------------|--|--|--|--|--|--|
| Largeaccelerated filer |  | Accelerated filer |  | Non-accelerated filer |
|                        |

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 ofthe Act).

Yes     No 

The aggregate market value of the common stock heldby non-affiliates of the registrant as of June  30,  2005 was$145,363,483 based on the last sale price for the common stock on thatdate as reported by the Nasdaq Capital MarketSM.

The number of shares outstanding of theregistrant's common stock as of March  10,  2006 was67,860,117.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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VIONPHARMACEUTICALS, INC.

TABLE OF CONTENTS

|            |  |                                                                                                                   |        |        |        |        |  |  |  |  |
|------------|--|-------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--|--|--|--|
|       |  | PARTI                                                                                                             |        |   |   |   |
|       |  |                                                                                                              |        |   | Page   |   |
| Item1      |  | Business                                                                                                          |        |   | 2      |   |
| Item 1A    |  | Risk Factors                                                                                                      |        |   | 16     |   |
| Item 1B    |  | Unresolved StaffComments                                                                                          |        |   | 23     |   |
| Item2      |  | Properties                                                                                                        |        |   | 23     |   |
| Item3      |  | Legal Proceedings                                                                                                 |        |   | 23     |   |
| Item 4     |  | Submission of Matters to a Vote ofSecurity Holders                                                                |        |   | 24     |   |
|       |  | PARTII                                                                                                            |        |   |   |   |
| Item5      |  | Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities |        |   | 25     |   |
| Item 6     |  | Selected FinancialData                                                                                            |        |   | 25     |   |
| Item7      |  | Management’s Discussion and Analysis of FinancialCondition and Results of Operations                        |        |   | 26     |   |
| Item 7A    |  | Quantitative and QualitativeDisclosures About Market Risk                                                         |        |   | 33     |   |
| Item 8     |  | Financial Statements andSupplementary Data                                                                        |        |   | 34     |   |
| Item9      |  | Changes in and Disagreements with Accountants on Accountingand Financial Disclosure                               |        |   | 59     |   |
| Item9A     |  | Controls and Procedures                                                                                           |        |   | 59     |   |
| Item 9B    |  | Other Information                                                                                                 |        |   | 59     |   |
|       |  | PARTIII                                                                                                           |        |   |   |   |
| Item10     |  | Directors and Executive Officers of the Registrant                                                                |        |   | 60     |   |
| Item 11    |  | ExecutiveCompensation                                                                                             |        |   | 61     |   |
| Item12     |  | Security Ownership of Certain Beneficial Owners andManagement                                                     |        |   | 69     |   |
| Item13     |  | Certain Relationships and Related Transactions                                                                    |        |   | 71     |   |
| Item 14    |  | PrincipalAccountant Fees and Services                                                                             |        |   | 71     |   |
|       |  | PARTIV                                                                                                            |        |   |   |   |
| Item15     |  | Exhibits, Financial Statement Schedules                                                                           |        |   | 73     |   |
| SIGNATURES |  |                                                                                                              |   |   |
|            |

Inthis report, unless the context otherwise requires, the terms‘‘we,’’ ‘‘us,’’‘‘our,’’ ‘‘theCompany’’ and ‘‘Vion’’ refer toVion Pharmaceuticals, Inc., a Delawarecorporation.

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All statementsother than statements of historical fact included in this Annual Reporton Form 10-K, including without limitation statements under‘‘Management’s Discussion and Analysis of FinancialCondition and Results of Operations’’ and‘‘Business,’’ regarding our financial position,business strategy, and plans and objectives of our management forfuture operations, are forward-looking statements. When used in thisAnnual Report on Form 10-K, words such as‘‘may,’’ ‘‘will,’’‘‘should,’’ ‘‘could,’’‘‘potential,’’‘‘seek,’’ ‘‘project,’’‘‘predict,’’‘‘anticipate,’’‘‘believe,’’‘‘estimate,’’‘‘expect,’’ ‘‘intend’’and similar expressions, as they relate to us or our management,identify forward-looking statements. Forward-looking statements arebased on the beliefs of our management as well as assumptions made byand information currently available to our management. These statementsare subject to risks and uncertainties that may cause actual resultsand events to differ significantly. A detailed discussion of risksattendant to the forward-looking statements is included under‘‘Item 1A - Risk Factors’’. The informationcontained in this Annual Report on Form 10-K is believed to be currentas of the date of filing with the Securities and Exchange Commission.We do not intend to update any of the forward-looking statements afterthe date of this filing to conform these statements to actual resultsor to changes in our expectations, except as required by law.

PART I

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|---------------|----------|
| ITEM 1:  | Business |

General

We are a development stage pharmaceutical companyengaged in the development of therapeutics for the treatment of cancer.We were incorporated in March  1992 as a Delaware corporation andbegan operations on May  1,  1994. For the years endedDecember  31,  2005, 2004 and 2003, we spent $16.6million, $13.8  million and $9.7  million, respectively, onresearch, development and clinical activities.

Our portfolio ofpotential products consists of two distinct small molecule anticanceragents in clinical development, and additional small molecules inpreclinical development. We also have developed a drug deliverytechnology for the treatment of cancer. ‘Preclinicaldevelopment’ or ‘preclinical studies’ indicate thatthe product candidates selected for development are being evaluated forpotency, specificity, manufacturability and pharmacologic activityin vitro, or cell culture, and in vivo, or animal models.Typically, clinical evaluation involves a three-phase process. In PhaseI, clinical trials are conducted with a small number of subjects todetermine the tolerated drug dose, early safety profile, properscheduling and the pattern of drug distribution, absorption andmetabolism. In Phase II, clinical trials are conducted with groups ofpatients afflicted with a specific disease in order to determineefficacy, dose-response relationships and expanded evidence of safety.In Phase III, large-scale, multi-center, controlled clinical trials areconducted in order to:

|  |              |                                                                  |
|--|--------------|------------------------------------------------------------------|
|  | •  | provide enough data forstatistical proof of safety and efficacy; |

|  |              |                                                        |
|--|--------------|--------------------------------------------------------|
|  | •  | compare the experimentaltherapy to existing therapies; |

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|--|--------------|------------------------------------------------------------------|
|  | •  | uncover any unexpected safetyproblems, such as side-effects; and |

|  |              |                            |
|--|--------------|----------------------------|
|  | •  | generate product labeling. |

Our product development programs are based on technologies that welicense from Yale University (Yale) and other cancer research centers.We have largely engaged in product development with respect toanticancer therapeutics through in-house preclinical and clinicaldevelopment and through collaboration with academic, research andgovernmental institutions. As our proposed products advance throughtrials depending on financial and pharmaceutical market conditions andrequired resources, we will determine the best method and/orpartnership to develop, and eventually market, our products.

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Products in ClinicalDevelopment

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|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Our leadproduct, Cloretazine® (VNP40101M), is an alkylating(DNA-damaging) agent. Our primary registration strategy for thiscompound is for the treatment of acute myelogenous leukemia (AML). APhase III trial of Cloretazine® in combination withcytosine arabinoside (Ara-C) in relapsed AML commenced in March2005. In January  2006, we announced that we will conduct apivotal Phase II trial in elderly patients with de novopoor-risk AML. This trial is expected to commence in the second quarterof 2006. In addition to these two trials in AML,Cloretazine® is being evaluated in clinical trials as asingle agent in chronic lymphocytic leukemia, small cell lung cancer,and adult and pediatric brain tumors, and in combination withtemozolomide in advanced hematologic malignancies.Cloretazine® has received two fast track designationsfrom the U.S. Food and Drug Administration (FDA) for the treatment of:(i) relapsed AML and (ii) elderly poor-risk AML.Cloretazine® has also received orphan drug designationfor the treatment of AML in the United States and the EuropeanUnion. |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Our second clinicalcompound, Triapine®, is a small molecule that inpreclinical models inhibits the enzyme ribonucleotide reductase, andtherefore prevents the replication of tumor cells by blocking acritical step in DNA synthesis. Intravenous Triapine®is being evaluated in Phase I and Phase II single agent and combinationclinical trials sponsored by the National Cancer Institute (NCI). TheNCI is also expected to sponsor a Phase I clinical trial of an oralformulation of Triapine® which should be initiated in2006. |

Products in Preclinical Development

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | VNP40541 (formerly calledKS119W) is an additional cytotoxic (cell-damaging) compound from thesulfonylhydrazine class. VNP40541 has been demonstrated in preclinicalstudies to be highly selective for hypoxic (poorly oxygenated) cellswhich are found in tumors and are often hard to treat with conventionalanticancer agents. We plan to file an Investigational New Drug (IND)application and commence a Phase I trial of VNP40541 in 2006. |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Heterocyclic hydrazones areanticancer compounds that have demonstrated potent anti-tumor effectsin preclinical studies. The mechanisms of action for these compoundsare unidentified at this time but appear to be unlike any knowncommercially available anticancer agents. In September  2005, weentered into an exclusive license for these compounds. We plan toevaluate these compounds in preclinical studies in 2006. |

Drug Delivery Technology

|  |              |                                                                                                                                                                                                                                                              |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | TAPET® (TumorAmplified Protein Expression Therapy), our drug delivery system usingmodified Salmonella bacteria, is designed to deliver anticanceragents directly to solid tumors. In 2006, we will continue to seek adevelopment partner for TAPET®. |

Overview ofCancer and Treatment Methods

Cancer is the second leading causeof death in the United States, exceeded only by heart disease. In 2005,the American Cancer Society estimated that 1.4  million new casesof cancer would be diagnosed in the United States and 570,280 Americanswould die from cancer.

Cancer is a heterogeneous group ofdiseases characterized by uncontrolled cell division and growthresulting in the development of a mass of cells or tumor, as well asthe invasion and spreading of these cells to other organs of the body(metastasis). Cancerous tumors can arise in any tissue or organ withinthe human body and generally cause clinical problems to the patientwhen the tumor affects the function of that organ or when the tumorspreads to other organs. Cancers which arise in the bone marrow (e.g.acute and chronic leukemias and multiple myeloma) or the lymph nodes(Hodgkin’s disease and lymphomas) spread through the bone marrowand lymphatic systems, affecting the growth of normal blood andlymphatic cells. Cancer is believed to occur as a result of a number offactors, such as genetic predisposition, chemical agents, viruses andradiation. These factors result in genetic changes affecting theability of cells to regulate their growth and differentiation.

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The most common methods of treatingpatients with cancer are surgery, radiation and drug therapy. A cancerpatient often receives treatment with a combination of methods. Surgeryand radiation therapy are particularly effective in patients where thedisease is localized. The most common method of treating patients withcancer that has spread beyond the primary site is to administersystemic anticancer drugs (chemotherapy). Chemotherapy seeks to damageand kill cancer cells or to interfere with the molecular and cellularprocesses that control the development, growth and survival ofmalignant tumor cells. In many cases, chemotherapy consists of theadministration of several different drugs in combination. Chemotherapycan cause patient weakness, loss of appetite, nausea and vomiting, anddamage to various organs that can result in loss of normal bodyfunctions.

The effectiveness of current cancer treatments withrespect to any particular patient varies greatly, depending upon thecancer diagnosis and the tolerance of the patient to treatment.Therefore, a significant need exists for new therapies which are moreeffective and have less toxicity.

Our Product DevelopmentPrograms

We are developing several potential products for thetreatment of cancer. Two of our small molecule anticancer agents are inhuman clinical trials, and additional small molecules are inpreclinical development. In addition, we are seeking a partner todevelop a drug delivery technology. The discussion below sets forth thedevelopment status of our product candidates (except as otherwisespecifically noted below) as of December  31,  2005.

Products in Clinical Development

Cloretazine®

Cloretazine® is an alkylating agent. Alkylatingagents damage DNA, which results in cell death. Alkylating agents aregenerally known to be among the most highly effective agents in thetreatment of cancer.

Preclinical data onCloretazine® showed broad anti-tumor activity in invivo models. It was curative in certain preclinical leukemiamodels, including mice bearing certain derivatives of a leukemia cellline that was resistant to standard alkylating agents.Cloretazine® was also active against solid tumormodels, including lung, colon, and brain cancer, and melanoma. It wascurative in mouse models in which a human glioma (brain tumor) or amouse colon cancer was implanted and growing under the skin. The drughas been shown in preclinical studies to be capable of crossing theblood-brain barrier with great efficiency. The blood-brain barrier hasbeen a common obstacle in achieving active concentrations of most drugswithin the brain.

Based on early indications of activity in thetrials conducted to date, our primary registration strategy forCloretazine® is for the treatment of AML, but we alsoare evaluating it in other hematologic malignancies and solid tumors.Below is a table with a list of all completed, ongoing and plannedCloretazine® clinical trials.

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|                                               |  |                                            |  |                        |  |                  |  |           |  |  |  |  |  |  |  |  |  |  |
|-----------------------------------------------|--|--------------------------------------------|--|------------------------|--|------------------|--|-----------|--|--|--|--|--|--|--|--|--|--|
| Trial                                         |  | Indication                                 |  | Sponsor                |  | CommencementDate |  | Status    |
| PhaseIII trial in combination with Ara-C      |  | AML,relapsed                               |  | Vion                   |  | March2005        |  | Ongoing   |
| Phase II single agent trial                   |  | AML, elderlypoor-risk                      |  | Vion                   |  | To be determined |  | Planned   |
| Phase II single agent trial                   |  | Small cell lung cancer                     |  | Vion                   |  | September2005    |  | Ongoing   |
| Phase II single agenttrial                    |  | Brain tumors, adult                        |  | Investigator-sponsored |  | June  2004       |  | Ongoing   |
| Phase II single agent trial                   |  | AML and high-riskmyelodysplastic syndromes |  | Vion                   |  | March  2004      |  | Ongoing   |
| Phase I/IIsingle agent trial                  |  | Chronic lymphocytic leukemia               |  | Vion                   |  | July  2005       |  | Ongoing   |
| Phase I trial                                 |  | Brain tumors, pediatric                    |  | Investigator-sponsored |  | April  2005      |  | Ongoing   |
| Phase I trial in combination withtemozolomide |  | Hematologic malignancies                   |  | Vion                   |  | October  2004    |  | Ongoing   |
| Phase Itrial in combination with Ara-C        |  | Hematologic malignancies                   |  | Vion                   |  | July  2003       |  | Completed |
| Phase I single agent trial                    |  | Solid tumors                               |  | Vion                   |  | February  2003   |  | Completed |
| Phase I single agent trial                    |  | Hematologicmalignancies                    |  | Vion                   |  | August  2002     |  | Completed |
| Phase I single agent trial                    |  | Solid tumors                               |  | Vion                   |  | June  2001       |  | Completed |
|                                               |

In March  2004, wereceived fast track designation from the FDA forCloretazine® in relapsed or refractory AML. InOctober  2005, we received fast track designation forCloretazine® in elderly poor-risk AML. The FDA’sfast track programs are designed to facilitate the development of newdrugs that are intended to treat serious or life-threatening conditionsand demonstrate the potential to address unmet medical needs. Althoughfast track status may expedite development and FDA review of anapplication, there can be no assurance thatCloretazine® will be reviewed more expeditiously forits ‘‘fast track’’ indications than wouldotherwise have been the case or will be approved promptly, or at all.Further, the FDA could revoke fast track status forCloretazine®.

In October  2004, we receivedorphan drug designation from the FDA for Cloretazine®in AML in the United States. Orphan drug designation may be granted toproducts that treat rare diseases or conditions that affect fewer than200,000 people in the United States. Orphan drug designation does notconvey any advantage or shorten the duration of the FDA review andapproval process. The designation may provide eligibility for aseven-year period of market exclusivity for the indication of AML aftermarketing approval, potential tax credits for research, grant fundingfor research and development, possibly reduced filing fees formarketing applications, and assistance with the review of clinicaltrial protocols.

In January  2006, we received orphan drugdesignation from the European Medicines Agency (EMEA) forCloretazine® in AML in the European Union. Orphan drugstatus is granted by the European Commission to promote development ofdrugs to treat rare diseases or conditions. Orphan drug designation inEurope does not convey any advantage or shorten the duration of theEMEA review and approval process. Orphan drug designation in Europe mayentitle Cloretazine® to: (i) ten years of marketexclusivity for the indication of AML; (ii) protocol assistance fromthe European Medicines Agency to optimize drug development in preparinga dossier that will meet regulatory requirements; (iii) reduced feesassociated with applying for market approval; and (iv) access toEuropean Union research funding.

Cloretazine® in HematologicMalignancies

We are conducting a Phase III trial ofCloretazine® in combination with Ara-C in relapsed AMLin over 50 clinical sites in North America and Europe. This trialstarted in March  2005. In February  2005, we reachedagreement with the FDA for this Phase III trial on a Special Protocol

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Assessment (SPA), a procedure by which the FDAprovides official evaluation and guidance on proposed protocols forpivotal Phase III clinical trials. In January  2006, we announcedthat we will conduct an additional pivotal Phase II trial ofCloretazine® as a single agent in elderly patients withde novo poor-risk AML. Elderly de novo poor-risk AMLpatients are those elderly patients whose poor-risk AML has not evolvedfrom a prior myelodysplastic syndrome. We plan to start this trial inthe second quarter of 2006. We are evaluatingCloretazine® in a Phase II single agent trial in AMLand high risk myelodysplastic syndromes that commenced in March2004, and was amended to accept additional patients in a strata withelderly previously untreated patients in the fall of 2005. We are alsoevaluating Cloretazine® as a single agent in a PhaseI/II trial in chronic lymphocytic leukemia and in combination withtemozolomide in a Phase I trial in advanced hematologicmalignancies.

Cloretazine®in Solid Tumors

We are conducting a Phase II trial ofCloretazine® as a single agent in small cell lungcancer. This trial started in September  2005. A Phase II trial ofCloretazine® as a single agent in adult brain tumors isongoing under an investigator’s IND. An additional Phase I trialin pediatric glioma was initiated in April  2005 under aninvestigator’s IND and continues to accrue patients.

Triapine®

Triapine® inhibits the enzyme ribonucleotidereductase in preclinical models. Ribonucleotide reductase inhibition isthought to arrest the growth of, or kill, cancer cell lines, byblocking a critical step in DNA synthesis. Inhibition of this enzymehas also been shown in vitro and in vivo to enhance theanti-tumor activity of several standard anticancer agents.

Wehave evaluated an intravenous formulation of Triapine®in five single agent Phase I trials, three single agent Phase IItrials, four Phase I combination trials, and two Phase II combinationtrials. At this time, we are not sponsoring any additional trials ofthe intravenous formulation of Triapine®.

InNovember  2002, we announced that the NCI’s Division ofCancer Treatment and Diagnosis had approved a collaboration for theclinical development of Triapine®. As part of thiscollaboration, the NCI’s Cancer Therapy Evaluation Program willsponsor clinical trials of Triapine® to further exploreits activity as a single agent or in combination with other agents inpatients with cancer. We provide the product used in these trials. Inearly 2003, we announced that a Clinical Trials Agreement had beenexecuted with the NCI and in January  2004, the first trial openedunder NCI sponsorship.

An intravenous formulation ofTriapine® is being evaluated in Phase I and Phase IIcombination trials sponsored by the NCI. Data from some of these trialsshould be available in 2006.

Clinical testing of new singleagent administration schedules may be possible with the oral form ofTriapine®, which to date has been studied in a smallnumber of patients to determine its absorption in the bloodstreamfollowing a single dose. We expect that a Phase I trial sponsored bythe NCI of an oral formulation of Triapine® willcommence in 2006.

License Agreement with Beijing PasonPharmaceuticals, Inc.

In October  2003, we enteredinto a license with Beijing Pason Pharmaceuticals, Inc. (Pason) wherebywe granted Pason the exclusive rights to develop, manufacture andmarket Triapine® in the People’s Republic ofChina, Taiwan, Hong Kong and Macao.

Products in PreclinicalDevelopment

VNP40541

VNP40541 (formerly knownas KS119W), an additional compound from the sulfonyl hydrazine class,has been demonstrated in preclinical studies to be highly selective forhypoxic (poorly oxygenated) cells which are found in tumors and areoften hard to treat with conventional anticancer agents. We areevaluating VNP40541 in preclinical studies and plan to file an INDapplication and initiate a Phase I trial of this compound in 2006.

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Heterocyclic Hydrazones

Heterocyclic hydrazones are anticancer compounds that havedemonstrated potent anti-tumor effects in preclinical studies. Themechanisms of action for these compounds are unidentified at this timebut appear to be unlike any commercially available anticancer agents ofwhich we know. In December  2003, we entered into an exclusiveresearch collaboration and option agreement related to these compoundswith a group of inventors from the Institute of Pharmacy and theInstitute of Medicinal Chemistry and Biochemistry at the University ofInnsbruck, and Austria Wirtschaftsservice Gesellschaft m.b.H, a bankspecializing in Austrian business promotion. In September  2005,we entered into an exclusive license for these compounds. We plan toevaluate heterocyclic hydrazones in preclinical studies in 2006.

Drug Delivery Technology

TAPET®(Tumor Amplified Protein Expression Therapy)

TAPET® is a proprietary technology that usesgenetically-altered Salmonella bacteria to delivercancer-fighting drugs preferentially to solid tumors. Extensivepreclinical studies in in vivo models have shown thatTAPET® bacteria migrate to and penetrate throughoutsolid tumors. Inside the tumors, TAPET® bacteria doublein quantity every 30 to 45 minutes, achieving very high bacterialcounts, reaching ratios in tumor versus normal tissues of 1000:1. Inaddition, TAPET® can be genetically engineered todeliver anticancer agents continuously within the tumor.

Weconducted clinical trials of TAPET® from 1999 to 2002.In 2006, we will continue to seek a partner to assist with futuredevelopment of TAPET® technology.

OtherProducts and Product Candidates for Conditions Other than Cancer

MELASYN®

MELASYN®is a patented, synthetic form of melanin that dissolves readily inwater. Melanin is a pigment formed by cells in the skin that gives skinits color and protects it from sun damage by absorbing ultravioletrays. We believe that MELASYN® is the firstwater-soluble, synthetic version of melanin, making it a potentiallyuseful ingredient for formulation of skin care products and cosmetics.Our MELASYN® patent and technology is licensed fromYale.

In March  2004, we entered into a non-exclusivesublicense agreement for MELASYN® with Johnson andJohnson Consumer Companies, Inc. The terms of the agreement do notinclude any upfront or milestone payments. If products including ourtechnology are developed, we will receive a royalty based on sales incountries where we have issued patents. In March  2005, we enteredinto a non-exclusive sublicense agreement for MELASYN®with B&P Company, Incorporated. The terms of the agreement do notinclude any upfront or milestone payments. When products including ourtechnology are developed, we receive a royalty based on sales incountries where we have issued patents.

Novel NucleosideAnalogs

We have licensed patents and patent applicationsrelated to a nucleoside analogue, or synthetic molecule, known asß-L-Fd4C from Yale. ß-L-Fd4C is an antiviral drug capableof inhibiting the replication of the hepatitis B virus (HBV).ß-L-Fd4C may also be useful for the treatment of the humanimmunodeficiency virus (HIV).

In February  2000, we signeda sublicense agreement for ß-L-Fd4C with AchillionPharmaceuticals, Inc. (Achillion), a privately-held biopharmaceuticalcompany developing and commercializing innovative antiviral therapies.Under the terms of the sublicense agreement, Achillion will fund thedevelopment of ß-L-Fd4C. In return, we received a small equityposition in Achillion and could receive milestone payments androyalties based on product revenue.

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License and Research Agreements

Agreements with Yale University

Since 1988, we, orpredecessors of our company, have entered into a series of agreementsunder which we have funded research at Yale and licensed inventionsfrom Yale. The license agreements with Yale grant us exclusive licensesto make, use, sell and practice the inventions covered by variouspatents and patent applications. Each license agreement requires us topay royalties, and in some cases milestone payments, to Yale. Certainlicenses are terminable in the event we do not exercise due diligencein commercializing the licensed technology.

Subsequent toentering into a license agreement with Yale in August  1994, wehave paid approximately $10.3  million through December31,  2005 to fund certain research at Yale, including research inthe laboratories of Dr.  Alan  Sartorelli, one of ourdirectors, and Dr.  Yung-Chi  Cheng, a member of ourscientific advisory board. We have agreed to pay an additional $250,000to support the research activities of Dr.  Sartorelli through thefirst quarter of 2007. Yale has sole discretion to use these funds toconduct research relating to products that it desires to pursue.Additionally, to the extent that such research results in technologiesnot covered by our license agreements with Yale, we may be unable toutilize such technologies unless we negotiate additional licenseagreements.

Yale/Vion (formerly MelaRx Pharmaceuticals,Inc.) License Agreement – September  1990

Undera license agreement with Yale dated September  1990, we have alicense to a synthetic form of melanin, which we have namedMELASYN®. Under the terms of the license agreement, wepay a license fee to Yale based on a percentage of net sales andsublicensing revenues.

Yale/Vion (formerly OncoRx, Inc.)License Agreement – August  1994

We are a partyto a license agreement with Yale entered into in August  1994 andsubsequently amended in five amendments. Under this amended license,Yale granted us a non-transferable worldwide exclusive license to make,have made, use, sell and practice inventions under certain patents andpatent applications for therapeutic and diagnostic purposes. We alsohave a non-exclusive license to an additional patent under this amendedlicense. The patents and patent applications under this amended licensecover Cloretazine®, Triapine®, KS119(an analogue of VNP40541), and ß-L-Fd4C. The term of the licenseis dictated by the expiration of any patents relating to any inventionsor, with respect to non-patented inventions or research, 17 years from1994 (i.e. through 2011). Yale has retained the right to make, use andpractice the inventions for non-commercial purposes and, with respectto two of the patents, Yale and its licensees have additional rights.This agreement as amended also provides that if Yale, as a result ofits own research, identifies potential commercial opportunities for thelicensed inventions, Yale will give us a first option to negotiate acommercial license for the commercial opportunities. Yale is entitledto royalties on sales, if any, of resulting products, sublicensingrevenues and, with regard to several patents, milestone payments basedon the status of clinical trials and/or regulatory approvals.

Wehave agreed with Yale that we will plan and implement appropriateresearch and development with respect to commercialization of productsbased on the licensed inventions. In the event that the agreement isterminated for breach, all rights under licenses previously grantedterminate. Accordingly, a default as to one product could affect ourrights in other products. In addition, Yale, at its sole option, canterminate any sublicenses that we grant.

Pursuant to theoriginal agreement, we issued to Yale 159,304 shares of our commonstock and made a payment of $50,000. In June  1997, this licenseagreement and another license agreement dated December  1995 wereamended pursuant to which Yale agreed to reduce certain amounts payableby us in exchange for 150,000 shares of our common stock issued to Yaleand valued at $600,000.

Yale/Vion (formerly OncoRx, Inc.)License Agreements – December  1995

InDecember  1995, we entered into a license agreement with Yalepursuant to which we received a non-transferable worldwide exclusivelicense, expiring over the lives of the patents, to three 

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inventions relating to gene therapy formelanoma. Technology licensed by us under this agreement relates toTAPET®. Pursuant to the license agreement, we paid Yalea $100,000 fee.

In December  1995, we entered into anotherlicense agreement with Yale pursuant to which we received anon-transferable worldwide exclusive license, expiring over the livesof the patents, to an invention relating to whitening skin.

Under the licensing agreements, Yale is entitled to milestonepayments based on the status of clinical trials and regulatoryapprovals. In addition, Yale is entitled to royalties on sales, if any,of resulting products and sublicense revenues.

OtherAgreements

License Agreement with Beijing PasonPharmaceuticals, Inc.

In October  2003, we enteredinto a license with Pason providing them with the exclusive rights todevelop, manufacture and market Triapine® in thePeople’s Republic of China, Taiwan, Hong Kong and Macao (thePason Territory). The terms of the agreement included an initialpayment of $500,000 which we received in November  2003,$4.75  million in potential additional milestone payments, andpotential royalty payments of 11% of anyTriapine® revenues in the Pason Territory. Pason willfund the preclinical and clinical development necessary for regulatoryapproval of Triapine® in the Pason Territory.

License Agreement with Austrian Inventors and AustriaWirtschaftsservice Gesellschaft m.b.H.

In December2003, we entered into a research collaboration and option agreement forcertain novel compounds, heterocyclic hydrazones, with a group ofinventors from the Institute of Pharmacy and the Institute of MedicalChemistry and Biochemistry at the University of Innsbruck, and AustriaWirtschaftsservice Gesellschaft m.b.H, a bank specializing in Austrianbusiness promotion.

In December  2003, we made an initialpayment of $25,000 to enter into the agreement. In September2005, we entered into an exclusive license for these compounds and madean additional payment of $37,500. Under this license agreement, we mustmake milestone payments based on the progress of product development,and pay royalties based on product revenues.

ConsultingAgreement with Gemin X, Inc.

In January  2004, weentered into a consulting agreement with Gemin X, Inc. (Gemin X), aprivately-held company developing oncology therapeutics. Under thisagreement, our chief scientific officer, Dr.  TerrenceDoyle, renders consulting services to Gemin X. Gemin X pays us, basedon an hourly rate, for up to 80% of Dr.  Doyle's timeper year. This agreement has been extended through March31,  2006, which is Dr.  Doyle’s planned retirementdate. We do not anticipate extending this agreement beyond thatdate.

Competition

Competition in the biopharmaceuticalindustry is intense and based on scientific and technological factors,the availability of patent and other protection for technology andproducts, the ability to finance and commercialize technologicaldevelopments, and the ability to obtain governmental approval fortesting, manufacturing and marketing drugs. Numerous pharmaceutical andbiotechnology companies have publicly announced their intention todevelop drugs that target the replication of tumor cells including, insome instances, agents to be used for the treatment of AML oralkylating agents like our compound Cloretazine®, oragents that target ribonucleotide reductase like our compoundTriapine®. These companies include, but are not limitedto Amgen Inc., AstraZeneca PLC, Bioenvision, Inc., Bristol-Myers SquibbCompany, Chiron Corporation, Eli Lilly and Co., Genentech Inc., GenzymeCorporation, ImClone Systems Inc., Johnson & Johnson, LorusTherapeutics Inc., MGI Pharma, Inc., OSI Pharmaceuticals, Inc., PfizerInc., Pharmion Corp., Schering-Plough Corporation and SGXPharmacuticals, Inc. Our competitors may have substantially

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greater financial, technical and humanresources than we have and may be better equipped to develop,manufacture and market products. In addition, many of these companieshave extensive experience in preclinical testing and human clinicaltrials, and in obtaining regulatory approvals. Our competitors maysucceed in obtaining approval for products more rapidly and indeveloping and commercializing products that are safer and moreeffective than those that we propose to develop. The existence of theseproducts, other products or treatments of which we are not aware orproducts or treatments that may be developed in the future mayadversely affect the marketability of our products by rendering themless competitive or obsolete. These companies, as well as academicinstitutions, governmental agencies and private research organizations,also compete with us in acquiring rights to products or technologiesfrom universities, and recruiting and retaining highly qualifiedscientific personnel and consultants.

The timing of marketintroduction of our potential products or of the products of otherswill be an important competitive factor. Accordingly, the relativespeed with which we can develop products, complete preclinical testing,clinical trials and regulatory approval processes, and supplycommercial quantities to market will influence our ability to bring aproduct to market. In addition, we may apply for orphan drugdesignation by the FDA for our proposed products. To the extent that acompetitor of ours develops and receives orphan drug designation andmarketing approval for a drug to treat the same indication prior to us,we may be precluded from marketing our product for a period of sevenyears.

Patents, Licenses and Trade Secrets

Our policyis to protect our technology by, among other means, filing patentapplications for technology that we consider important to thedevelopment of our business. We intend to file additional patentapplications, when appropriate, relating to new developments orimprovements in our technology and other specific products that wedevelop. We also rely on trade secrets, know-how and continuingtechnological innovations, as well as patents we have licensed or maylicense from other parties to develop and maintain our competitiveposition.

In connection with our license agreement with Yaledated August  1994, we are the exclusive licensee, subject tocertain rights retained by Yale, of a number of issued patents andpending U.S. and foreign patent applications relating to:

|  |              |                                                                                                      |
|--|--------------|------------------------------------------------------------------------------------------------------|
|  | •  | Cloretazine®,KS119 (an analogue of VNP40541), and other compounds in thesulfonylhydrazine class; |

|  |              |                                                                 |
|--|--------------|-----------------------------------------------------------------|
|  | •  | Triapine® andother ribonucleotide reductase inhibitors; and |

|  |              |                                                                                                                                               |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | ß-L-Fd4C, its compositionand its use for the treatment of HBV and HIV infections, and its use incombination with other anti-AIDS drugs. |

We are also theexclusive licensee of Yale of one issued U.S. and a number of foreignpatents and pending patent applications relating to synthetic melaninand methods for using synthetic melanin, such as for sunscreen orself-tanning agents relevant to our MELASYN®technology.

Pursuant to our license agreement with Yale datedDecember  1995, we are the exclusive licensee of a number ofissued patents and pending patent applications, U.S. and foreign,relating to our TAPET® technology, which include claimsfor methods of diagnosing and/or treating various solid tumor cancers,including melanoma, lung cancer, breast cancer and colon cancer. Wealso have rights, either by license and/or by assignment, to issuedpatents and pending patent applications, U.S. and foreign, relating toour TAPET® technology. In addition, we have pending anumber of U.S. provisional and non-provisional patent applications, aninternational patent application and a number of foreign patentapplications related to this technology.

We or our licensors areprosecuting the patent applications related to products we license bothwith the U.S. Patent and Trademark Office (PTO) and various foreignpatent agencies, but we do not know whether any of our applicationswill result in the issuance of any patents or, whether any issuedpatent will provide significant proprietary protection or will becircumvented or invalidated. During 

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the course of patent prosecution, patentapplications are evaluated for, among other things, utility, novelty,non-obviousness, written description and enablement. The PTO mayrequire that the claims of an initially filed patent application beamended if it is determined that the scope of the claims includesubject matter that is not useful, novel, non-obvious, describedadequately or enabled. Furthermore, in certain instances, the practiceof a patentable invention may require a license from the holder ofdominant patent rights.

We cannot predict whether our patentapplications or our competitors' patent applications will resultin valid patents being issued. An issued patent is entitled to apresumption of validity. The presumption may be challenged inlitigation; a court could find any patent of ours or of our competitorsinvalid and/or unenforceable. Litigation, which could result insubstantial cost to us, may also be necessary to enforce our patent andproprietary rights and/or to determine the scope and validity of theproprietary rights of others.

The patent position ofbiotechnology and pharmaceutical firms generally is highly uncertainand involves complex legal and factual questions. To date, noconsistent policy has emerged regarding the breadth of claims allowedin biotechnology and pharmaceutical patents.

GovernmentRegulation

Overview.    Regulation by state andfederal governmental authorities in the U.S. and foreign countries is asignificant factor in the development of our anticancer products, andwill be a significant factor in manufacturing and marketing of theseproducts, if they are successfully developed and approved for sale. Allof our products will require regulatory clearances or approvals priorto commercialization. In particular, drugs, biological agents andmedical devices are subject to rigorous testing and other approvalrequirements by the FDA pursuant to the Federal Food, Drug, andCosmetic Act and the Public Health Service Act and its regulations, aswell as by similar health authorities in foreign countries. Variousfederal statutes and regulations also govern or influence the testing,manufacturing, safety, labeling, packaging, advertising, storage,registration, listing and recordkeeping related to marketing of suchproducts. Regulatory approval often takes a number of years andinvolves the expenditure of substantial resources. Approval time alsodepends on a number of factors, including the severity of the diseasein question, the availability of alternative treatments and the risksand benefits demonstrated in clinical trials. We cannot be certain thatany required FDA or other regulatory approval will be granted or, ifgranted, will not be withdrawn.

The development of a therapeuticdrug typically first requires preclinical testing. Preclinicaldevelopment of therapeutic drugs and biological agents is generallyconducted in the laboratory to evaluate the safety and the potentialefficacy of a compound by relevant in vitro and in vivotesting. When a product is tested prospectively to determine its safetyfor purposes of obtaining FDA approvals or clearances, such testingmust be performed in accordance with good laboratory practices fornon-clinical studies. The results of preclinical testing are submittedto the FDA as part of an IND. The IND must become effective, the studymust be approved by an institutional review board, and informed consentmust be obtained from the clinical subjects, before human clinicaltrials can begin.

Typically, clinical evaluation involves athree-phase process. In Phase I, clinical trials are conducted with asmall number of subjects to determine the tolerated drug dose, earlysafety profile, proper scheduling and the pattern of drug distribution,absorption and metabolism. In Phase II, clinical trials are conductedwith groups of patients afflicted with a specific disease in order todetermine efficacy, dose-response relationships and expanded evidenceof safety. In Phase III, large-scale, multi-center, controlled clinicaltrials are conducted in order to:

|  |              |                                                                  |
|--|--------------|------------------------------------------------------------------|
|  | •  | provide enough data forstatistical proof of safety and efficacy; |

|  |              |                                                        |
|--|--------------|--------------------------------------------------------|
|  | •  | compare the experimentaltherapy to existing therapies; |

|  |              |                                                                  |
|--|--------------|------------------------------------------------------------------|
|  | •  | uncover any unexpected safetyproblems, such as side-effects; and |

|  |              |                            |
|--|--------------|----------------------------|
|  | •  | generate product labeling. |

In the case of drugs for cancer and other life-threatening diseases,the initial human testing is generally conducted in patients ratherthan in healthy volunteers.

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Tests of our product candidates and humanclinical trials may be delayed or terminated due to factors such asunfavorable results or insufficient patient enrollment. Furthermore,the FDA may suspend clinical trials at any time on various grounds.Delays in tests and trials may have a material adverse effect on ourbusiness.

The results of the preclinical and clinical testingare submitted to the FDA either as part of a new drug application (NDA)for drugs, or a biologics license application (BLA) for biologics, forapproval to commence commercial distribution. For a biologic drug, themanufacturer generally must also obtain approval of an establishmentlicense application. In responding to an NDA or BLA, the FDA may grantmarketing approval, request additional information or deny theapplication if it determines that the application does not satisfy itsregulatory approval criteria. It may take several years to obtainapproval after submission of an NDA or BLA, although approval is notassured. The FDA also normally conducts a pre-approval inspection andother occasional inspections of an applicant's facilities toensure compliance with current good manufacturing practices. Further,stringent FDA regulatory requirements continue after a product isapproved for marketing, and changes to products or labeling can requireadditional approvals. If any of our products is approved for marketing,we will be subject to stringent post-marketing requirements.

Wealso will be subject to widely varying foreign regulations governingclinical trials and pharmaceutical sales. Whether or not FDA approvalhas been obtained, approval of a product by the comparable regulatoryauthorities of foreign countries must be obtained before marketing theproduct in those countries. The approval process varies from country tocountry and the time may be longer or shorter than that required forFDA approval. We intend, to the extent possible, to rely on foreignlicensees to obtain regulatory approval to market our products inforeign countries.

In October  2004, we received orphandrug designation for Cloretazine® in AML. Under theOrphan Drug Act, a sponsor may obtain designation by the FDA of a drugor biologic as an ‘orphan’ drug for a particularindication. Orphan drug designation is granted to drugs for rarediseases or conditions, including many cancers, with a prevalence ofless than 200,000 cases in the United States. The sponsor of a drugthat has obtained orphan drug designation and which is the first toobtain approval of a marketing application for such drug, whichapproval cannot be assured, is entitled to marketing exclusivity for aperiod of seven years for the designated indication. This means that noother company can market the same orphan drug for the same indicationapproved by the FDA for seven years after approval unless such companyproves its drug is clinically superior or the approved orphan drugmarketer cannot supply demand for the drug. Legislation is periodicallyconsidered that could significantly affect the Orphan Drug law. Weintend to seek additional orphan drug designations for our productswhere appropriate. There can be no assurance that future changes to theOrphan Drug Act would not diminish the value of any orphan drugdesignation obtained by us.

FDA regulatory proceduresestablished in 1988 are intended to speed further the availability ofnew drugs intended to treat life-threatening and severely debilitatingillnesses. These procedures provide for early and continuousconsultation with the FDA regarding preclinical and clinical studiesnecessary to gain marketing approval. This regulatory framework alsoprovides that if Phase I results demonstrate potential, Phase IIclinical trials may be designed that obviate the need for lengthy,expensive Phase III testing. Notwithstanding the foregoing, approvalmay be denied by the FDA or traditional Phase III studies may berequired. The FDA may also seek our agreement to perform post-approvalPhase IV studies, which confirm product safety and efficacy.

InJanuary  2006, we received orphan drug designation forCloretazine® for the treatment of AML in Europe. Orphandrug status is granted by the European Commission to promotedevelopment of drugs to treat rare diseases or conditions. Orphan drugdesignation does not convey any advantage or shorten the duration ofthe EMEA review and approval process. Orphan drug designation mayentitle Cloretazine® to: (i) ten years of marketexclusivity for the indication of AML; (ii) protocol assistance fromthe European Medicines Agency to optimize drug development in preparinga dossier that will meet regulatory requirements; (iii) reduced feesassociated with applying for market approval; and (iv)  access toEuropean Union research funding.

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In addition to regulations relating todrug development, we are subject to federal, state and localenvironmental laws and regulations, including those promulgated by theOccupational Safety and Health Administration (OSHA), the EnvironmentalProtection Agency (EPA) and the Nuclear Regulatory Commission (NRC),that govern activities or operations that may have adverseenvironmental effects, such as discharges to air and water, as well ashandling and disposal practices for solid and hazardous wastes. Theselaws also impose strict liability for the costs of cleaning up, and fordamages resulting from, sites of past spills, disposals or otherreleases of hazardous substances and materials for the investigationand remediation of environmental contamination at properties operatedby us and at off-site locations where we have arranged for the disposalof hazardous substances.

We have made, and will continue tomake, expenditures for our facilities to comply with current and futureenvironmental laws. To date, we have not incurred significant costs andare not aware of any significant liabilities associated with ourcompliance with federal, state and local environmental laws andregulations. However, environmental laws have changed in recent yearsand we may become subject to stricter environmental standards in thefuture and may face large capital expenditures to comply withenvironmental laws. We have limited capital and are uncertain whetherwe will be able to pay for significantly large capital expenditures.Also, future developments, administrative actions or liabilitiesrelating to environmental matters may have a material adverse effect onour financial condition or results of operations.

All of ouroperations are performed under strict environmental and health safetycontrols consistent with OSHA, EPA and NRC regulations. We cannot becertain that we will be able to control all health and safety problems.If we cannot control those problems, we may be held liable and may berequired to pay the costs of remediation. These liabilities and costscould be material.

Manufacturing and Marketing

We donot have experience in manufacturing or marketing products and have notyet commercially introduced any products. We do not currently have theresources to manufacture or market on a commercial scale any productsthat we develop. We currently use third parties to manufacture limitedquantities of our products for use in clinical activities.

Ifour products are approved for sale by regulatory authorities, we willneed to develop manufacturing and marketing capability or makearrangements with third parties to manufacture, distribute and sell ourproducts. In the event we decide to establish a manufacturing anddistribution facility or a marketing and sales force, we will requiresubstantial additional funds and will be required to hire and retainadditional personnel.

Employees

As of December31,  2005, we had 40 full-time employees.

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Executive Officers and Directors

The following table contains the names and positions of ourexecutive officers and directors:

|                             |  |                                                                  |  |  |  |  |
|-----------------------------|--|------------------------------------------------------------------|--|--|--|--|
| Name                        |  | Position                                                         |
| Alan Kessman                |  | Chief Executive Officer and Director                             |
| Howard B.Johnson            |  | President and Chief Financial Officer                            |
| Ann Cahill                  |  | Vice President of ClinicalDevelopment                            |
| Meghan Fitzgerald           |  | VicePresident and Chief Business Officer                         |
| Ivan King                   |  | Vice President of Research and Development                       |
| Karen Schmedlin             |  | Vice President of Finance, ChiefAccounting Officer and Secretary |
| Terrence W. Doyle,Ph.D.(4)  |  | Vice President and Chief ScientificOfficer                       |
| William Miller(1,2,3)       |  | Director                                                         |
| GeorgeBickerstaff(1,2)      |  | Director                                                         |
| Stephen K. Carter, M.D.(3)  |  | Director                                                         |
| Alan C. Sartorelli,Ph.D.(3) |  | Director                                                         |
| Mario Sznol,M.D             |  | Director                                                         |
| GaryWillis(1,2)             |  | Director                                                         |
|                             |

|  |
|--|
|  |  |
|  |

|     |                                                                |
|-----|----------------------------------------------------------------|
| (1) | Memberof the Compensation Committee of the Board of Directors. |

|     |                                                         |
|-----|---------------------------------------------------------|
| (2) | Member of the AuditCommittee of the Board of Directors. |

|     |                                                                             |
|-----|-----------------------------------------------------------------------------|
| (3) | Member of theNominating and Governance Committee of the Board of Directors. |

|     |                                                                      |
|-----|----------------------------------------------------------------------|
| (4) | Dr. Doyle hasinformed us of his plan to retire as of March  31,2006. |

|  |
|--|
|  |  |  |  |
|  |

Alan Kessman, age 59,has been our Chief Executive Officer since January  1999 and hasserved on our Board of Directors since October  1998. Mr.Kessman also served as our President from April  1999 toJanuary  2004. Mr.  Kessman is a partner of PS Capital LLC,an international investment and management advisor. From 1983 to 1998,Mr.  Kessman was chairman, chief executive officer and presidentof Executone Information Systems, Inc., a developer and marketer ofvoice and data communications systems.

Howard B. Johnson,age 46, has been our President since January  2004 and our ChiefFinancial Officer since March  2002. Mr.  Johnson was a vicepresident and a consultant for Nutrition 21, Inc., a nutri-ceuticalcompany, from November  2001 until March  2002. FromMay  1999 until February  2001, Mr.  Johnson was chieffinancial officer of IBS Interactive, Inc. (now Digital Fusion, Inc.),an information technology services company. Mr.  Johnson foundedand from 1996 to 1999 was chairman and chief executive officer ofMedWorks Corporation, a privately held medical device company. From1983 to 1993, Mr.  Johnson was an investment banker at PaineWebberGroup, Inc.

Ann Lee Cahill, age 45, has been our VicePresident of Clinical Development since October  2004. Ms.Cahill was our Senior Director of Clinical Affairs from October2003 to October  2004 and Director of Clinical Affairs fromJanuary  2002 to October  2003. From 1997 to 2002, Ms.Cahill was a member of the project management group of Schering-PloughCorporation, including leadership roles in clinical affairs forhepatitis and medical oncology. From 1985 to 1997, Ms.  Cahill wasa physician associate in a medical oncology practice.

MeghanFitzgerald, age 35, has been our Vice President and Chief BusinessOfficer since January  2006. From 2005 to January  2006,Ms.  Fitzgerald was Senior Director of Strategic Planning andBusiness Development and from 2001 to 2005 World Wide MarketingDirector of Life Cycle Management for Pfizer Human Health. From1997-2001 Ms.  Fitzgerald held marketing positions at Merck,Forest Labs and Sanofi-Synthelabo. Prior to 1997, Ms.  Fitzgeraldwas a registered nurse.

Ivan King, Ph.D., age 50, hasbeen our Vice President of Research and Development since January2004. Dr.  King was our Vice President of Research from July1998 to January  2004, Senior Director of Biology from April1997 to July  1998 and Director of Biology from October  1995to April  1997. From 1990 to 1995, Dr.  King was a sectionleader in the department of tumor biology at 

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Schering-Plough Research Institute in chargeof the cell biology and in vivo biology groups where he was responsiblefor identifying targets, developing high throughput assays, evaluatingin vitro and in vivo activities of drug candidates and recommendingcandidates for clinical development. Dr.  King’s firstindustrial position was as a senior research scientist at Bristol-MyersSquibb Company.

Karen Schmedlin, age 43, has been ourVice President, Finance and Chief Accounting Officer since March8,  2006 and our Secretary since April  2001. Ms.Schmedlin was our Controller from October  2000 to March2006. From 1990 to 2000, Ms.  Schmedlin held various finance andmarketing positions at Executone Information Systems, Inc., a developerand marketer of voice and data communications systems, includingdirector of marketing operations, division controller and manager offinancial reporting. From 1984 to 1990, Ms.  Schmedlin was anauditor with Arthur Andersen & Co.

Terrence W. Doyle,Ph.D., age 63, has been our Vice President and Chief ScientificOfficer since January  2004. Prior to that, Dr.  Doyle wasour Vice President of Research and Development since the merger withOncoRx, Inc. and served in the same capacity for OncoRx, Inc. fromJanuary  1994 until the merger. From 1967 to 1993, Dr.  Doylewas an employee of the Bristol-Myers Squibb Company, including from1990 to 1993 an executive director with Bristol-Myers Squibb Company.Dr.  Doyle is the original holder of 49 U.S. patents foranti-infective, anti-inflammatory and anti-tumor agents and the authorof over 175 published research articles and abstracts on cancerchemotherapy. Dr.  Doyle has informed the Company that his plannedretirement date is March  31,  2006.

William R.Miller, age 77, has been Chairman of our Board since April1995. From February  1995 until April  1995, Mr.  Millerwas Chairman of the Board of OncoRx, Inc., which merged into theCompany (then known as MelaRx, Inc.) in April  1995. Mr.Miller is currently a director of ImClone Systems, Inc., abiotechnology company. From 1964 until his retirement in 1991,Mr.  Miller was employed by Bristol-Myers Squibb Company invarious positions, including vice chairman of the board commencing in1985.

George Bickerstaff, age 50, has been a directorsince June  2005. Mr.  Bickerstaff is a director of OracleHealthcare Acquisition Corp, a blank check company. Mr.Bickerstaff is Managing Director of CRT Capital Group LLC, aninvestment banking company, since June  2005. From October2000 to May  2004, Mr.  Bickerstaff held various positionswith Novartis, including chief financial officer of Novartis Pharma AG.From 1998 to September  2000, Mr.  Bickerstaff held seniorfinance and operating roles in venture-funded businesses and, prior tothat, held various financial positions with the Dun and BradstreetCorporation, including Chief Financial Officer of IMS Healthcare.

Stephen K. Carter, M.D., age 68, has been a director since2001. Dr.  Carter is a director of Cytogen Corp., Alfacell Corp.,Tapestry Pharmaceuticals, Inc. and Emisphere Technologies Inc. (each abiotechnology company). From 1998 to 2000, Dr.  Carter was seniorvice president, clinical and regulatory affairs of SUGEN, Inc.(subsequently acquired by Pharmacia & Upjohn, Inc.). From 1995 to1996, Dr.  Carter was senior vice president, research anddevelopment with Boehringer Ingelheim Pharmaceuticals, Inc. and from1982 to 1995 held various positions with Bristol-Myers Squibb Company,including senior vice president, worldwide clinical research anddevelopment.

Alan C. Sartorelli, Ph.D., age 74, has beena director since 1995. Dr.  Sartorelli has been an Alfred GilmanProfessor of Pharmacology at Yale University School of Medicine since1967 and Chairman of our Scientific Advisory Board since April1995. Dr.  Sartorelli was Chairman of the OncoRx, Inc. ScientificAdvisory Board from May  1993 to April  1995 and director ofYale Comprehensive Cancer Center from 1984 to 1993.

MarioSznol, M.D., age 48, has been a director since October  2004.Dr.  Sznol is an associate professor of medicine at YaleUniversity School of Medicine since October  2004. Dr.  Sznolwas our vice president of clinical affairs from September  1999 toOctober  2004. From 1994 to 1999, Dr.  Sznol served as headof the Biologics Evaluation Section, Investigational Drug Branch,Cancer Therapy Evaluation Program, Division of Cancer Treatment andDiagnosis of the National Cancer Institute, or NCI, an institute of theNational Institutes of Health.

Gary Willis, age 60, hasbeen a director since June  2005. Mr. Willis is a director ofRofin-Sinar Technologies, Benthos Corporation and Plug Power Inc. From1992 to 2000, Mr. Willis was Chairman, 

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President and Chief Executive Officer of theZygo Corporation, a developer and marketer of optical systems andcomponents. From 1984 to 1990, Mr. Willis was Chairman, President andChief Executive Officer of the Foxboro Company, a supplier ofinstruments, systems, and services for industrial processautomation.

Our directors are elected annually to serve untilthe next annual meeting of stockholders and until their successorsshall have been duly elected and shall qualify. Our executive officersare elected by the board annually and serve for such period or untiltheir earlier resignation or removal by the board.

AvailableInformation

The following information can be found on ourwebsite at http://www.vionpharm.com or may be obtained free ofcharge by contacting our Investor Relations Department at (203)498-4210 or by sending an e-mail message toinfo@vionpharm.com:

|  |              |                                                                                                                                                                                                                                                     |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K andamendments to those reports, as soon as reasonably practicable aftersuch material is electronically filed with the Securities and ExchangeCommission; |

|  |              |                                                                                                                                                                                                                                                                                                                                     |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | our policiesrelated to corporate governance, including the charter for theNominating and Governance Committee of our Board of Directors, our codeof ethics and business conduct applying to our directors, officers andemployees, and our code of ethics applying to our chief executiveofficer and senior financial officials; and |

|  |              |                                                              |
|--|--------------|--------------------------------------------------------------|
|  | •  | the charter of the AuditCommittee of our Board of Directors. |

ITEM 1A.    RiskFactors

This Annual Report on Form 10-K contains, inaddition to historical information, forward-looking statements thatinvolve risks and uncertainties. Our actual results could differmaterially. Factors that could cause or contribute to such differencesinclude, but are not limited to, those discussed under‘‘Risk Factors’’ below, as well as thosediscussed elsewhere in this Annual Report on Form 10-K.

Aninvestment in our securities is risky. Prior to making a decision aboutinvesting in our securities, you should carefully consider the specificrisks discussed below. The risks and uncertainties described below arenot the only ones facing us. Additional risks and uncertainties notpresently known to us, or that we currently see as immaterial, may alsoharm our business. If any of the risks or uncertainties described belowor any such additional risks and uncertainties actually occur, ourbusiness, results of operations and financial condition could bematerially and adversely affected. In this case, the trading price ofour securities could decline and you might lose all or part of yourinvestment.

If we fail to obtain the capital necessary tofund our operations, we will be unable to continue or complete ourproduct development.

We will need to raise substantialadditional capital to fund operations and complete our productdevelopment. As of December  31,  2005, we had $52.8million in cash and cash equivalents to fund our operations andcontinue our product development. We will not have an approved andmarketable product for the foreseeable future. Accordingly, we willneed to raise substantial additional capital to have sufficient capitalto fund our operations in 2007 and beyond.

We may not getfunding when we need it or on favorable terms. If we cannot raiseadequate funds to satisfy our capital requirements, we may have todelay, scale-back or eliminate our research and development activities,clinical studies or future operations. We might have to license ourtechnology to others. This could result in sharing revenues which wemight otherwise retain for ourselves. Any of these actions may harm ourbusiness, financial condition and results of operations.

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The amount of capital we may need dependson many factors, including:

|  |              |                                                                    |
|--|--------------|--------------------------------------------------------------------|
|  | •  | the progress, timing and scopeof our product development programs; |

|  |              |                                                                               |
|--|--------------|-------------------------------------------------------------------------------|
|  | •  | the progress, timing and scopeof our preclinical studies and clinical trials; |

|  |              |                                                            |
|--|--------------|------------------------------------------------------------|
|  | •  | the time and cost necessary toobtain regulatory approvals; |

|  |              |                                                                                                                                                                                                               |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | the time and cost necessary tofurther develop manufacturing processes, arrange for contractmanufacturing or build manufacturing facilities and obtain thenecessary regulatory approvals for those facilities; |

|  |              |                                                                                       |
|--|--------------|---------------------------------------------------------------------------------------|
|  | •  | the time and cost necessary todevelop sales, marketing and distribution capabilities; |

|  |              |                                                                                                       |
|--|--------------|-------------------------------------------------------------------------------------------------------|
|  | •  | our ability to enter into andmaintain collaborative, licensing and other commercial relationships;and |

|  |              |                                                                                        |
|--|--------------|----------------------------------------------------------------------------------------|
|  | •  | our partners’commitment of time and resource to the development of our products. |

We have limited access to the capital markets and, if we canraise additional funding, stockholders may experience extremedilution.

We have limited access to the capital markets toraise capital. The capital markets have been unpredictable in the past,especially for drug development companies and unprofitable companiessuch as ours. In addition, it is difficult to raise capital undercurrent market conditions. The amount of capital that a company such asours is able to raise often depends on variables that are beyond ourcontrol, such as the share price of our stock and its trading volume.As a result, we may not be able to secure financing on terms attractiveto us, or at all. If we are able to consummate a financing arrangement,the amount raised may not be sufficient to meet our future needs. Ifadequate funds are not available on acceptable terms, or at all, ourbusiness, including our technology licenses, relationships with keysuppliers, results of operations, financial condition and our continuedviability will be materially adversely affected.

To the extentwe encounter additional opportunities to raise cash, we would likelysell additional equity or debt securities. Due to our current stockprice and market conditions, and the amount of capital we need, anysuch debt or equity securities are likely to be sold at relatively lowprices, including prices which are below the market prices of ourstock, and may have substantial rights to control the Company. Forexample, in our private placement in June  2003, shares of commonstock were sold at $1.30 per share which was approximately 64%of market price at the time. Stockholders are likely to experienceextreme dilution as well as subordination of their rights. We do nothave any contractual restrictions on our ability to incur debt. Anyindebtedness could contain covenants that restrict our operations.

If we continue to incur operating losses, we may be unable tocontinue our operations.

We have incurred losses sinceinception. As of December  31,  2005, we had an accumulateddeficit of approximately $149.8  million. If we continue to incuroperating losses and fail to become a profitable company, we may beunable to continue our operations. Since we began our business, we havefocused on research, development and clinical trials of productcandidates. We expect to continue to operate at a net loss for at leastthe next several years as we continue our research and developmentefforts, continue to conduct clinical trials and develop manufacturing,sales, marketing and distribution capabilities. Our futureprofitability depends on our receiving regulatory approval of ourproduct candidates and our ability to successfully manufacture andmarket approved drugs. The extent of our future losses and the timingof our profitability are highly uncertain.

If we do notobtain regulatory approval for our products, we will not be able tosell our products and the value of our company and our financialresults will be harmed.

We cannot sell or market our drugswithout regulatory approval. If we cannot obtain regulatory approvalfor our products, the value of our company and our financial resultswill be harmed. In the 

17

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United States, we must obtain approval fromthe U.S. Food and Drug Administration (FDA) for each drug that weintend to sell. The current status of our potential products is asfollows:

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Cloretazine® isbeing evaluated in five clinical trials sponsored by us including aPhase III trial in relapsed acute myelogenous leukemia in combinationwith Ara-C, a Phase II trial as a single agent in small cell lungcancer, a Phase I/II trial in refractory or relapsed chroniclymphocytic leukemia, a Phase II trial in acute myelogenous leukemiaand high-risk myelodysplasia, and a Phase I trial in combination withtemozolomide, as well as two investigator-sponsored trials in pediatricand adult brain tumors; |

|  |              |                                                                                                                                                              |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | TheNational Cancer Institute is sponsoring Phase I and Phase II trials ofTriapine® as a single agent and in combination withstandard chemotherapies; and |

|  |              |                                                                                 |
|--|--------------|---------------------------------------------------------------------------------|
|  | •  | VNP40541 and heterocyclichydrazones are being evaluated in preclinical studies. |

If andwhen we complete the several phases of clinical testing for each drugcandidate, we will submit our test results to the FDA. FDA review maygenerally take up to two years and approval is not assured. Foreigngovernments also regulate drugs distributed outside the United States.A delay in obtaining regulatory approvals for any of our drugcandidates will also have a material adverse effect on ourbusiness.

If our drug trials are delayed or achieveunfavorable results, we will not be able to obtain regulatory approvalsfor our products.

We must conduct extensive testing of ourproduct candidates before we can obtain regulatory approval for ourproducts. We need to conduct human clinical trials. These tests andtrials may not achieve favorable results. We would need to reevaluateany drug that did not test favorably and either alter the drug or dose,or abandon the drug development project. In such circumstances, wewould not be able to obtain regulatory approval on a timely basis, ifever.

Factors that can cause delay or termination in ourclinical trials include:

|  |              |                          |
|--|--------------|--------------------------|
|  | •  | slow patient enrollment; |

|  |              |                                                                      |
|--|--------------|----------------------------------------------------------------------|
|  | •  | long treatment time required todemonstrate safety and effectiveness; |

|  |              |                                                      |
|--|--------------|------------------------------------------------------|
|  | •  | lack of sufficient supplies ofthe product candidate; |

|  |              |                                                            |
|--|--------------|------------------------------------------------------------|
|  | •  | adverse medical events or sideeffects in treated patients; |

|  |              |                                                                 |
|--|--------------|-----------------------------------------------------------------|
|  | •  | lack of effectiveness of theproduct candidate being tested; and |

|  |              |                           |
|--|--------------|---------------------------|
|  | •  | lack of sufficient funds. |

If the testing or use of our potential products harms people,we could be subject to costly and damaging product liabilityclaims.

Our business exposes us to potential productliability risks that are inherent in the testing, manufacturing andmarketing of drug products. These risks are particularly inherent inhuman trials of our proposed products. Unacceptable side effects may bediscovered during preclinical and clinical testing of one or more ofour potential products. Side effects and other liability risks couldgive rise to viable product liability claims against us. While we haveobtained insurance coverage for patients enrolled in clinical trials,we may not be able to maintain this insurance on acceptable terms,insurance may not provide adequate coverage against potentialliabilities and we may need additional insurance coverage for expandedclinical trials and commercial activity. As a result, product liabilityclaims, even if successfully defended, could have a material adverseeffect on our business, financial condition and results of operations.If the side effects are determined to be unacceptable, we will not beable to commercialize our products.

18

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If we are found to beinfringing on patents or trade secrets owned by others, we may beforced to cease or alter our drug development efforts, obtain a licenseto continue the development or sale of our products, and/or paydamages.

Our manufacturing processes and potential productsmay conflict with patents that have been or may be granted tocompetitors, universities or others, or the trade secrets of thosepersons and entities. As the drug development industry expands and morepatents are issued, the risk increases that our processes and potentialproducts may give rise to claims that they infringe the patents ortrade secrets of others. These other persons could bring legal actionsagainst us claiming damages and seeking to enjoin clinical testing,manufacturing and marketing of the affected product or process. If anyof these actions are successful, in addition to any potential liabilityfor damages, we could be required to obtain a license in order tocontinue to conduct clinical tests, manufacture or market the affectedproduct or use the affected process. Required licenses may not beavailable on acceptable terms, if at all, and the results of litigationare uncertain. If we become involved in litigation or otherproceedings, it could consume a substantial portion of our financialresources and the efforts of our personnel.

We rely onconfidentiality agreements to protect our trade secrets. If theseagreements are breached by our employees or other parties, our tradesecrets may become known to our competitors.

We rely ontrade secrets that we seek to protect through confidentialityagreements with our employees and other parties. If these agreementsare breached, our competitors may obtain and use our trade secrets togain a competitive advantage over us. We may not have any remediesagainst our competitors and any remedies that may be available to usmay not be adequate to protect our business and compensate us for thedamaging disclosure. In addition, we may have to expend resources toprotect our interests from possible infringement by others.

If we fail to recruit and retain key personnel, our researchand development programs may be delayed.

We are highlydependent upon the efforts of our senior management and scientificpersonnel, particularly, Alan Kessman, our chief executive officer anddirector; Howard Johnson, our president and chief financial officer;Ann Lee Cahill, our vice president, clinical development; Ivan King,Ph.D., our vice president, research and development; and MeghanFitzgerald, our vice president and chief business officer. There isintense competition in the drug development industry for qualifiedscientific and technical personnel. Since our business is verytechnical and specialized, we need to continue to attract and retainsuch people. We may not be able to continue to attract and retain thequalified personnel necessary for developing our business, particularlyin light of our need to raise substantial additional financing in orderto continue our operations in 2007 and beyond. We have no key maninsurance policies on any of the officers listed above and we only havean employment agreement with Mr.  Kessman. If we lose the servicesof our management and scientific personnel or fail to recruit otherscientific and technical personnel, our research and productdevelopment programs will be significantly and detrimentallyaffected.

We face intense competition in the market foranticancer products, and if we are unable to compete successfully, ourbusiness will suffer.

Numerous pharmaceutical andbiotechnology companies have publicly announced their intention todevelop drugs that target the replication of tumor cells including, insome instances, the development of agents which treat AML and arealkylating agents similar to our compound Cloretazine®and agents which target ribonucleotide reductase similar to ourcompound Triapine®. These companies include, but arenot limited to Amgen Inc., AstraZeneca PLC, Bioenvision, Inc.,Bristol-Myers Squibb Company, Chiron Corporation, Eli Lilly and Co.,Genentech Inc., Genzyme Corporation, ImClone Systems Inc., Johnson& Johnson, Lorus Therapeutics Inc., MGI Pharma, Inc., OSIPharmaceuticals, Inc., Pfizer Inc., Pharmion Corp., Schering-PloughCorporation and SGX Pharmacuticals, Inc. These and other largepharmaceutical companies have substantially greater financial and otherresources and development capabilities than we do and havesubstantially greater 

19

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experience in undertaking preclinical andclinical testing of products, obtaining regulatory approvals, andmanufacturing and marketing pharmaceutical products. In addition, ourcompetitors may succeed in obtaining approval for products more rapidlythan us and in developing and commercializing products that are saferand more effective than those that we propose to develop. The existenceof these products, other products or treatments of which we are notaware or products or treatments that may be developed in the future mayadversely affect the marketability of our products by rendering themless competitive or obsolete. In addition to competing withuniversities and other research institutions in the development ofproducts, technologies and processes, we may compete with othercompanies in acquiring rights to products or technologies fromuniversities.

If our corporate partners, licensors,licensees, collaborators at research institutions and others do notconduct activities in accordance with our arrangements, our researchand development efforts may be delayed.

Our strategy forthe research, development and commercialization of our products entailsentering into various arrangements with corporate partners, licensors,licensees, collaborators at research institutions and others. Wecurrently depend on the following third parties:

|  |              |                                                                                                                                                      |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | The National Cancer Institute(NCI) with respect to clinical development of Triapine®in Phase I and Phase II single agent and combination trials; |

|  |              |                                                                                                       |
|--|--------------|-------------------------------------------------------------------------------------------------------|
|  | •  | Yale University (Yale) forcollaborative research and for technologies that are licensed by themto us; |

|  |              |                                                                                                                                             |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Beijing PasonPharmaceuticals, Inc. for the development of Triapine®in the People’s Republic of China, Hong Kong, Macao andTaiwan; |

|  |              |                                                                                                                                                                                  |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Duke UniversityComprehensive Cancer Center for clinical development ofCloretazine® in adult patients with recurrent gliomas(brain cancer) under an investigator’s IND; |

|  |              |                                                                                                                                                    |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | The Pediatric Brain TumorConsortium (PBTC) for clinical development ofCloretazine® in pediatric brain tumors under aninvestigator’s IND. |

|  |              |                                                                                                                |
|--|--------------|----------------------------------------------------------------------------------------------------------------|
|  | •  | Healthcare facilities in theUnited States and other countries to perform human clinical trials ofour products; |

|  |              |                                                                                                                                          |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Clinicalresearch organizations in the United States and other countries tomonitor and collect data related to human clinical trials; and |

|  |              |                                                                                              |
|--|--------------|----------------------------------------------------------------------------------------------|
|  | •  | Contract manufacturers toproduce our products for use in preclinical and clinicalactivities. |

If the third parties do not conduct activities inaccordance with the arrangements we have with them, our research anddevelopment efforts may be delayed. We may also rely on othercollaborative partners to obtain regulatory approvals and tomanufacture and market our products. The amount and timing of resourcesto be devoted to these activities by these other parties may not bewithin our control.

If Yale does not conduct researchrelating to products we would like to pursue, we may never realize anybenefits from our funding provided to Yale.

ThroughDecember  31,  2005, we have paid approximately $10.3million to Yale for research funding. We have agreed to pay anadditional $250,000 to support the research activities of one of ourdirectors, an affiliate of Yale, through March  31,  2007. Wemay continue to support certain research projects at Yale. We generallydo not have the right to control the research that Yale is conductingwith our funding, and our funds may not be used to conduct researchrelating to products that we would like to pursue. Additionally, if theresearch being conducted by Yale results in technologies that Yale hasnot already licensed or agreed to license to us, we may need tonegotiate additional license agreements or we may be unable to utilizethose technologies.

Even if we obtain regulatory approvalfor our products, we currently lack the ability and resources tocommercialize the products.

If our products are approvedfor sale by regulatory authorities, we will need to developmanufacturing and marketing capability or make arrangements with thirdparties to manufacture, 

20

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distribute and sell our products forcommercial use. We do not currently have arrangements for manufacturingor marketing products on a commercial basis.

Ifenvironmental laws become stricter in the future, we may face largecapital expenditures in order to comply with environmentallaws.

We cannot accurately predict the outcome or timingof future expenditures that we may be required to expend to comply withcomprehensive federal, state and local environmental laws andregulations. We must comply with environmental laws that govern, amongother things, all emissions, waste water discharge and solid andhazardous waste disposal, and the remediation of contaminationassociated with generation, handling and disposal activities. To date,we have not incurred significant costs and are not aware of anysignificant liabilities associated with our compliance with federal,state and local laws and regulations. However, environmental laws havechanged in recent years and we may become subject to stricterenvironmental standards in the future and may face large capitalexpenditures to comply with environmental laws. We have limited capitaland are uncertain whether we will be able to pay for significantlylarge capital expenditures. Also, future developments, administrativeactions or liabilities relating to environmental matters may have amaterial adverse effect on our financial condition or results ofoperations.

All of our operations are performed under strictenvironmental and health safety controls consistent with theOccupational Safety and Health Administration, the EnvironmentalProtection Agency and the Nuclear Regulatory Commission regulations. Wecannot be certain that we will be able to control all health and safetyproblems. If we cannot control those problems, we may be held liableand may be required to pay the costs of remediation. These liabilitiesand costs could be material.

We may expand our businessthrough new acquisitions that could disrupt our business, harm ourfinancial condition and may also dilute current stockholders’ownership interests in our company.

Our business strategyincludes expanding our products and capabilities, and we may seekacquisitions to do so. Acquisitions involve numerous risks,including:

|  |              |                               |
|--|--------------|-------------------------------|
|  | •  | substantial cashexpenditures; |

|  |              |                                                    |
|--|--------------|----------------------------------------------------|
|  | •  | potentiallydilutive issuance of equity securities; |

|  |              |                                                                                                                                   |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------|
|  | •  | incurrence of debt andcontingent liabilities, some of which may be difficult or impossible toidentify at the time of acquisition; |

|  |              |                                                                       |
|--|--------------|-----------------------------------------------------------------------|
|  | •  | difficulties in assimilatingthe operations of the acquired companies; |

|  |              |                                                                              |
|--|--------------|------------------------------------------------------------------------------|
|  | •  | diverting ourmanagement’s attention away from other business concerns; |

|  |              |                                                                                |
|--|--------------|--------------------------------------------------------------------------------|
|  | •  | risks of entering markets inwhich we have limited or no direct experience; and |

|  |              |                                                                                    |
|--|--------------|------------------------------------------------------------------------------------|
|  | •  | the potential loss of our keyemployees or key employees of the acquired companies. |

We cannotassure you that any acquisition will result in short-term or long-termbenefits to us. We may incorrectly judge the value or worth of anacquired company or business. In addition, our future success woulddepend in part on our ability to manage the rapid growth associatedwith some of these acquisitions. We cannot assure you that we will beable to make the combination of our business with that of acquiredbusinesses or companies work or be successful. Furthermore, thedevelopment or expansion of our business or any acquired business orcompanies may require a substantial capital investment by us. We maynot have these necessary funds or they might not be available to us onacceptable terms or at all. We may also seek to raise funds by sellingshares of our stock, which could dilute current stockholder’sownership interest in our company.

We rely on third partymanufacturers to manufacture our product candidates. If these thirdparty manufacturers fail to manufacture product candidates ofsatisfactory quality, in a timely manner, in sufficient quantities orat acceptable costs, development and commercialization of our productscould be delayed.

We have no manufacturing facilities, andwe have no experience in the commercial manufacturing of drugs or indesigning drug manufacturing processes. We have contracted with thirdparty 

21

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manufacturers to produce our productcandidates for clinical trials. We have limited supplies of our productcandidates for clinical trials. If our supplies are damaged ordestroyed, either during storage or shipping or otherwise, our clinicaltrials may be delayed, which could have a material adverse effect onour business. We intend to rely on third party contract manufacturersto manufacture, supply, store and distribute commercial quantities ofour product candidates. We will also rely on our third partymanufacturing partners to work with us to complete the Chemistry,Manufacturing and Control, or CMC, section of any NDAs or othermarketing approval application we may file.

Contractmanufacturers are obliged to operate in accordance with governmentmandated obligations, including FDA-mandated current good manufacturingpractices (cGMPs). A failure of any of our contract manufacturers toestablish and follow cGMPs or to document their adherence to suchpractices may lead to significant delays in the availability ofmaterial for clinical trials and may delay or prevent filing orapproval of marketing applications for our products.

Changingcontract manufacturers may be difficult, and the number of potentialmanufacturers is limited. Changing manufacturers requires re-validationof the manufacturing processes and procedures in accordance withgovernment mandated obligations, including FDA-mandated cGMPs. Suchre-validation may be costly and time-consuming. It may be difficult orimpossible for us to find replacement manufacturers on acceptable termsquickly, if at all. Either of these factors could delay or prevent thecompletion of our clinical trials, the approval of our productcandidates by the FDA or other regulatory agencies, or thecommercialization of our products, result in higher costs, or cause adecline in potential product revenues.

Drug manufacturers aresubject to on-going, periodic unannounced inspections by the FDA andcorresponding state and foreign agencies to ensure strict compliancewith cGMPs, other government regulations and corresponding foreignstandards. While we are obligated to audit the performance of thirdparty contractors, we do not have control over our third partymanufacturers’ compliance with these regulations and standards.Failure by our third party manufacturers or us to comply withapplicable regulations could result in sanctions being imposed on us,including fines, injunctions, civil penalties, failure of thegovernment to grant market approval of drugs, delays, suspension ofclinical trials, withdrawal of approvals, seizures, detentions orrecalls of product, operating restrictions and criminalprosecution.

To date, our product candidates have beenmanufactured in small quantities by third party manufacturers forpreclinical and clinical trials. In order to obtain marketing approvalfor any of these product candidates, we will need to enter intolong-term supply agreements with our existing or new third partymanufacturers and demonstrate that we can manufacture sufficientquantities for commercial sale. Our third party manufacturers may notbe able to successfully increase their manufacturing capacity or applyat commercial scale the current manufacturing process for any of ourproduct candidates in a timely or economic manner, or at all. This mayrequire seeking out additional manufacturing partners who may havedifferent equipment requiring additional validation studies, which therelevant government regulator must review and approve. If we are unableto successfully increase the manufacturing capacity for a productcandidate, the regulatory approval or commercial launch of that productcandidate may be delayed or there may be a shortage in the supply ofthe product candidate. Our product candidates require precise,high-quality manufacturing. The failure of our third partymanufacturers to achieve and maintain these high manufacturingstandards, including the incidence of manufacturing errors, couldresult in patient injury or death, product recalls or withdrawals,delays or failures in product testing or delivery, cost overruns orother problems that could seriously harm our business.

Ourcommon stock could be delisted from the Nasdaq CapitalMarketSM.

If the price of ourcommon stock declines below $1.00 per share, we may fail to meetNasdaq’s maintenance criteria, which may result in the delistingof our common stock from the Nasdaq Capital MarketSM.

In such the event of delisting, trading, if any, in our common stockmay then continue to be conducted in the non-Nasdaq over-the-countermarket in what are commonly referred to as the 

22

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electronic bulletin board and the‘‘pink sheets’’. As a result, an investor mayfind it more difficult to dispose of or obtain accurate quotations asto the market value of our common stock. In addition, we would besubject to a Rule promulgated by the Securities and Exchange Commissionthat, if we fail to meet criteria set forth in such Rule, imposesvarious practice requirements on broker-dealers who sell securitiesgoverned by the Rule to persons other than established customers andaccredited investors. For these types of transactions, thebroker-dealer must make a special suitability determination for thepurchaser and have received the purchaser’s written consent tothe transactions prior to the sale. Consequently, the Rule may have amaterially adverse effect on the ability of broker-dealers to sell oursecurities, which may materially affect the ability of stockholders tosell our securities in the secondary market.

A delisting fromthe Nasdaq Capital MarketSM will also make us ineligible touse Form S-3 to register shares of our common stock with the Securitiesand Exchange Commission, thereby making it more difficult and expensivefor us to register our common stock and raise additional capital. Wewould also incur additional costs under state blue-sky laws to sellequity if we are delisted.

The rights that have been andmay in the future be granted to our stockholders may allow our Boardand management to deter a potential acquisition in which the Board andmanagement are to be replaced.

We have in place astockholder rights plan, or ‘‘poison pill’’,which enables our board of directors to issue rights to purchase commonstock when someone acquires 20% or more of the outstandingshares of our common stock. As a result of the plan, anyone wishing totake over the company would most likely be forced to negotiate atransaction with our Board and management in order not to trigger thepill. The need to negotiate with the Board or management couldfrustrate a proposed takeover particularly where the Board andmanagement wish to remain entrenched. This would prevent ourstockholders from participating in a takeover or tender offer, whichmight be of substantial value to them.

The large number ofour shares that may be held in the market may depress the market priceof our stock and could result in substantial dilution to the holders ofour shares of common stock.

Sale or issuance of asubstantial number of shares of our common stock in the future couldcause the market price of our common stock to decline. It may alsoimpair our ability to obtain additional financing. As of March1,  2006, we had outstanding warrants to purchase 9,198,971 sharesof our common stock at exercise prices ranging from $2.20 to $3.25 pershare. All such shares have been registered for resale on registrationstatements filed with the Securities and Exchange Commission and willbe freely tradable when issued upon exercise of the warrants. Inaddition, as of March  1,  2006, there were 4,720,480 sharesof common stock issuable upon exercise of options granted by us. We mayalso grant awards under our 2005 Stock Incentive Plan to purchase up toan additional 5,708,738 shares of common stock.

ITEM1B.    Unresolved Staff Comments

Not applicable.

ITEM 2.    Properties

Our principal facilityconsists of approximately 20,000 square feet of leased laboratory andoffice space in New Haven, Connecticut. The facility lease expires inDecember  2010. The current annual rental rate is approximately$217,000. We believe our space is sufficient for our preclinicaldevelopment, clinical and administrative activities.

ITEM3.    Legal Proceedings

In the normal course ofbusiness, we may be subject to proceedings, lawsuits and other claims.We are not a party to any legal proceedings that may have a materialadverse effect on our business.

23

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ITEM 4.    Submission of Mattersto a Vote of Security Holders

At our annual meeting ofstockholders held on October  25,  2005, three proposals werevoted upon by our stockholders. A description of each proposal and atabulation of the votes for each of the proposals follows:

1.    To elect seven directors to hold office until the 2006annual meeting of stockholders or until their successors are electedand qualified. All seven nominees were elected:

|                          |  |             |            |                               |  |        |           |        |  |  |
|--------------------------|--|-------------|------------|-------------------------------|--|--------|-----------|--------|--|--|
|                     |  | For Nominee |            | AuthorityWithheld FromNominee |
| WilliamR. Miller         |  |        | 57,714,246 |                          |  |   | 829,932   |   |
| George Bickerstaff       |  |        | 57,979,534 |                          |  |   | 564,644   |   |
| Stephen K. Carter, M.D.  |  |        | 57,787,683 |                          |  |   | 756,495   |   |
| Alan Kessman             |  |        | 57,501,199 |                          |  |   | 1,042,979 |   |
| Alan C.Sartorelli, Ph.D. |  |        | 56,703,164 |                          |  |   | 1,841,014 |   |
| Mario Sznol, M.D.        |  |        | 57,124,413 |                          |  |   | 1,419,765 |   |
| Gary K. Willis           |  |        | 57,979,634 |                          |  |   | 564,544   |   |
|                          |

2.    Toapprove the Vion Pharmaceuticals, Inc. 2005 Stock Incentive Plan. ThePlan was approved:

|            |  |         |           |                               |  |        |            |        |  |  |
|------------|--|---------|-----------|-------------------------------|--|--------|------------|--------|--|--|
| For        |  | Against |           | Abstentions andBrokerNon-Vote |
| 20,624,279 |  |    | 2,021,992 |                          |  |   | 35,897,907 |   |
|            |

3.    Ratification of theappointment of Ernst & Young LLP as the Company’sindependent auditors for the year ending December  31,  2005.The appointment of Ernst & Young LLP was ratified:

|            |  |         |         |                               |  |        |         |        |  |  |
|------------|--|---------|---------|-------------------------------|--|--------|---------|--------|--|--|
| For        |  | Against |         | Abstentions andBrokerNon-Vote |
| 58,005,001 |  |    | 236,303 |                          |  |   | 302,874 |   |
|            |

24

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PART II

|              |                                                                                                                  |
|--------------|------------------------------------------------------------------------------------------------------------------|
| ITEM5.  | Market for Registrant’s CommonEquity, Related Stockholder Matters and Issuer Purchases of EquitySecurities |

Market Information for Common Stock

Our common stock is traded under the symbol‘‘VION’’ on the Nasdaq CapitalMarketSM. The following table reflects the range of high andlow closing sales prices of our common stock for each of the calendarquarters in 2005 and 2004 as reported by the Nasdaq CapitalMarketSM.

|                |  |        |      |        |  |        |      |        |  |        |      |        |  |        |      |        |  |  |
|----------------|--|--------|------|--------|--|--------|------|--------|--|--------|------|--------|--|--------|------|--------|--|--|
|           |  | 2005   |      | 2004   |
|           |  | High   |      | Low    |  | High   |      | Low    |
| FirstQuarter   |  | $      | 4.47 |   |  | $      | 2.64 |   |  | $      | 4.01 |   |  | $      | 1.59 |   |
| Second Quarter |  |   | 2.88 |   |  |   | 2.09 |   |  |   | 5.31 |   |  |   | 3.32 |   |
| ThirdQuarter   |  |   | 2.84 |   |  |   | 2.17 |   |  |   | 4.46 |   |  |   | 2.89 |   |
| Fourth Quarter |  |   | 2.20 |   |  |   | 1.57 |   |  |   | 5.06 |   |  |   | 4.14 |   |
|                |

Holders

At March  10,  2006, there were 463 holders of record ofour common stock, one of which is Cede & Co., a nominee forDepository Trust Company (DTC). All of the shares of common stock heldby brokerage firms, banks and other financial institutions as nomineesfor beneficial owners are deposited into participant accounts at DTC,and are therefore considered to be held of record by Cede & Co. asone stockholder.

Dividends

We have never paid cashdividends on our common stock. We currently intend to retain all futureearnings for use in the operation of our business and do not anticipatepaying cash dividends in the foreseeable future.

|              |                         |
|--------------|-------------------------|
| ITEM6.  | Selected Financial Data |

Thefollowing selected financial data for each of the five years in theperiod ended December  31,  2005, and for the period fromMay  1,  1994 (inception) through December  31,2005, are derived from our audited financial statements. The selectedfinancial data should be read in conjunction with the consolidatedfinancial statements, related notes and‘‘Management’s Discussion and Analysis of FinancialCondition and Results of Operations’’ included elsewhereherein.

25

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|                                                                   |  |        |         |         |  |        |         |         |  |        |         |                                                                  |  |        |         |         |  |        |         |         |  |        |          |         |  |  |
|-------------------------------------------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|------------------------------------------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|----------|---------|--|--|
|                                                              |  | 2005   |         | 2004    |  | 2003   |         | 2002    |  | 2001   |         | For the PeriodFrom May 1,1994(Inception)through December31, 2005 |
| Statement of OperationsData:                                      |  |   |    |    |  |   |    |    |  |   |    |                                                             |  |   |    |    |  |   |    |    |  |   |     |    |
| Totalrevenues                                                     |  | $      | 23      |    |  | $      | 275     |    |  | $      | 375     |                                                             |  | $      | 238     |    |  | $      | 650     |    |  | $      | 12,942   |    |
| Loss fromoperations                                               |  |   | (19,821 | )  |  |   | (16,501 | )  |  |   | (11,923 | )                                                           |  |   | (13,021 | )  |  |   | (15,014 | )  |  |   | (138,129 | )  |
| Net loss                                                          |  |   | (18,041 | )  |  |   | (16,055 | )  |  |   | (11,838 | )                                                           |  |   | (12,310 | )  |  |   | (13,810 | )  |  |   | (131,062 | )  |
| Preferred stock dividends and accretion                           |  |   | — |    |  |   | — |    |  |   | — |                                                             |  |   | — |    |  |   | — |    |  |   | (18,489  | )  |
| Loss applicable to commonshareholders                             |  |   | (18,041 | )  |  |   | (16,055 | )  |  |   | (11,838 | )                                                           |  |   | (12,310 | )  |  |   | (13,810 | )  |  |   | (149,551 | )  |
| Basic and diluted loss applicable tocommon shareholders per share |  |   | (0.28   | )  |  |   | (0.30   | )  |  |   | (0.36   | )                                                           |  |   | (0.43   | )  |  |   | (0.51   | )  |  |   |     |    |
| Balance SheetData:                                                |  |   |    |    |  |   |    |    |  |   |    |                                                             |  |   |    |    |  |   |    |    |  |   |     |    |
| Cash, cashequivalents and short-term investments                  |  | $      | 52,762  |    |  | $      | 41,729  |    |  | $      | 15,719  |                                                             |  | $      | 10,131  |    |  | $      | 22,644  |    |  |   |     |    |
| Total assets                                                      |  |   | 53,719  |    |  |   | 42,644  |    |  |   | 16,376  |                                                             |  |   | 10,923  |    |  |   | 23,601  |    |  |   |     |    |
| Long-term obligations and redeemable preferredstock               |  |   | — |    |  |   | — |    |  |   | — |                                                             |  |   | — |    |  |   | — |    |  |   |     |    |
|                                                                   |

|              |                                                                                            |
|--------------|--------------------------------------------------------------------------------------------|
| ITEM7.  | Management’s Discussion and Analysisof Financial Condition and Results of Operations |

Overview

We are a development stage pharmaceutical companyengaged in the development of therapeutics for the treatment of cancer.Our activities to date have consisted primarily of research and productdevelopment, preclinical trials of product candidates, obtainingregulatory approval for clinical trials, conducting clinical trials,negotiating and obtaining collaborative agreements, and obtainingfinancing in support of these activities. Historically, our revenueshave primarily consisted of contract research grants, technologylicense fees, and research and laboratory support service fees. Sinceinception, we have generated minimal revenues and have incurredsubstantial operating losses from our activities. We expect to incursubstantial operating losses for the next several years due to expensesassociated with our activities.

We have five research anddevelopment projects, which include two product candidates in clinicaltrials (Cloretazine® and Triapine®),two product development programs in preclinical development (VNP40541and heterocyclic hydrazones) and one drug delivery technology(TAPET®) for which we are seeking a developmentpartner.The following table provides information on clinical trialssponsored by us that were open for patient accrual as of March1,  2006.

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|                  |  |                                                                                        |  |                       |  |  |  |  |  |  |
|------------------|--|----------------------------------------------------------------------------------------|--|-----------------------|--|--|--|--|--|--|
| Product          |  | Trial                                                                                  |  | TrialCommencementDate |
| Cloretazine® |  | Phase III trial in relapsed acute myelogenous leukemia incombination with Ara-C        |  | March2005             |
| Cloretazine® |  | PhaseII trial in small cell lung cancer                                                |  | September2005         |
| Cloretazine® |  | PhaseII trial in acute myelogenous leukemia and high-riskmyelodysplasia                |  | March  2004           |
| Cloretazine® |  | PhaseI/II trial in refractory or relapsed chronic lymphocytic leukemia                 |  | July  2005            |
| Cloretazine® |  | PhaseI trial in combination with temozolomide in patients with hematologicmalignancies |  | October  2004         |
|                  |

Inaddition to the above-listed clinical trials forCloretazine®which are sponsored by us, a Phase II trialin adult brain tumors was initiated in May  2004 under aninvestigator’s IND. Additionally, a Phase I trial in pediatricbrain tumors was initiated in April  2005 by the Pediatric BrainTumor Consortium (PBTC) under an investigator’s IND. We provideproduct for these trials and incur certain costs related to patientenrollment.

The National Cancer Institute (NCI) is sponsoringPhase I and Phase II clinical trials of Triapine®. Weprovide product for the NCI trials.

Completion of clinicaltrials may take several years or more and the length of time can varysubstantially according to the type, complexity, novelty and intendeduse of a product candidate. The types of costs incurred during aclinical trial vary depending upon the type of product candidate, thedisease treated and the nature of the study.

We budget andmonitor our research and development costs by category. Significantcategories of costs include personnel, clinical, third party researchand development services, and laboratory supplies.The cost to take aproduct candidate through clinical trials is dependent upon, amongother things, the disease indications, the timing, the size and dosingschedule of each clinical trial, the number of patients enrolled ineach trial and the speed at which patients are enrolled and treated. Wecould incur increased product development costs, if we experiencedelays in trial enrollment, the evaluation of clinical trial results orin applying for or obtaining regulatory approvals. Significant delayscould allow our competitors to bring products to market before we doand impair our ability to commercialize our product candidates. Theseuncertainties and variability make it difficult to accurately predictthe future cost of or timing to complete our product developmentprojects.

We cannot be certain that any of our products willprove to be safe or effective, will achieve the safety and efficacyneeded to proceed through Phase III or registrational clinical trials,will receive regulatory approvals, or will be successfullycommercialized. Our clinical trials might prove that our productcandidates may not be effective in treating disease or may haveundesirable or unintended side effects, toxicities or othercharacteristics that require us to cease further development of theproduct.

We expect that we will need to enter into and completePhase III or registrational clinical trials of our products in order toapply for regulatory approval. If we achieve successful completion ofPhase III or registrational trials, which have commenced or which wemay in the future commence, of which there can be no certainty, weintend to submit the results to the U.S. Food and Drug Administration(FDA) to support an application for regulatory approval of theproduct.

Given the uncertainties related to pharmaceuticalproduct development, we are currently unable to reliably estimate when,if ever, our product candidates will generate revenue and cash flows.We do 

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not expect to receive net cash inflows fromany of our major research and development projects until and unless aproduct candidate becomes a profitable commercial product.

Critical Accounting Policies and Estimates

The accompanyingdiscussion and analysis of our financial condition and results ofoperations are based upon our financial statements and the relateddisclosures, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation ofthese consolidated financial statements requires us to make estimatesand assumptions that affect the amounts reported in our financialstatements and accompanying notes. These estimates form the basis formaking judgments about the carrying values of assets and liabilities.We base our estimates and judgments on historical experience and onvarious other assumptions that we believe to be reasonable under thecircumstances. Actual results could differ materially from theseestimates.

We believe the following policies to be the mostcritical to an understanding of our financial condition and results ofoperations because they require us to make estimates, assumptions andjudgments about matters that are inherently uncertain.

Revenue Recognition

We record revenue undertechnology license agreements related to the following:

|  |              |                                                                                                                                                                                     |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Nonrefundable upfront licensefees for which no further performance obligations exist are recognizedas revenue on the earlier of when payments are received or collectionis assured; |

|  |              |                                                                                                                                                                                                                                   |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Nonrefundableupfront license fees including guaranteed, time-based payments thatrequire continuing involvement in the form of development or otherefforts by us are recognized as revenue ratably over the performanceperiod; and |

|  |              |                                                                                                        |
|--|--------------|--------------------------------------------------------------------------------------------------------|
|  | •  | Milestonepayments are recognized as revenue when milestones, as defined in theagreement, are achieved. |

Actual license fees received may varyfrom recorded estimated revenues.

We record revenue fromroyalties, if any, based on licensees’ sales of our products ortechnologies. Revenues are recognized as earned in accordance with thecontract terms when royalties from licensees can be reliably measuredand collectibility is reasonably assured. Royalty estimates are made inadvance of amounts collected based on historical and forecastedtrends.

We record revenue from research and laboratory support,if any, as the services are provided. Actual research and laboratorysupport fees collected may vary from revenue recognized.

Werecord revenue from contract research grants, if any, as the costs areincurred. We are reimbursed for eligible costs after submission ofgrant reports. We are subject to grant audits as required by theDepartment of Health and Human Services. Audits may result inadjustments to the amount of grant revenues recorded and fundsreceived.

The effect of any change in revenues from technologylicense agreements, research and laboratory support, or contractresearch grants would be reflected in revenues in the period suchdetermination was made. Historically, such adjustments have beeninsignificant.

Research and Development Expenses

We record research and development expenses as incurred. We discloseclinical trials expenses, and other research and development expensesas separate components of research and development expense in ourconsolidated statements of operations to provide more meaningfulinformation to our investors. The expenses are based, in part, onestimates of certain costs when incurred. The effect of any change inthe clinical trials expenses and other research and developmentexpenses would be reflected in the period such determination wasmade.

Income Taxes

We provide deferred incometaxes for the future tax consequences of temporary differences betweenthe financial statement carrying amounts and the tax basis of assetsand liabilities, and on 

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operating loss and tax credit carryforwards.Except for the provisions recorded for minimum state capital taxes andthe sale recorded in 2003 of certain research and development taxcredits to the State of Connecticut, we have not recorded a provisionor benefit for income taxes in the financial statements due torecurring historical losses. Accordingly, we have provided a fullvaluation allowance for our deferred income tax asset as ofDecember  31,  2005. In the event we were to determine thatwe would be able to realize deferred income tax assets in the future,an adjustment to the valuation allowance would be made in the period ofdetermination.

Stock-Based Compensation

Wemeasure stock-based compensation expense under Accounting PrinciplesBoard Opinion No.  25, Accounting for Stock Issued toEmployees and related Interpretations (APB 25), and providerequired pro forma disclosures under the fair value recognitionprovisions of Financial Accounting Standards No. 123, Accounting forStock – Based Compensation (SFAS  123), as amended byFinancial Accounting Standards No. 148, Accounting for Stock-BasedCompensation – Transition and Disclosure (SFAS 148).

Recently Issued Accounting Standards

There may bepotential new accounting pronouncements or regulatory rulings, whichmay have an impact on our future financial position and results ofoperations. In December  2004, the Financial Accounting StandardsBoard (FASB) issued Statement of Financial Accounting Standards No.123R, Share-Based Payment (SFAS 123R), which replaces SFAS 123and supersedes APB 25. SFAS 123R requires the recognition of the fairvalue of stock-based compensation to employees and non-employees in netearnings. We currently account for stock-based compensation expense forrestricted stock, grants of stock options and purchases under theemployee stock purchase plan under APB 25 and provide pro formadisclosures required by SFAS 123, as amended by SFAS 148. We will adoptSFAS 123R and recognize an expense for share-based compensation in ourconsolidated financial statements beginning January  1,2006. See Note 2 in our Notes to Consolidated Financial Statements forthe pro forma net loss and net loss per share amounts for the periodspresented as if we had used a fair-value-based method similar to themethods required under SFAS 123R to measure compensation expense forshare-based payments. We expect the adoption of SFAS 123R to have asignificant adverse impact on our consolidated statements of operationsand net loss per share. We estimate the maximum expense to berecognized for options granted prior to January  1,  2006will be $620,000 for 2006, $330,000 for 2007, $320,000 for 2008 and$5,000 for 2009. In addition, we will recognize an expense each yearbeginning in 2006 for compensation expense associated with restrictedstock awards, purchases under the employee stock purchase plan andoption grants on or after January  1,  2006, if any.

In June  2005, the FASB issued SFAS No. 154, AccountingChanges and Error Corrections (SFAS  154), which applies toall voluntary changes in accounting principle, and changes therequirements for accounting for and reporting of a change in accountingprinciple. SFAS 154 requires retrospective application to priorperiods’ financial statements of a voluntary change inaccounting principle unless it is impracticable. Previously, mostvoluntary changes in accounting principle were recognized by includingin net income of the period of the change the cumulative effect ofchanging to the new accounting principle. SFAS 154 is effective foraccounting changes and corrections of errors made in fiscal yearsbeginning after December  15,  2005. Earlier application ispermitted for accounting changes and corrections of errors madeoccurring in fiscal years beginning after June  1,  2005.

Results of Operations

Year Ended December31,  2005 Compared to the Year Ended December  31,2004

Revenues.    Revenues for the year endedDecember  31,  2005 were $23,000 as compared to $275,000 for2004. The decrease was due primarily to lower revenues from researchand laboratory support service fees and contract research grants. Allrevenues under contract research grants have been fully recognized asof December  31,  2004 as all grants have expired.Accordingly, we have no material source of revenues.

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Research and DevelopmentExpenses.    Total research and development (R&D) expenseswere $16.6  million for the year ended December  31,2005, compared to $13.8  million for 2004 as a result of higherother R&D expenses of $2.2  million and higher clinical trialsexpenses of $623,000. The increase in other R&D expenses resultedfrom late-stage clinical development of Cloretazine®,including expenses not directly related to clinical trials, as well aspreclinical development costs related to VNP40541 (formerly KS119W).The increase in clinical trials expenses was due to higher spending forCloretazine® trials of $2.5  million (primarily asa result of patient accrual to our Phase III trial beginning inMarch  2005) partially offset by lower spending forTriapine® trials of $1.9  million due to fewertrials being open to patient accrual. We expect total research anddevelopment expenses to increase over the next two years mainly due toconducting larger clinical trials, including our Phase III trial andthe planned commencement of a pivotal Phase II clinical trial in 2006,as well as additional development of our preclinical products.

General and Administrative Expenses.    General andadministrative expenses were $3.2  million for the year endedDecember  31,  2005, compared to $3.0  million in 2004.The increase was primarily due to higher professional fees forrecruiting and benefit consulting.

InterestIncome.    Interest income was $1.8  million for the yearended December  31,  2005, compared to $547,000 for 2004. Theincrease was due to higher interest rates and higher levels of investedfunds in 2005 as a result of net proceeds received from a registereddirect offering of our common stock in January  2005.

Other Expense.    Other expense related to foreigncurrency transaction losses was $4,000 for the year endedDecember  31,  2005, compared to $73,000 for 2004. Theforeign currency transaction losses are related to contracts with avendor outside the U.S. that are denominated in a foreign currency.

Income Tax Provision.    Income tax provisions of$40,000 and $28,000 were recorded for the years ended December31,  2005 and 2004, respectively, for minimum state capital taxespaid.

Net Loss.    The net loss was $18.0million, or $0.28 per share based on weighted-average sharesoutstanding of 65.2  million, for the year ended December31,  2005, compared to $16.1  million, or $0.30 per sharebased on weighted-average shares outstanding of 53.5  million, for2004.

Year Ended December  31,  2004 Compared tothe Year Ended December  31,  2003

Revenues.     Revenues for the year ended December31,  2004, were $275,000 as compared to $375,000 for 2003. Thedecrease was due primarily to lower revenues from contract researchgrants. All revenues under contract research grants have been fullyrecognized as all grants have expired.

Research andDevelopment Expenses.    Total research and developmentexpenses were $13.8  million for the year ended December31,  2004, compared to $9.7  million for 2003 as a result ofhigher clinical trials expenses of $3.6  million and higher otherR&D expenses of $471,000. The increase in clinical trials expenseswas due primarily to higher spending for Cloretazine®trials of $3.2  million primarily as a result of patient accrualto a Phase II trial in acute myeloid leukemia and myelodysplasticsyndromes initiated in March  2004, as well as higher drugproduction expense of $645,000 for Triapine® andCloretazine®, and higher clinical consulting fees of$331,000, partially offset by lower spending of $809,000 forTriapine® trials. The increase in other R&Dexpenses was primarily due to costs associated with two preclinicalproduct development programs (KS119W and heterocyclic hydrazones) andhigher payroll-related costs.

General and AdministrativeExpenses.    General and administrative expenses were$3.0  million for the year ended December  31,  2004, ascompared to $2.6  million in 2003. The increase was primarily dueto higher payroll-related costs and higher professional fees forfinancial services and employee recruiting as we moved into late-stageclinical trials of products, partially offset by lower legal fees as aresult of non-recurring legal fees in 2003 for license agreements andassistance with other transactions.

InterestIncome.    Interest income was $547,000 for the year endedDecember  31,  2004, compared to $136,000 for 2003. Theincrease was primarily due to higher levels of invested funds in 2004as a 

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result of net proceeds received from aprivate placement of our common stock in February  2004 and netproceeds from warrant exercises during 2004.

OtherExpense.    Other expense related to foreign currencytransaction losses was $73,000 for the year ended December31,  2004, compared to $45,000 for 2003. The foreign currencytransaction losses were related to contracts with a vendor outside theU.S. that are denominated in a foreign currency.

Income TaxProvision.    An income tax provision of $28,000 was recordedfor the year ended December  31,  2004, for minimum statecapital taxes paid. For the year ended December  31,  2003,an income tax provision of $4,000 was recorded for minimum statecapital taxes paid net of proceeds from the sale of certain researchand development tax credits to the State of Connecticut.

NetLoss.    The net loss was $16.1  million, or $0.30 pershare based on weighted-average shares outstanding of 53.5million, for the year ended December  31,  2004, as comparedto $11.8  million, or $0.36 per share based on weighted-averageshares outstanding of 32.8  million, for 2003.

Liquidityand Capital Resources

At December  31,  2005, we hadcash and cash equivalents of $52.8  million, compared to$41.7  million at December  31,  2004. The increase in2005 was primarily due to net proceeds of $30.2  million from aregistered direct offering of common stock, described below, andproceeds of $245,000 from common stock issuances under employee stockplans, offset by cash used to fund operating activities of $19.0million and acquisitions of capital equipment of $417,000. Cash used inoperations was primarily to fund clinical and preclinical productdevelopment activities as well as for working capital and generalcorporate purposes.

Cash Used in OperatingActivities

Cash used in operating activities is primarilya result of our net loss. However, operating cash flows differ from netloss as a result of non-cash charges, changes in operating assets andliabilities, or differences in the timing of cash flows andearnings/expense recognition. Significant components of cash used inoperating activities are as follows:

Receivables and prepaidexpenses decreased $149,000 during the year ended December31,  2005 compared to an increase of $113,000 for 2004. Thedecrease in 2005 was primarily due to a reduction in a deposit paid toa clinical research organization as well as a reduction of prepaidinsurance expense as the timing of insurance premium payments differsfrom the recognition of insurance expense. The increase in 2004 wasprimarily due to a deposit paid to a clinical research organization,partially offset by a reduction of prepaid insurance expense.

Current liabilities decreased $1.3  million during the yearended December  31,  2005 compared to an increase of$2.0  million for 2004. The decrease in 2005 was primarily due toa reduction in the accrual for clinical trial costs as the timing ofpayments to clinical vendors differs from the recognition of clinicaltrials expenses as well as a reduction of $683,000 as actual expensesfor two clinical trials were less than original estimates. The increaseof $2.0  million in 2004 was primarily due to an increase in theaccrual for clinical trial costs as the timing of payments to clinicalvendors differs from the recognition of clinical trials expenses.

Cash Provided by or Used in Investing Activities

Cash provided by or used in investing activities primarily relatesto acquisitions of capital equipment and, in prior years, the purchasesand maturities of investments. Capital expenditures were $417,000 and$358,000 for the years ended December  31,  2005 and 2004,respectively. Capital expenditures for 2005 included purchases ofcomputer software and laboratory equipment. Capital expenditures for2004 included the purchase of laboratory equipment. Capitalexpenditures for fiscal 2006 are not expected to exceed $1million. For the year ended December  31,  2004, purchases ofmarketable securities totaled $61.9  million and maturities ofmarketable securities totaled $76.4  million. Cash provided by thematurities of these short-term investments in marketable securities wasreinvested during the second quarter of 2004 in U.S. Treasurysecurities classified as cash equivalents. As a result, short-terminvestments were reduced to $0.

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Cash Provided by FinancingActivities

Cash provided by financing activities isprimarily related to capital raised, warrant exercise proceeds andproceeds from common stock issuances under our employee stock plans.For the year ended December  31,  2005, we received netproceeds of $30.2  million from a registered direct offering ofcommon stock in January  2005, described below, and proceeds of$245,000 from common stock issuances through employee stock plans. Forthe year ended December  31,  2004, we received net proceedsof $33.0  million from a private placement of common stock inFebruary  2004 and proceeds of $7.3  million from exercisesof warrants, described below.

In February  2004, wecompleted a private placement of 13,553,845 shares of our common stockat $2.60 per share. The investors also received warrants to purchase3,388,463 shares of common stock at $3.25 per share and the placementagent received a warrant to purchase an additional 300,000 shares ofcommon stock at $3.25 per share. All of these warrants expire onFebruary  11,  2009. Net proceeds from this private placementtotaled $33  million.

For the year ended December31,  2004, we issued 2,987,567 shares of our common stock uponexercises of warrants issued in connection with private placements in2003 and 2004, resulting in proceeds of $7.3  million.

InJanuary  2005, we received net proceeds of $30.2  millionfrom a registered direct offering of 10  million shares of ourcommon stock at $3.25 per share.

All proceeds are being and willbe used to fund clinical and preclinical product developmentactivities, and for working capital and general corporate purposes.

Future Cash Requirements

Based on our currentoperating plan, we estimate that our existing cash and cash equivalentstotaling $52.8  million at December  31,  2005 will besufficient to fund our operations into 2007. Our operating plans andcash requirements may vary materially from the foregoing due to theresults of preclinical development, clinical trials, product testing,relationships with strategic partners, changes in focus and directionof our preclinical and clinical development programs, competitive andtechnological advances, the regulatory process in the United States andabroad, and other factors. In the future, we will need to raise capitalto complete our product development and clinical trials and to fundoperations in 2007 and beyond, however, we cannot assure you that wewill be able to raise additional capital, nor can we predict what theterms of any financing might be.

Off-Balance SheetFinancing

We have no off-balance sheet arrangements that have amaterial current effect or that are reasonably likely to have amaterial future effect on our financial position or results ofoperations.

Contractual Obligations

The following tablesummarizes our significant contractual obligations which are notrecorded on the balance sheet at December  31,  2005 and thefuture periods in which such obligations are expected to be settled incash. Additional details regarding these obligations are provided infootnotes to the consolidated financial statements, as referenced inthe table:

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|                                               |  |                       |       |                |  |           |       |           |  |                |         |        |  |        |         |        |  |        |                     |        |  |  |
|-----------------------------------------------|--|-----------------------|-------|----------------|--|-----------|-------|-----------|--|----------------|---------|--------|--|--------|---------|--------|--|--------|---------------------|--------|--|--|
|                                          |  | Payments Due byPeriod |
| (Inthousands)                                 |  | Total                 |       | Less than1year |  | 1-3 years |       | 3-5 years |  | Morethan5years |
| Employment agreement (Note 10)                |  | $                     | 1,236 |           |  | $         | 412   |      |  | $              | 824     |   |  | $      | — |   |  | $      |   — |   |
| Operating lease obligations(Note 10)          |  |                  | 1,123 |           |  |      | 248   |      |  |           | 441     |   |  |   | 434     |   |  |   | —             |   |
| Research and developmentcommitment (Note  11) |  |                  | 250   |           |  |      | 200   |      |  |           | 50      |   |  |   | — |   |  |   | —             |   |
| Purchaseobligations(1)                        |  |                  | 2,272 |           |  |      | 2,272 |      |  |           | — |   |  |   | — |   |  |   | —             |   |
| Total                                         |  | $                     | 4,881 |           |  | $         | 3,132 |      |  | $              | 1,315   |   |  | $      | 434     |   |  | $      | —             |   |
|                                               |

|  |
|--|
|  |  |
|  |

|  |     |                                                                                                    |
|--|-----|----------------------------------------------------------------------------------------------------|
|  | (1) | Purchaseobligations include commitments related to contract drug manufacturingand outside testing. |

Under our executed license agreements(refer to Note 3), we are obligated to make milestone payments totaling$2,625,000 upon achieving specified milestones and to pay royalties toour licensors. These contingent milestone and royalty paymentobligations are not included in the above table.

Under variousagreements with contract research organizations, clinical sites andcontract drug manufacturers, we expect to incur costs relating to theprogress of clinical trials. These costs are expensed as incurred andare based upon patient enrollment, services rendered or other expensesas incurred. The accrual for clinical trials costs expensed but not yetpaid is included on our balance sheet. In the event of termination,certain agreements provide for cancellation fees to be paid by us andfor reimbursement of noncancellable commitments that may have beenentered into on our behalf. These potential cancellation fees are notincluded in the above table.

|               |                                                           |
|---------------|-----------------------------------------------------------|
| ITEM7A.  | Quantitative and Qualitative DisclosuresAbout Market Risk |

We are exposed to market risk, includingchanges to interest rates associated with our cash equivalents andinvestments, and foreign currency exchange rates. The followingdescribes the nature of these risks which we do not believe to bematerial to us.

Our cash equivalents are generally highly liquidinvestments in money market funds and U.S.  government securities.These investments are subject to interest rate risk and, as such, ourfuture investment income may fall short of expectations due to changesin interest rates. However, the conservative nature of our investmentsmitigates our interest rate exposure. Our investments are held forpurposes other than trading and we believe that we currently have nomaterial adverse market risk exposure. The weighted-average interestrate on cash equivalents held at December  31,  2005 wasapproximately 4.2%.

We have contracts with a vendoroutside the U.S. that are denominated in a foreign currency. To date,fluctuations in this currency have not materially impacted our resultsof operations. We have no derivative financial instruments. We do notbelieve we have material exposures to changes in foreign currencyexchange rates.

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|              |                                            |
|--------------|--------------------------------------------|
| ITEM8.  | Financial Statements and SupplementaryData |

Report of Independent Registered Public AccountingFirm

The Board of Directors and Shareholders of VionPharmaceuticals, Inc.

We have audited the accompanyingconsolidated balance sheets of Vion Pharmaceuticals, Inc. andsubsidiary as of December  31,  2005 and 2004, and therelated consolidated statements of operations, shareholders'equity, and cash flows for each of the three years in the period endedDecember  31,  2005 and for the period from May1,  1994 (inception) to December  31,  2005. Thesefinancial statements are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conductedour audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Vion Pharmaceuticals,Inc. and subsidiary at December  31,  2005 and 2004, and theconsolidated results of their operations and their cash flows for eachof the three years in the period ended December  31,  2005and the period from May  1,  1994 (inception) toDecember  31,  2005, in conformity with U.S. generallyaccepted accounting principles.

We also have audited, inaccordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of VionPharmaceuticals, Inc's internal control over financial reportingas of December  31,  2005, based on criteria established inInternal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our reportdated March 8,  2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Hartford, Connecticut

March8,  2006

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Report of Independent Registered PublicAccounting Firm

The Board of Directors and Shareholders ofVion Pharmaceuticals, Inc.

We have auditedmanagement’s assessment, included in the accompanying Form 10-K,that Vion Pharmaceuticals, Inc. maintained effective internal controlover financial reporting as of December  31,  2005, based oncriteria established in Internal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the TreadwayCommission (the COSO criteria). Vion Pharmaceuticals, Inc’smanagement is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is toexpress an opinion on management’s assessment and an opinion onthe effectiveness of the company’s internal control overfinancial reporting based on our audit.

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained inall material respects. Our audit included obtaining an understanding ofinternal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally acceptedaccounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1)pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance thattransactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a materialeffect on the financial statements.

Because of itsinherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controlsmay become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’sassessment that Vion Pharmaceuticals, Inc. maintained effectiveinternal control over financial reporting as of December31,  2005, is fairly stated, in all material respects, based onthe COSO criteria. Also, in our opinion, Vion Pharmaceuticals, Inc.maintained, in all material respects, effective internal control overfinancial reporting as of December  31,  2005, based on theCOSO criteria.

We also have audited, in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates), the consolidated balance sheets of Vion Pharmaceuticals, Inc.as of December  31,  2005 and 2004, and the relatedconsolidated statements of operations, shareholders’ equity, andcash flows for each of the three years in the period endedDecember  31,  2005 and the period from May  1,1994 (inception) to December  31,  2005 and our report datedMarch 8,  2006 expressed an unqualified option thereon.

/s/ Ernst & Young LLP

Hartford, Connecticut

March8,  2006

35

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VionPharmaceuticals, Inc.(A Development Stage Company)ConsolidatedBalance Sheets

|                                                                                                                                                                     |  |              |          |         |  |        |          |         |  |  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--------------|----------|---------|--|--------|----------|---------|--|--|
|                                                                                                                                                                |  | December 31, |
| (In thousands, except shareand per share data)                                                                                                                      |  | 2005         |          | 2004    |
| ASSETS                                                                                                                                                              |  |         |     |    |  |   |     |    |
| Currentassets:                                                                                                                                                      |  |         |     |    |  |   |     |    |
| Cash and cashequivalents                                                                                                                                            |  | $            | 52,762   |    |  | $      | 41,729   |    |
| Accounts receivable                                                                                                                                                 |  |         | 31       |    |  |   | 13       |    |
| Prepaid expenses                                                                                                                                                    |  |         | 195      |    |  |   | 362      |    |
| Total current assets                                                                                                                                                |  |         | 52,988   |    |  |   | 42,104   |    |
| Property and equipment, net                                                                                                                                         |  |         | 706      |    |  |   | 515      |    |
| Securitydeposits                                                                                                                                                    |  |         | 25       |    |  |   | 25       |    |
| Total assets                                                                                                                                                        |  | $            | 53,719   |    |  | $      | 42,644   |    |
| LIABILITIES ANDSHAREHOLDERS’EQUITY                                                                                                                            |  |         |     |    |  |   |     |    |
| Currentliabilities:                                                                                                                                                 |  |         |     |    |  |   |     |    |
| Accrued expenses                                                                                                                                                    |  | $            | 3,305    |    |  | $      | 5,130    |    |
| Accountspayable                                                                                                                                                     |  |         | 855      |    |  |   | 567      |    |
| Accrued payroll and payroll-related expenses                                                                                                                        |  |         | 560      |    |  |   | 354      |    |
| Deferredrevenue                                                                                                                                                     |  |         | 18       |    |  |   | 18       |    |
| Total current liabilities                                                                                                                                           |  |         | 4,738    |    |  |   | 6,069    |    |
| Deferred revenue                                                                                                                                                    |  |         | 342      |    |  |   | 360      |    |
| Total liabilities                                                                                                                                                   |  |         | 5,080    |    |  |   | 6,429    |    |
| Shareholders’equity:                                                                                                                                          |  |         |     |    |  |   |     |    |
| Preferred stock, $0.01 parvalue, authorized: 5,000,000 shares; issued and outstanding:none                                                                     |  |         | —  |    |  |   | —  |    |
| Common stock, $0.01 par value, authorized: 150,000,000shares; issued and outstanding: 66,177,892 and 55,860,313 shares atDecember  31,  2005 and 2004, respectively |  |         | 662      |    |  |   | 559      |    |
| Additionalpaid-in capital                                                                                                                                           |  |         | 197,916  |    |  |   | 167,421  |    |
| Deferred compensation                                                                                                                                               |  |         | (133     | )  |  |   | —  |    |
| Deficit accumulated during thedevelopment stage                                                                                                                     |  |         | (149,806 | )  |  |   | (131,765 | )  |
|                                                                                                                                                                |  |         | 48,639   |    |  |   | 36,215   |    |
| Total liabilities andshareholders’ equity                                                                                                                     |  | $            | 53,719   |    |  | $      | 42,644   |    |
|                                                                                                                                                                     |

See Notes to ConsolidatedFinancial Statements

36

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Vion Pharmaceuticals, Inc.(ADevelopment Stage Company)Consolidated Statements ofOperations

|                                                                   |  |                               |            |                                                                 |  |        |            |         |  |        |            |         |  |        |          |         |  |  |
|-------------------------------------------------------------------|--|-------------------------------|------------|-----------------------------------------------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--------|----------|---------|--|--|
|                                                              |  | For the Year EndedDecember31, |            | For the Periodfrom May 1,1994(Inception)throughDecember 31,2005 |
| (In thousands, except shareand per share data)                    |  | 2005                          |            | 2004                                                            |  | 2003   |
| Revenues:                                                         |  |                          |       |                                                            |  |   |       |    |  |   |       |    |  |   |     |    |
| Technologylicense fees                                            |  | $                             | 22         |                                                            |  | $      | 26         |    |  | $      | 30         |    |  | $      | 4,509    |    |
| Research and laboratory supportfees                               |  |                          | 1          |                                                            |  |   | 149        |    |  |   | 136        |    |  |   | 5,932    |    |
| Contract research grants                                          |  |                          | —    |                                                            |  |   | 100        |    |  |   | 209        |    |  |   | 2,501    |    |
| Total revenues                                                    |  |                          | 23         |                                                            |  |   | 275        |    |  |   | 375        |    |  |   | 12,942   |    |
| Operatingexpenses:                                                |  |                          |       |                                                            |  |   |       |    |  |   |       |    |  |   |     |    |
| Clinicaltrials                                                    |  |                          | 9,996      |                                                            |  |   | 9,373      |    |  |   | 5,772      |    |  |   | 46,508   |    |
| Other research anddevelopment                                     |  |                          | 6,609      |                                                            |  |   | 4,434      |    |  |   | 3,963      |    |  |   | 73,615   |    |
| Total research and development                                    |  |                          | 16,605     |                                                            |  |   | 13,807     |    |  |   | 9,735      |    |  |   | 120,123  |    |
| General and administrative                                        |  |                          | 3,239      |                                                            |  |   | 2,969      |    |  |   | 2,563      |    |  |   | 30,948   |    |
| Total operating expenses                                          |  |                          | 19,844     |                                                            |  |   | 16,776     |    |  |   | 12,298     |    |  |   | 151,071  |    |
| Loss from operations                                              |  |                          | (19,821    | )                                                          |  |   | (16,501    | )  |  |   | (11,923    | )  |  |   | (138,129 | )  |
| Interestincome                                                    |  |                          | 1,828      |                                                            |  |   | 547        |    |  |   | 136        |    |  |   | 7,248    |    |
| Interest expense                                                  |  |                          | (4         | )                                                          |  |   | —    |    |  |   | (2         | )  |  |   | (214     | )  |
| Other expense                                                     |  |                          | (4         | )                                                          |  |   | (73        | )  |  |   | (45        | )  |  |   | (122     | )  |
| Loss before income taxes                                          |  |                          | (18,001    | )                                                          |  |   | (16,027    | )  |  |   | (11,834    | )  |  |   | (131,217 | )  |
| Income tax provision(benefit)                                     |  |                          | 40         |                                                            |  |   | 28         |    |  |   | 4          |    |  |   | (155     | )  |
| Net loss                                                          |  |                          | (18,041    | )                                                          |  |   | (16,055    | )  |  |   | (11,838    | )  |  |   | (131,062 | )  |
| Preferred stock dividends andaccretion                            |  |                          | —    |                                                            |  |   | —    |    |  |   | —    |    |  |   | (18,489  | )  |
| Loss applicable tocommon shareholders                             |  | $                             | (18,041    | )                                                          |  | $      | (16,055    | )  |  | $      | (11,838    | )  |  | $      | (149,551 | )  |
| Basic and diluted loss applicable tocommon shareholders per share |  | $                             | (0.28      | )                                                          |  | $      | (0.30      | )  |  | $      | (0.36      | )  |  |   |     |    |
| Weighted-averagenumber of shares of common stock outstanding      |  |                          | 65,161,176 |                                                            |  |   | 53,464,140 |    |  |   | 32,808,228 |    |  |   |     |    |
|                                                                   |

See Notes toConsolidated FinancialStatements

37

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VionPharmaceuticals, Inc.(A Development Stage Company)ConsolidatedStatement of Changes in Shareholders’ Equity

|                                                                                        |  |                                  |           |                                  |  |              |         |               |  |                          |         |                      |  |                                            |         |                    |  |                                |           |         |  |        |         |         |  |        |         |        |  |        |         |         |  |        |         |         |  |        |         |        |  |        |         |         |  |        |         |         |  |  |
|----------------------------------------------------------------------------------------|--|----------------------------------|-----------|----------------------------------|--|--------------|---------|---------------|--|--------------------------|---------|----------------------|--|--------------------------------------------|---------|--------------------|--|--------------------------------|-----------|---------|--|--------|---------|---------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                   |  | ClassAConvertiblePreferred Stock |           | ClassBConvertiblePreferred Stock |  | Common Stock |         | TreasuryStock |  | AdditionalPaid-inCapital |         | DeferredCompensation |  | AccumulatedOtherComprehensiveIncome (Loss) |         | AccumulatedDeficit |  | TotalShareholders’Equity |
| (Inthousands, except share data)                                                       |  | Shares                           |           | Amount                           |  | Shares       |         | Amount        |  | Shares                   |         | Amount               |
| Issuanceof common stock — July and August  1994                                  |  |                             |      |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 2,852,548 |    |  | $      | 29      |    |  |   |    |   |  |   |    |    |  |   |    |    |  |   |    |   |  | $      | (21     | )  |  | $      | 8       |    |
| Netloss                                                                                |  |                             |      |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |      |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   |    |    |  |   |    |   |  |   | (476    | )  |  |   | (476    | )  |
| Balance at December  31,1994                                                           |  |                             | —   |                             |  | $            | — |          |  |                     | — |                 |  | $                                          | — |               |  |                           | 2,852,548 |    |  | $      | 29      |    |  | $      | — |   |  | $      | — |    |  | $      | — |    |  | $      | — |   |  | $      | (497    | )  |  | $      | (468    | )  |
| Stockoptions issued for compensation — February  1995                            |  |                             |      |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |      |    |  |   |    |    |  |   |    |   |  |   | 540     |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 540     |    |
| Reverse acquisition ofMelaRx Pharmaceuticals, Inc. — April  1995                 |  |                             |      |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 2,000,000 |    |  |   | 20      |    |  |   |    |   |  |   | 4,300   |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 4,320   |    |
| Shares repurchasedpursuant to employment agreements — April  1995                |  |                             |      |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | (274,859  | )  |  |   | (3      | )  |  |   |    |   |  |   |    |    |  |   |    |    |  |   |    |   |  |   | 2       |    |  |   | (1      | )  |
| Privateplacement of common stock — April  1995                                   |  |                             |      |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 76,349    |    |  |   | — |    |  |   |    |   |  |   | 205     |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 205     |    |
| Warrants issued with bridgenotes — April  1995                                   |  |                             |      |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |      |    |  |   |    |    |  |   |    |   |  |   | 200     |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 200     |    |
| Initial public offering ofUnit Purchase Options — August  1995 and September1995 |  |                             |      |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 2,875,000 |    |  |   | 29      |    |  |   |    |   |  |   | 9,667   |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 9,696   |    |
| Issuance of common stock                                                               |  |                             |      |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 1,250     |    |  |   | — |    |  |   |    |   |  |   | 1       |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 1       |    |
| Net loss                                                                               |  |                             |      |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |      |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   |    |    |  |   |    |   |  |   | (9,531  | )  |  |   | (9,531  | )  |
| BALANCE AT DECEMBER 31, 1995                                                           |  |                             | —   |                             |  | $            | — |          |  |                     | — |                 |  | $                                          | — |               |  |                           | 7,530,288 |    |  | $      | 75      |    |  | $      | — |   |  | $      | 14,913  |    |  | $      | — |    |  | $      | — |   |  | $      | (10,026 | )  |  | $      | 4,962   |    |
| Issuance of Class A convertiblepreferred stock                                         |  |                             | 1,250,000 |                             |  |         | 13      |          |  |                     |    |                 |  |                                       |    |               |  |                           |      |    |  |   |    |    |  |   |    |   |  |   | 22,890  |    |  |   |    |    |  |   |    |   |  |   | (11,371 | )  |  |   | 11,532  |    |
| Conversion of Class A convertiblepreferred stock                                       |  |                             | (164,970  | )                           |  |         | (1      | )        |  |                     |    |                 |  |                                       |    |               |  |                           | 458,255   |    |  |   | 5       |    |  |   |    |   |  |   | (4      | )  |  |   |    |    |  |   |    |   |  |   |    |    |  |   | — |    |
| Class A convertiblepreferred stock dividend                                            |  |                             | 21,998    |                             |  |         | — |          |  |                     |    |                 |  |                                       |    |               |  |                           |      |    |  |   |    |    |  |   |    |   |  |   | 256     |    |  |   |    |    |  |   |    |   |  |   | (256    | )  |  |   | — |    |
| Issuance of common stock                                                               |  |                             |      |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 29,418    |    |  |   | — |    |  |   |    |   |  |   | 104     |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 104     |    |
| Compensation associated withstock option grants                                        |  |                             |      |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |      |    |  |   |    |    |  |   |    |   |  |   | 190     |    |  |   | (190    | )  |  |   |    |   |  |   |    |    |  |   | — |    |
| Amortization of deferredcompensation                                                   |  |                             |      |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |      |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 83      |    |  |   |    |   |  |   |    |    |  |   | 83      |    |
| Net loss                                                                               |  |                             |      |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |      |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   |    |    |  |   |    |   |  |   | (7,609  | )  |  |   | (7,609  | )  |
| BALANCE AT DECEMBER 31, 1996                                                           |  |                             | 1,107,028 |                             |  | $            | 12      |          |  |                     | — |                 |  | $                                          | — |               |  |                           | 8,017,961 |    |  | $      | 80      |    |  | $      | — |   |  | $      | 38,349  |    |  | $      | (107    | )  |  | $      | — |   |  | $      | (29,262 | )  |  | $      | 9,072   |    |
| Conversion of Class A convertiblepreferred stock                                       |  |                             | (396,988  | )                           |  |         | (4      | )        |  |                     |    |                 |  |                                       |    |               |  |                           | 1,102,757 |    |  |   | 11      |    |  |   |    |   |  |   | (7      | )  |  |   |    |    |  |   |    |   |  |   |    |    |  |   | — |    |
|                                                                                        |

38

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|                                                                     |  |                                  |         |                                  |  |              |         |               |  |                          |        |                      |  |                                            |         |                    |  |                                |           |        |  |        |         |        |  |        |         |        |  |        |         |         |  |        |        |         |  |        |         |        |  |        |         |         |  |        |         |         |  |  |
|---------------------------------------------------------------------|--|----------------------------------|---------|----------------------------------|--|--------------|---------|---------------|--|--------------------------|--------|----------------------|--|--------------------------------------------|---------|--------------------|--|--------------------------------|-----------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|---------|--|--------|--------|---------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                |  | ClassAConvertiblePreferred Stock |         | ClassBConvertiblePreferred Stock |  | Common Stock |         | TreasuryStock |  | AdditionalPaid-inCapital |        | DeferredCompensation |  | AccumulatedOtherComprehensiveIncome (Loss) |         | AccumulatedDeficit |  | TotalShareholders’Equity |
| (Inthousands, except share data)                                    |  | Shares                           |         | Amount                           |  | Shares       |         | Amount        |  | Shares                   |        | Amount               |
| Class A convertible preferred stockdividend                         |  |                             | 47,592  |                             |  |         | — |          |  |                     |   |                 |  |                                       |    |               |  |                           |      |   |  |   |    |   |  |   |    |   |  |   | 623     |    |  |   |   |    |  |   |    |   |  |   | (623    | )  |  |   | — |    |
| Issuance of Class B convertiblepreferred stock                      |  |                             |    |                             |  |         |    |          |  |                     | 4,850  |                 |  |                                       | — |               |  |                           |      |   |  |   |    |   |  |   |    |   |  |   | 4,852   |    |  |   |   |    |  |   |    |   |  |   | (370    | )  |  |   | 4,482   |    |
| Conversion of Class B convertiblepreferred stock                    |  |                             |    |                             |  |         |    |          |  |                     | (258   | )               |  |                                       | — |               |  |                           | 64,642    |   |  |   | 1       |   |  |   |    |   |  |   | (1      | )  |  |   |   |    |  |   |    |   |  |   |    |    |  |   | — |    |
| Accretion of dividendpayable on Class B convertible preferred stock |  |                             |    |                             |  |         |    |          |  |                     |   |                 |  |                                       |    |               |  |                           |      |   |  |   |    |   |  |   |    |   |  |   | 138     |    |  |   |   |    |  |   |    |   |  |   | (138    | )  |  |   | — |    |
| Extension/reissuance of underwriter warrants                        |  |                             |    |                             |  |         |    |          |  |                     |   |                 |  |                                       |    |               |  |                           |      |   |  |   |    |   |  |   |    |   |  |   | 168     |    |  |   |   |    |  |   |    |   |  |   |    |    |  |   | 168     |    |
| Exercise of warrants                                                |  |                             |    |                             |  |         |    |          |  |                     |   |                 |  |                                       |    |               |  |                           | 238       |   |  |   | — |   |  |   |    |   |  |   | — |    |  |   |   |    |  |   |    |   |  |   |    |    |  |   | — |    |
| Issuance of common stock                                            |  |                             |    |                             |  |         |    |          |  |                     |   |                 |  |                                       |    |               |  |                           | 598,336   |   |  |   | 6       |   |  |   |    |   |  |   | 3,464   |    |  |   |   |    |  |   |    |   |  |   |    |    |  |   | 3,470   |    |
| Exercise of stock options                                           |  |                             |    |                             |  |         |    |          |  |                     |   |                 |  |                                       |    |               |  |                           | 50,000    |   |  |   | — |   |  |   |    |   |  |   | 20      |    |  |   |   |    |  |   |    |   |  |   |    |    |  |   | 20      |    |
| Compensation associated withstock option grants                     |  |                             |    |                             |  |         |    |          |  |                     |   |                 |  |                                       |    |               |  |                           |      |   |  |   |    |   |  |   |    |   |  |   | 56      |    |  |   |   |    |  |   |    |   |  |   |    |    |  |   | 56      |    |
| Amortization of deferredcompensation                                |  |                             |    |                             |  |         |    |          |  |                     |   |                 |  |                                       |    |               |  |                           |      |   |  |   |    |   |  |   |    |   |  |   |    |    |  |   | 35     |    |  |   |    |   |  |   |    |    |  |   | 35      |    |
| Net loss                                                            |  |                             |    |                             |  |         |    |          |  |                     |   |                 |  |                                       |    |               |  |                           |      |   |  |   |    |   |  |   |    |   |  |   |    |    |  |   |   |    |  |   |    |   |  |   | (5,344  | )  |  |   | (5,344  | )  |
| BALANCE AT DECEMBER 31, 1997                                        |  |                             | 757,632 |                             |  | $            | 8       |          |  |                     | 4,592  |                 |  | $                                          | — |               |  |                           | 9,833,934 |   |  | $      | 98      |   |  | $      | — |   |  | $      | 47,662  |    |  | $      | (72    | )  |  | $      | — |   |  | $      | (35,737 | )  |  | $      | 11,959  |    |
|                                                                     |

39

----

Vion Pharmaceuticals, Inc.(ADevelopment Stage Company)Consolidated Statement of Changes inShareholders’ Equity (continued)

|                                                                         |  |                                  |          |                                  |  |              |         |               |  |                          |         |                      |  |                                            |         |                    |  |                                |            |         |  |        |         |        |  |        |         |         |  |        |        |         |  |        |        |         |  |        |         |        |  |        |         |         |  |        |         |         |  |  |
|-------------------------------------------------------------------------|--|----------------------------------|----------|----------------------------------|--|--------------|---------|---------------|--|--------------------------|---------|----------------------|--|--------------------------------------------|---------|--------------------|--|--------------------------------|------------|---------|--|--------|---------|--------|--|--------|---------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                    |  | ClassAConvertiblePreferred Stock |          | ClassBConvertiblePreferred Stock |  | Common Stock |         | TreasuryStock |  | AdditionalPaid-inCapital |         | DeferredCompensation |  | AccumulatedOtherComprehensiveIncome (Loss) |         | AccumulatedDeficit |  | TotalShareholders’Equity |
| (Inthousands, except share data)                                        |  | Shares                           |          | Amount                           |  | Shares       |         | Amount        |  | Shares                   |         | Amount               |
| Accretion of dividend payable on Class B convertible preferredstock     |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |    |  |   |    |   |  |   |    |    |  | $      | 287    |    |  |   |   |    |  |   |    |   |  | $      | (287    | )  |  | $      | — |    |
| Conversionof Class B convertible preferred stock                        |  |                             |     |                             |  |         |    |          |  |                     | (4,592  | )               |  | $                                          | — |               |  |                           | 1,205,178  |    |  | $      | 12      |   |  |   |    |    |  |   | (12    | )  |  |   |   |    |  |   |    |   |  |   |    |    |  |   | — |    |
| Premium on conversiondividend on Class B convertible preferred stock    |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 585,898    |    |  |   | 6       |   |  |   |    |    |  |   | 2,044  |    |  |   |   |    |  |   |    |   |  |   | (2,049  | )  |  |   | 1       |    |
| Conversion ofClass A convertible preferred stock                        |  |                             | (174,981 | )                           |  | $            | (2      | )        |  |                     |    |                 |  |                                       |    |               |  |                           | 486,062    |    |  |   | 5       |   |  |   |    |    |  |   | (3     | )  |  |   |   |    |  |   |    |   |  |   |    |    |  |   | — |    |
| Class A convertiblepreferred stock dividend                             |  |                             | 34,005   |                             |  |         | — |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |    |  |   |    |   |  |   |    |    |  |   | 329    |    |  |   |   |    |  |   |    |   |  |   | (329    | )  |  |   | — |    |
| Discount on Series 1998 convertiblepreferred stock                      |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |    |  |   |    |   |  |   |    |    |  |   | 1,597  |    |  |   |   |    |  |   |    |   |  |   | (1,597  | )  |  |   | — |    |
| Series 1998convertible preferred stock accretion                        |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |    |  |   |    |   |  |   |    |    |  |   |   |    |  |   |   |    |  |   |    |   |  |   | (151    | )  |  |   | (151    | )  |
| Common stock issued in exchange forcancellation of outstanding warrants |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 1,792,952  |    |  |   | 18      |   |  |   |    |    |  |   | (61    | )  |  |   |   |    |  |   |    |   |  |   |    |    |  |   | (43     | )  |
| Exercise of stockoptions                                                |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 32,750     |    |  |   | — |   |  |   |    |    |  |   | 120    |    |  |   |   |    |  |   |    |   |  |   |    |    |  |   | 120     |    |
| Exerciseof warrants                                                     |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 16,272     |    |  |   | — |   |  |   |    |    |  |   | 11     |    |  |   |   |    |  |   |    |   |  |   |    |    |  |   | 11      |    |
| Compensationassociated with stock option grants                         |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |    |  |   |    |   |  |   |    |    |  |   | 51     |    |  |   |   |    |  |   |    |   |  |   |    |    |  |   | 51      |    |
| Amortization of deferredcompensation                                    |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |    |  |   |    |   |  |   |    |    |  |   |   |    |  | $      | 35     |    |  |   |    |   |  |   |    |    |  |   | 35      |    |
| Net loss                                                                |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |    |  |   |    |   |  |   |    |    |  |   |   |    |  |   |   |    |  |   |    |   |  |   | (10,478 | )  |  |   | (10,478 | )  |
| BALANCE AT DECEMBER 31, 1998                                            |  |                             | 616,656  |                             |  | $            | 6       |          |  |                     | — |                 |  | $                                          | — |               |  |                           | 13,953,046 |    |  | $      | 139     |   |  | $      | — |    |  | $      | 52,025 |    |  | $      | (37    | )  |  | $      | — |   |  | $      | (50,628 | )  |  | $      | 1,505   |    |
| Conversion of Class A convertiblepreferred stock                        |  |                             | (144,612 | )                           |  |         | (1      | )        |  |                     |    |                 |  |                                       |    |               |  |                           | 401,707    |    |  |   | 4       |   |  |   |    |    |  |   | (3     | )  |  |   |   |    |  |   |    |   |  |   |    |    |  |   | — |    |
| Class A convertiblepreferred stock dividend                             |  |                             | 26,150   |                             |  |         | — |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |    |  |   |    |   |  |   |    |    |  |   | 385    |    |  |   |   |    |  |   |    |   |  |   | (385    | )  |  |   | — |    |
| Series 1998 convertible preferred stockaccretion                        |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |    |  |   |    |   |  |   |    |    |  |   |   |    |  |   |   |    |  |   |    |   |  |   | (325    | )  |  |   | (325    | )  |
| Common stock issued in exchange forcancellation of outstanding warrants |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 102        |    |  |   | — |   |  |   |    |    |  |   |   |    |  |   |   |    |  |   |    |   |  |   |    |    |  |   | — |    |
| Exercise ofstock options                                                |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 470,886    |    |  |   | 5       |   |  |   | (196    | )  |  |   | 650    |    |  |   |   |    |  |   |    |   |  |   | (40     | )  |  |   | 419     |    |
| Retirement of treasury stock                                            |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | (35,659    | )  |  |   | — |   |  |   | 196     |    |  |   |   |    |  |   |   |    |  |   |    |   |  |   | (196    | )  |  |   | — |    |
| Exerciseof warrants                                                     |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 26,296     |    |  |   | — |   |  |   |    |    |  |   |   |    |  |   |   |    |  |   |    |   |  |   |    |    |  |   | — |    |
| Issuance ofcommon stock                                                 |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 3,425,741  |    |  |   | 34      |   |  |   |    |    |  |   | 14,955 |    |  |   |   |    |  |   |    |   |  |   |    |    |  |   | 14,989  |    |
|                                                                         |

40

----

|                                                      |  |                                  |          |                                  |  |              |         |               |  |                          |         |                      |  |                                            |         |                    |  |                                |            |        |  |        |        |        |  |        |         |        |  |        |         |         |  |        |         |         |  |        |         |        |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------------|--|----------------------------------|----------|----------------------------------|--|--------------|---------|---------------|--|--------------------------|---------|----------------------|--|--------------------------------------------|---------|--------------------|--|--------------------------------|------------|--------|--|--------|--------|--------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                 |  | ClassAConvertiblePreferred Stock |          | ClassBConvertiblePreferred Stock |  | Common Stock |         | TreasuryStock |  | AdditionalPaid-inCapital |         | DeferredCompensation |  | AccumulatedOtherComprehensiveIncome (Loss) |         | AccumulatedDeficit |  | TotalShareholders’Equity |
| (Inthousands, except share data)                     |  | Shares                           |          | Amount                           |  | Shares       |         | Amount        |  | Shares                   |         | Amount               |
| Amortization of deferredcompensation                 |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |   |   |  |   |    |   |  |   |    |    |  |   | 34      |    |  |   |    |   |  |   |    |    |  |   | 34      |    |
| Net loss                                             |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |   |   |  |   |    |   |  |   |    |    |  |   |    |    |  |   |    |   |  |   | (10,769 | )  |  |   | (10,769 | )  |
| BALANCE AT DECEMBER 31, 1999                         |  |                             | 498,194  |                             |  | $            | 5       |          |  |                     | — |                 |  | $                                          | — |               |  |                           | 18,242,119 |   |  | $      | 182    |   |  | $      | — |   |  | $      | 68,012  |    |  | $      | (3      | )  |  | $      | — |   |  | $      | (62,343 | )  |  | $      | 5,853   |    |
| Conversion of Class Aconvertible preferred stock     |  |                             | (502,928 | )                           |  |         | (5      | )        |  |                     |    |                 |  |                                       |    |               |  |                           | 1,397,035  |   |  |   | 14     |   |  |   |    |   |  |   | (9      | )  |  |   |    |    |  |   |    |   |  |   |    |    |  |   | — |    |
| Redemption of Class Aconvertible preferred stock     |  |                             | (545     | )                           |  |         | — |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |   |   |  |   |    |   |  |   | (5      | )  |  |   |    |    |  |   |    |   |  |   |    |    |  |   | (5      | )  |
| Class A convertible preferred stock dividend         |  |                             | 5,279    |                             |  |         | — |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |   |   |  |   |    |   |  |   | 248     |    |  |   |    |    |  |   |    |   |  |   | (248    | )  |  |   | — |    |
| Series 1998convertible preferred stock accretion     |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |   |   |  |   |    |   |  |   |    |    |  |   |    |    |  |   |    |   |  |   | (358    | )  |  |   | (358    | )  |
| Conversion of Series 1998 convertiblepreferred stock |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 1,507,024  |   |  |   | 15     |   |  |   |    |   |  |   | 5,523   |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 5,538   |    |
| Exercise of stock options                            |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 650,409    |   |  |   | 7      |   |  |   |    |   |  |   | 2,868   |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 2,875   |    |
| Exercise of warrants                                 |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 4,371,055  |   |  |   | 44     |   |  |   |    |   |  |   | 23,270  |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 23,314  |    |
| Compensation associatedwith stock option grants      |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |   |   |  |   |    |   |  |   | 120     |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 120     |    |
| Amortization of deferredcompensation                 |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |   |   |  |   |    |   |  |   |    |    |  |   | 3       |    |  |   |    |   |  |   |    |    |  |   | 3       |    |
| Change in net unrealizedgainsand losses              |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |   |   |  |   |    |   |  |   |    |    |  |   |    |    |  |   | 120     |   |  |   |    |    |  |   | 120     |    |
| Net loss                                             |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |   |   |  |   |    |   |  |   |    |    |  |   |    |    |  |   |    |   |  |   | (14,803 | )  |  |   | (14,803 | )  |
| Comprehensiveloss                                    |  |                             |     |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |   |   |  |   |    |   |  |   |    |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | (14,683 | )  |
| BALANCE AT DECEMBER 31, 2000                         |  |                             | —  |                             |  | $            | — |          |  |                     | — |                 |  | $                                          | — |               |  |                           | 26,167,642 |   |  | $      | 262    |   |  | $      | — |   |  | $      | 100,027 |    |  | $      | — |    |  | $      | 120     |   |  | $      | (77,752 | )  |  | $      | 22,657  |    |
|                                                      |

41

----

Vion Pharmaceuticals, Inc.(ADevelopment Stage Company)Consolidated Statement of Changes inShareholders’ Equity (continued)

|                                                     |  |                                  |         |                                  |  |              |         |               |  |                          |         |                      |  |                                            |         |                    |  |                                |            |        |  |        |         |        |  |        |         |        |  |        |         |        |  |        |         |        |  |        |         |         |  |        |          |         |  |        |         |         |  |  |
|-----------------------------------------------------|--|----------------------------------|---------|----------------------------------|--|--------------|---------|---------------|--|--------------------------|---------|----------------------|--|--------------------------------------------|---------|--------------------|--|--------------------------------|------------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|---------|--|--------|----------|---------|--|--------|---------|---------|--|--|
|                                                |  | ClassAConvertiblePreferred Stock |         | ClassBConvertiblePreferred Stock |  | Common Stock |         | TreasuryStock |  | AdditionalPaid-inCapital |         | DeferredCompensation |  | AccumulatedOtherComprehensiveIncome (Loss) |         | AccumulatedDeficit |  | TotalShareholders’Equity |
| (Inthousands, except share data)                    |  | Shares                           |         | Amount                           |  | Shares       |         | Amount        |  | Shares                   |         | Amount               |
| Publicoffering of common stock — August  2001 |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 2,500,000  |   |  | $      | 25      |   |  |   |    |   |  | $      | 11,386  |   |  |   |    |   |  |   |    |    |  |   |     |    |  | $      | 11,411  |    |
| Exercise of stock options                           |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 191,527    |   |  |   | 2       |   |  |   |    |   |  |   | 777     |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 779     |    |
| Exercise of warrants                                |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 4,015      |   |  |   | — |   |  |   |    |   |  |   | 14      |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 14      |    |
| Compensation associated withstock option grants     |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |    |   |  |   |    |   |  |   | 111     |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 111     |    |
| Issuances under employeebenefit plans               |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 10,189     |   |  |   | — |   |  |   |    |   |  |   | 62      |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 62      |    |
| Change innet unrealized gainsand losses             |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  | $      | (126    | )  |  |   |     |    |  |   | (126    | )  |
| Net loss                                            |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |    |  | $      | (13,810  | )  |  |   | (13,810 | )  |
| Comprehensiveloss                                   |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | (13,936 | )  |
| BALANCE AT DECEMBER 31, 2001                        |  |                             | — |                             |  | $            | — |          |  |                     | — |                 |  | $                                          | — |               |  |                           | 28,873,373 |   |  | $      | 289     |   |  | $      | — |   |  | $      | 112,377 |   |  | $      | — |   |  | $      | (6      | )  |  | $      | (91,562  | )  |  | $      | 21,098  |    |
| Exercise of stock options                           |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 10,395     |   |  |   | — |   |  |   |    |   |  |   | 32      |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 32      |    |
| Issuances under employeebenefit plans               |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 25,104     |   |  |   | — |   |  |   |    |   |  |   | 38      |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 38      |    |
| Change innet unrealized gains andlosses             |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   | 6       |    |  |   |     |    |  |   | 6       |    |
| Net loss                                            |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |    |  |   | (12,310  | )  |  |   | (12,310 | )  |
| Comprehensiveloss                                   |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | (12,304 | )  |
| BALANCE AT DECEMBER 31, 2002                        |  |                             | — |                             |  | $            | — |          |  |                     | — |                 |  | $                                          | — |               |  |                           | 28,908,872 |   |  | $      | 289     |   |  | $      | — |   |  | $      | 112,447 |   |  | $      | — |   |  | $      | — |    |  | $      | (103,872 | )  |  | $      | 8,864   |    |
| Private placement— June  2003                 |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 3,846,150  |   |  |   | 38      |   |  |   |    |   |  |   | 4,436   |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 4,474   |    |
| Private placement — September  2003           |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 6,475,000  |   |  |   | 65      |   |  |   |    |   |  |   | 10,340  |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 10,405  |    |
| Exercise of stockoptions                            |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 5,552      |   |  |   | — |   |  |   |    |   |  |   | 3       |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 3       |    |
| Issuancesunder employee benefit plans               |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 41,181     |   |  |   | 1       |   |  |   |    |   |  |   | 13      |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 14      |    |
| Net loss and comprehensive loss                     |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |    |  |   | (11,838  | )  |  |   | (11,838 | )  |
| BALANCE AT DECEMBER 31, 2003                        |  |                             | — |                             |  | $            | — |          |  |                     | — |                 |  | $                                          | — |               |  |                           | 39,276,755 |   |  | $      | 393     |   |  | $      | — |   |  | $      | 127,239 |   |  | $      | — |   |  | $      | — |    |  | $      | (115,710 | )  |  | $      | 11,922  |    |
| Private placement –February  2004             |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 13,553,845 |   |  |   | 136     |   |  |   |    |   |  |   | 32,791  |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 32,927  |    |
| Exercise of stock options                           |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 35,454     |   |  |   | — |   |  |   |    |   |  |   | 71      |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 71      |    |
| Exercise of warrants                                |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 2,987,567  |   |  |   | 30      |   |  |   |    |   |  |   | 7,311   |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 7,341   |    |
| Issuances under employeebenefit plans               |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 6,692      |   |  |   | — |   |  |   |    |   |  |   | 9       |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 9       |    |
| Net loss andcomprehensive loss                      |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |    |  |   | (16,055  | )  |  |   | (16,055 | )  |
| BALANCE AT DECEMBER 31, 2004                        |  |                             | — |                             |  | $            | — |          |  |                     | — |                 |  | $                                          | — |               |  |                           | 55,860,313 |   |  | $      | 559     |   |  | $      | — |   |  | $      | 167,421 |   |  | $      | — |   |  | $      | — |    |  | $      | (131,765 | )  |  | $      | 36,215  |    |
|                                                     |

42

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|                                       |  |                                  |         |                                  |  |              |         |               |  |                          |         |                      |  |                                            |         |                    |  |                                |            |        |  |        |         |        |  |        |         |        |  |        |         |        |  |        |        |         |  |        |         |        |  |        |          |         |  |        |         |         |  |  |
|---------------------------------------|--|----------------------------------|---------|----------------------------------|--|--------------|---------|---------------|--|--------------------------|---------|----------------------|--|--------------------------------------------|---------|--------------------|--|--------------------------------|------------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--------|--------|---------|--|--------|---------|--------|--|--------|----------|---------|--|--------|---------|---------|--|--|
|                                  |  | ClassAConvertiblePreferred Stock |         | ClassBConvertiblePreferred Stock |  | Common Stock |         | TreasuryStock |  | AdditionalPaid-inCapital |         | DeferredCompensation |  | AccumulatedOtherComprehensiveIncome (Loss) |         | AccumulatedDeficit |  | TotalShareholders’Equity |
| (Inthousands, except share data)      |  | Shares                           |         | Amount                           |  | Shares       |         | Amount        |  | Shares                   |         | Amount               |
| Direct offering —January  2005  |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 10,000,000 |   |  |   | 100     |   |  |   |    |   |  |   | 30,094  |   |  |   |   |    |  |   |    |   |  |   |     |    |  |   | 30,194  |    |
| Restrictedstock awards                |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 77,610     |   |  |   | 1       |   |  |   |    |   |  |   | 158     |   |  |   | (159   | )  |  |   |    |   |  |   |     |    |  |   | — |    |
| Amortization of deferredcompensation  |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   | 26     |    |  |   |    |   |  |   |     |    |  |   | 26      |    |
| Exercise of stock options             |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 217,798    |   |  |   | 2       |   |  |   |    |   |  |   | 202     |   |  |   |   |    |  |   |    |   |  |   |     |    |  |   | 204     |    |
| Issuances under employeebenefit plans |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           | 22,171     |   |  |   | — |   |  |   |    |   |  |   | 41      |   |  |   |   |    |  |   |    |   |  |   |     |    |  |   | 41      |    |
| Net loss andcomprehensive loss        |  |                             |    |                             |  |         |    |          |  |                     |    |                 |  |                                       |    |               |  |                           |       |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |   |    |  |   |    |   |  |   | (18,041  | )  |  |   | (18,041 | )  |
| BALANCE AT DECEMBER 31, 2005          |  |                             | — |                             |  | $            | — |          |  |                     | — |                 |  | $                                          | — |               |  |                           | 66,177,892 |   |  | $      | 662     |   |  | $      | — |   |  | $      | 197,916 |   |  | $      | (133   | )  |  | $      | — |   |  | $      | (149,806 | )  |  | $      | 48,639  |    |
|                                       |

See Notes to ConsolidatedFinancial Statements

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VionPharmaceuticals, Inc.(A Development Stage Company)

Consolidated Statements of Cash Flows

|                                                                                    |  |                               |         |                                                                 |  |        |         |         |  |        |          |         |  |        |          |         |  |  |
|------------------------------------------------------------------------------------|--|-------------------------------|---------|-----------------------------------------------------------------|--|--------|---------|---------|--|--------|----------|---------|--|--------|----------|---------|--|--|
|                                                                               |  | For the Year EndedDecember31, |         | For the PeriodFrom May 1,1994(Inception)throughDecember 31,2005 |
| (In thousands)                                                                     |  | 2005                          |         | 2004                                                            |  | 2003   |
| Cash flows from operatingactivities:                                               |  |                          |    |                                                            |  |   |    |    |  |   |     |    |  |   |     |    |
| Net loss                                                                           |  | $                             | (18,041 | )                                                          |  | $      | (16,055 | )  |  | $      | (11,838  | )  |  | $      | (131,062 | )  |
| Adjustments toreconcile net loss to net cash used in operatingactivities—    |  |                          |    |                                                            |  |   |    |    |  |   |     |    |  |   |     |    |
| Depreciationand amortization                                                       |  |                          | 226     |                                                            |  |   | 213     |    |  |   | 195      |    |  |   | 3,054    |    |
| Non-cash compensation                                                              |  |                          | 26      |                                                            |  |   | — |    |  |   | —  |    |  |   | 1,094    |    |
| Loss on equipment disposals                                                        |  |                          | — |                                                            |  |   | — |    |  |   | 8        |    |  |   | 12       |    |
| Purchasedresearch and development                                                  |  |                          | — |                                                            |  |   | — |    |  |   | —  |    |  |   | 4,481    |    |
| Stock issued forservices                                                           |  |                          | — |                                                            |  |   | — |    |  |   | —  |    |  |   | 600      |    |
| Amortization of financing costs                                                    |  |                          | — |                                                            |  |   | — |    |  |   | —  |    |  |   | 346      |    |
| Extension/re-issuance of placement agent warrants                                  |  |                          | — |                                                            |  |   | — |    |  |   | —  |    |  |   | 168      |    |
| Changes in operating assets and liabilities—Receivables and prepaid expenses |  |                          | 149     |                                                            |  |   | (113    | )  |  |   | 45       |    |  |   | (225     | )  |
| Other assets                                                                       |  |                          | — |                                                            |  |   | — |    |  |   | 4        |    |  |   | (22      | )  |
| Current liabilities                                                                |  |                          | (1,331  | )                                                          |  |   | 1,992   |    |  |   | 2,000    |    |  |   | 4,685    |    |
| Deferredrevenue                                                                    |  |                          | (18     | )                                                          |  |   | (17     | )  |  |   | 395      |    |  |   | 360      |    |
| Net cash used in operatingactivities                                               |  |                          | (18,989 | )                                                          |  |   | (13,980 | )  |  |   | (9,191   | )  |  |   | (116,509 | )  |
| Cash flows from investingactivities:                                               |  |                          |    |                                                            |  |   |    |    |  |   |     |    |  |   |     |    |
| Acquisition ofequipment                                                            |  |                          | (417    | )                                                          |  |   | (358    | )  |  |   | (117     | )  |  |   | (2,828   | )  |
| Purchases of marketablesecurities                                                  |  |                          | — |                                                            |  |   | (61,901 | )  |  |   | (119,100 | )  |  |   | (321,052 | )  |
| Maturities of marketablesecurities                                                 |  |                          | — |                                                            |  |   | 76,401  |    |  |   | 113,950  |    |  |   | 321,052  |    |
| Net cash provided by(used in) investing activities                                 |  |                          | (417    | )                                                          |  |   | 14,142  |    |  |   | (5,267   | )  |  |   | (2,828   | )  |
| Cash flows from financingactivities:                                               |  |                          |    |                                                            |  |   |    |    |  |   |     |    |  |   |     |    |
| Net proceedsfrom issuance of common stock                                          |  |                          | 30,439  |                                                            |  |   | 33,007  |    |  |   | 14,896   |    |  |   | 112,231  |    |
| Net proceeds frominitial public offering                                           |  |                          | — |                                                            |  |   | — |    |  |   | —  |    |  |   | 9,696    |    |
| Net proceeds fromissuance of preferred stock                                       |  |                          | — |                                                            |  |   | — |    |  |   | —  |    |  |   | 20,716   |    |
| Net proceeds fromexercise of Class A Warrants                                      |  |                          | — |                                                            |  |   | — |    |  |   | —  |    |  |   | 5,675    |    |
| Net proceeds fromexercise of Class B Warrants                                      |  |                          | — |                                                            |  |   | — |    |  |   | —  |    |  |   | 17,538   |    |
| Net proceeds fromexercise of other warrants                                        |  |                          | — |                                                            |  |   | 7,341   |    |  |   | —  |    |  |   | 7,456    |    |
| Repayment ofequipment capital leases                                               |  |                          | — |                                                            |  |   | — |    |  |   | —  |    |  |   | (927     | )  |
| Other financingactivities, net                                                     |  |                          | — |                                                            |  |   | — |    |  |   | —  |    |  |   | (286     | )  |
| Netcash provided by financing activities                                           |  |                          | 30,439  |                                                            |  |   | 40,348  |    |  |   | 14,896   |    |  |   | 172,099  |    |
| Change in cash and cashequivalents                                                 |  |                          | 11,033  |                                                            |  |   | 40,510  |    |  |   | 438      |    |  |   | 52,762   |    |
| Cash and cash equivalents, beginning ofperiod                                      |  |                          | 41,729  |                                                            |  |   | 1,219   |    |  |   | 781      |    |  |   | —  |    |
| Cash and cash equivalents,end of period                                            |  | $                             | 52,762  |                                                            |  | $      | 41,729  |    |  | $      | 1,219    |    |  | $      | 52,762   |    |
| Supplemental disclosure of cash flowinformation:                                   |  |                          |    |                                                            |  |   |    |    |  |   |     |    |  |   |     |    |
| Cash paid forinterest                                                              |  | $                             | 4       |                                                            |  | $      | — |    |  | $      | 2        |    |  | $      | 214      |    |
| Cash paid for taxes                                                                |  | $                             | 43      |                                                            |  | $      | 7       |    |  | $      | 17       |    |  | $      | 67       |    |
|                                                                                    |

See Notes to ConsolidatedFinancial Statements

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VionPharmaceuticals, Inc.(A Development Stage Company)Notes toConsolidated Financial Statements

1.    The Company

Vion Pharmaceuticals, Inc. (the‘‘Company’’) is a development stage companyengaged in the development of therapeutics for the treatment of cancer.The Company was incorporated in March  1992 as a Delawarecorporation and began operations on May  1,  1994.

In April  1995, the Company merged into OncoRx ResearchCorp., a wholly-owned subsidiary of MelaRx Pharmaceuticals Inc.(‘‘MelaRx’’), and the Company’s name waschanged to OncoRx, Inc. The stockholders of the Company were issued2,654,038 common shares and 23,859 preferred shares of MelaRx inexchange for all 2,000,000 outstanding shares of common stock of theCompany valued at $2.16 per share (fair value). As the shareholders ofthe Company obtained a majority interest in the merged company, foraccounting purposes the Company is treated as the acquirer. Therefore,the transaction was recorded as a purchase in the Company’sfinancial statements, which include the results of operations of theCompany from inception and MelaRx from the date of acquisition. The$4.5  million excess of cost over the fair value ofMelaRx’s net tangible assets was treated as purchased researchand development and expensed immediately.

In August1995, the Company completed an initial public offering (refer to Note5) resulting in net proceeds to the Company of $9.7  million andin April  1996 the Company’s name was changed to VionPharmaceuticals, Inc.

In November  2004, the Companyestablished a wholly-owned subsidiary in the United Kingdom to act asthe Company’s legal representative for clinical trials sponsoredby the Company in the european economic area.

2.    Summaryof Significant Accounting Policies

Principals ofConsolidation

The consolidated financial statements ofthe Company include the accounts of Vion Pharmaceuticals, Inc. and itssubsidiary after elimination of intercompany accounts andtransactions.

Use of Estimates

The preparationof financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to makeestimates and assumptions that affect the amounts reported in thefinancial statements and notes thereto. Actual results may differmaterially from those estimates.

During the year endedDecember  31,  2005, the Company recorded a reduction inclinical trials expenses of $683,000 as a result of actual clinicaltrial costs for two Phase II trials being less than original estimates.This has been accounted for as a change in estimate in accordance withAPB  Opinion No. 9, Reporting the Results of Operations,and APB Opinion No. 20, Accounting Changes.

CashEquivalents

Cash equivalents include investments withmaturities of three months or less when purchased.

Fair Valueof Financial Instruments

The estimated fair value ofamounts reported in the financial statements has been determined byusing available market information and appropriate valuationmethodologies. Carrying values for all financial instruments includedin current assets and current liabilities approximate fair value,because of their short-term nature.

45

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Property and Equipment

Property and equipment are stated at cost. Depreciation ofequipment is computed under the straight-line method over the estimateduseful lives of the assets ranging from three to seven years. Leaseholdimprovements are carried at cost and amortized on a straight-line basisover the shorter of the lease term or the estimated useful lives of theassets.

The following is a summary of property andequipment as of December  31 (in  thousands):

|                                           |
|-------------------------------------------|
|                                           |  |  |  |  |  |  |  |  |  |  |
|                                      |  | 2005 |  | 2004 |
| Office and computer equipment             |  | $ | 631 |   |  | $ | 412 |   |
| Furniture and fixtures                    |  |   | 208 |   |  |   | 210 |   |
| Laboratoryequipment                       |  |   | 2,212 |   |  |   | 2,034 |   |
| Leasehold improvements                    |  |   | 403 |   |  |   | 381 |   |
|                                      |  |   | 3,454 |   |  |   | 3,037 |   |
| Accumulated depreciation and amortization |  |   | (2,748 | )  |  |   | (2,522 | )  |
| Property and equipment, net               |  | $ | 706 |   |  | $ | 515 |   |
|                                           |

Depreciation expense wasapproximately $226,000, $213,000 and $195,000 for the years endedDecember  31,  2005, 2004 and 2003, respectively, and$3.1  million for the period from May  1,  1994(inception) through December  31,  2005.

IncomeTaxes

Deferred income taxes are recognized for thefuture tax consequences of temporary differences between the financialstatement carrying amounts and the tax basis of assets and liabilities,and for net operating loss and tax credit carryforwards. A valuationallowance is provided to reduce deferred income tax assets to anestimated realizable value.

Revenue Recognition

Technology License Fees.    The Company hasrecognized revenue from fees, including non-refundable upfront fees,under license agreements with Beijing Pason Pharmaceuticals, Inc. andothers (refer to Note 3) totaling $22,000, $26,000, $30,000 and$4.5  million for the years ended December  31,  2005,2004, and 2003, and the period from May  1,  1994 (inception)through December  31,  2005, respectively. Non-refundableupfront fees are recognized as revenue ratably over the performanceperiod.

Research and Laboratory SupportFees.    The Company recognizes revenue from research andlaboratory support as the services are performed.

Contract Research Grants.    The Company hasreceived grants in prior years from the National Cancer Institute forvarious research projects. The grants provide for reimbursement ofproject costs. Revenues from these grants of $0, $100,000, $209,000,and $2.5  million have been recognized as the costs were incurredfor the years ended December  31,  2005, 2004 and 2003, andfor the period from May  1,  1994 (inception) toDecember  31,  2005, respectively. The Company currently doesnot have any contract research grants.

Research and DevelopmentExpenses

The Company records research and developmentexpenses as incurred. The Company discloses clinical trials expensesand other research and development expenses as separate components ofresearch and development expense in its statements of operations toprovide more meaningful information to investors. The classification ofexpenses into these components of research and development expense arebased, in part, on estimates of certain costs when incurred. The effectof any change in the clinical trials expenses and other research anddevelopment expenses would be reflected in the period suchdetermination was made.

Other Expense

Otherexpense of $4,000, $73,000, $45,000 and $122,000 for the years endedDecember  31,  2005, 2004 and 2003, and for the period fromMay  1,  1994 (inception) through December  31,2005, respectively, 

46

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represents foreign currency transactionlosses related to contracts that are denominated in a foreign currencywith a vendor outside the U.S.

Per Share Data

The following table sets forth the computation of basic anddiluted loss per share (in thousands, except per share data):

|                                                             |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|-------------------------------------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                        |  | 2005   |         | 2004    |  | 2003   |
| Net loss                                                    |  | $      | (18,041 | )  |  | $      | (16,055 | )  |  | $      | (11,838 | )  |
| Weighted-averagenumber of shares of common stockoutstanding |  |   | 65,161  |    |  |   | 53,464  |    |  |   | 32,808  |    |
| Basic and diluted loss per share                            |  | $      | (0.28   | )  |  | $      | (0.30   | )  |  | $      | (0.36   | )  |
|                                                             |

For additional disclosuresregarding warrants and preferred stock, refer to Note 5. For additionaldisclosures regarding stock options, refer to Note 6. As the Companyhas not generated net income in the periods presented, there is nodilutive per share calculation and therefore, these options andwarrants have been excluded from the per share computationspresented.

Stock-Based Compensation

The Companyaccounts for stock options and restricted stock utilizing the intrinsicvalue method in accordance with Accounting Principles Board Opinion No.25, Accounting for Stock Issued to Employees (‘‘APB25’’) and related interpretations. Under APB 25, nocompensation expense is recognized because the exercise price of ouremployee stock options equals the market price of the underlying stockat the date of grant. The Company has adopted the disclosure onlyprovisions of Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation (‘‘SFAS123’’), as amended by SFAS No. 148, Accounting forStock-Based Compensation – Transition and Disclosure("SFAS 148’’). The issuance of SFAS No.123R, Share-Based Payment (‘‘SFAS123R’’) will significantly change the way the Companyaccounts for grants of stock options as of January  1,2006.

No compensation expense for stock option grants isreflected in the Company’s reported net loss for the years endedDecember  31,  2005, 2004 and 2003. The following informationregarding net loss and net loss per share has been determined as if theCompany had accounted for its employee stock options and employee stockpurchase plan under the fair value method prescribed by SFAS 123 (inthousands, except per share amounts).

47

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|                                                                                                             |  |        |         |         |  |        |         |                                                 |  |        |         |         |  |        |          |         |  |  |
|-------------------------------------------------------------------------------------------------------------|--|--------|---------|---------|--|--------|---------|-------------------------------------------------|--|--------|---------|---------|--|--------|----------|---------|--|--|
|                                                                                                        |  | 2005   |         | 2004    |  | 2003   |         | From Inception(May 1, 1994) toDecember 31, 2005 |
| Reported net loss                                                                                           |  | $      | (18,041 | )  |  | $      | (16,055 | )                                          |  | $      | (11,838 | )  |  | $      | (131,062 | )  |
| Add: Stock-based employee compensation expense included inreported net loss                                 |  |   | — |    |  |   | — |                                            |  |   | — |    |  |   | 768      |    |
| Deduct: Stock-basedemployee compensation expense determined under the fair value basedmethod for all awards |  |   | (1,678  | )  |  |   | (1,888  | )                                          |  |   | (3,009  | )  |  |   | (22,680  | )  |
| Proforma net loss                                                                                           |  |   | (19,719 | )  |  |   | (17,943 | )                                          |  |   | (14,847 | )  |  |   | (152,974 | )  |
| Pro forma preferredstock dividend and accretion                                                             |  |   | — |    |  |   | — |                                            |  |   | — |    |  |   | (18,489  | )  |
| Pro forma lossapplicable to common shareholders                                                             |  | $      | (19,719 | )  |  | $      | (17,943 | )                                          |  | $      | (14,847 | )  |  | $      | (171,463 | )  |
| Reported basicand diluted loss applicable to common shareholders per share                                  |  | $      | (0.28   | )  |  | $      | (0.30   | )                                          |  | $      | (0.36   | )  |  |   |     |    |
| Pro formabasic and diluted loss applicable to common shareholders per share                                 |  | $      | (0.30   | )  |  | $      | (0.34   | )                                          |  | $      | (0.45   | )  |  |   |     |    |
|                                                                                                             |

The fair value ofstock options was estimated at the date of grant using a Black-Scholesoption valuation model with the following weighted-averageassumptions:

|                                                                          |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|--------------------------------------------------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                     |  | 2005   |         | 2004    |  | 2003   |
| Interest rate                                                            |  |   | 3.91    | %  |  |   | 3.75    | %  |  |   | 3.73    | %  |
| Volatility                                                               |  |   | 54.12   | %  |  |   | 72      | %  |  |   | 146     | %  |
| Expected life (in years)                                                 |  |   | 5.80    |    |  |   | 5.95    |    |  |   | 5.88    |    |
| Dividend yield                                                           |  |   | — |    |  |   | — |    |  |   | — |    |
| Weighted-average grant date fair valueof options granted during the year |  | $      | 1.22    |    |  | $      | 2.97    |    |  | $      | 0.33    |    |
|                                                                          |

The stock-basedcompensation for grants of stock options as presented above does notinclude restricted stock expense of $26,000, which was reported as partof the net loss for the year ended December  31,  2005.

Recently Issued Accounting Standards

InDecember  2004, the Financial Accounting Standards Board issuedSFAS 123R, which replaces SFAS 123 and supersedes APB 25. SFAS123Rrequires the recognition of the fair value of stock-based compensationto employees and non-employees in net earnings. The Company currentlyaccounts for stock-based compensation expense for restricted stock,grants of stock options and purchases under the employee stock purchaseplan under APB 25 and provides pro forma disclosures required by SFAS123, as amended by SFAS 148. The Company will adopt SFAS 123R and willrecognize an expense for share-based compensation in its consolidatedfinancial statements beginning January  1,  2006. The proforma net loss and net loss per share amounts shown in the above tablewere determined as if the Company had used a fair-value-based methodsimilar to the methods required under SFAS 123R to measure compensationexpense for share-based payments. We expect the adoption of SFAS 123Rto have a significant adverse impact on our consolidated statements ofoperations and net loss per share. We estimate the maximum expense tobe recognized for options granted prior to January  1,  2006will be $620,000 for 2006, $330,000 for 2007, $320,000 for 2008 and$5,000 for 2009. In addition, we will recognize an expense each yearbeginning in 2006 for compensation expense associated with restrictedstock awards, purchases under the employee stock purchase plan andoption grants on or after January  1,  2006, if any.

In June  2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections (SFAS 154), whichapplies to all voluntary changes in accounting principle, and changesthe requirements for 

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accounting for and reporting of a change inaccounting principle. SFAS 154 requires retrospective application toprior periods’ financial statements of a voluntary change inaccounting principle unless it is impracticable. Previously, mostvoluntary changes in accounting principle were recognized by includingin net income of the period of the change the cumulative effect ofchanging to the new accounting principle. SFAS 154 is effective foraccounting changes and corrections of errors made in fiscal yearsbeginning after December  15,  2005. Earlier application ispermitted for accounting changes and corrections of errors madeoccurring in fiscal years beginning after June  1,  2005.

3.    License Agreements

License Agreements with YaleUniversity

Since 1988, the Company or its predecessorcompanies have entered into a series of agreements under which theCompany has licensed inventions from Yale University(‘‘Yale’’). The license agreements with Yalegrant the Company exclusive licenses to make, use, sell and practicethe inventions covered by various patents and patent applications. Eachlicense agreement requires the Company to pay royalties and, in somecases, milestone payments to Yale. Certain licenses are terminable inthe event the Company does not exercise due diligence incommercializing the licensed technology.

LicenseAgreement with Yale University – September1990.    Pursuant to a license agreement entered into inSeptember  1990 between the Company and Yale, the Company has alicense to a synthetic form of melanin, which the Company has namedMELASYN®. Under the terms of the amended licenseagreement, the Company pays a license fee to Yale based on a percentageof net sales and sublicensing revenues. Through December31,  2005, the Company has paid royalties to Yale of $81,000 onsublicensing revenues under this agreement.

In 1998, theCompany agreed to be the exclusive selling agent forMELASYN® and entered into a non-exclusive sublicensefor the MELASYN® technology with San-Mar Laboratories(‘‘San-Mar’’). Under the terms of the amendedsublicense agreement, the Company received a sublicense fee forproducts sold by San-Mar with guaranteed minimum annual royalties of$50,000 per year. This amended sublicense agreement expired onFebruary  28,  2003. In March  2004, the Company enteredinto a non-exclusive sublicense agreement for MELASYN®with Johnson and Johnson Consumer Companies, Inc. The terms of theagreement do not include any upfront or milestone payments. If productsincluding the Company’s technology are developed, the Companywill receive a royalty based on sales in countries where it has issuedpatents.

License Agreement with Yale University– August  1994.    The Company is a party to alicense agreement with Yale entered into in August  1994 andsubsequently amended in five amendments. Under this amended license,Yale granted to the Company a non-transferable worldwide exclusivelicense to make, have made, use, sell and practice inventions undercertain patents and patent applications for therapeutic and diagnosticpurposes. The Company also has a non-exclusive license to two patentsunder this amended license. The patents and patent applications underthis license and its amendments cover Cloretazine®,KS119W, and Β-L-Fd4C. The term of the license is the expiration ofany patents relating to any inventions or, with respect to non-patentedinventions or research, 17  years. Yale is entitled to royaltieson sales, if any, of resulting products and sublicensing revenues and,with regard to several patents related to sulfonylhydrazine prodrugs(including Cloretazine® and KS119W) andTriapine®, potential milestone payments totaling$850,000 based on the completion of Phase II clinical trials,regulatory filings and regulatory approvals. No milestone payments havebeen paid or are due under the amended license agreement throughDecember  31,  2005.

Pursuant to the originalagreement, the Company issued to Yale 159,304 shares of theCompany’s common stock and made a payment of $50,000. InJune  1997, this license agreement and another license agreementdated December  1995 were amended pursuant to which the Companyissued 150,000 shares of its common stock to Yale valued at $600,000.Through December  31,  2005, the Company has paid royaltiesto Yale of $107,000 on sublicensing revenues under this agreement.

License Agreements with Yale University –December  1995.    In December  1995, the Company andYale entered into a license agreement pursuant to which the Companyreceived a non-transferable 

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worldwide exclusive license, expiring overthe lives of the patents, to three inventions relating to gene therapyfor melanoma. Technology licensed under this agreement relates toTAPET®. In June  1997, pursuant to the licenseagreement, the Company paid Yale a $100,000 initial fixed royaltyfee.

In December  1995, the Company and Yale enteredinto another license agreement pursuant to which the Company received anon-transferable worldwide exclusive license, expiring over the livesof the patents, to an invention relating to whitening skin.

Under the licensing agreements, Yale is entitled to potentialmilestone payments totaling $1,000,000 based on the completion of PhaseII clinical trials, regulatory filings and regulatory approvals. Inaddition, Yale is entitled to royalties on sales, if any, of resultingproducts and sublicense revenues. There are no amounts due under theseagreements as of December  31,  2005.

Other LicenseAgreements

License Agreement with Beijing PasonPharmaceuticals, Inc. – September  2003.    InSeptember  2003, the Company entered into a license agreement withBeijing Pason Pharmaceuticals, Inc. (‘‘Pason’’)whereby the Company granted Pason the exclusive rights to develop,manufacture and market Triapine® in the People’sRepublic of China, Taiwan, Hong Kong and Macao (the‘‘Territory’’). Under the terms of theagreement, the Company received an initial payment in November2003 of $500,000 and may receive $4.75  million in potentialadditional milestone payments and potential royalty payments of11% of any Triapine® revenues in the PasonTerritory. In accordance with the Securities and ExchangeCommission’s Staff Accounting Bulletin No. 104, RevenueRecognition, the Company will recognize revenue of approximately$400,000, which represents the initial payment received from Pason netof royalties paid to Yale, over the life of the agreement. The Companyrecognized revenue related to this agreement of approximately $18,000,$18,000, $4,000 and $40,000 for the years ended December31,  2005, 2004 and 2003, and for the period from May1,  1994 (inception) through December  31,  2005,respectively.

License Agreement with AustrianInventors and Austria Wirtschaftsservice  Gesellschaftm.b.H.– June  2005.    In November  2003, theCompany entered into a research collaboration and option agreement forcertain novel anticancer compounds, heterocyclic compounds, with agroup of inventors from the Institute of Pharmacy and the Institute ofMedical Chemistry and Biochemistry at the University of Innsbruck, andAustria Wirtschaftsservice Gesellschaft m.b.H. In June  2005, theCompany entered into an exclusive worldwide license agreement for thecompounds. The Company recorded as research and development expense aninitial payment of $25,000 in 2003 to enter into the option agreementand an additional payment of $37,500 in 2005 to enter into the licenseagreement. The terms of the license agreement call for potentialmilestone payments totaling $775,000 for each licensed product based onregulatory filings, commencement of a Phase III clinical trial orpivotal registration study, and regulatory approvals, as well asroyalties based on product revenues.

4.    AccruedExpenses

The following is a summary of accrued expensesas of December  31 (in thousands):

|                        |
|------------------------|
|                        |  |  |  |  |  |  |  |  |  |  |
|                   |  | 2005 |  | 2004 |
| Clinical trials        |  | $ | 2,553 |   |  | $ | 4,326 |   |
| Gifts                  |  |   | 250 |   |  |   | 250 |   |
| Professional fees      |  |   | 217 |   |  |   | 289 |   |
| Other                  |  |   | 285 |   |  |   | 265 |   |
| Total Accrued Expenses |  | $ | 3,305 |   |  | $ | 5,130 |   |
|                        |

5.    Shareholders’Equity

In April  1995,  2,000,000 shares ofcommon stock valued at $2.16 per share were issued in conjunction withthe merger with MelaRx resulting in net proceeds to the Company of$4.3  million (refer to Note  1). Shortly prior to theconsummation of the merger, the Company issued 76,349 shares of commonstock for net proceeds of $0.2  million.

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In August  1995, the Companycompleted an initial public offering (‘‘IPO’’)of 2,875,000 Unit Purchase Options (‘‘UPOs’’),consisting of an aggregate of 2,875,000 shares of common stock,2,875,000 redeemable Class A Warrants and 2,875,000 redeemable Class BWarrants at $4.00 per UPO. The net proceeds to the Company from the IPOwere $9.7  million before repayment of certain bridge financing.In addition, the Company granted to the underwriter an option topurchase up to 250,000 UPOs at $5.20 per UPO, subsequently adjusted dueto antidilution provisions. Each Class A Warrant entitled the holder topurchase one share of common stock and one Class B Warrant. Each ClassB Warrant entitled the holder to purchase one share of common stock.The Class A and Class B Warrants were exercisable through August14,  2000, and were exchanged, exercised or redeemed prior to thatdate, resulting in aggregate net proceeds to the Company of $23.2million.

Commencing with its IPO through December31,  2005, the Company has raised gross proceeds of $171.2million through the issuance of common stock, preferred stock andwarrants.

Issuance and Extension of Placement AgentWarrants

In connection with two private financings ofthe Company’s predecessor, MelaRx, Inc., the placement agent wasissued warrants to purchase 202,486 shares of common stock at pricesranging from $3.56 to $4.44 per share, expiring on July  5,1998 (the ‘‘Expiration Date’’). Through theExpiration Date, holders of warrants to purchase 94,336 shares electeda cashless exercise into 13,949 shares of common stock and theremaining warrants to purchase 108,150 shares of common stockexpired.

Class A Convertible Preferred Stock

InMay  1996, the Company completed a private placement of 1,250,000shares of Class A Convertible Preferred Stock (‘‘Class AStock’’), at $10.00 per share, resulting in net proceeds tothe Company of $11.5  million. Each share of Class A Stock wasconvertible at the option of the holder into 2.777777 shares of theCompany’s common stock. The Company recorded an imputed one-timenon-cash dividend of approximately $11.4  million as a result ofthe difference between the conversion price and the quoted market priceof the Company’s common stock as of the date of issuance asrequired by the Financial Accounting Standards Board Emerging IssuesTask Force D-60, Accounting for the Issuance of ConvertiblePreferred Stock and Debt Securities with a Nondetachable ConversionFeature (EITF  D-60). The shares of Class A Stock paidsemi-annual dividends of 5% per annum, payable in additionalshares of Class A Stock. The Company recorded non-cash dividends from1996 through 2000 totaling $1.8  million based on the quotedmarket price of the common stock as of the dividend date. All non-cashdividends have been recognized as a charge against the accumulateddeficit with a corresponding increase in additional paid-in capital.The non-cash dividends have been included in the loss applicable tocommon shareholders.

In connection with the foregoingtransaction, the Company issued warrants to the placement agent,expiring May  22,  2001 (the ‘‘ExpirationDate’’), to purchase an aggregate of 546,875 shares of theCompany’s common stock at prices ranging from $3.96 to $12.00.As of the Expiration Date, holders of warrants to purchase 257,321shares elected cash or cashless exercises into 174,572 shares of commonstock and the remaining warrants to purchase 289,554 shares expired.The issuance of the Class A Stock at closing also triggered certainantidilution adjustment provisions of the Company’s otheroutstanding warrants, resulting in the issuance of additionalwarrants.

In accordance with the terms of the Class AStock, the Company notified the holders of outstanding shares of itsintention to redeem their Class A stock on December  26,2000 (the ‘‘Redemption Date’’) at a redemptionprice of $10.00 per share. All outstanding shares of Class A Stock wereconverted by the holders into shares of common stock with the exceptionof 545 shares of Class A Stock that were redeemed for an aggregate of$5,450 and cancelled as of the Redemption Date.

Class BConvertible Preferred Stock

In August  1997, theCompany completed a private placement of 4,850 shares of non-votingClass B Convertible Preferred Stock (‘‘Class BStock’’) at $1,000 per share, resulting in net proceeds tothe Company of $4.5  million. Shares of Class B Stock wereimmediately convertible into shares of 

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common stock including an accretion of8% per annum. The Company recorded an imputed one-time charge of$0.4  million as a result of the difference between the conversionprice and the quoted market price of the Company’s common stockat the date of issuance. Shares of the Class B Stock were eligible toreceive dividends paid in Class C Convertible Preferred Stock(‘‘Class C Stock’’) which were immediatelyconvertible into shares of the Company’s common stock.Conversions of Class B Stock in 1998 resulted in the issuance of180,141 shares of common stock valued at $0.6  million. Inaddition, the Company recorded accretion of 37,168 shares of commonstock valued at $0.1  million in 1997 and 61,078 shares of commonstock valued at $0.3  million in 1998. All non-cash dividends wererecorded as a charge against the accumulated deficit with acorresponding increase in additional paid-in capital. The non-cashdividends have been included in the loss applicable to commonshareholders.

In August  1998, the Company reachedagreement with the holders of its Class B Stock to convert an aggregateof 2,892 shares of Class B Stock, constituting all of the outstandingClass B Stock, into an aggregate of 1,070,423 shares of common stock.The conversions of Class B Stock resulted in the issuance of 304,188shares of common stock valued at $1.1  million, and accretion of6,553 shares of common stock valued at $23,000. As part of thisagreement, an additional 101,569 common shares were issued to holdersof the Class B Stock. In accordance with Financial Accounting StandardsBoard Emerging Issues Task Force D-42, The Effect on the Calculationof Earnings Per Share for the Redemption or Induced Conversion ofPreferred Stock, the excess of $0.4  million of the fair valueof the common stock issued upon conversion over the fair value of thecommon stock issuable pursuant to the original conversion terms wasincluded in the loss applicable to common shareholders. Holders of theClass B Stock waived their antidilution rights arising from theissuance of the 5% Redeemable Convertible Preferred Stock Series1998.

5% Redeemable Convertible Preferred Stock Series1998

In June  1998, the Company completed a privateplacement of 5,000 shares of non-voting 5%  RedeemableConvertible Preferred Stock Series 1998 (‘‘Series 1998Preferred Stock’’). The Series 1998 Preferred Stock wasissued at $1,000 per share, resulting in net proceeds to the Company of$4.7  million. The shares of Series 1998 Preferred Stock accrueddividends of 5% per annum payable in-kind. Each share of Series1998 Preferred Stock was convertible into common stock based on theformula of issued price plus accrued dividends divided by $3.60. Inconnection with the sale of the Series 1998 Preferred Stock, theCompany imputed a one-time non-cash dividend of approximately$1.6  million as a result of the difference between the conversionprice and the quoted market price of the Company’s common stockat the date of issuance as required by EITF D-60. Such amount wasrecognized upon issuance of the Series 1998 Preferred Stock as a chargeagainst the accumulated deficit with a corresponding increase toadditional paid-in capital. The imputed non-cash dividend was includedin the loss applicable to common shareholders. The dividend requirementon Preferred Stock also reflects the amortization of the costs ofcompleting the offering and the accretion of the 5% per annumdividend. The 5% accretion resulted in a charge against theaccumulated deficit with a corresponding increase to additionalpaid-in-capital from 1998 through 2000 of $0.8  million. Theissuance of the Series 1998 Preferred Stock at closing also triggeredcertain antidilution adjustment provisions of the Company’soutstanding warrants, resulting in the issuance of additionalwarrants.

In accordance with the terms of the Series 1998Preferred Stock, all of the outstanding preferred shares having aredemption value of $5.4  million were automatically convertedinto 1,507,024 common shares at the $3.60 conversion price, effectiveFebruary  22,  2000.

Antidilution Adjustment to ClassA and Class B Warrants

As a result of the sale inMay  1996 of Class A Stock, an antidilution adjustment was made tothe exercise price of the Class A Warrants and the Class B Warrants andthere was a corresponding distribution of additional Class A Warrantsand Class B Warrants. Each holder of a Class A Warrant was issued anadditional 0.1 Class A Warrant and the exercise price of the Class AWarrants was reduced from $5.20 to $4.73. Each holder of a Class BWarrant was issued an additional 0.1 Class B Warrant and the exerciseprice of the Class B Warrants was reduced from $7.00 to $6.37.

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Subsequently, as a result of thesale in June  1998 of Series 1998 Preferred Stock, an additionalantidilution adjustment was made to the exercise price of the Class AWarrants and the Class B Warrants with a corresponding distribution ofadditional Class A Warrants and Class B Warrants. Each holder of aClass A Warrant was issued an additional 0.02 Class A Warrant and theexercise price of the Class A Warrants was reduced from $4.73 to $4.63.Each holder of a Class B Warrant was issued an additional 0.02 Class BWarrant and the exercise price of the Class B Warrant was reduced from$6.37 to $6.23.

Class A and Class B Warrant ExchangeOffers

In 1998, the Company offered to exchange eachoutstanding Class A Warrant, at the holder’s option, for either0.438 shares of common stock or 0.254 shares of common stock and $0.66in cash. The Company simultaneously offered to exchange eachoutstanding Class B Warrant, at the holder's option, for either0.212 shares of common stock or 0.123 shares of common stock and $0.32in cash. As a result of the exchange offers, 3,209,806 Class A Warrantsand 1,881,835 Class B Warrants were exchanged for 1,395,027 and 397,925shares of the Company’s common stock, and $39,000 and $3,700 incash, respectively.

Redemption of Class A Warrants

The Class A Warrants entitled the holder to purchase oneshare of common stock and one Class B Warrant for an exercise price of$4.63. In February  2000, the Company notified holders of itsoutstanding Class A Warrants of its intention to redeem the warrants onMarch  13,  2000 (the  ‘‘RedemptionDate’’). The Company received net proceeds of $5.7million from the exercise of 1.3  million Class A Warrants.

Redemption of Class B Warrants

The Class B Warrantsentitled the holder to purchase one share of common stock at anexercise price of $6.23. In March  2000, the Company notifiedholders of its outstanding Class B Warrants of its intention to redeemthe warrants on April  27,  2000 (the‘‘Redemption Date’’). The Company received netproceeds of $17.5  million from the exercise of 2.9  millionClass B Warrants.

Private Placement of Common Stock –April  1999

In April  1999, the Companycompleted a private placement of 893,915 shares of its common stock at$4.47 per share resulting in net proceeds of approximately $4million.

Public Offering of Common Stock – October1999

In October and November  1999, the Companycompleted the sale of 2,530,000 shares of common stock at $5.00 pershare, in an underwritten public offering. The net proceeds from thisoffering were approximately $11.1  million. In conjunction withthe offering, the underwriter was granted warrants to purchase 220,000shares of common stock at $6.00 per share, expiring October25,  2004. Through the expiration date, holders of warrants topurchase 12,000 shares elected cashless exercises into 6,786shares of common stock and the remaining warrants to purchase 208,000shares of common stock expired.

Public Offering of Common Stock– August  2001

In August  2001, theCompany completed the sale of 2,500,000 shares of common stock at $5.00per share, in an underwritten public offering. The net proceeds fromthis offering were approximately $11.4  million.

PrivatePlacement of Common Stock – June  2003

InJune  2003, the Company completed a private placement of 3,846,150shares of its common stock at $1.30 per share and warrants to purchase1,923,075 shares of common stock at $2.20 per share. The warrantsexpire on June  23,  2008. The net proceeds from thisoffering were approximately $4.5  million.

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Private Placement of Common Stock– September  2003

In September  2003,the Company completed a private placement of 6,475,000 shares of itscommon stock at $1.75 per share and warrants to purchase 6,475,000shares of common stock at $2.50 per share. A warrant to purchase anadditional 100,000 shares of common stock at $2.50 per share was issuedto the placement agent and valued at approximately $172,000. All ofthese warrants expire on September  19,  2008. BeginningApril  9,  2005, if the volume weighted average price of thecommon stock is at or above $3.50 per share for a period of 20consecutive trading days, then the warrants shall become callable bythe Company upon written notice within 3 trading days of such period.The net proceeds, after consideration of cash offering costs, wereapproximately $10.4  million.

Private Placement of CommonStock – February  2004

In February2004, the Company completed a private placement of 13,553,845 shares ofits common stock at $2.60 per share and warrants to purchase 3,388,463shares of common stock at $3.25 per share. A warrant to purchase anadditional 300,000 shares of common stock at $3.25 per share was issuedto the placement agent and valued at approximately 667,000. All ofthese warrants expire on February  11,  2009. BeginningMay  27,  2005, if the volume weighted average price of thecommon stock is at or above $4.875 per share for a period of 20consecutive trading days, then the warrants shall become callable bythe Company upon written notice within 10 trading days of such period.The net proceeds, after consideration of cash offering costs, wereapproximately $33  million.

Registered Direct Offering ofCommon Stock – January  2005

In January2005, the Company received net proceeds of $30.2  million from aregistered direct offering of 10  million shares of its commonstock at $3.25 per share.

Reserved Shares

As ofDecember  31,  2005, the Company has reserved 21,872,078shares of its common stock for issuances related to potential futureexercises of warrants outstanding, stock options outstanding and stockavailable for grant (see Note 6), as well as potential future purchasesof common stock under the employee stock purchase plan (see Note 7). Inaddition, shares are reserved for the following but the number ofreserved shares is not fixed. The Company may from time to time sell upto an aggregate of $75  million of its common stock or warrantsunder an effective Form S-3 shelf registration statement including10  million shares of common stock issued in a direct registeredoffering in January  2005. The Company also has a stockholderrights plan whereby each share of its outstanding common stock has theright to purchase one share of common stock as set forth in the rightsagreement.

Warrants Outstanding

A summary of theoutstanding warrants to purchase shares of the Company’s commonstock, as described above, as of December  31,  2005 is asfollows:

|                                           |  |                                                                             |           |                                              |  |                |        |        |  |        |           |        |  |  |
|-------------------------------------------|--|-----------------------------------------------------------------------------|-----------|----------------------------------------------|--|----------------|--------|--------|--|--------|-----------|--------|--|--|
| Warrantsissued in connection with         |  | NumberofShares ofCommon Stockto be IssuedUpon ExerciseofOutstandingWarrants |           | Exercise PricePer ShareofOutstandingWarrants |  | ExpirationDate |
| Private placement – June  2003      |  |                                                                        | 1,192,349 |                                         |  | $              | 2.20   |   |  |   | 6/23/2008 |   |
| Private placement – September  2003 |  |                                                                        | 4,439,313 |                                         |  | $              | 2.50   |   |  |   | 9/19/2008 |   |
| Private placement – February  2004  |  |                                                                        | 3,567,309 |                                         |  | $              | 3.25   |   |  |   | 2/11/2009 |   |
| Total                                     |  |                                                                        | 9,198,971 |                                         |  |           |   |   |  |   |      |   |
|                                           |

6.    StockOptions and Restricted Stock

Stock Options

TheCompany’s 2003 Stock Option Plan (the ‘‘2003Plan’’) was terminated in October  2005 in connectionwith the adoption of the Company’s 2005 Stock Incentive Plan(the ‘‘2005 Plan’’). The 

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Company’s Amended and Restated 1993Stock Option Plan (the ‘‘1993 Plan’’) expiredon April  15,  2003. As such, the Company no longer grantsoptions under the 1993 Plan and 2003 Plan (the ‘‘OptionPlans’’). Stock options previously granted remainoutstanding under the Option Plans and will continue to vest accordingto schedule. Options outstanding outside the Option Plans representstock options granted in 1999 to purchase 980,000 shares of commonstock to the Company’s Chief Executive Officer under the SeniorExecutive Stock Option Plan. There are no additional shares availablefor issuance under this plan.

Incentive options grantedto employees and officers under the Option Plans vest in equal annualinstallments over periods ranging from one to four years commencing noearlier than the first anniversary of the date of grant, or earlier ona change of control. Incentive options expire the earlier of: (i) tenyears after the date of grant, or (ii) three months after terminationof service. Incentive options which are not vested expire immediatelyupon termination of service. The exercise price for incentive optionsgranted was equal to the fair market value of the common stock on thedate of grant.

The Option Plans provided for theautomatic grant of non-qualified stock options to purchase shares ofcommon stock to directors of the Company who are not employees orprincipal stockholders. The exercise price for each share subject to adirector option was equal to the fair market value of the common stockon the date of grant. Director options vest after one year under the2003 Plan and two years under the 1993 Plan, or earlier on a change ofcontrol. Generally, director options will expire the earlier of: (i) 10years after the date of grant, or (i) one year after termination ofservice as a director under the 2003 Plan or 90 days after terminationof service as a director under the 1993 Plan. Director options whichare not vested expire immediately upon termination of service as adirector. Options granted to directors totaled 0, 115,000 and 135,694in 2005, 2004 and 2003, respectively.

A summary of theCompany’s stock option activity under all option plans andrelated information is as follows:

|                                  |  |                         |       |                               |  |                        |         |                               |  |                         |       |                               |  |        |      |        |  |        |         |         |  |        |         |        |  |  |
|----------------------------------|--|-------------------------|-------|-------------------------------|--|------------------------|---------|-------------------------------|--|-------------------------|-------|-------------------------------|--|--------|------|--------|--|--------|---------|---------|--|--------|---------|--------|--|--|
|                             |  | 2005                    |       | 2004                          |  | 2003                   |
|                             |  | Options(in 000’s) |       | Weighted-AverageExercisePrice |  | Options(in000’s) |         | Weighted-AverageExercisePrice |  | Options(in 000’s) |       | Weighted-AverageExercisePrice |
| Outstanding at beginning of year |  |                    | 5,174 |                          |  | $                      | 4.68    |                          |  |                    | 4,497 |                          |  | $      | 4.68 |   |  |   | 4,127   |    |  | $      | 5.08    |   |
| Granted                          |  |                    | 82    |                          |  |                   | 2.24    |                          |  |                    | 746   |                          |  |   | 4.53 |   |  |   | 518     |    |  |   | 1.51    |   |
| Exercised                        |  |                    | (218  | )                        |  |                   | 0.94    |                          |  |                    | (35   | )                        |  |   | 2.21 |   |  |   | (6      | )  |  |   | 0.55    |   |
| Forfeited                        |  |                    | (17   | )                        |  |                   | 4.62    |                          |  |                    | (24   | )                        |  |   | 2.85 |   |  |   | (142    | )  |  |   | 4.83    |   |
| Expired                          |  |                    | (89   | )                        |  |                   | — |                          |  |                    | (10   | )                        |  |   | 5.98 |   |  |   | — |    |  |   | — |   |
| Outstanding at end of year       |  |                    | 4,932 |                          |  | $                      | 4.81    |                          |  |                    | 5,174 |                          |  | $      | 4.68 |   |  |   | 4,497   |    |  | $      | 4.68    |   |
| Exercisable at end of year       |  |                    | 4,306 |                          |  | $                      | 4.97    |                          |  |                    | 3,955 |                          |  | $      | 4.93 |   |  |   | 3,390   |    |  | $      | 5.00    |   |
|                                  |

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The following table presentsweighted-average price and life information about significant optiongroups outstanding as of December  31,  2005:

|                         |  |                                    |       |                                       |  |                               |     |                                   |  |                               |       |        |  |        |       |        |  |        |       |        |  |  |
|-------------------------|--|------------------------------------|-------|---------------------------------------|--|-------------------------------|-----|-----------------------------------|--|-------------------------------|-------|--------|--|--------|-------|--------|--|--------|-------|--------|--|--|
|                    |  | OptionsOutstanding                 |       | Options Exercisable                   |
| Rangeof Exercise Prices |  | NumberOutstanding (in 000’s) |       | Weighted-AverageRemainingLife (Years) |  | Weighted-AverageExercisePrice |     | NumberExercisable (in000’s) |  | Weighted-AverageExercisePrice |
| $0.36 - $1.79           |  |                               | 1,138 |                                  |  |                          | 6.8 |                              |  | $                             | 0.93  |   |  |   | 1,042 |   |  | $      | 0.87  |   |
| $1.80 - $3.57           |  |                               | 162   |                                  |  |                          | 5.9 |                              |  |                          | 2.51  |   |  |   | 82    |   |  |   | 2.78  |   |
| $3.58 - $5.36           |  |                               | 2,047 |                                  |  |                          | 6.0 |                              |  |                          | 4.57  |   |  |   | 1,597 |   |  |   | 4.61  |   |
| $5.37 - $7.15           |  |                               | 890   |                                  |  |                          | 3.1 |                              |  |                          | 5.84  |   |  |   | 890   |   |  |   | 5.84  |   |
| $7.16 - $8.94           |  |                               | 328   |                                  |  |                          | 4.3 |                              |  |                          | 7.40  |   |  |   | 328   |   |  |   | 7.40  |   |
| $8.95 - $10.72          |  |                               | 10    |                                  |  |                          | 4.4 |                              |  |                          | 9.88  |   |  |   | 10    |   |  |   | 9.88  |   |
| $10.73 - $14.30         |  |                               | 65    |                                  |  |                          | 2.6 |                              |  |                          | 12.25 |   |  |   | 65    |   |  |   | 12.25 |   |
| $14.31 - $16.09         |  |                               | 282   |                                  |  |                          | 4.2 |                              |  |                          | 14.88 |   |  |   | 282   |   |  |   | 14.88 |   |
| $16.10 - $17.88         |  |                               | 10    |                                  |  |                          | 4.8 |                              |  |                          | 17.88 |   |  |   | 10    |   |  |   | 17.88 |   |
|                    |  |                               | 4,932 |                                  |  |                          | 5.4 |                              |  | $                             | 4.81  |   |  |   | 4,306 |   |  | $      | 4.97  |   |
|                         |

Restricted Stock

InOctober  2005, the Company’s shareholders approved the 2005Plan. The 2005 Plan provides for a range of awards, includingrestricted stock, stock appreciation rights, deferred stock, otherawards based on shares of common stock, and performance awards. Underthe 2005 Plan, 7,441,907 shares of common stock are available for newawards to directors, officers, employees and consultants on the date ofthe plan’s adoption. The amount of shares authorized forgranting included 716,907 shares transferred from the 2003 Plan. Noaward may be made under the 2005 Plan after October  25,2015.

The 2005 Plan provides an initial restricted stockgrant on the first trading day following a non-employeedirector’s initial appointment or election to the board for thenumber of shares of common stock determined by dividing $100,000 by thefair market value of the common stock on such date (providing that, ifthe price per share of the common stock is less than $2.00 on suchdate, the number of restricted shares is fixed at 34,700), which shareswill vest in three equal annual installments on the anniversary of thegrant date or upon a change in control. Further, on the first tradingday following each annual meeting, each eligible director will receivean automatic grant of restricted stock for the number of shares ofcommon stock determined by dividing $28,200 by the fair market value ofthe common stock on such date (provided that, if the price per share ofthe common stock is less than $2.00 on such date, the number of sharesof restricted stock is fixed at 11,300), such shares will fully vestone year after the date of each grant or upon a change in control.

For the year ended December  31,  2005, the Companyissued 77,610 shares of restricted stock at a fair value of $2.05 pershare and recorded compensation expense of $26,000 for the restrictedshares. As of December  31,  2005, there was $133,000 ofdeferred compensation expense recorded related to non-vested restrictedstock. The expense will be recognized over the vesting period ending inNovember  2006.

7.    Stock Purchase Plan

A total of 450,000 shares of common stock are authorized forissuance under the Company’s employee stock purchase plan (the‘‘Stock Purchase Plan’’). The Stock PurchasePlan permits eligible employees to purchase up to 2,000 shares ofcommon stock at the lower of 85% of the fair market value of thecommon stock at the beginning or at the end of each six-month offeringperiod. 22,171 shares, 6,692 shares and 31,782 shares were issued in2005, 2004 and 2003, respectively, under the Stock Purchase Plan.

8.    401(k) Savings Plan

The Company makesmatching contributions in cash under a 401(k) Savings Plan up to anannual maximum match of $1,000 per employee or, prior to January1,  2004, its common stock at the election 

56

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of the employee. The expense for thematching contribution was $24,000, $23,000 and $25,000 for the yearsended December  31,  2005, 2004 and 2003, respectively, and$221,000 for the period from May  1,  1994 (inception)through December  31,  2005. 9,399 shares were issued in 2003for the stock matching contribution.

9.    Income Taxes

At December  31,  2005, the Company has availablefor federal income tax purposes net operating loss carryforwards,subject to review by the Internal Revenue Service, totaling $115million and a general business tax credit of $3.7  millionexpiring in 2010 through 2025. The difference between the deficitaccumulated during the development stage for financial reportingpurposes and the net operating loss carryforwards for tax purposes isprimarily due to certain costs which are not currently deductible fortax purposes and differences in accounting and tax basis resulting fromthe merger described in Note 1. The ability of the Company to realize afuture tax benefit from a portion of its net operating losscarryforwards and general business credits may be limited due tochanges in ownership of the Company.

Significantcomponents of the deferred income taxes are as follows (inthousands):

|                                          |  |              |         |         |  |        |         |         |  |  |
|------------------------------------------|--|--------------|---------|---------|--|--------|---------|---------|--|--|
|                                     |  | December 31, |
|                                     |  | 2005         |         | 2004    |
| Operating loss carryforwards             |  | $            | 44,845  |    |  | $      | 39,129  |    |
| General business tax creditcarryforwards |  |         | 3,662   |    |  |   | 3,072   |    |
| AMT tax credit carryforwards             |  |         | 10      |    |  |   | 10      |    |
| Contributions                            |  |         | 786     |    |  |   | 1,241   |    |
| Compensation related                     |  |         | 243     |    |  |   | 168     |    |
| Other                                    |  |         | 311     |    |  |   | 375     |    |
| Total deferred income tax asset          |  |         | 49,857  |    |  |   | 43,995  |    |
| Valuationallowance                       |  |         | (49,857 | )  |  |   | (43,995 | )  |
| Deferred income tax asset,net            |  | $            | — |    |  | $      | — |    |
|                                          |

The valuation allowanceincreased by $5.9  million and $7.1  million during 2005 and2004, respectively.

For the year ended December31,  2005, the Company recorded approximately $40,000 related tominimum state capital taxes paid.

10.    Commitments andContingencies

Leases

The Company hasnon-cancelable operating leases for its facility and its laboratory andoffice equipment expiring through 2010. Rental expense under thefacility lease is recognized on a straight-line basis. Rental expenseunder the operating leases was approximately $344,000, $298,000 and$284,000 for the years ended December  31,  2005, 2004 and2003, respectively, and $2.7  million for the period fromMay  1,  1994 (inception) through December  31,2005. As of December  31,  2005, future minimum leasepayments due under non-cancelable operating lease agreements withinitial terms in excess of one year are $248,000 for 2006, $224,000 for2007, $217,000 for 2008, $217,000 for 2009 and $217,000 for 2010.

In January  2006, the Company extended its facilitylease through December  31,  2010. Rental expenses for 2006to 2010 under the extended lease are reflected in the above futureminimum lease payment amounts.

Agreements

Underthe terms of an employment agreement, the Company is obligated to payits Chief Executive Officer (‘‘CEO’’) a minimumannual salary of $412,000 through December  31,  2008. TheCEO is also eligible for a bonus of up to 50% of his base salarybased on the achievement of specified objectives. 

57

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In the event the CEO’s employment isterminated by the Company for any reason other than cause ordisability, or if the CEO terminates for good reason as defined in theagreement, the Company is obligated to pay him two times the sum of hisbase salary plus his average annual bonus for the prior two years andto continue payment of certain insurance costs on his behalf.

The Company has entered into severance agreements with itsofficers pursuant to which each of these officers would be entitled tocertain payments in the event such officer loses his employment duringthe twelve-month period following a ‘‘change ofcontrol’’, as defined in the agreement, and additionally,in the case of the Company’s President, following a change inthe Company’s CEO. Specifically, the officer would be entitledto a lump sum severance payment equal to the sum of twelve months ofthe officer’s monthly base salary plus the average of the lasttwo cash bonus payments made to the officer, and to the continuation ofgroup health insurance benefits for up to eighteen months. Theforegoing amounts are not payable if termination of the officer isbecause of his death, by the Company for cause, or by the officer otherthan for good reason.

A former director of the Company isa party to a Consulting and Finder’s Agreement with the Companydated June  4,  1992, and amended February  17,1995. This agreement entitles him to receive an annual fee equal to10% of the net after-tax profits of the Company attributable tothe sale or licensing of products or technology related toTAPET® licensed pursuant to the Company’sDecember  1995 license agreement with Yale (refer to Note3), until the cumulative total of such fees equals $3  million.Such fee continues to be payable notwithstanding the director’sdeath until the $3  million has been paid. Through December31,  2005, no amounts are due or have been paid under thisagreement.

The Company has various commitments relatingto its research and license agreements ( refer  toNote  3).

The Company enters into indemnificationprovisions under its agreements with other companies in the ordinarycourse of business, typically clinical sites, suppliers and businesspartners. Pursuant to these agreements, we generally indemnify, holdharmless and agree to reimburse the indemnified parties for lossessuffered or incurred by the indemnified parties in connection with useor testing of our product candidates, or with any U.S patent or anycopyright or other intellectual property infringement claim by anythird party with respect to products. The term of these indemnificationagreements is generally perpetual. The potential amount of futurepayments we could be required to make under these indemnificationagreements is unlimited. We have not incurred any costs to defendlawsuits or settle claims related to these indemnification agreements.We have no liabilities recorded for costs associated with theseagreements as of December  31,  2005.

11.    Related Party Transactions

The Companyrecorded research and development expense of $200,000, $200,000 and$400,000 for the years ended December  31,  2005, 2004 and2003, respectively, related to gifts to fund research throughMarch  31,  2007 at the laboratory headed by one of itsdirectors, an affiliate of Yale. Included in the Company’scurrent liabilities at December  31,  2005, is $250,000 forthe balance of the gifts to be paid in five equal quarterlyinstallments through the first quarter of 2007.

12.    Selected Quarterly Financial Data (Unaudited)

The following is a summary of unaudited selected quarterlyfinancial data for the years ended December  31,  2005 and2004 (in thousands, except per share amounts):

|                                 |  |         |        |         |  |        |        |         |  |        |        |         |  |        |        |         |  |        |         |         |  |  |
|---------------------------------|--|---------|--------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--------|---------|---------|--|--|
|                            |  | Quarter |        | Year    |
| 2005                            |  | First   |        | Second  |  | Third  |        | Fourth  |  | 2005   |
| Revenues                        |  | $       | 5      |    |  | $      | 7      |    |  | $      | 6      |    |  | $      | 5      |    |  | $      | 23      |    |
| Net loss                        |  |    | (4,552 | )  |  |   | (5,107 | )  |  |   | (3,727 | )  |  |   | (4,655 | )  |  |   | (18,041 | )  |
| Basic and diluted loss pershare |  |    | (0.07  | )  |  |   | (0.08  | )  |  |   | (0.06  | )  |  |   | (0.07  | )  |  |   | (0.28   | )  |
|                                 |

58

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|                                 |  |         |        |         |  |        |        |         |  |        |        |         |  |        |        |         |  |        |         |         |  |  |
|---------------------------------|--|---------|--------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--------|---------|---------|--|--|
|                            |  | Quarter |        | Year    |
| 2004                            |  | First   |        | Second  |  | Third  |        | Fourth  |  | 2004   |
| Revenues                        |  | $       | 96     |    |  | $      | 125    |    |  | $      | 50     |    |  | $      | 4      |    |  | $      | 275     |    |
| Netloss                         |  |    | (3,258 | )  |  |   | (3,669 | )  |  |   | (3,906 | )  |  |   | (5,222 | )  |  |   | (16,055 | )  |
| Basic and dilutedloss per share |  |    | (0.07  | )  |  |   | (0.07  | )  |  |   | (0.07  | )  |  |   | (0.09  | )  |  |   | (0.30   | )  |
|                                 |

|              |                                                                                     |
|--------------|-------------------------------------------------------------------------------------|
| ITEM9.  | Changes in and Disagreements with Accountantson Accounting and Financial Disclosure |

None.

|               |                         |
|---------------|-------------------------|
| ITEM9A.  | Controls and Procedures |

Controls and Procedures

Based on their evaluation as ofDecember 31, 2005, our Chief Executive Officer and ChiefFinancial Officer, have concluded that our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended) were effective toensure that the information required to be disclosed in the reportsthat we file or submit under the Securities Exchange Act of 1934, asamended, is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission rulesand forms.

Management's Report on Internal Control overFinancial Reporting

Our management is responsible forestablishing and maintaining adequate internal control over financialreporting (as defined in Rule 13a-15(f) under the SecuritiesExchange Act of 1934, as amended). Our management assessed theeffectiveness of our internal control over financial reporting as ofDecember 31, 2005. In making this assessment, our managementused the criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission(‘‘COSO’’) in Internal Control-IntegratedFramework. Our management has concluded that, as of December 31,2005, our internal control over financial reporting is effective basedon these criteria. Our independent registered public accounting firm,Ernst & Young LLP, have issued an audit report on our assessment ofour internal control over financial reporting, which is includedherein.

There was no change in our internal control overfinancial reporting during the quarter ended December 31, 2005that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

Allinternal control systems, no matter how well designed, have inherentlimitations. Therefore, even those systems determined to be effectivecan provide only reasonable assurance with respect to financialstatement preparation and presentation.

ITEM 9B.    OtherInformation

None.

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PART III

ITEM10.    Directors and Executive Officers of theRegistrant

Executive Officers and Directors

See‘‘Part I – Executive Officers andDirectors.’’

Audit Committee Financial Expert

Our board of directors has determined that Mr.  Bickerstaff whoserves on its audit committee qualifies as ‘‘auditcommittee financial expert’’ (as that term is defined inthe rules promulgated by the United States Securities and ExchangeCommission (SEC) pursuant to the Sarbanes-Oxley Act of 2002). Our boardof directors has a separately-designated standing audit committeeestablished in accordance with Section 3(a)(58)A of the SecuritiesExchange Act of 1934 and has also determined that all members of theaudit committee are ‘‘independent’’, as thatterm is used in Item 7(d)(3)(iv) of Schedule 14A under the SecuritiesExchange Act of 1934.

Section 16(a) Beneficial OwnershipReporting Compliance

Section 16(a) of the Securities ExchangeAct of 1934 requires our executive officers and directors, and personswho beneficially own more than ten percent of our Common Stock, to fileinitial reports of ownership and reports of changes in ownership withthe SEC and the NASDAQ Stock Market. Executive officers, directors andgreater than ten percent beneficial owners are required by the SEC tofurnish us with copies of all Section 16(a) forms they file.

Based upon a review of the forms furnished to us and writtenrepresentations from our executive officers and directors, we believethat during fiscal 2005 all Section 16(a) filing requirementsapplicable to our executive officers, directors and greater than tenpercent beneficial owners were complied with.

Code ofEthics

We have adopted a Code of Ethics and Business Conductapplying to our directors, officers and employees, as well as a Code ofEthics that applies to our chief executive officer and senior financialofficers. The codes have been posted on our website,www.vionpharm.com.

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|               |                        |
|---------------|------------------------|
| ITEM11.  | Executive Compensation |

Thefollowing table sets forth information concerning all cash and non-cashcompensation awarded to, earned by or paid to our Chief ExecutiveOfficer and to our four most highly compensated executive officers,other than the Chief Executive Officer, who were serving as executiveofficers at December  31,  2005, for services rendered to usin all capacities during the three fiscal years ended December31,  2005.

|                                       |  |        |        |                     |  |                        |         |                         |  |                           |         |                                       |  |                          |        |           |  |        |         |        |  |        |         |        |  |        |         |           |  |  |
|---------------------------------------|--|--------|--------|---------------------|--|------------------------|---------|-------------------------|--|---------------------------|---------|---------------------------------------|--|--------------------------|--------|-----------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|-----------|--|--|
|                                  |  |   |        | Annual Compensation |  | Long-Term Compensation |
| Name andPrincipalPosition             |  | Year   |        | Salary ($)          |  | Bonus ($)              |         | OtherAnnualCompensation |  | RestrictedStockAwards (5) |         | Securities UnderlyingOptions/SARs (#) |  | AllOtherCompensation ($) |
| Alan Kessman                          |  |   | 2005   |                |  | $                      | 428,480 |                    |  | $                         | 80,000  |                                  |  |                     |        | (4)  |  |   | — |   |  |   | — |   |  | $      | 1,000   | (6)  |
| — Chief Executive          |  |   | 2004   |                |  | $                      | 412,000 | (2)                |  | $                         | 100,000 |                                  |  |                     |        | (4)  |  |   | — |   |  |   | 150,000 |   |  | $      | 1,000   | (6)  |
| Officer(1)                            |  |   | 2003   |                |  | $                      | 412,000 | (3)                |  |                      | — |                                  |  |                     |        | (4)  |  |   | — |   |  |   | 80,000  |   |  | $      | 14,200  | (7)  |
| HowardB. Johnson                      |  |   | 2005   |                |  | $                      | 275,000 |                    |  | $                         | 80,053  |                                  |  |                     |        | (4)  |  |   | — |   |  |   | — |   |  |   | — |      |
| — President and Chief |  |   | 2004   |                |  | $                      | 250,000 | (2)                |  | $                         | 25,001  |                                  |  |                     |        | (4)  |  |   | — |   |  |   | 100,000 |   |  |   | — |      |
| Financial Officer                     |  |   | 2003   |                |  | $                      | 200,000 | (3)                |  |                      | — |                                  |  |                     |        | (4)  |  |   | — |   |  |   | 60,000  |   |  |   | — |      |
| Ann Lee Cahill                   |  |   | 2005   |                |  | $                      | 200,000 |                    |  | $                         | 65,000  |                                  |  |                     |        | (4)  |  |   | — |   |  |   | — |   |  | $      | 1,000   | (6)  |
| — Vice President,          |  |   | 2004   |                |  | $                      | 184,800 |                    |  | $                         | 15,400  |                                  |  |                     |        | (4)  |  |   | — |   |  |   | 105,000 |   |  | $      | 1,000   | (6)  |
| Clinical                              |  |   |   |                |  |                   |    |                    |  |                      |    |                                  |  |                     |   |      |  |   |    |   |  |   |    |   |  |   |    |      |
| Development(8)                        |  |   | 2003   |                |  |                   | — |                    |  |                      | — |                                  |  |                     |   |      |  |   | — |   |  |   | — |   |  |   | — |      |
| Ivan King,Ph.D.                       |  |   | 2005   |                |  | $                      | 220,000 |                    |  | $                         | 35,035  |                                  |  |                     |        | (4)  |  |   | — |   |  |   | — |   |  | $      | 1,000   | (6)  |
| — Vice President,          |  |   | 2004   |                |  | $                      | 208,000 | (2)                |  | $                         | 20,800  |                                  |  |                     |        | (4)  |  |   | — |   |  |   | 50,000  |   |  | $      | 1,000   | (6)  |
| Researchand Development               |  |   | 2003   |                |  | $                      | 200,000 | (3)                |  |                      | — |                                  |  |                     |        | (4)  |  |   | — |   |  |   | 40,000  |   |  | $      | 1,000   | (6)  |
| Terrence W. Doyle, Ph.D.              |  |   | 2005   |                |  | $                      | 224,973 |                    |  | $                         | — |                                  |  |                     |        | (4)  |  |   | — |   |  |   | — |   |  | $      | 1,000   | (6)  |
| — Vice President,          |  |   | 2004   |                |  | $                      | 224,973 | (2)                |  | $                         | 4,500   |                                  |  |                     |        | (4)  |  |   | — |   |  |   | — |   |  | $      | 1,000   | (6)  |
| ChiefScientific Officer(9)            |  |   | 2003   |                |  | $                      | 216,320 | (3)                |  |                      | — |                                  |  |                     |        | (4)  |  |   | — |   |  |   | 10,000  |   |  | $      | 1,500   | (6)  |
|                                       |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                               |
|-----|-------------------------------------------------------------------------------------------------------------------------------|
| (1) | Weare a party to an employment agreement with Mr. Kessman. See‘‘— Employment Agreements.’’ |

|     |                                                                                                                                                                                                                                                |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Excludes 2004payments of salary deferrals in 2002-2003 to conserve cash resources asfollows: Mr.  Kessman — $114,607; Mr.  Johnson —$27,222; Dr.  King — $27,222; Dr.  Doyle —$29,440; and Dr.  Sznol — $30,704. |

|     |                                                                                                                                                                                                                                                                              |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Includes 2003 salarydeferrals to conserve cash resources, net of payments of salarydeferrals beginning August  2003, as follows: Mr.  Kessman— $14,274; Mr.  Johnson — $3,889; Dr.  King— $3,889; Dr.  Doyle — $4,203; and Dr.  Sznol— $4,387. |

|     |                                                                                                                                                |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | Aggregate amount ofsuch compensation is less than the lesser of $50,000 or 10% ofthe total salary and bonus reported for the indicated person. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (5) | On January5,  2006, Messrs. Kessman, Johnson, King and Ms.  Cahill weregranted 466,667 shares, 221,667 shares, 138,889 shares and 186,667shares of restricted stock, respectively, for their performance in2005. The shares will vest upon the earliest of (A) December31,  2008; (B) the approval of an NDA to marketCloretazine®; or (C) the occurrence of a Change ofControl, as defined in our 2005 Stock Incentive Plan. There were norestricted shares held by our executive officers as of December31,  2005. |

|     |                                                                              |
|-----|------------------------------------------------------------------------------|
| (6) | Consists of matching contribution to theCompany’s 401(k) Savings Plan. |

|     |                                                    |
|-----|----------------------------------------------------|
| (7) | Consists of life anddisability insurance payments. |

|     |                                                                 |
|-----|-----------------------------------------------------------------|
| (8) | Ms. Cahill was namedan executive officer on October  15,  2004. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (9) | In January2004, we entered into a consulting agreement with Gemin X, Inc. (GeminX), under which Dr.  Doyle renders consulting services to Gemin X.Gemin X paid us $207,000 and $213,325 for Dr.  Doyle'sconsulting for the years ended December  31,  2005 and 2004,respectively. Dr.  Doyle has informed us of his intent to retireon March  31,  2006. It is intended that our agreement withGemin X will terminate as of that date. |

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Option Grants in Last Fiscal Year

The following table sets forth the grant of stock options madeduring the year ended December  31,  2005 to the personsnamed in the Summary Compensation Table:

|                         |  |                                               |         |                                                        |  |                              |         |                   |  |                                                                                           |         |        |  |        |         |        |  |        |         |        |  |        |         |        |  |  |
|-------------------------|--|-----------------------------------------------|---------|--------------------------------------------------------|--|------------------------------|---------|-------------------|--|-------------------------------------------------------------------------------------------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                    |  | NumberofSecuritiesUnderlyingOptionsGranted(b) |         | % of TotalOptionsGrantedtoEmployeesin FiscalPeriod (c) |  | ExerciseofBasePrice($/Sh)(d) |         | ExpirationDate(e) |  | Potential RealizableValue atAssumedAnnual Rates of Stock Price Appreciation forOptionTerm |
| Name (a)                |  | 5%($)(f)                                      |         | 10%($)(g)                                              |
| Alan Kessman            |  |                                          | — |                                                   |  |                         | — |              |  |                                                                                      | — |   |  |   | — |   |  |   | — |   |  |   | — |   |
| Howard B. Johnson       |  |                                          | — |                                                   |  |                         | — |              |  |                                                                                      | — |   |  |   | — |   |  |   | — |   |  |   | — |   |
| Ann Lee Cahill          |  |                                          | — |                                                   |  |                         | — |              |  |                                                                                      | — |   |  |   | — |   |  |   | — |   |  |   | — |   |
| Ivan King, Ph.D.        |  |                                          | — |                                                   |  |                         | — |              |  |                                                                                      | — |   |  |   | — |   |  |   | — |   |  |   | — |   |
| Terrence W. Doyle,Ph.D. |  |                                          | — |                                                   |  |                         | — |              |  |                                                                                      | — |   |  |   | — |   |  |   | — |   |  |   | — |   |
|                         |

Aggregated Option Exercises in LastFiscal Year and Fiscal Year-End Option Values

The followingtable sets forth information with respect to stock options exercised in2005 and unexercised stock options held by the persons named in theSummary Compensation Table at December  31,  2005.

|                          |  |                                |         |                        |  |                                                                         |                     |                                                                   |  |        |           |        |  |        |         |        |  |   |         |        |  |   |         |        |  |  |
|--------------------------|--|--------------------------------|---------|------------------------|--|-------------------------------------------------------------------------|---------------------|-------------------------------------------------------------------|--|--------|-----------|--------|--|--------|---------|--------|--|---|---------|--------|--|---|---------|--------|--|--|
|                     |  | SharesAcquiredonExercise(#)(b) |         | Value Realized ($) (c) |  | Number of SecuritiesUnderlyingUnexercised Options at FiscalYear-End (#) |                     | Value ofUnexercised In-the-Money Options at FiscalYear-End ($)(1) |
| Name(a)                  |  | Exercisable(d)                 |         | Unexercisable(e)       |  | Exercisable (f)                                                         |                     | Unexercisable(g)                                                  |
| Alan Kessman             |  |                           | — |                   |  | $                                                                       |   — |                                                              |  |   | 1,542,927 |   |  |   | — |   |  | $ | 171,400 |   |  | $ | — |   |
| Howard B. Johnson        |  |                           | — |                   |  | $                                                                       | —             |                                                              |  |   | 399,999   |   |  |   | 182,500 |   |  | $ | 82,949  |   |  | $ | 1,600   |   |
| Ann Lee Cahill           |  |                           | — |                   |  | $                                                                       | —             |                                                              |  |   | 64,166    |   |  |   | 85,834  |   |  | $ | 22,533  |   |  | $ | 267     |   |
| Ivan King, Ph.D.         |  |                           | — |                   |  | $                                                                       | —             |                                                              |  |   | 312,048   |   |  |   | 50,834  |   |  | $ | 73,633  |   |  | $ | 1,067   |   |
| Terrence W. Doyle, Ph.D. |  |                           | — |                   |  | $                                                                       | —             |                                                              |  |   | 230,533   |   |  |   | 3,334   |   |  | $ | 42,790  |   |  | $ | 267     |   |
|                          |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                      |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Computedbased upon the difference between the closing price of theCompany’s common stock on December  30,  2005 ($1.65)and the exercise price. |

Employment and Change inControl Agreements

In November  2003, we entered into anemployment agreement effective January  1,  2004 with AlanKessman, our Chief Executive Officer. Pursuant to this agreement,Mr.  Kessman receives a minimum base salary of $412,000 per yearand is eligible for a bonus of up to 50% of his base salarybased on the achievement of specified objectives. In the eventMr.  Kessman’s employment is terminated by us for anyreason other than cause or disability, or if Mr.  Kessmanterminates for good reason, we are obligated to pay him two times thesum of his base salary plus his average annual bonus for the prior twoyears and to continue payment of certain insurance costs on his behalf.Under Mr.  Kessman’s employment agreement, it shallconstitute ‘‘good reason’’ for Mr.Kessman to terminate his employment and receive the amounts describedabove if there is a change in control and the Company or itssuccessors, as the case may be, fails to agree in writing to extend theexpiration date of the employment agreement to the two-year anniversaryof the change of control. In September  2005 and January2006 we negotiated extensions of Mr.  Kessman’s employmentagreement, and the termination date of Mr.  Kessman’semployment agreement is now December  31,  2008.

We entered into severance agreements with Howard B. Johnson,our President and Chief Financial Officer, Ann Lee Cahill, our VicePresident of Clinical Development, Meghan Fitzgerald, our VicePresident and Chief Business Officer, Dr.  Ivan  King, ourVice President of Research and Development, Karen Schmedlin our VicePresident of Finance, Chief Accounting Officer and 

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Corporate Secretary, and Dr.  TerrenceW. Doyle, our Vice President and Chief Scientific Officer, pursuant towhich each of these officers would be entitled to certain payments inthe event such officer loses his employment during the twelve-monthperiod following a ‘‘change in control,’’ asdefined in the agreement. Specifically, if a ‘‘change incontrol’’ occurs, the officer shall be entitled to a lumpsum severance payment equal to the sum of twelve months of theofficer’s monthly base salary as in effect as of the date oftermination or immediately prior to the change in control, whichever isgreater, plus the average of the last two cash bonus payments made tothe officer prior to the change in control. The officer would also beentitled to all payments necessary to provide him with group healthinsurance benefits substantially similar to those which he wasreceiving immediately prior to the date of termination until theearlier of 18 months after such termination or the date he has obtainednew full-time employment. The foregoing amounts are not payable iftermination of the officer is because of his death, by us for cause, orby the officer other than for good reason.

OnSeptember  13,  2005, we entered into an additional agreementwith Howard B. Johnson, our President and Chief Financial Officer,pursuant to which Mr.  Johnson would be entitled to certainpayments in the event his employment is terminated after AlanKessman’s retirement, resignation or termination as our ChiefExecutive Officer (‘‘CEO’’). Specifically, ifat any time within one year after the earlier of (i) the date of apublic announcement by the Company of the hiring of a new CEO and (ii)the date of hiring of such new CEO as set forth in such publicannouncement (the ‘‘CEO Hiring Date’’)Mr.  Johnson is terminated by the Company without cause (asdefined in the agreement), he shall be entitled to a lump sum paymentequal to the sum of twelve months of his monthly base salary as ineffect as of the date of termination or immediately prior to suchtermination, whichever is greater, plus the average of the last twocash bonus payments made to Mr.  Johnson prior to his termination.Mr.  Johnson would also be entitled to all payments necessary toprovide him with group health insurance benefits substantially similarto those which he was receiving immediately prior to the date oftermination until the earlier of 12  months after such terminationor the date he obtains new full-time employment. Also, if Mr.Johnson voluntarily resigns from his position as President and ChiefFinancial Officer of the Company within the first 90 days following theCEO Hiring Date, he shall be entitled to receive his full base salary,at the rate as in effect at the date of resignation, at such time assuch payments would have been due pursuant to his previous salaryarrangement, until the earlier of 12 months after the date of suchresignation or the date he obtains new full-time employment (the‘‘Transition Period’’), provided that Mr.Johnson advises and consults by telephone, in writing or, at a mutuallyagreeable time, in person regarding the affairs of the Company with theofficers and directors of the Company upon requests for such servicesby such officers and directors during the Transition Period. In theevent of such resignation, Mr.  Johnson would also be entitled toall payments necessary to provide him with group health insurancebenefits substantially similar to those which he was receivingimmediately prior to the date of termination until the earlier of 12months after such termination or the date he obtains new full-timeemployment. The foregoing amounts are not payable if the termination ofMr.  Johnson is due to his death, is a result of a termination byus for cause or if Mr.  Johnson is offered the position ofCEO.

Compensation of Directors

ThroughSeptember  12,  2005, our non-employee directors received$1,000 for each board meeting attended and the chairman of the boardreceived $4,000 for each board meeting attended. Directors were alsoreimbursed for expenses actually incurred in attending board orcommittee meetings.

Our 2003 Stock Option Plan providedfor, among other things, the automatic grant of 20,000 stock options toeach person who is initially elected or appointed to the Board ofDirectors as a non-employee director. The exercise price for each sharesubject to such options is equal to the fair market value of the commonstock on the date of grant. These options vest after one year (orearlier on a change of control) and, generally, expire upon the earlierof ten years after the date of grant or one year after termination ofservice as a director. Upon their initial appointment to the Board onJune  8,  2005, Mr.  Bickerstaff and Mr. Willis wereeach granted 20,000 options at an exercise price of $2.09 per share.Due to shareholder approval of the 2005 Stock Incentive Plan onOctober  25,  2005, no additional option grants will be madeunder our 2003 Stock Option Plan.

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Upon the advice and recommendationof outside compensation consultants retained by the CompensationCommittee, which advice and recommendation was based upon a detailedanalysis of the practices of companies within our peer group as well asemerging trends occurring within director compensation arena, and otherfactors considered by the Compensation Committee and the Board, theCompensation Committee recommended and the Board of Directors approvedthe following changes, effective September  13,  2005, to thecash compensation payable to our non-employee directors:

|  |              |                                                                                            |
|--|--------------|--------------------------------------------------------------------------------------------|
|  | •  | payment of a $15,000 annualretainer to each director other than the chairman of the board; |

|  |              |                                                                   |
|--|--------------|-------------------------------------------------------------------|
|  | •  | payment of a $40,000 annualretainer to the chairman of the board; |

|  |              |                                                                                                                            |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------|
|  | •  | payment of a $5,000 annualretainer to the chair of each committee of the board other than thechair of the audit committee; |

|  |              |                                                                          |
|--|--------------|--------------------------------------------------------------------------|
|  | •  | payment of a $10,000 annualretainer to the chair of the audit committee; |

|  |              |                                                                                                                                                                                    |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | the increase of the meeting feepayable for each board meeting attended from $1,000 to $1,500 and theelimination of the $4,000 meeting fee payable to the chairman of theboard; and |

|  |              |                                                                                                                                                                |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | payment of$1,000 meeting fee for each committee meeting attended in person and$500 for each committee meeting attended by teleconference that exceedsone hour. |

Directors will also continue to be reimbursedfor expenses actually incurred in attending board and committeemeetings.

Also upon the advice and recommendation ofoutside compensation consultants retained by the CompensationCommittee, and other factors considered by the Compensation Committeeand the Board, effective September  13,  2005, theCompensation Committee recommended and the Board of Directors approvedchanging the form in which equity compensation is provided to ournon-employee directors from stock option awards to restricted stockawards, on the following terms:

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | annual restricted stockgrants to each non-employee director on the first trading day followingeach annual meeting for the number of shares of our common stockdetermined by dividing $28,200 by the fair market value of our commonstock on such date (provided that, if the price per share of our commonstock is less than $2.00 on such date, the number of shares ofrestricted stock shall be fixed at 11,300), which shares shall fullyvest one year after the date of each grant or upon a change in control;and |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | an initialrestricted stock grant on the first trading day following anon-employee director’s initial appointment or election to theboard for the number of shares of our common stock determined bydividing $100,000 by the fair market value of our common stock on suchdate (provided that, if the price per share of our common stock is lessthan $2.00 on such date, the number of shares of restricted stock shallbe fixed at 34,700), which shares shall vest in three equal annualinstallments or upon a change in control. |

Pursuant to our 2005Stock Incentive Plan approved by our stockholders on October25,  2005, a grant of 12,935 shares of restricted stock was madeto each of our non-employee directors (Messrs. Bickerstaff, Miller andWillis and Drs. Carter, Sartorelli and Sznol) following our 2005 annualmeeting of stockholders. These shares vest one year after the date ofgrant (or earlier upon a change of control) and are subject toforfeiture upon termination of service as a director prior to thevesting date.

Compensation Committee Interlocks andInsider Participation

The compensation committeeconsists of Gary Willis, George Bickerstaff and William Miller. Nomember of the compensation committee was an officer or employee of theCompany during 2005 or was formerly an officer of the Company. Inaddition, no executive officer at the Company served as a member ofanother entity’s Board of Directors or as a member of thecompensation committee of 

64

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another entity (or other board committeeperforming equivalent functions) during 2005, which entity had anexecutive officer serving on the Board of Directors of the Company.

Compensation Committee Report on ExecutiveCompensation

This Executive Compensation Reportdiscusses the Company’s executive compensation policies and thebasis for the compensation paid to the Executive Officers during theyear ended December  31,  2005.

CompensationPolicy.    The Committee’s policy with respect toexecutive compensation has been designed to:

|  |              |                                                                                                                                                                                                                                                                                                         |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Adequately and fairlycompensate executive officers in relation to responsibilities,capabilities and contributions to the Company and in a manner that iscommensurate with compensation paid by companies of comparable size andat a comparable stage of development within the Company’sindustry; |

|  |              |                                                                                                                                    |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Rewardexecutive officers for the achievement of short-term goals and for theenhancement of the long-term value of the Company; and |

|  |              |                                                                                                                                                                                                |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | Align the interests ofthe executive officers with those of the stockholders with respect toshort-term operating goals and long-term increases in the value of theCompany’s Common Stock. |

The components ofcompensation generally paid to executive officers consist of: (a) basesalary and (b) incentive compensation in the form of annual bonuspayments and equity-based incentive compensation awards by the Companyunder the Company’s 2005 Stock Incentive Plan. TheCompany’s Compensation Committee is responsible for reviewingand approving cash compensation paid by the Company to its executiveofficers and members of the Company’s senior management team,including annual bonuses and stock-based awards, selecting theindividual executives and members of senior management who will beawarded bonuses and stock-based awards, and for determining the timing,pricing and amount of all stock-based awards granted to executives andmembers of senior management under the Company’s 2005 StockIncentive Plan.

The Company’s executivecompensation program emphasizes the use of incentive-based compensationto reward the Company’s executive officers and members of seniormanagement for individual contributions to the achievement of theCompany’s business, research and product development objectivesrecommended by the CEO and approved by the Compensation Committee. TheCompany uses stock-based awards to provide an incentive for asubstantial number of its officers and employees, including members ofmanagement, and to reward such officers and employees for achieving theCompany’s business objectives. The Company believes itsincentive compensation plan rewards management when the Company and itsstockholders have benefited from achieving the Company’sbusiness objectives and targeted clinical, research and developmentobjectives, all of which the Compensation Committee feels will dictate,in large part, the Company’s future operating results. TheCompensation Committee believes that its policy of compensatingofficers and employees with incentive-based compensation fairly andadequately compensates those individuals in relation to theirresponsibilities, capabilities and contribution to the Company, and ina manner that is commensurate with compensation paid by companies ofcomparable size and at a comparable stage of development within theCompany’s industry.

Components ofCompensation.    The primary components of compensation paid bythe Company to its executive officers and senior management personnel,and the relationship of such components of compensation to theCompany’s performance, are discussed below:

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | BaseSalary.    The Compensation Committee periodically reviews thebase salary paid by the Company to its executive officers and membersof the senior management team. Adjustments to base salaries aredetermined based upon a number of factors, including theCompany’s performance (to the extent such can fairly beattributed or related to each executive’s |

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|  |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |   | performance), as well as the nature of eachexecutive’s responsibilities, capabilities and contributions.The Compensation Committee attempts to ascertain whether salariesfairly reflect job responsibilities and prevailing market conditionsand rates of pay. Generally, salary increases, if any, are givenannually at the beginning of each year. The Compensation Committeebelieves that base salaries for the Company’s executive officershave historically been reasonable in relation to the Company’ssize and performance in comparison with the compensation paid bysimilarly sized companies or companies within the Company’sindustry. |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | IncentiveCompensation.    As discussed above, a substantial portion ofeach executive officer’s compensation package is in the form ofincentive compensation designed to reward the achievement of short-termoperating goals and long-term increases in stockholder value. Annually,the CEO recommends, and the Compensation Committee considers and adoptsperformance criteria for the Company’s executive officers onwhich to base bonuses for the year. Typically, the cash bonus to bepaid based upon the achievement of the performance criteria will bebetween 25% and 50% of the executive’s basesalary. The performance criteria are generally the achievement ofcertain targets relating to the Company’s clinical trials,registrational requirements of the Company’s drug products,business development objectives, increases in stockholder value andfinancial objectives. The Company’s 2005 Stock Incentive Planallows the Board of Directors or the Compensation Committee to grantstock-based awards of the Company’s Common Stock to executiveofficers and employees. Under the terms of the 2005 Stock IncentivePlan, the Board of Directors and the Compensation Committee haveauthority to select the executive officers and employees who will begranted stock-based awards and to determine the timing, pricing andnumber of shares of stock to be awarded. Typically, these awards vestupon the earliest of (A) approximately three years after the date ofgrant, (B) the approval of an NDA to marketCloretazine®, or (C) the occurrence of a Change ofControl, as defined in our 2005 Stock Incentive Plan, although theCompensation Committee may adopt other or additional vesting criteria.The Compensation Committee believes that the stock-based awards withthe forgoing vesting criteria reward executive officers only to theextent that stockholders have benefited from increases in the value ofthe Company’s Common Stock. |

Compensation ofthe Chief Executive Officer.    The Company has entered into anexecutive employment agreement as amended with Mr.  Kessman.For material terms of this executive employment agreement see‘‘Employment Agreements’’. TheCompensation Committee believes that the monthly compensation under theagreement adequately and fairly compensates Mr.  Kessman inrelation to his responsibilities, capabilities, contributions anddedication to the Company and secures for the Company the benefit ofhis leadership, management and financial skills and capabilities.Moreover, the Compensation Committee believes that the salary and otherbenefits are reasonable in relation to the responsibilities,capabilities, contributions and dedication of Mr.  Kessman to theCompany and are in line with the compensation earned by chief executiveofficers employed by companies of comparable size and stage ofdevelopment within the Company’s industry.

TaxDeductibility.    Section 162(m) of the Internal Revenue Code of1986, as amended, generally denies publicly-held corporations a federalincome tax deduction for compensation exceeding $1,000,000 paid toNamed Executive Officers, excluding performance-based compensation.Through December  31,  2005, this provision has not limitedour ability to deduct executive compensation, but the CompensationCommittee will continue to monitor the potential impact of Section162(m) on our ability to deduct executive compensation.

Conclusion.    The Compensation Committee believesthat the concepts discussed above further the stockholder interestsbecause a significant part of executive compensation is based upon theCompany achieving its product development and other specific goals setby the Board of Directors. At the same time, the Compensation Committeebelieves that the program encourages responsible management of theCompany in the short-term. The Compensation Committee regularlyconsiders plan design so that the total program is as effective aspossible in furthering stockholder interests.

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The Compensation Committee basesits review on the experience of its own members, on informationrequested from management personnel, and on discussions with andinformation compiled by various independent consultants retained by theCompany.

|                                                              |  |        |  |  |  |  |
|--------------------------------------------------------------|--|--------|--|--|--|--|
| Submitted by the Compensation Committee:                     |  |   |
| GARY WILLIS,CHAIRMANGEORGE BICKERSTAFFWILLIAM R.MILLER  |  |   |
|                                                              |

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PerformanceGraph

The following line graph compares the five-yearcumulative total stockholder’s return on our Common Stock to:(i) the change in the cumulative total return on the Nasdaq CompositeIndex for U.S. Companies and (ii) the change in the cumulative totalreturn on the Nasdaq Biotechnology Index, which includes biotechnologycompanies, assuming an investment of $100 made in each and assuming thereinvestment of any dividends.

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|                |                                                                                              |
|----------------|----------------------------------------------------------------------------------------------|
| ITEM 12.  | SecurityOwnership of Certain Beneficial Owners and Management and RelatedStockholder Matters |

The following table sets forthinformation as of March  1,  2006 (except as otherwise notedin the footnotes) regarding the beneficial ownership (as defined by theSecurities and Exchange Commission (the‘‘SEC’’)) of our Common Stock: (i) each personknown by us to own beneficially more than five percent of ouroutstanding Common Stock; (ii) each of our current directors; (iii)each executive officer named in the Summary Compensation Table; and(iv) all of our current directors and executive officers as a group.Except as otherwise specified, the named beneficial owner has the solevoting and investment power over the shares listed and the address ofeach beneficial owner is c/o Vion Pharmaceuticals, Inc., 4 SciencePark, New Haven, Connecticut 06511.

|                                                                                                                                                                                           |  |                                 |           |                                           |  |        |  |  |  |  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|---------------------------------|-----------|-------------------------------------------|--|--------|--|--|--|--|
| Directors and Officers                                                                                                                                                                    |  | NumberofSharesBeneficiallyOwned |           | PercentofOutstandingShares of CommonStock |
| George Bickerstaff                                                                                                                                                                        |  |                            | 12,935    |                                      |  | *      |
| Stephen K. Carter, M.D.                                                                                                                                                                   |  |                            | 94,986    | (1)                                  |  | *      |
| WilliamR. Miller                                                                                                                                                                          |  |                            | 394,294   | (2)                                  |  | *      |
| Alan C. Sartorelli, Ph.D.                                                                                                                                                                 |  |                            | 534,648   | (3)                                  |  | *      |
| MarioSznol, M.D.                                                                                                                                                                          |  |                            | 455,521   | (4)                                  |  | *      |
| Gary Willis                                                                                                                                                                               |  |                            | 12,935    |                                      |  | *      |
| Alan Kessman                                                                                                                                                                              |  |                            | 2,059,450 | (5,6)                                |  | 3.0%   |
| Howard B. Johnson                                                                                                                                                                         |  |                            | 709,166   | (6,7)                                |  | 1.0%   |
| Ann Lee Cahill                                                                                                                                                                            |  |                            | 258,636   | (6,8)                                |  | *      |
| Ivan King, Ph.D                                                                                                                                                                           |  |                            | 460,437   | (6,9)                                |  | *      |
| Terrence W. Doyle, Ph.D                                                                                                                                                                   |  |                            | 463,057   | (10)                                 |  | *      |
| Alldirectors and executive officers as a group (13 persons).                                                                                                                              |  |                            | 5,768,069 | (11)                                 |  | 8.1%   |
| OtherBeneficialOwners                                                                                                                                                                     |  |                            |      |                                      |  |   |
| RajRajaratnam Galleon Management, L.L.C. Galleon Management,L.P. Galleon Advisors, L.L.C. Galleon Captains Partners,L.P. Galleon Captains Offshore, Ltd. Galleon HealthcarePartners, L.P. |  |                            |      |                                      |  |   |
| Galleon HealthcareOffshore, Ltd. 135 East 57th Street, 16th Floor New York, NY10022                                                                                                       |  |                            | 5,702,948 | (12)                                 |  | 8.4%   |
| OrbiMed AdvisorsLLCOrbiMed Capital LLC                                                                                                                                                    |  |                            |      |                                      |  |   |
| Samuel D.Isaly767 Third Avenue, 30th FloorNew York, NY 10017                                                                                                                              |  |                            | 3,362,100 | (13)                                 |  | 5.0%   |
|                                                                                                                                                                                           |

|  |
|--|
|  |  |
|  |

|   |                      |
|---|----------------------|
| * | Lessthan one percent |

|     |                                                          |
|-----|----------------------------------------------------------|
| (1) | Includes 82,051shares issuable upon exercise of options. |

|     |                                                          |
|-----|----------------------------------------------------------|
| (2) | Includes 88,472shares issuable upon exercise of options. |

|     |                                                                                                                                                                                                      |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Includes 190,874shares beneficially owned by Dr.  Sartorelli’s wife, as towhich Dr.  Sartorelli disclaims beneficial ownership. Alsoincludes 121,508 shares issuable upon exercise of options. |

|     |                                                           |
|-----|-----------------------------------------------------------|
| (4) | Includes 437,586shares issuable upon exercise of options. |

|     |                                                                                                                                                             |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (5) | Includes 12,756 sharesheld by a family trust of which Mr.  Kessman is a controllingmember. Also includes 1,542,927 shares issuable upon exercise ofoptions. |

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|     |                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (6) | OnJanuary  5, 2006, Messrs. Kessman, Johnson, King and Ms.Cahill were granted 466,667 shares, 221,667 shares, 138,889 shares and186,667 shares of restricted stock, respectively, for their performancein 2005. The shares will vest upon the earliest of (A) December31, 2008; (B) the approval of an NDA to marketCloretazine®; or (C) the occurrence of a Change ofControl, as defined in our 2005 Stock Incentive Plan. |

|     |                                                           |
|-----|-----------------------------------------------------------|
| (7) | Includes 487,499 sharesissuable upon exercise of options. |

|     |                                                          |
|-----|----------------------------------------------------------|
| (8) | Includes 67,916 sharesissuable upon exercise of options. |

|     |                                                           |
|-----|-----------------------------------------------------------|
| (9) | Includes 312,048 sharesissuable upon exercise of options. |

|      |                                                                                                                                                                             |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (10) | Includes 43,400 sharesheld by Dr.  Doyle’s wife, as to which Dr.  Doyledisclaims beneficial ownership. Also includes 230,533 shares issuableupon exercise of options. |

|      |                                                             |
|------|-------------------------------------------------------------|
| (11) | Includes 3,430,256shares issuable upon exercise of options. |

|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (12) | Based on data setforth in an Amendment No. 1 to Schedule 13G filed with the SEC onFebruary  15,  2006, of the 5,702,948 shares reported in suchSchedule 13G: (i) 811,356 are held by Galleon Captains Partners, L.P.;(ii) 209,000 are held by Galleon Healthcare Partners, L.P.; (iii)3,267,944 are held by Galleon Captains Offshore, Ltd.; and (iv)1,414,648 are held by Galleon Healthcare Offshore, Ltd. GalleonManagement, L.P. and Galleon Advisors, L.L.C. share dispositive andvoting power over the shares held by Galleon Captains Partners, L.P.and Galleon Healthcare Partners, L.P. pursuant to a partnershipagreement by and between Galleon Captains Partners, L.P. and GalleonHealthcare Partners, L.P. Galleon Management, L.P. acts as investmentmanager to Galleon Captains Offshore, Ltd. and Galleon HealthcareOffshore, Ltd. and has dispositive and voting power with respect to theshares held by them. Raj Rajaratnam is the managing member of GalleonManagement, L.L.C., which, as the general partner of GalleonManagement, L.P., controls Galleon Management, L.P. Mr.Rajaratnam is also the managing member of Galleon Management, L.L.C.and Galleon Advisors L.L.C. As managing member of Galleon Management,L.L.C. and Galleon Advisors L.L.C., Mr.  Rajaratnam holds soledispositive and voting power over the securities held by GalleonCaptains Partners L.P., Galleon Healthcare Partners, L.P., GalleonCaptains Offshore, Ltd. and Galleon Healthcare Offshore, Ltd. Theshares reported as owned in the Schedule 13G by Raj Rajaratnam, GalleonManagement, L.P., Galleon Management, L.L.C., and Galleon Advisors,L.L.C. may be deemed beneficially owned as a result of the purchase ofsuch shares by Galleon Captains Partners, L.P., Galleon CaptainsOffshore, Ltd., Galleon Healthcare Partners, L.P., and GalleonHealthcare Offshore, Ltd., as the case may be. Each of Raj Rajaratnam,Galleon Management, L.P., Galleon Management, L.L.C., and GalleonAdvisors, L.L.C. disclaims any beneficial ownership of the sharesreported in the Schedule 13G, except to the extent of any pecuniaryinterest therein. |

|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (13) | Based on data setforth in Schedule 13G filed with the SEC on February  6,2006, of the 3,362,100 shares reported in such Schedule 13G: (i)1,725,100 are held by OrbiMed Advisors LLC; and (ii) 1,637,000 are heldby OrbiMed Capital LLC. OrbiMed Advisors LLC and OrbiMed Capital LLCare investment advisors. Samuel D. Isaly is a control person OrbiMedAdvisors LLC and OrbiMed Capital LLC and shares dispositive and votingpower over the shares held by OrbiMed Advisors LLC and OrbiMed CapitalLLC. OrbiMed Advisors LLC and OrbiMed Capital LLC hold shares on behalfof Caduceus Capital Master Fund Limited (560,000 shares), CaduceusCapital II, L.P. (268,000 shares), UBS Eucalyptus Fund, LLC (438,000shares), PaineWebber Eucalyptus Fund, LLC (53,000 shares), HFR SHCAggressive Fund (106,000 shares), Knightsbridge Post Venture IV L.P.(210,800 shares), Knightsbridge Integrated Holdings, V, LP (225,200shares), Knightsbridge Netherlands II, LP (56,600 shares),Knightsbridge Integrated Holdings IV Post Venture, LP (88,200shares),Knightsbridge Post Venture III, LP (40,200 shares),Knightsbridge Netherlands I LP (38,300 shares), KnightsbridgeNetherlands III LP (58,500 shares), Knightsbridge Integrated HoldingsII Limited (53,400 shares),Knightsbridge Venture Completion 2005 LP(26,100 shares), Knightsbridge Venture Capital VI, L.P. (73,400shares), Knightsbridge Venture Capital IV LP (54,600 shares),Knightsbridge Venture Capital III LP (40,800 shares), and FinsburyEmerging Biotechnology plc (971,000 shares). |

EquityCompensation Plan Information

The following table providesinformation about shares of our common stock that may be issued uponthe exercise of options and rights under all of the Company'sexisting equity compensation plans as of December  31,2005.

|                                                           |  |                                                                                       |           |                                                                           |  |                                                                              |        |           |  |        |           |           |  |  |
|-----------------------------------------------------------|--|---------------------------------------------------------------------------------------|-----------|---------------------------------------------------------------------------|--|------------------------------------------------------------------------------|--------|-----------|--|--------|-----------|-----------|--|--|
| Plan Category                                             |  | Number ofSecurities to beIssuedUponExercise ofOutstanding Options,Warrants and Rights |           | Weighted-AverageExercise PriceofOutstandingOptions,Warrants and Rights($) |  | Number ofSecuritiesAvailable forFutureIssuanceUnder EquityCompensation Plans |
| Equity compensation plans approved by security holders    |  |                                                                                  | 3,983,686 | (1)(2)                                                               |  | $                                                                            | 4.61   |      |  |   | 7,741,277 | (3)  |
| Equitycompensation plans not approved by security holders |  |                                                                                  | 948,144   | (4)                                                                  |  |                                                                         |        | (4)  |  |   | —   |      |
| Total                                                     |  |                                                                                  | 4,931,830 |                                                                      |  |                                                                         |   |      |  |   | 7,741,277 |      |
|                                                           |

|  |
|--|
|  |  |
|  |

|     |                        |
|-----|------------------------|
| (1) | Reflectsthe following: |

|  |     |                                                                                                                                                                                                                                        |
|--|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (a) | Outstanding options topurchase 1,222,833 shares of our common stock granted under our 2003Stock Option Plan. We no longer grant stock options under our 2003Stock Option Plan due to the adoption of our 2005 Stock Incentive Plan,and |

70

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|  |     |                                                                                                                                                                                                                 |
|--|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (b) | Outstandingoptions to purchase 2,760,853 shares of our common stock granted underour 1993 Stock Option Plan. We no longer grant stock options under our1993 Stock Option Plan, which expired on April  15,2003. |

|     |                                                                                                                                                                                                                                                                                       |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Underour 2000 Employee Stock Purchase Plan, participants are permitted topurchase our common stock during the stock offering period.Accordingly, the number of shares of common stock to be issued underour 2000 Employee Stock Purchase Plan is not determinable and is notincluded. |

|     |                                                                                                                                                                                                                                                      |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Reflects 7,364,297shares of our common stock available for future issuance atDecember  31,  2005 under our 2005 Stock Incentive Plan and376,980 shares of our common stock available for future issuance underour 2000 Employee Stock Purchase Plan. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | Reflects outstandingoptions to purchase 948,144 shares of our common stock granted underour Senior Executive Stock Option Plan (the ‘‘SeniorPlan’’) to Mr.  Kessman in January  1999 atexercise prices ranging from $5.25 to $5.775 in connection with hisemployment agreement. The shares of common stock issuable upon exerciseof the options granted to Mr.  Kessman under the Senior Plan havenot been registered. The following summarizes the principal terms ofthe Senior Plan, which was adopted by our Board of Directors onJanuary  11,  1999. Options may be granted under the SeniorPlan to our Chief Executive Officer and to a director or officers whoare considered a Reporting Persons under Rule 16b-3. The Board hasappointed its Compensation Committee to administer the plan. Subject tothe limitations of the Senior Plan, the Compensation Committee hasbroad authority under the Senior Plan. The maximum number of shares ofcommon stock that may be issued under the Senior Plan is 980,000,subject to customary antidilution and other adjustments provided for inthe Senior Plan, and the maximum number of shares of common stock withrespect to such options that may be granted to any individual in anycalendar year is 980,000 shares. Shares of common stock available forissuance under the Senior Plan may be authorized and unissued or heldby the Company in its treasury. All options expire not more than 10years after the date of grant. The exercise price for each share ofcommon stock covered by an option will be determined by the Committeeat the time of grant. The Committee may establish vesting and otherconditions or restrictions on the exercise of an option and/or upon theissuance of common stock in connection with the exercise of an optionas it deems appropriate. No option will be exercisable during the first6 months after the date of grant. If an optionee's employment orservice terminates, the portion of an option not exercisable on thedate of termination shall immediately terminate and the portion of anoption that is exercisable on the date of termination shall remainexercisable for a period of time following the termination date, asfollows: (i) if due to death or disability, for one year; (ii) if dueto cause, immediately terminates; and (iii) for any other termination,for 3 months. The Senior Plan will terminate on September9,  2013, unless sooner terminated by the Board. The Board mayamend or terminate the Senior Plan at any time. |

|               |                                               |
|---------------|-----------------------------------------------|
| ITEM13.  | Certain Relationships and RelatedTransactions |

We recorded research and development expenseof $200,000 during 2005 related to a gift to fund research throughMarch  31,  2007 at the laboratory headed by one of ourdirectors, Dr.  Sartorelli, at Yale University. The balance ofgifts of $250,000 at December  31,  2005 will be paid in fiveequal quarterly installments through the first quarter of 2007.

|                |                                       |
|----------------|---------------------------------------|
| ITEM 14.  | Principal Accountant Fees andServices |

The following table presents the aggregate feesfor professional audit services and other services rendered by Ernst& Young LLP, our independent registered public accountants, in 2005and 2004:

|                   |
|-------------------|
|                   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|              |  | Years ended December31, |
|              |  | 2005 |  | 2004 |
|              |  | Fees |  | % Approvedby the AuditCommittee |  | Fees |  | % Approvedby the AuditCommittee |
| Audit fees        |  | $ | 180,993 |   |  |   | 100 | %  |  | $ | 166,195 |   |  |   | 100 | %  |
| Audit relatedfees |  |   | — |   |  |   | — |   |  |   | — |   |  |   | — |   |
| Tax fees          |  |   | 29,554 |   |  |   | 100 | %  |  |   | 28,000 |   |  |   | 100 | %  |
| All other fees    |  |   | 1,515 |   |  |   | 100 | %  |  |   | 1,590 |   |  |   | 100 | %  |
| Total             |  | $ | 212,062 |   |  |   |   |   |  | $ | 195,785 |   |  |   |   |   |
|                   |

Audit Fees consist of fees billed for theannual audit of our financial statements and other audit servicesincluding the provision of consents and the review of documents filedwith the SEC. The fees for 2005 include $60,000 of accrued audit feesfor the 2005 year-end audit that were not billed until 2006. The feesfor 2004 include $73,000 of accrued audit fees for the third-quarter2004 review and the 2004 year-end audit that were not billed until2005.

Audit Related Fees consist of fees billed fortransaction consultations.

Tax Fees consist of feesbilled for tax compliance services.

All Other Feesconsist of a subscription fee for an online accounting researchdatabase.

71

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Audit Committee Pre-approval Policies andProcedures

The Audit Committee of our Board of Directors isresponsible, among other matters, for the oversight of the externalauditor. The Audit Committee has adopted a policy regardingpre-approval of audit and permissible non-audit services provided byour independent registered public accountants (the‘‘Policy’’).

Under the Policy, proposedservices either (i) may be pre-approved by the Audit Committee withoutconsideration of specific case-by-case services as‘‘general pre-approval’’; or (ii) require thespecific pre-approval of the Audit Committee as ‘‘specificpre-approval’’. The Audit Committee may delegate eithertype of pre-approval authority to one or more of its members. ThePolicy sets out the audit, audit-related, tax and other services thathave received the general pre-approval of the Audit Committee,including those described in the footnotes to the table, above; theseservices are subject to annual review by the Audit Committee. All otheraudit, audit-related, tax and other services must receive a specificpre-approval from the Audit Committee.

The Audit Committeeestablishes budgeted fee levels annually for each of the fourcategories of audit and non-audit services that are pre-approved underthe Policy, namely, audit, audit-related, tax and other services.Requests or applications to provide services that require specificapproval by the Audit Committee are submitted to the Audit Committee byboth the external auditor and the chief financial officer. At eachregular meeting of the Audit Committee, the external auditor provides areport in order for the Audit Committee to review the services that theexternal auditor is providing, as well as the status and cost of thoseservices.

72

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PART IV

|                |                                        |
|----------------|----------------------------------------|
| ITEM 15.  | Exhibits, Financial StatementSchedules |

(a) 1.    FinancialStatements

The following is a list of the FinancialStatements included in Item 8 of Part II of this Report:

|                                                                                                                                                                         |  |      |  |  |  |  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|------|--|--|--|--|
|                                                                                                                                                                    |  | Page |
| Reports of Independent Registered Public Accounting Firm                                                                                                                |  | 34   |
| Consolidated Balance Sheets as ofDecember  31,  2005 and 2004                                                                                                           |  | 36   |
| Consolidated Statements of Operations for the Years EndedDecember  31,  2005, 2004 and 2003 and for the Period fromMay  1,  1994 (Inception) through December  31,2005. |  | 37   |
| Consolidated Statement of Changesin Shareholders’ Equity for the Period from May  1,1994 (Inception) Through December  31,  2005                                  |  | 38   |
| Consolidated Statements of Cash Flows forthe Years Ended December  31,  2005, 2004 and 2003 and forthe Period from May  1,  1994 (Inception) throughDecember  31,  2005 |  | 44   |
| Notes toConsolidated Financial Statements                                                                                                                               |  | 45   |
|                                                                                                                                                                         |

2.    Financial StatementSchedules

Schedules not included herein are omittedbecause they are inapplicable or not required or because the requiredinformation is given in the financial statements and notes thereto.

3.    Exhibits

The exhibits required by this itemand included in this report or incorporated herein by reference are asfollows:

|            |  |             |  |                                                                                                                                                                                                                                                                             |  |  |  |  |  |  |
|------------|--|-------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| ExhibitNo. |  | Description |
| 2.1        |  | —     |  | Agreement and Plan of Mergeramong MelaRx Pharmaceuticals, Inc., OncoRx Research Corp. and OncoRx,Inc. dated as of April  19,  1995(1)                                                                                                                                       |
| 2.2        |  | —     |  | Certificate of Merger, datedApril  20,  1995(1)                                                                                                                                                                                                                             |
| 3.1        |  | —     |  | Restated Certificate of Incorporation, asamended(2)                                                                                                                                                                                                                         |
| 3.2        |  | —     |  | By-laws, as amended(2)                                                                                                                                                                                                                                                      |
| 3.3        |  | —     |  | Certificate of Amendment to the Certificate ofIncorporation of Vion Pharmaceuticals, Inc. dated as of July26,  2001(13)                                                                                                                                                     |
| 3.4        |  | —     |  | Certificate of Amendment to the Certificate ofIncorporation of Vion Pharmaceuticals, Inc. dated as ofJune  10,  2004(22)                                                                                                                                               |
| 4.1        |  | —     |  | Rights Agreement dated as of October26,  1998 between Vion Pharmaceuticals, Inc. and American StockTransfer & Trust Company (includes form of Right Certificateattached as Exhibit A and a Summary of Rights to Purchase Common Sharesattached as Exhibit B thereto)(3) |
| 4.2        |  | —     |  | Revised form of WarrantAgreement by and between Vion Pharmaceuticals, Inc. and Brean Murray& Co., Inc.(4)                                                                                                                                                               |
| 4.3        |  | —     |  | Form of Underwriter's Warrant (included asExhibit A to Exhibit 4.2 above)(4)                                                                                                                                                                                                |
| 4.4        |  | —     |  | Amendment No. 1 to RightsAgreement between Vion Pharmaceuticals, Inc. and American StockTransfer & Trust Company dated as of August  16,2004(23)                                                                                                                        |
|            |

73

----

|            |  |             |  |                                                                                                                                                                    |  |  |  |  |  |  |
|------------|--|-------------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| ExhibitNo. |  | Description |
| 10.1       |  | —     |  | License Agreement between Yale University and OncoRx, Inc. dated asof August  31,  1994(1,16)                                                                      |
| 10.2       |  | —     |  | Letter Agreement between YaleUniversity and OncoRx, Inc. dated August  19,1994(1)                                                                                  |
| 10.3       |  | —     |  | Extension Agreement between Yale University and MelaRxPharmaceuticals, Inc., dated as of July  1,1992(1)                                                           |
| 10.4       |  | —     |  | License Agreement between Yale University and OncoRx Corporationdated as of November  15,  1995(15)                                                                |
| 10.5       |  | —     |  | Letter Agreement between YaleUniversity and MelaRx Pharmaceuticals, Inc., dated as of February2,  1995(1)                                                          |
| 10.6       |  | —     |  | Reserved                                                                                                                                                           |
| 10.7       |  | —     |  | Reserved                                                                                                                                                           |
| 10.8       |  | —     |  | License Agreement between Yale University andOncoRx, Inc. dated as of December  15,1995(15)                                                                        |
| 10.9       |  | —     |  | Reserved                                                                                                                                                           |
| 10.10      |  | —     |  | Reserved                                                                                                                                                           |
| 10.11      |  | —     |  | Reserved                                                                                                                                                           |
| 10.12      |  | —     |  | Consulting and Finder's Agreement between MelaRxPharmaceuticals, Inc. and Jacob A. Melnick, dated June  4, 1992,as amended by Agreement dated February  17,1995(1) |
| 10.13      |  | —     |  | Clinical Trials Agreement between Vion Pharmaceuticals, Inc. andthe Division of Cancer Treatment and Diagnosis, NCI, datedJanuary  9,  2003(15)                    |
| 10.14      |  | —     |  | Letter Agreement between YaleUniversity and OncoRx, Inc. (formerly MelaRx Pharmaceuticals, Inc.),dated July  5,  1995(1)                                           |
| 10.15      |  | —     |  | Reserved                                                                                                                                                           |
| 10.16      |  | —     |  | Reserved                                                                                                                                                           |
| 10.17      |  | —     |  | Reserved                                                                                                                                                           |
| 10.18      |  | —     |  | Reserved                                                                                                                                                           |
| 10.19      |  | —     |  | Amendment No. 1 to LicenseAgreement between Yale University and Vion Pharmaceuticals, Inc. (f/k/aOncoRx, Inc.) dated as of June  12,1997(9)                        |
| 10.20      |  | —     |  | Amendment No. 2 to License Agreement between Yale University andVion Pharmaceuticals, Inc. (f/k/a OncoRx, Inc.) dated as of June12,  1997(9)                       |
| 10.21      |  | —     |  | Collaborative Development andDistribution Agreement between Boehringer Ingelheim International GmbHand Vion Pharmaceuticals, Inc. dated November  24,1997(6,32)    |
| 10.22      |  | —     |  | Reserved                                                                                                                                                           |
| 10.23      |  | —     |  | Amendment No. 5 to a License Agreement between Yale University andVion Pharmaceuticals, Inc. (f/k/a OncoRx, Inc.) dated as of March3,  2003(16,32)                 |
| 10.24      |  | —     |  | Amendment No. 3 to a License Agreement betweenYale University and Vion Pharmaceuticals, Inc. (f/k/a OncoRx, Inc.)dated as of September  25,  1998(10)              |
|            |

74

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|            |  |             |  |                                                                                                                                                                                                                                                                                                             |  |  |  |  |  |  |
|------------|--|-------------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| ExhibitNo. |  | Description |
| 10.25      |  | —     |  | Formof Severance Agreement between the Company and Ann Lee Cahill, TerrenceW. Doyle, Meghan Fitzgerald, Howard B. Johnson, Ivan King, KarenSchmedlin and Mario Sznol(11)                                                                                                                                    |
| 10.26      |  | —     |  | Reserved                                                                                                                                                                                                                                                                                                    |
| 10.27      |  | —     |  | Senior Executive Stock OptionPlan(11)                                                                                                                                                                                                                                                                       |
| 10.28      |  | —     |  | Reserved                                                                                                                                                                                                                                                                                                    |
| 10.29      |  | —     |  | Development and License Agreement dated December  1,1999 between the Company and Boehringer Ingelheim InternationalGmbH(12,32)                                                                                                                                                                              |
| 10.30      |  | —     |  | Reserved                                                                                                                                                                                                                                                                                                    |
| 10.31      |  | —     |  | Amendment No. 4 to a License Agreement between Yale University andVion Pharmaceuticals, Inc. (f/k/a OncoRx, Inc.) dated as ofJanuary  31,  2000(13, 32)                                                                                                                                                     |
| 10.32      |  | —     |  | Lease between Science ParkDevelopment Corporation and Vion Pharmaceuticals, Inc. datedNovember  1,  2001(14)                                                                                                                                                                                                |
| 10.33      |  | —     |  | Vion Pharmaceuticals, Inc.Amended and Restated 1993 Stock Option Plan, asAmended(14)                                                                                                                                                                                                                        |
| 10.34      |  | —     |  | Securities Purchase Agreement as of June  19,2003(17)                                                                                                                                                                                                                                                       |
| 10.35      |  | —     |  | Registration Rights Agreement as of June  19,2003(17)                                                                                                                                                                                                                                                       |
| 10.36      |  | —     |  | Form of Warrant(17)                                                                                                                                                                                                                                                                                         |
| 10.37      |  | —     |  | Securities Purchase Agreement as ofSeptember  8,  2003(18)                                                                                                                                                                                                                                                  |
| 10.38      |  | —     |  | Registration Rights Agreementas of September  8,  2003(18)                                                                                                                                                                                                                                                  |
| 10.39      |  | —     |  | Form ofWarrant(18)                                                                                                                                                                                                                                                                                          |
| 10.40      |  | —     |  | Research Services Agreement between Vion Pharmaceuticals, Inc. andEli Lilly and Company as of September  8,2003(19,32)                                                                                                                                                                                      |
| 10.41      |  | —     |  | License Agreement between Vion Pharmaceuticals, Inc. and BeijingPason Pharmaceuticals, Inc. dated September  12,2003(19,32)                                                                                                                                                                                 |
| 10.42      |  | —     |  | Employment Agreement between Vion Pharmaceuticals, Inc. and AlanKessman dated as of November  3,2003(19)                                                                                                                                                                                                    |
| 10.43      |  | —     |  | Research Collaboration and Option Agreement with a group ofinventors from the Institute of Pharmacy and the Institute of MedicalChemistry and Biochemistry at the University of Innsbruck, and AustriaWirtschaftsservice Gesellschaft m.b.H. and Vion Pharmaceuticals, Inc.dated November  24,  2003(31,32) |
| 10.44      |  | —     |  | Securities Purchase Agreementas of February  9,  2004(20)                                                                                                                                                                                                                                                   |
| 10.45      |  | —     |  | Registration Rights Agreementas of February  9,  2004(20)                                                                                                                                                                                                                                                   |
| 10.46      |  | —     |  | Form ofWarrant(20)                                                                                                                                                                                                                                                                                          |
| 10.47      |  | —     |  | License Agreement between Johnson & Johnson Consumer Companies,Inc. and Vion Pharmaceuticals, Inc. dated March  1,2004(21,33)                                                                                                                                                                           |
| 10.48      |  | —     |  | Vion Pharmaceuticals, Inc. 2003 Stock Option Plan, as amended(through June  2004)(22)                                                                                                                                                                                                                       |
| 10.49      |  | —     |  | Form of Stock Option Agreement for ExecutiveOfficers(22)                                                                                                                                                                                                                                                    |
|            |

75

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|            |  |             |  |                                                                                                                                                                                                                                                                                     |  |  |  |  |  |  |
|------------|--|-------------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| ExhibitNo. |  | Description |
| 10.50      |  | —     |  | Amendment to Option Agreements with MarioSznol(22)                                                                                                                                                                                                                                  |
| 10.51      |  | —     |  | Consulting Agreement between Vion Pharmaceuticals, Inc. and MarioSznol dated October  15,  2004(24)                                                                                                                                                                                 |
| 10.52      |  | —     |  | Placement Agency Agreement byand among Vion Pharmaceuticals, Inc., CIBC World Markets Corp. andLeerink Swann & Company, dated January  25,2005(25)                                                                                                                              |
| 10.53      |  | —     |  | Escrow Agreement by and between Vion Pharmaceuticals, Inc.,JPMorgan Chase Bank, N.A. and CIBC World Markets Corp., datedJanuary  25,  2005(25)                                                                                                                                      |
| 10.54      |  | —     |  | Agreement by and betweenHoward B. Johnson and Vion Pharmaceuticals, Inc., dated September13,  2005(26)                                                                                                                                                                              |
| 10.55      |  | —     |  | Amendment No. 1, dated September  13,2005, to the Employment Agreement with Alan Kessman datedNovember  3,  2003(26)                                                                                                                                                                |
| 10.56      |  | —     |  | Amended Exclusive LicenseAgreement, by and among Dr. Johnny Easmon, Prof. Dr. GottfriedHeinisch, Dr. Gerhard Purstinger, Prof. Dr. Heinz-Herbert Fiebig, Prof.Dr. Johann-Hofmann, Austria Wirtschaftsservice Gesellschaft M.B.H. andthe Company, dated as of June  30,  2005(27,32) |
| 10.57      |  | —     |  | VionPharmaceuticals, Inc. 2005 Stock IncentivePlan(28)                                                                                                                                                                                                                              |
| 10.58      |  | —     |  | Form of Restricted Stock Agreement for Non- Employee DirectorsUnder the 2005 Stock Incentive Plan(28)                                                                                                                                                                               |
| 10.59      |  | —     |  | Form of Restricted StockAgreement under 2005 Stock Incentive Plan for ExecutiveOfficers(29)                                                                                                                                                                                         |
| 10.60      |  | —     |  | Amendment No. 2 of Employment Agreement of Alan Kessman, dated asof January  3,  2006(29)                                                                                                                                                                                           |
| 10.61      |  | —     |  | First Amendment to Lease,dated January  25,  2006, by and between VionPharmaceuticals, Inc. and Science Park DevelopmentCorporation(30)                                                                                                                                             |
| 21.1       |  | —     |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                      |
| 23.1       |  | —     |  | Consent of Ernst & YoungLLP, Independent Registered Public Accounting Firm                                                                                                                                                                                                      |
| 24.1       |  | —     |  | Power of Attorney (included onsignature page)                                                                                                                                                                                                                                       |
| 31.1       |  | —     |  | Certification of the Chief Executive Officer pursuant to Section302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                               |
| 31.2       |  | —     |  | Certification of the Chief Financial Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                               |
| 32.1       |  | —     |  | Certification of the ChiefExecutive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002                                                                                                                                                                                |
| 32.2       |  | —     |  | Certificationof the Chief Financial Officer pursuant to Section 906 of theSarbanes-Oxley Act of2002                                                                                                                                                                                 |
|            |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                    |
|-----|------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Incorporatedby reference to the Company’s Registration Statement on FormSB-2 (File No. 33-93468), effective August  14,1995. |

|     |                                                                                                                                |
|-----|--------------------------------------------------------------------------------------------------------------------------------|
| (2) | Incorporatedby reference to the Company’s Quarterly Report on Form 10-QSBfor the quarterly period ended June  30,  1998. |

76

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|     |                                                                                                        |
|-----|--------------------------------------------------------------------------------------------------------|
| (3) | Incorporatedby reference to the Company’s Current Report on Form 8-K filedon October  26,  1998. |

|     |                                                                                                                                       |
|-----|---------------------------------------------------------------------------------------------------------------------------------------|
| (4) | Incorporated by reference tothe Company’s Registration Statement on Form S-1 (File No.333-83837), effective October  26,  1999. |

|     |          |
|-----|----------|
| (5) | Reserved |

|     |                                                                                                                            |
|-----|----------------------------------------------------------------------------------------------------------------------------|
| (6) | Incorporated by reference tothe Company’s Annual Report on Form 10-KSB for the fiscal yearended December  31,  1997. |

|     |          |
|-----|----------|
| (7) | Reserved |

|     |          |
|-----|----------|
| (8) | Reserved |

|     |                                                                                                                       |
|-----|-----------------------------------------------------------------------------------------------------------------------|
| (9) | Incorporated by reference tothe Company’s Quarterly Report on Form 10-QSB for the quarterended June  30,  1997. |

|      |                                                                                                                            |
|------|----------------------------------------------------------------------------------------------------------------------------|
| (10) | Incorporated by referenceto the Company’s Annual Report on Form 10-KSB for the fiscalyear ended December  31,  1998. |

|      |                                                                                                                        |
|------|------------------------------------------------------------------------------------------------------------------------|
| (11) | Incorporated by referenceto the Company’s Quarterly Report on Form 10-QSB for the quarterended March  31,  1999. |

|      |                                                                                                                            |
|------|----------------------------------------------------------------------------------------------------------------------------|
| (12) | Incorporated by referenceto the Company’s Annual Report on Form 10-KSB for the fiscalyear ended December  31,  1999. |

|      |                                                                                                                     |
|------|---------------------------------------------------------------------------------------------------------------------|
| (13) | Incorporated by referenceto the Company’s Quarterly Report on Form 10-Q for the quarterended June  30,  2001. |

|      |                                                                                                                          |
|------|--------------------------------------------------------------------------------------------------------------------------|
| (14) | Incorporated by referenceto the Company’s Annual Report on Form 10-K for the fiscal yearended December  31,  2001. |

|      |                                                                                                                          |
|------|--------------------------------------------------------------------------------------------------------------------------|
| (15) | Incorporated by referenceto the Company’s Annual Report on Form 10-K for the fiscal yearended December  31,  2002. |

|      |                                                                                                                            |
|------|----------------------------------------------------------------------------------------------------------------------------|
| (16) | Incorporated by referenceto the Company’s Annual Report on Form 10-K/A for the fiscalyear ended December  31,  2002. |

|      |                                                                                                    |
|------|----------------------------------------------------------------------------------------------------|
| (17) | Incorporated by referenceto the Company’s Current Report on Form 8-K filed on June20,  2003. |

|      |                                                                                                          |
|------|----------------------------------------------------------------------------------------------------------|
| (18) | Incorporated by referenceto the Company’s Current Report on Form 8-K filed onSeptember  10,  2003. |

|      |                                                                                                                          |
|------|--------------------------------------------------------------------------------------------------------------------------|
| (19) | Incorporated by referenceto the Company’s Quarterly Report on Form 10-Q for the quarterended September  30,  2003. |

|      |                                                                                                         |
|------|---------------------------------------------------------------------------------------------------------|
| (20) | Incorporated by referenceto the Company’s Current Report on Form 8-K filed onFebruary  11,  2004. |

|      |                                                                                                      |
|------|------------------------------------------------------------------------------------------------------|
| (21) | Incorporated by referenceto the Company’s Current Report on Form 8-K/A filed on March 18,2004. |

|      |                                                                                                                          |
|------|--------------------------------------------------------------------------------------------------------------------------|
| (22) | Incorporatedby reference to the Company’s Quarterly Report on Form 10-Q forthe quarter ended September  30,  2004. |

|      |                                                                                                       |
|------|-------------------------------------------------------------------------------------------------------|
| (23) | Incorporated by referenceto the Company’s Current Report on Form 8-K filed onAugust  16,  2004. |

|      |                                                                                                          |
|------|----------------------------------------------------------------------------------------------------------|
| (24) | Incorporated by referenceto the Company’s Current Report on Form 8-K/A filed onNovember  9,  2004. |

|      |                                                                                                        |
|------|--------------------------------------------------------------------------------------------------------|
| (25) | Incorporated by referenceto the Company’s Current Report on Form 8-K filed onJanuary  26,  2005. |

77

----

|      |                                                                                                          |
|------|----------------------------------------------------------------------------------------------------------|
| (26) | Incorporatedby reference to the Company’s Current Report on Form 8-K filedon September  13,  2005. |

|      |                                                                                                          |
|------|----------------------------------------------------------------------------------------------------------|
| (27) | Incorporated by referenceto the Company’s Current Report on Form 8-K filed onSeptember  28,  2005. |

|      |                                                                                                        |
|------|--------------------------------------------------------------------------------------------------------|
| (28) | Incorporated by referenceto the Company’s Current Report on Form 8-K filed onOctober  31,  2005. |

|      |                                                                                                       |
|------|-------------------------------------------------------------------------------------------------------|
| (29) | Incorporated by referenceto the Company’s Current Report on Form 8-K filed onJanuary  9,  2006. |

|      |                                                                                                        |
|------|--------------------------------------------------------------------------------------------------------|
| (30) | Incorporated by referenceto the Company’s Current Report on Form 8-K filed onJanuary  31,  2006. |

|      |                                                                                                                            |
|------|----------------------------------------------------------------------------------------------------------------------------|
| (31) | Incorporated by referenceto the Company’s Annual Report on Form 10-K/A for the fiscalyear ended December  31,  2003. |

|      |                                                                                                                                                  |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------|
| (32) | Certain portions of thisexhibit have been omitted pursuant to an order granting confidentialtreatment by the Securities and Exchange Commission. |

|      |                                                                                                                                                                                                                                                             |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (33) | Certain portions of thisexhibit have been omitted pursuant to a request for an order grantingconfidential treatment by the Securities and Exchange Commission. Theomitted non-public information has been filed with the Securities andExchange Commission. |

78

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

|                      |  |                          |  |                        |  |  |  |  |  |  |
|----------------------|--|--------------------------|--|------------------------|--|--|--|--|--|--|
|                 |  | VION PHARMACEUTICALS,INC |
| Date: March16,  2006 |  | By:                      |  | /s/ AlanKessman        |
|                 |  |                     |  | Alan Kessman           |
|                 |  |                     |  | Chief ExecutiveOfficer |
|                      |

POWER OF ATTORNEY

KNOWN ALLMEN BY THESE PRESENTS, that each person whose signature appears belowconstitutes and appoints Alan Kessman and Howard B. Johnson, and eachof them, his true and lawful attorneys-in-fact and agents, with fullpower of substitution and resubstitution, for him and in his name,place and stead, in any and all capacities, to sign any and allamendments to this Annual Report, and to file the same, with allexhibits thereto, and other documents in connection therewith, with theSecurities and Exchange Commission, granting to said attorneys-in-factand agents, and each of them, full power and authority to do andperform such and every act and thing requisite and necessary to bedone, as fully to all intents and purposes as he might or could do inperson, hereby ratifying and confirming all that said attorneys-in-factand agents, or any of them, or their or his substitute or substitutes,may lawfully do or cause to be done by virtue thereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, this reporthas been signed below by the following persons on behalf of theregistrant and in the capacities and on the datesindicated.

|                              |  |                                                                      |  |                  |
|------------------------------|--|----------------------------------------------------------------------|--|------------------|
| Signature                    |  | Title                                                                |  | Date             |
|                              |
| /s/William R. Miller         |  | Chairman of the Board                                                |  | March  16,2006   |
|                              |
| William R. Miller            |
|                              |
| /s/ Alan Kessman             |  | Chief Executive Officer andDirector(Principal Executive Officer)     |  | March16,  2006   |
|                              |
| AlanKessman                  |
|                              |
| /s/ Howard B.Johnson         |  | President andChief Financial Officer(Principal Financial Officer)    |  | March  16,  2006 |
|                              |
| Howard B. Johnson            |
|                              |
| /s/Karen Schmedlin           |  | VPFinance and Chief Accounting Officer (Principal AccountingOfficer) |  | March  16,  2006 |
|                              |
| Karen Schmedlin              |
|                              |
| /s/ George Bickerstaff       |  | Director                                                             |  | March16,  2006   |
|                              |
| GeorgeBickerstaff            |
|                              |
| /s/ Stephen K. Carter,M.D.   |  | Director                                                             |  | March  16,2006   |
|                              |
| Stephen K. Carter, M.D.      |
|                              |
| /s/ Alan C. Sartorelli,Ph.D. |  | Director                                                             |  | March  16,2006   |
|                              |
| Alan C. Sartorelli, Ph.D.    |
|                              |
| /s/ Mario Sznol,M.D.         |  | Director                                                             |  | March  16,  2006 |
|                              |
| Mario Sznol M.D.             |
|                              |
| /s/ GaryK. Willis.           |  | Director                                                             |  | March  16,2006   |
|                              |
| Gary K. Willis.              |
|                              |

79

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