UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.20549

FORM 10-K

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|   | ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |

For the fiscal year ended December 31, 2003

OR

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|   | TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 |

For the transition period from               to              

Commission File Number 000-26534

VIONPHARMACEUTICALS, INC.

(Exact nameof registrant as specified in itscharter)

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| Delaware                                                      |  | 13-3671221                         |
| (Stateor other jurisdiction of incorporation or organization) |  | (I.R.S.Employer IdentificationNo.) |
| 4Science ParkNew Haven,Connecticut                            |  | 06511                              |
| (Addressof principal executive offices)                       |  | (ZipCode)                          |
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Registrant's telephonenumber, 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 ofClassCommon Stock, $0.01 par value(together with associated Common Stock Purchase Rights)

Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch 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 bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, tothe best of registrant's knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act). Yes    No 

The aggregate market value ofthe common stock held by non-affiliates of the registrant as of June30, 2003 was $47,555,968 based on the last sale price for the commonstock on that date as reported by the Nasdaq SmallCapMarketSM.

The number of shares outstanding ofthe registrant's common stock as of March 24, 2004 was54,832,383.

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VIONPHARMACEUTICALS, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

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| Item   |  |                                                                                        |  | Page |
|   |  | **PARTI**                                                                                   |  |
| 1.     |  | Business                                                                                    |  | 1    |
| 2.     |  | Properties                                                                                  |  | 15   |
| 3.     |  | LegalProceedings                                                                            |  | 15   |
| 4.     |  | Submission ofMatters to a Vote of Security Holders                                          |  | 16   |
|   |  | **PARTII**                                                                                  |  |
| 5.     |  | Market for Registrant'sCommon Equity and Related StockholderMatters                         |  | 17   |
| 6.     |  | Selected FinancialData                                                                      |  | 17   |
| 7.     |  | Management'sDiscussion and Analysis of Financial Condition and Results ofOperations         |  | 18   |
| 7A.    |  | Quantitative andQualitative Disclosures about MarketRisk                                    |  | 29   |
| 8.     |  | Financial Statements andSupplementaryData                                                   |  | 30   |
| 9.     |  | Changesin and Disagreements with Accountants on Accounting and FinancialDisclosure          |  | 51   |
| 9A.    |  | Controls andProcedures                                                                      |  | 51   |
|   |  | **PARTIII**                                                                                 |  |
| 10.    |  | Directors and Executive Officersof the Registrant                                           |  | 51   |
| 11.    |  | ExecutiveCompensation                                                                       |  | 53   |
| 12.    |  | SecurityOwnership of Certain Beneficial Owners and Management and RelatedStockholderMatters |  | 60   |
| 13.    |  | CertainRelationships and RelatedTransactions                                                |  | 64   |
| 14.    |  | PrincipalAccountant Fees and Services                                                       |  | 64   |
|   |  | **PARTIV**                                                                                  |  |
| 15.    |  | Exhibits, Financial StatementSchedules and Reports on Form8-K                               |  | 66   |
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In this report,unless the context otherwise requires, the terms"we," "us,""our," "theCompany" and "Vion" refer toVion Pharmaceuticals, Inc., a Delawarecorporation.

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Allstatements other than statements of historical fact included in thisAnnual Report on Form 10-K, including without limitation statementsunder "Management's Discussion and Analysis ofFinancial Condition 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"Management's Discussion and Analysis of FinancialCondition and Results of Operations." 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

ITEM 1:    Business

General

We are a development stage company engaged in thedevelopment of therapeutics and technologies for the treatment ofcancer. We were incorporated in March 1992 as a Delaware corporationand began operations on May 1, 1994. For the years ended December 31,2003, 2002 and 2001, we spent $9.7 million, $10.5 million and $12.5million, respectively, on research, development and clinicalactivities.

Our portfolio of potential products consists of twodistinct small molecule anticancer agents in clinical development andadditional small molecules and a drug delivery system in preclinicaldevelopment. 'Preclinical development' or'preclinical studies' indicate that the product candidatesselected for development are being evaluated for potency, specificity,manufacturability and pharmacologic activity in vitro, or cellculture, and in vivo, or animal, models. Clinical developmentinvolves a three-phase process. 'Phase I' indicates safetyand proof-of-concept testing and determination of the maximum tolerateddose in a limited patient population. 'Phase II' indicatessafety, dosing and activity testing in a limited patient population.'Phase III' indicates safety, dosing and efficacy testingin a large patient population.

Products in ClinicalDevelopment

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| •  | Triapine®inhibits the enzyme ribonucleotide reductase, and therefore preventsthe replication of tumor cells by blocking a critical step in DNAsynthesis. We are evaluating Triapine in Phase I and Phase IIcombination trials. Triapine is also being evaluated in additionalPhase I and Phase II single agent and combination clinical trialssponsored by the National Cancer Institute. |

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| •  | CLORETAZINETM (VNP40101M)is a sulfonyl hydrazine alkylating (DNA-damaging) agent. We areevaluating CLORETAZINETM (VNP40101M) for safety inPhase I single agent and combination trials. In March 2004, weannounced that CLORETAZINETM (VNP40101M) was designatedas a fast track program by the U.S. Food and Drug Administration (FDA)in relapsed or refractory acute myeloid leukemia. In March 2004, weinitiated a Phase II trial of CLORETAZINETM (VNP40101M)as a single agent in acute myeloid leukemia and myelodysplasticsyndromes. We also plan to commence a Phase II trial ofCLORETAZINETM (VNP40101M) in combination with cytosinearabinoside (Ara-C) in acute myeloid leukemia in 2004. Initiation of aPhase II trial of CLORETAZINETM (VNP40101M) in humanglioma (brain cancer) is planned for 2004 under an investigator'sInvestigational New Drug Application (IND). |

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Products in PreclinicalDevelopment

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| •  | 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 commerciallyavailable anticancer agents that we know of. In December 2003, weentered into an exclusive research collaboration and option agreementrelated to these compounds and we are now evaluating heterocyclichydrazones in preclinical studies. |

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| •  | KS119, an additional cytotoxic(cell-damaging) compound from the sulfonyl hydrazine class, has beendemonstrated in preclinical studies to be highly selective for hypoxic(poorly oxygenated) cells which are found in tumors and are often hardto treat with conventional anticancer agents. We are evaluating KS119in preclinicalstudies. |

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| •  | TAPET® (TumorAmplified Protein Expression Therapy), our drug delivery system usingmodified Salmonella bacteria, is designed to deliver anticanceragents directly to solid tumors. Our first generation TAPET bacteria,VNP20009, was previously evaluated in Phase I trials. Based on theclinical evidence provided by VNP20009, we developed twosecond-generation TAPET vectors designed for improved colonization ofhuman tumors. Both of these vectors have been evaluated in veterinaryclinical trials in dogs with spontaneous tumors. We continue toevaluate one of these vectors in additional veterinary clinical studiesin dogs. |

Our product development programs are based ontechnologies that we license from Yale University (Yale) and othercancer research centers. Our product development strategy consists oftwo main approaches. First, we engage in product development withrespect to anticancer therapeutics and technologies through in-housepreclinical and clinical development and through collaboration withacademic institutions. Second, depending on financial andpharmaceutical market conditions and required resources, we determinethe best method and/or partnership to develop, and eventually market,our products.

Overview of Cancer and Treatment Methods

Cancer is the second leading cause of death in the United States,exceeded only by heart disease. It is a devastating disease withtremendous unmet medical needs. The American Cancer Society estimatesthat 1.4 million new cases of cancer will be diagnosed in 2004 in theUnited States and 563,700 Americans are expected to die from cancer in2004.

Cancer is a group of diseases characterized byuncontrolled cell division resulting in the development of a mass ofcells, commonly known as a tumor, as well as the invasion and spreadingof these cells. Cancerous tumors can arise in any tissue or organwithin the human body. Cancer is believed to occur as a result of anumber of factors, such as genetic predisposition, chemical agents,viruses and irradiation. These factors result in genetic changesaffecting the ability of cells to regulate their growth anddifferentiation normally. When a normal cell becomes cancerous, it canspread to various sites in the body.

The most common methods oftreating patients with cancer are surgery, radiation and drug therapy.A cancer patient often receives treatment with a combination ofmethods. Surgery and radiation therapy are particularly effective inpatients where the disease is localized and has not spread to othertissues or organs. The most common method of treating patients withcancer that has spread beyond the primary site is to administeranticancer drugs by mouth or intravenously. In general, drugs used totreat cancer are classified as chemotherapy. Chemotherapy seeks todamage and kill cancer cells or to interfere with the molecular andcellular processes 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.

Current treatment for most kinds of cancer isinadequate. Therefore, a significant need exists for new therapieswhich are more effective and/or have reduced side effects.

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Our Product Development Programs

We are developing several potential products for the treatment ofcancer. Two small molecule anticancer chemotherapy agents are in humanclinical trials and additional small molecules and a drug deliverysystem are in preclinical development. The discussion below sets forththe development status of our product candidates as of December 31,2003. A 'complete response' in a clinical trial means thatthe patient shows no remaining evidence of tumor or cancer as assessedby physical exam, x-ray studies and/or tissue biopsies. A'partial response' in a clinical trial means that thepatient shows approximately a 50% reduction in the volume of thetumor.

Products in Clinical Development

Triapine®

Triapine inhibits the enzymeribonucleotide reductase. 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.

Basedon its mechanism of action and preclinical data generated by us andother researchers, we have focused our clinical development strategyfor Triapine in combination with other anticancer agents, but have alsoconducted single agent trials to test its safety and activity as amonotherapy.

Triapine has been evaluated in five single agentPhase I trials and three single agent Phase II trials. The Phase Itrials explored various schedules of administration and determinedmaximum tolerated doses for both solid tumors and hematologic(blood-related) malignancies. The single agent Phase II trials employedone schedule of administration. Overall, evidence of biologic andanti-tumor activity was observed, however, in the tumor types studiedto date, Triapine as a single agent has not demonstrated sufficientactivity to continue development beyond Phase II. Additional singleagent Phase II trials in other malignancies are planned under ourcollaboration with the National Cancer Institute (NCI) and are expectedto commence in 2004. Data from these trials should become available inthe 2005 to 2006 timeframe.

Preclinical studies have also shownthat, by altering the schedule of administration, the anti-tumoractivity of Triapine as a single agent can be increased. Clinicaltesting of more optimal single agent administration schedules may bepossible with the oral form of Triapine, which to date has been studiedin a small number of patients to determine its absorption in thebloodstream following a single dose, and a prodrug form (a chemicallymodified form of the active drug that, when administered to patients,is converted to the active drug) of Triapine, which is being evaluatedin preclinical studies.

Preclinical data have demonstrated thatTriapine can increase the anti-tumor effects of certain otheranticancer agents, including those that damage DNA and the class ofagents known as nucleoside analogues. On this basis, we initiated fourcombination Phase I trials. From these studies, we selected thecombination of Triapine and gemcitabine for evaluation in Phase IItrials. Through our collaboration for Triapine clinical developmentwith the NCI, additional Phase I and Phase II combination trials areplanned for initiation in 2004. Data from these trials should becomeavailable in the 2005 to 2006 timeframe.

Additional clinicaltrials of Triapine, including potential pivotal studies, will be basedon the results of ongoing clinical trials.

Triapine as a SingleAgent in Solid Tumors

Phase I Single Agent Clinical Trialsin Solid Tumors

For Triapine as a single agent in solidtumors, three dosing schedules, a two-hour intravenous infusionschedule administered once monthly, a two-hour infusion scheduleadministered daily for four or five days, and a 96-hour intravenousinfusion schedule, were evaluated in Phase I clinical development. Withthese schedules in Phase I trials, it was established that Triapine was

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well-tolerated, relevant blood concentrationsof Triapine® at doses at or below the maximum tolerateddose were achieved, and, although none of the patients met the criteriafor partial or complete responses, evidence of anti-tumor activity wasobserved. The anti-tumor activity consisted of reduction in tumormarkers (substances produced by the tumor and measured in blood),decreases in tumor masses, or prolonged stable disease, and wasobserved in several patients with diverse types of advanced,treatment-refractory tumors (breast, esophagus, head and neck, isletcell (hormone-producing cells of the pancreas) and uterine cancer).

Phase II Single Agent Clinical Trials in Solid Tumors

In the second half of 2001, we initiated a Phase II clinical trialof the two-hour infusion schedule, administered daily for five daysevery other week in patients with advanced or metastatic breast cancer.This trial was closed in 2002 after nine patients had receivedtreatment. All patients in this trial had substantial prior treatmentwith standard agents and no partial or complete responses wereobserved.

In October 2002, we initiated a Phase II study of thetwo-hour infusion schedule, administered daily for four days everyother week, in patients with recurrent or metastatic squamous cellcancer of the head and neck. In February 2004, we announced that in atotal of 32 patients accrued in this trial, one patient achieved apartial response, and 9 patients had a response of stable diseaseassessed after four courses of treatment (at approximately eightweeks). Treatment with Triapine was well-tolerated in this trial.

In January 2003, we initiated an additional Phase II study inprostate cancer with patients receiving the two-hour infusion schedule,administered daily for four days every other week. In February 2004, weannounced that accrual of patients in this trial had been closed afterten patients.

Triapine in Combination with other AnticancerAgents in Solid Tumors

Phase I Combination Clinical Trialwith Gemcitabine in Solid Tumors

In August 2001, weinitiated a Phase I clinical trial of Triapine combined with theanticancer agent gemcitabine in patients with treatment-refractoryadvanced or metastatic solid tumors. Results from this trial werepresented at the American Society for Clinical Oncology in June 2003.The trial enrolled 26 patients with advanced cancer of differentorigins whose disease had progressed after standard therapy or forwhich standard therapy was not considered effective. Triapine wasadministered at a fixed dose intravenously over two to four hoursfollowed by a thirty-minute infusion of gemcitabine. Treatment wasrepeated weekly for three weeks followed by a week of rest. Thegemcitabine dose was increased in successive cohorts of three to sixpatients. The study demonstrated that Triapine could be administeredsafely with a standard single-agent dose and schedule of gemcitabine.Serum concentrations of Triapine were achieved in the trial at a levelcapable of enhancing gemcitabine in tumor cell lines. Among 22 patientsevaluable for tumor response, a complete response was observed in onepatient with an adenocarcinoma (a type of cancer that arises fromglandular tissues) of unknown origin, and two patients achieved apartial response. The partial responses occurred in a patient withnon-small-cell lung cancer and in a patient with esophageal cancer.Eight additional patients received four or more cycles oftreatment.

Phase II Combination Clinical Trials withGemcitabine in Solid Tumors

In May 2003, we initiated PhaseII trials of Triapine in combination with gemcitabine in non-small-celllung cancer and pancreatic cancer. Data from these trials should beavailable in 2004.

Other Phase I Combination Trials in SolidTumors

In May and July 2001, we initiated two additionalPhase I clinical trials of Triapine in patients with advanced ormetastatic solid tumors. In the first trial Triapine was combined withthe anticancer agent cisplatin. The second trial combined Triapine withcisplatin and paclitaxel. Preliminary data from the Triapine-cisplatintrial was released in abstract form in June 2003. These data indicatedthat Triapine (as a two hour-infusion daily for four days) could beadministered safely with doses of cisplatin commonly used forcombinations with other anticancer agents. The toxicity of the

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combination was similar to that expected foreach agent alone at the same respective doses. Stabilization of diseasethat had been progressing prior to treatment was observed in severalpatients, including patients that had been treated previously withcisplatin or similar anticancer agents.

Triapine® in Leukemia

Phase I SingleAgent Clinical Trials in Leukemia

In 2001, we initiated twoPhase I clinical trials of Triapine in patients withtreatment-refractory leukemias. Traditionally, patients withhematologic malignancies receive higher doses of anti-tumor drugscompared to solid tumor patients because of the need to induce maximaleffects on the tumor cells in the bone marrow. Therefore, these studieswere established to determine the maximum tolerated dose and mostintense schedule possible (limited only by toxicity to organs otherthan the bone marrow) for both the daily administration for fiveconsecutive days and 96-hour infusion regimens.

In December2002, we reported the clinical data from the leukemia trials at theAmerican Society of Hematology meeting. A total of 44 patients withadvanced hematologic malignancies that had progressed following one ormore standard treatments were entered into the two trials. Triapine wasadministered by 96-hour intravenous continuous infusion every otherweek or for two consecutive weeks in one trial and by two-hourintravenous infusion once or twice daily for five days every other weekfor two consecutive weeks in the other trial. In both trials, Triapinewas demonstrated to be well-tolerated. Triapine temporarily reduced thenumber of circulating leukemia cells in most patients. In addition, twopatients with acute myeloid leukemia (AML) had temporary completeclearance of leukemia cells in bone marrow, and one patient with AMLhad an objective partial response.

Phase I CombinationClinical Trial in Leukemia

In March 2003, we initiated aPhase I trial to evaluate Triapine in combination with Ara-C inadvanced leukemia. Data from this trial should be available in2004.

Triapine Collaborations

Collaboration with theNational Cancer Institute

In November 2002, we announcedthat the NCI's Division of Cancer Treatment and Diagnosis hadapproved a collaboration for the clinical development of Triapine. Aspart of the collaboration, the NCI's Cancer Therapy EvaluationProgram will sponsor clinical trials of Triapine to further explore itsactivity as a single agent or in combination with other agents inpatients with cancer. We provide the product to be used in thesetrials. In early 2003, we announced that a Clinical Trials Agreementhad been executed with the NCI and in January 2004, we announced thefirst trial to open under NCI sponsorship, a Phase I clinical trial ofTriapine in combination with fludarabine for the treatment of advancedleukemia.

Research Services Agreement with Eli Lilly andCompany

In September 2003, we entered into a researchservices agreement with Eli Lilly and Company (Lilly) related to thePhase II trials of Triapine in combination with Lilly'santicancer agent, Gemzar® (gemcitabine). The agreementrelates to the measurement of the expression of several genes in tumortissue and blood samples from patients participating in the Phase IItrials of the combination therapy in non-small-cell lung cancer andpancreatic cancer.

License Agreement with Beijing PasonPharmaceuticals, Inc.

In October 2003, we entered into alicense with Beijing Pason Pharmaceuticals, Inc. (Pason) providing themwith the exclusive rights to develop, manufacture and market Triapinein the People's Republic of China, Taiwan, Hong Kong andMacao.

Additional Forms of Triapine

We are alsodeveloping both an oral dosage form and a prodrug version of Triapine.These alternative forms may be easier to administer and could increaseTriapine's anti-tumor effect as a 

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single agent. In December 2002, we announcedinitial clinical results from six patients treated with a single doseof the oral formulation. At the higher dose level of 100 mg, oralabsorption of the drug from the stomach into the blood in excess of60% was observed in three patients. Initial preclinical studiesof the prodrug have shown that it remains in the blood four to sixtimes longer than Triapine itself.

Additional Applications forTriapine

In October 2003, we announced that we had received aSmall Business Innovation Research grant from the National Institutesof Health/National Institute of Allergy and Infectious Diseases tosupport preclinical studies intended to assess the activity of Triapinein combination with various nucleoside analogues against humanimmunodeficiency virus (HIV), hepatitis B virus (HBV) and herpessimplex virus (HSV). These studies will be conducted in collaborationwith the Yale University School of Medicine.

CLORETAZINETM (VNP40101M)

CLORETAZINETM (VNP40101M) is a sulfonyl hydrazinealkylating agent. Alkylating agents damage DNA, which results in celldeath. Alkylating agents are known to be among the most highlyeffective agents in the treatment of cancer.

Preclinical data onCLORETAZINETM (VNP40101M) showed broad antitumoractivity in in vivo models. It was curative in certainpreclinical leukemia models, including mice bearing certain derivativesof a leukemia cell line that were resistant to standard alkylatingagents. CLORETAZINE TM (VNP40101M) was alsoactive against solid tumor models, including lung, colon, and braincancer, and melanoma. It was curative in mouse models in which a humanglioma (brain tumor) or a mouse colon cancer was implanted and growingunder the skin. The drug has been shown in preclinical studies to becapable of crossing the blood-brain barrier with great efficiency. Theblood-brain barrier has been a common obstacle in achieving activeconcentrations of most drugs within the brain.

Clinicaldevelopment of CLORETAZINETM (VNP40101M) has includedtwo single-agent Phase I trials in solid tumors, a single-agent Phase Itrial in hematologic malignancies, and a Phase I trial ofCLORETAZINETM (VNP40101M) in combination with Ara-C inhematologic malignancies. Based on early indications of activity inPhase I trials, we have focused our clinical development strategy forCLORETAZINETM (VNP40101M) in leukemia, but plan toconduct additional studies to evaluate CLORETAZINETM(VNP40101M) in solid tumors.

In March 2004, we received fasttrack designation from the FDA for CLORETAZINETM(VNP40101M) in relapsed or refractory AML. The FDA's fasttrack programs are designed to facilitate the development and expeditethe review of new drugs that are intended to treat serious orlife-threatening conditions and that demonstrate the potential toaddress unmet medical needs.

CLORETAZINETM(VNP40101M) in Solid Tumors

We have conducted two Phase Istudies of CLORETAZINETM (VNP40101M) in solid tumors.These studies have been designed to determine the safety and maximumtolerated dose of the drug in different treatment schedules.

InJune 2001, we initiated a Phase I trial ofCLORETAZINETM (VNP40101M), administered byfifteen-minute intravenous infusion every four to six weeks, inpatients with advanced or metastatic solid tumors. In November 2002, wereported clinical results from this trial at the EORTC-NCI-AACR Meetingon "Molecular Targets and CancerTherapeutics." At the time of presentation, the trial hadenrolled 23 patients with advanced cancer of different origins that wasconsidered unresponsive to or had progressed after standard treatments.Overall, CLORETAZINETM (VNP40101M) was well-toleratedacross all dose levels. The highest dose tested is suitable forconducting Phase II trials.

An additional Phase I trial ofCLORETAZINETM (VNP40101M) to explore a weeklyadministration schedule in solid tumors commenced in February 2003.Data from this trial should be available in 2004.

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Initiation of a Phase II trial ofCLORETAZINETM (VNP40101M) in human glioma (brain tumor)is also planned for 2004 under an investigator's InvestigationalNew Drug Application (IND).

CLORETAZINETM(VNP40101M) in Leukemia

Wehave conducted two Phase I studies of CLORETAZINETM(VNP40101M) in hematologic (blood) malignancies. These studies havebeen designed to determine the safety and maximum tolerated dose of thedrug in different treatment schedules in this indication.

InAugust 2002, we initiated a Phase I trial ofCLORETAZINETM (VNP40101M) administered by 15 to90-minute intravenous infusion to patients with advanced hematologicmalignancies. Results from this trial were presented at the AmericanSociety for Clinical Oncology in June 2003. At the time of dataanalysis, 31 patients with advanced or refractory hematologicmalignancies had been entered. At all dose levels,CLORETAZINETM (VNP40101M) was observed to bewell-tolerated. The most common toxicity was a transient, dose-relatedinfusion syndrome that was effectively controlled with supportive careand pre-medication. At the highest dose, one patient had prolongedsuppression of blood-forming elements, which was considered adose-limiting toxicity. Evidence of anti-tumor activity was documentedby (i) a complete response in a patient with myelodysplastic syndromes(a disorder of blood-forming elements that can lead to leukemia) and apatient with AML, and (ii) significant reduction or elimination ofmarrow blasts (leukemic cells) at the end of the first cycle oftreatment in four patients with AML.

In July 2003, we initiateda Phase I trial of CLORETAZINETM (VNP40101M) incombination with Ara-C in advanced leukemia. Data from this trialshould be available in 2004.

In March 2004, we initiated a PhaseII trial of CLORETAZINETM (VNP40101M) as single agentin AML and myelodysplastic syndromes. A Phase II trial ofCLORETAZINETM (VNP40101M) in combination with Ara-C inAML is expected to start in the second half of 2004.

Productsin Preclinical Development

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 agentsthat we know of. 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.

We are nowevaluating heterocyclic hydrazones in preclinical studies. During the17-month research collaboration and option agreement, we willinvestigate several heterocyclic hydrazones in order to identify a leadproduct candidate. During this period, we will also have the right toenter into an exclusive worldwide license agreement for the compounds.We made an initial payment of $25,000 to enter into the agreement, andan additional payment of $75,000 will be required if we exercise theoption to enter into the exclusive worldwide license. The licenseagreement calls for milestone payments to be paid based on the progressof product development, and royalties based on product revenues.

KS119

KS119, an additional compound from the sulfonylhydrazine class, has been demonstrated in preclinical studies to behighly selective for hypoxic (poorly oxygenated) cells which are foundin tumors and are often hard to treat with conventional anticanceragents. We are evaluating KS119 in preclinical studies.

TAPET® (Tumor Amplified Protein ExpressionTherapy)

TAPET is a proprietary technology that usesgenetically-altered Salmonella bacteria to delivercancer-fighting drugs preferentially to solid tumors. Extensivepreclinical studies in in vivo models 

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have shown that TAPET® bacteriamigrate to and penetrate throughout solid tumors. Inside the tumors,TAPET bacteria double in quantity every 30 to 45 minutes, achievingvery high bacterial counts, reaching ratios in tumor versus normaltissues of 1000:1. In addition, TAPET can be genetically engineered todeliver anticancer agents continuously within the tumor.

TAPETbacteria are also genetically engineered to reduce normal, toxicreactions to these bacteria. As an additional safety measure, TAPETbacteria remain fully sensitive to antibiotic therapies. Extensivepreclinical toxicology studies in several species, including mice,rats, pigs, dogs and monkeys, have demonstrated these safety measuresto be effective.

In May 2002, we announced cumulative resultsfrom the intravenous infusion studies of VNP20009, our first-generationTAPET vector. In three clinical trials of VNP20009 deliveredintravenously over 30 minutes or four hours, 49 patients were treated,and biopsies were taken from tumors of 18 patients who received thethree highest dose levels administered in the trials. Of these 18biopsies, 17 could be evaluated and bacteria were detected in 5 out of17 or 29%. An acceptable level of bacterial colonization of thetumor was achieved in 2 out of 17 or 12%.

Based onclinical data from our initial TAPET trials, in May 2002 we announcedthat we would conduct one additional trial of VNP20009 in combinationwith cyclosporine and methotrexate, and focus our efforts on developingsecond-generation vectors with improved tumor colonizationcapabilities. This trial was terminated in June 2003 in order to focusour resources on second-generation vector development.

Second-Generation TAPET Vectors

Based on the clinicalevidence provided by VNP20009, we developed two second-generation TAPETvectors designed for improved colonization of human tumors. Both ofthese vectors have been evaluated in veterinary clinical trials in dogswith spontaneous tumors. We continue to evaluate one of these vectorsin additional veterinary clinical studies in dogs.

Product andProduct Candidates for Conditions Other than Cancer

MELASYN®

MELASYN is a synthetic form ofmelanin that dissolves readily in water. Melanin is a pigment formed bycells in the skin that gives skin its color and protects it from sundamage by absorbing ultraviolet rays. We believe that MELASYN is thefirst water-soluble, synthetic version of melanin, making it a noveland useful ingredient for formulation of skin care products andcosmetics. The simplicity of its manufacture allows MELASYN to beproduced in commercial quantities at low cost. In addition, MELASYNblends in and conforms to a person's skin tone without the orangecolor associated with most commercially available self-tanningproducts.

Our MELASYN patent and technology is licensed fromYale. In 1998, we agreed to be the exclusive selling agent for MELASYNand sublicensed the MELASYN patent and technology to San-MarLaboratories (San-Mar). Under the terms of the amended sublicenseagreement, we granted to San-Mar a worldwide, non-exclusive sublicensefor the manufacture and sale of products containing MELASYN to aspecific customer. This licensed expired in February 2003.

InMarch 2004, we entered into a non-exclusive sublicense agreement forMELASYN with Johnson and Johnson Consumer Companies, Inc. The terms ofthe agreement do not include any upfront or milestone payments. Ifproducts including our technology are developed, we will receive aroyalty based on sales in countries where we have issued patents.

Novel Nucleoside Analogs

We have licensed patents andpatent applications related to a nucleoside analogue, or syntheticmolecule, known as β-L-Fd4C from Yale. β-L-Fd4C is anantiviral drug capable of inhibiting the replication of the HBV. HBV isa causative agent of both acute and chronic forms of hepatitis thataffects about 300 million people worldwide. HBV also predisposes itsvictims to the development of liver cancer. β-L-Fd4C may also beuseful for the treatment of HIV.

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In February 2000, we signed a sublicenseagreement for β-L-Fd4C with Achillion Pharmaceuticals, Inc.(Achillion), a privately-held biopharmaceutical company developing andcommercializing innovative antiviral therapies. Under the terms of thesublicense agreement, Achillion will fund the development ofβ-L-Fd4C. In return, we received a small equity position inAchillion and could receive milestone payments and royalties based onproduct revenue.

Research and License 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, we havepaid through December 31, 2003 approximately $9.9 million to fundcertain research at Yale, including research in the laboratories of Dr.John Pawelek, Dr. Alan Sartorelli, one of our directors, and Dr.Yung-Chi Cheng, a member of our scientific advisory board. Yale hassole discretion to use these funds to conduct research relating toproducts that it desires to pursue. Additionally, to the extent thatsuch research results in technologies not covered by our licenseagreements with Yale, we may be unable to utilize such technologiesunless we negotiate additional license agreements. In 2003, we recordedexpense of $400,000 related to gifts made to Yale for research to beconducted through March 31, 2005 by Dr. Alan Sartorelli. Included inour current liabilities in the accompanying balance sheet at December31, 2003, was $250,000 for the balance of the gifts to be paid in fiveequal quarterly installments through the first quarter of 2005.

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

Under a license agreement with Yaledated September 1990, we have a license to a synthetic form of melanin,which we have named MELASYN®. Under the terms of thelicense agreement, we pay a license fee to Yale based on a percentageof net sales and sublicensing revenues.

Yale/Vion (formerlyMelaRx Pharmaceuticals, Inc.) Research Agreement – July 1992

We entered into a research agreement with Yale in July 1992,subsequently renewed in June 1998, to provide funding through September30, 2002 for certain research projects performed under the supervisionof Dr. John Pawelek. Technology licensed by us from research conductedunder this agreement includes the inventions collectively known asTAPET®.

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

We are a party to alicense agreement with Yale entered into in August 1994 andsubsequently amended in six amendments, most recently in March 2003.Under this license as amended, Yale granted us a non-transferableworldwide exclusive license to make, have made, use, sell and practiceinventions under certain patents and patent applications fortherapeutic and diagnostic purposes. We also have a non-exclusivelicense to two patents under this license and its amendments. Thepatents and patent applications under this license and its amendmentscoverTriapine®,   CLORETAZINETM(VNP40101M), KS119 and β-L-Fd4C. The term of the license isdictated by the expiration of any patents relating to any inventionsor, with respect to non-patented inventions or research, 17 years. Yalehas retained the right to make, use and practice the inventions fornon-commercial purposes and, with respect to two of the patents, Yaleand its licensees have additional rights. This agreement as amendedalso provides that if Yale, as a result of its own research, identifiespotential commercial opportunities for the licensed inventions, Yalewill give us a first option to negotiate a commercial 

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license for the commercial opportunities.Yale is entitled to royalties on sales, if any, of resulting products,sublicensing revenues and, with regard to several patents, milestonepayments based on the status of clinical trials and/or regulatoryapprovals.

We have agreed with Yale that we will plan andimplement appropriate research and development with respect tocommercialization of products based on the licensed inventions. In theevent that the agreement is terminated for breach, all rights underlicenses previously granted terminate. Accordingly, a default as to oneproduct could affect our rights in other products. In addition, Yale,at its sole option, can terminate any sublicenses that we grant.

Pursuant to the original agreement, we issued to Yale 159,304 sharesof our common stock and made a payment of $50,000. In June 1997, thislicense agreement and another license agreement dated December 1995were amended pursuant to which Yale agreed to reduce certain amountspayable by us in exchange for 150,000 shares of our common stock issuedto Yale and valued at $600,000.

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

In December1995, we entered into a license agreement with Yale pursuant to whichwe received a non-transferable worldwide exclusive license, expiringover the lives of the patents, to three inventions relating to genetherapy for melanoma. Technology licensed by us under this agreementrelates to TAPET®. Pursuant to the license agreement, wepaid Yale a $100,000 fee.

In December 1995, we entered intoanother license 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

Clinical Trials Agreement with the National CancerInstitute

In January 2003, we entered into a Clinical TrialsAgreement with the Cancer Therapy Evaluation Program of the NCI'sDivision of Cancer Treatment and Diagnosis. The Clinical TrialsAgreement covers the conduct of clinical trials sponsored by the NCI toexplore the activity of Triapine® as a single agent andin combination with other drugs for the treatment of cancer.

Research Services Agreement with Eli Lilly and Company

InSeptember 2003, we entered into a research services agreement withLilly related to the Phase II trials of Triapine in combination withLilly's anticancer agent, Gemzar® (gemcitabine).The agreement relates to the measurement of the expression of severalgenes in tumor tissue and blood samples from patients participating inthe Phase II trials of the combination therapy in non-small-cell lungcancer and pancreatic cancer.

License Agreement with BeijingPason Pharmaceuticals, Inc.

In October 2003, we entered into alicense with Pason providing them with the exclusive rights to develop,manufacture and market Triapine in the People's Republic ofChina, Taiwan, Hong Kong and Macao (the Pason Territory). The terms ofthe agreement included an initial payment of $500,000, $4.75 million inpotential additional milestone payments, and potential royalty paymentsof 11% of any Triapine revenues in the Pason Territory. Pasonwill fund the preclinical and clinical development necessary forregulatory approval of Triapine in the Pason Territory.

Research Collaboration and Option Agreement with Austrian Inventorsand Austria Wirtschaftsservice 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 

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and the Institute of Medical Chemistry andBiochemistry at the University of Innsbruck, and AustriaWirtschaftsservice Gesellschaft m.b.H, a bank specializing in Austrianbusiness promotion.

During the 17-month research collaborationand option agreement, we will investigate several heterocyclichydrazones in preclinical research studies in order to identify a leadproduct candidate. During this period, we will also have the right toenter into an exclusive worldwide license agreement for the compounds.We made an initial payment of $25,000 to enter into the agreement, andan additional payment of $75,000 will be required if we exercise theoption to enter into the exclusive worldwide license. The licenseagreement calls for milestone payments to be paid based on the progressof product development, and royalties based on product revenues.

Consulting Agreement with Gemin X, Inc.

In January 2004, weentered into a consulting agreement with Gemin X, Inc. (Gemin X), aprivately-held company developing novel oncology therapeutics. Underthis agreement, our chief scientific officer, Dr. Terrence Doyle,renders consulting services to Gemin X. Gemin X has agreed to reimburseus, based on an hourly rate, for up to 80% of Dr. Doyle'stime per year.

Cooperative Research and DevelopmentAgreement

In April 2000, we entered into a Cooperative Researchand Development Agreement (CRADA) with the NCI, under the directsupervision of Steven A. Rosenberg, M.D., Ph.D., Chief of Surgery inthe NCI's Division of Clinical Sciences, a renowned cancerresearcher and a leading authority on the application of cytokines,tumor vaccines and other biological agents in cancer patients, for"Development of TAPET®-BasedImmunotherapies Targeted Against Cancer." Under the termsof the CRADA, our scientific team worked with Dr. Rosenberg'slaboratory to evaluate VNP20009 using CRADA funds and other resourcessupplied by us.

In June 2002, payments to the NCI under theCRADA were suspended by mutual agreement. Initial work under the CRADAhad been completed and no additional work is planned pending thedevelopment of a second-generation TAPET vector.

Competition

Competition in the biopharmaceutical industryis intense and based on scientific and technological factors, theavailability 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. 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 target ribonucleotidereductase like our compound Triapine® and agents whichare alkylating agents like our compound CLORETAZINETM (VNP40101M).These companies include, but are not limited to, Bristol-Myers SquibbCompany, Pfizer Inc., Chiron Corporation, Amgen Inc., Genentech Inc.,ImClone Systems Inc., OSI Pharmaceuticals, Inc., Eli Lilly and Co.,Lorus Therapeutics Inc., Schering-Plough Corporation and AstraZenecaPLC. Our competitors may have substantially greater financial,technical and human resources than we have and may be better equippedto develop, manufacture and market products. In addition, many of thesecompanies have extensive experience in preclinical testing and humanclinical trials, and in obtaining regulatory approvals. Our competitorsmay succeed in obtaining approval for products more rapidly than us andin developing 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, 

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complete preclinical testing, clinicaltrials and regulatory approval processes, and supply commercialquantities to market will influence our ability to bring a product tomarket. In addition, we may apply for Orphan Drug designation by theFDA for our proposed products. To the extent that a competitor of oursdevelops and receives Orphan Drug designation and marketing approvalfor a drug to treat the same indication prior to us, we may beprecluded from marketing our product for a period of seven years.

Patents, Licenses and Trade Secrets

Our policy is toprotect 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 the Yale/Vion License Agreementdated August 1994, we are the exclusive licensee, subject to certainrights retained by Yale, of a number of issued and pending U.S. andforeign patent applications relatingto:

|              |                                                            |
|--------------|------------------------------------------------------------|
| •  | Triapine® and otherribonucleotide reductaseinhibitors; |

|              |                                                                                              |
|--------------|----------------------------------------------------------------------------------------------|
| •  | CLORETAZINETM(VNP40101M), KS119 and other compounds in the sulfonyl hydrazineclass; and |

|              |                                                                                                                                              |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| •  | β-L-Fd4C, itscomposition and its use for the treatment of HBV and HIV infections,and its use in combination with other anti-AIDS drugs. |

We arealso the exclusive licensee of one issued U.S. and a number of foreignutility patents and pending patent applications relating to syntheticmelanin and methods for using synthetic melanin, such as, for sunscreenor self-tanning agents. The one U.S. patent and the foreign patents andpatent applications are relevant to our MELASYN®technology.

Pursuant to the Yale/Vion License Agreement datedDecember 1995 entered into as a result of the Yale/Vion ResearchAgreement dated July 1992, 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, but not limited to, melanoma, lung cancer, breast cancer andcolon cancer. We also have rights, either by license and/or byassignment, to issued patents and pending patent applications, U.S. andforeign, relating to our TAPET technology. In particular, we havepending and intend to pursue a number of U.S. provisional andnon-provisional patent applications, an international patentapplication and a number of foreign patent applications related to thistechnology.

We or our licensors are prosecuting the patentapplications related to products we license both with the U.S. Patentand Trademark Office (PTO) and various foreign patent agencies, but wedo not know whether any of our applications will result in the issuanceof any patents or, whether any issued patent will provide significantproprietary protection or will be circumvented or invalidated. Duringthe course of patent prosecution, patent applications are evaluatedfor, among other things, utility, novelty, non-obviousness, writtendescription and enablement. The PTO may require that the claims of aninitially filed patent application be amended if it is determined thatthe scope of the claims include subject matter that is not useful,novel, non-obvious, described adequately or enabled. Furthermore, incertain instances, the practice of a patentable invention may require alicense from the holder of dominant patent rights. In cases where oneparty believes that it has a claim to an invention covered by a patentapplication or patent of a second party, the first party may attempt toprovoke an interference proceeding in the PTO or such a proceeding mayotherwise be declared by the PTO. In general, in an interferenceproceeding, the PTO reviews the competing patents and/or patentapplications to determine the validity of the competing claims,including, but not limited to, determining priority of invention. Anysuch determination would be subject to appeal in the appropriate UnitedStates federal courts. When two patents are involved, the federaldistrict court in Washington, D.C. conducts an interference trial.

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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. We may participate in interferenceproceedings that may in the future be declared by the PTO. Interferenceand/or litigation proceedings could result in substantial cost tous.

The patent position of biotechnology and pharmaceuticalfirms generally is highly uncertain and involves complex legal andfactual questions. To date, no consistent policy has emerged regardingthe breadth of claims allowed in biotechnology and pharmaceuticalpatents.

Government Regulation

Overview.    Regulation by state and federal governmentalauthorities in the United States and foreign countries is a significantfactor in the manufacture and marketing of our products and in ourongoing research and product development activities. All of ourproducts will require regulatory clearances or approvals prior tocommercialization. In particular, drugs, biological agents and medicaldevices are subject to rigorous preclinical 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. The process of obtaining these clearances or approvals andthe subsequent compliance with appropriate federal statutes andregulations require the expenditure of substantial resources. We cannotbe certain that any required FDA or other regulatory approval will begranted or, if granted, will not be withdrawn.

Drugs andBiological Agents.    Preclinical development of therapeuticdrugs and biological agents is generally conducted in the laboratory toevaluate the safety and the potential efficacy of a compound byrelevant in vitro and in vivo testing. When a product istested prospectively to determine its safety for purposes of obtainingFDA approvals or clearances, such testing must be performed inaccordance with good laboratory practices for non-clinical studies. Theresults of preclinical testing are submitted to the FDA as part of aninvestigational new drug application, or IND. The IND must becomeeffective, the study must be approved by an institutional review board,and informed consent must be obtained from the clinical subjects,before human clinical trials can begin.

Regulatory approvaloften takes a number of years and involves the expenditure ofsubstantial resources. Approval time also depends on a number offactors, including the severity of the disease in question, theavailability of alternative treatments and the risks and benefitsdemonstrated in clinical trials. Typically, clinical evaluationinvolves a three-phase process. In Phase I, clinical trials areconducted with a small number of subjects to determine the tolerateddrug dose, early safety profile, proper scheduling and the pattern ofdrug distribution, absorption and metabolism. In Phase II, clinicaltrials are conducted with groups of patients afflicted with a specificdisease in order to determine efficacy, dose-response relationships andexpanded evidence of safety. In Phase III, large-scale, multi-center,controlled clinical trials are conducted in orderto:

|              |                                                                  |
|--------------|------------------------------------------------------------------|
| •  | provide enough data for statisticalproof of safety and efficacy; |

|              |                                                       |
|--------------|-------------------------------------------------------|
| •  | comparethe experimental therapy to existingtherapies; |

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

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

Inthe case of drugs for cancer and other life-threatening diseases, theinitial human testing is generally conducted in patients rather than inhealthy 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, orNDA, for drugs, or a product license application, or BLA, forbiologics, for approval to commence commercial distribution. For abiologic drug, the manufacturer generally must also obtain approval ofan establishment license application. In responding to an NDA or BLA,the FDA may grant marketing approval, request additional information ordeny the application if it determines that the application does notsatisfy its regulatory approval criteria. It may take several years toobtain approval after submission of an NDA or BLA, although approval isnot assured. The FDA also normally conducts a pre-approval inspectionand other 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.

Orphan Drug Designation.    Underthe Orphan Drug Act, a sponsor may obtain designation by the FDA of adrug or 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 is entitled tomarketing exclusivity for a period of seven years for the designatedindication. This means that no other company can market the same OrphanDrug for the same indication approved by the FDA for seven years afterapproval unless such company proves its drug is clinically superior orthe approved Orphan Drug marketer cannot supply demand for the drug.Legislation is periodically considered that could significantly affectthe Orphan Drug law. We intend to seek this designation for ourproducts where appropriate. There can be no assurance that futurechanges to the Orphan Drug Act would not diminish the value of anyOrphan Drug designation obtained by us.

Drugs forLife-Threatening Illnesses.    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 are promising, Phase II clinicaltrials may be designed that obviate the need for lengthy, expensivePhase III testing. Notwithstanding the foregoing, approval may bedenied by the FDA or traditional Phase III studies may be required. TheFDA may also seek our agreement to perform post-approval Phase IVstudies, which confirm product safety and efficacy.

Environmental Matters.    We are subject to federal, stateand local environmental laws and regulations, including thosepromulgated by the Occupational Safety and Health Administration(OSHA), the Environmental Protection Agency (EPA) and the NuclearRegulatory Commission (NRC), that govern activities or operations thatmay have adverse environmental effects, such as discharges to air andwater, as well as handling and disposal practices for solid andhazardous wastes. These laws also impose strict liability for the costsof cleaning up, and for damages resulting from, sites of past spills,disposals or other releases of hazardous substances and materials forthe investigation and remediation of environmental contamination atproperties operated by us and at off-site locations where we havearranged for the disposal of hazardous substances.

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We have made, and will continue to make,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 December 31,2003, we had 29 full-time employees, of which 20 were engaged inresearch, development and clinical activities, and 9 in administrationand finance.

Available Information

The followinginformation can be found on our website at http://www.vionpharm.com ormay be obtained free of charge by contacting our Investor RelationsDepartment at (203) 498-4210 or by sending an e-mail message toinfo@vionpharm.com:

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

|              |                                                                                                                                                                                                                                          |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | our policies related tocorporate governance, including the charter for the Nominating andGovernance Committee of our Board of Directors and our code of ethicsapplying to our chief executive officer and senior financial officials;and |

|              |                                                              |
|--------------|--------------------------------------------------------------|
| •  | the charter of the Audit Committeeof our Board of Directors. |

ITEM2.    Properties

Our principal facility consists ofapproximately 20,000 square feet of leased laboratory and office spacein New Haven, Connecticut. The lease expires in October 2006. Thecurrent annual rental rate is approximately $276,000. We believe ourspace is sufficient for our preclinical development, clinical andadministrative activities.

ITEM 3.    LegalProceedings

In the normal course of business, we may besubject to proceedings, lawsuits and other claims. We are not a partyto any legal proceedings that may have a material adverse effect on ourbusiness.

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ITEM 4.    Submission of Mattersto a Vote of Security Holders

At the Annual Meeting ofStockholders of the Company held on December 9, 2003, three proposalswere voted upon by the Company's stockholders. There were39,271,203 shares of the Company's common stock outstanding, eachshare entitled to one vote on each matter presented at the AnnualMeeting. A brief description of each proposal voted upon at the AnnualMeeting and the number of votes cast for or against, as well as thenumber of abstentions to each proposal are set forth below.

Proposal No. 1 – Election of Directors

A vote wastaken at the Annual Meeting for the election of seven Directors of theCompany to hold office until the next Annual Meeting of Stockholders ofthe Company or until their successors are elected and qualified. Allseven nominees were elected. The aggregate number of votes cast byholders of common stock voted in person or by proxy for each nomineewas as follows:

|                          |  |            |            |                                |  |        |         |        |  |  |
|--------------------------|--|------------|------------|--------------------------------|--|--------|---------|--------|--|--|
|                     |  | ForNominee |            | Authority WithheldFrom Nominee |
| William R.Miller         |  |       | 33,663,348 |                           |  |   | 513,948 |   |
| StephenK. Carter, M.D.   |  |       | 33,749,385 |                           |  |   | 427,911 |   |
| Frank T. Cary            |  |       | 33,704,170 |                           |  |   | 473,126 |   |
| Alan Kessman             |  |       | 33,528,718 |                           |  |   | 648,578 |   |
| Charles K.MacDonald      |  |       | 33,735,335 |                           |  |   | 441,961 |   |
| AlanC. Sartorelli, Ph.D. |  |       | 33,796,785 |                           |  |   | 380,511 |   |
| Walter B.Wriston         |  |       | 33,704,170 |                           |  |   | 473,126 |   |
|                          |

ProposalNo. 2 – Approval of the Adoption of Vion Pharmaceuticals, Inc.2003 Stock Option Plan

A vote was taken at the Annual Meetingon the proposal to approve the adoption of the Vion Pharmaceuticals,Inc. 2003 Stock Option Plan. The proposal was approved. The aggregatenumber of votes cast by holders of common stock voted in person or byproxy for the proposal was as follows:

|           |  |         |           |                                 |  |        |        |        |  |  |
|-----------|--|---------|-----------|---------------------------------|--|--------|--------|--------|--|--|
| For       |  | Against |           | Abstentionsand Broker Non-Votes |
| 8,819,083 |  |    | 1,154,153 |                            |  |   | 58,680 |   |
|           |

Proposal No. 3 – Ratification ofSelection of Independent Auditors

A vote was taken at theAnnual Meeting on the proposal to ratify the appointment of Ernst &Young LLP as auditors for the Company for the fiscal year endingDecember 31, 2003. The selection of Ernst & Young LLP was ratified.The aggregate number of votes cast by holders of common stock voted inperson or by proxy for the proposal was as follows:

|            |  |         |         |                                 |  |        |        |        |  |  |
|------------|--|---------|---------|---------------------------------|--|--------|--------|--------|--|--|
| For        |  | Against |         | Abstentionsand Broker Non-Votes |
| 33,894,226 |  |    | 249,488 |                            |  |   | 33,582 |   |
|            |

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PARTII

ITEM 5.    Market for Registrant's CommonEquity and Related Stockholder Matters

Market Informationfor Common Stock

Our Common Stock has traded under the symbol"VION" on the Nasdaq SmallCap MarketSMsince December 19, 2002, and on the Nasdaq NationalMarket® from October 25, 1999 until December 18, 2002.The following table reflects the range of high and low closing salesprices of our Common Stock for each of the calendar quarters in 2003and 2002 as reported by the Nasdaq SmallCap Market and the NasdaqNational Market.

|               |  |        |      |        |  |        |      |        |  |        |      |        |  |        |      |        |  |  |  |  |  |  |
|---------------|--|--------|------|--------|--|--------|------|--------|--|--------|------|--------|--|--------|------|--------|--|--|--|--|--|--|
|          |  | 2003   |      | 2002   |  |
|          |  | High   |      | Low    |  | High   |      | Low    |  |
| FirstQuarter  |  | $      | 0.48 |   |  | $      | 0.30 |   |  | $      | 4.95 |   |  | $      | 3.81 |   |  |
| SecondQuarter |  |   | 2.53 |   |  |   | 0.30 |   |  |   | 3.97 |   |  |   | 0.39 |   |  |
| ThirdQuarter  |  |   | 2.14 |   |  |   | 1.27 |   |  |   | 0.61 |   |  |   | 0.32 |   |  |
| FourthQuarter |  |   | 2.25 |   |  |   | 1.49 |   |  |   | 0.90 |   |  |   | 0.25 |   |  |
|               |

Holders

At March 24, 2004, there were approximately 476 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.

Changes inSecurities and Use of Proceeds

On June 23, 2003, we issued3,846,150 shares of our Common Stock at $1.30 per share in a privateplacement to a group of institutional investors in reliance on anexemption under Section 4(2) of the Securities Act of 1933, as amended,and Regulation D promulgated thereunder. The investors also receivedwarrants to purchase 1,923,075 shares of Common Stock at $2.20 pershare. These warrants expire on June 23, 2008. The aggregate offeringprice in this offering was $5 million. We have subsequently registeredthe resale of these shares by the investors pursuant to a registrationstatement on Form S-3, which became effective on July 24, 2003.

On September 19, 2003, we issued 6,475,000 shares of our CommonStock at $1.75 per share in a private placement to a group ofinstitutional investors in reliance on an exemption under Section 4(2)of the Securities Act of 1933, as amended, and Regulation D promulgatedthereunder. The investors also received warrants to purchase 6,475,000shares of Common Stock, and the placement agent received a warrant topurchase 100,000 shares of Common Stock at $2.50 per share. All ofthese warrants expire on September 19, 2008. The aggregate offeringprice in this offering was $11.3 million. We have subsequentlyregistered the resale of these shares by the investors and placementagent pursuant to a registration statement on Form S-3, which becameeffective on October 8, 2003.

The net proceeds of $14.9 millionfrom these private placements will be used to fund clinical andpreclinical research and development activities, working capital andgeneral corporate purposes.

ITEM 6.    Selected FinancialData

The following selected financial data for each of thefive years in the period ended December 31, 2003, and for the periodfrom May 1, 1994 (inception) through December 31, 2003, are derivedfrom 

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our audited financial statements. Theselected financial data should be read in conjunction with thefinancial statements, related notes and"Management's Discussion and Analysis of FinancialCondition and Results of Operations" included elsewhereherein.

|                                                                  |  |                                     |         |         |  |        |         |         |  |        |         |                                                                    |  |        |         |         |  |        |         |         |  |        |          |         |  |  |
|------------------------------------------------------------------|--|-------------------------------------|---------|---------|--|--------|---------|---------|--|--------|---------|--------------------------------------------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|----------|---------|--|--|
|                                                             |  | 2003                                |         | 2002    |  | 2001   |         | 2000    |  | 1999   |         | Forthe PeriodFrom May 1, 1994 (Inception) throughDecember 31, 2003 |
|                                                             |  | (Inthousands, except per sharedata) |
| **Statement of OperationsData:**                                 |  |                                |    |    |  |   |    |    |  |   |    |                                                               |  |   |    |    |  |   |    |    |  |   |     |    |
| Totalrevenues                                                    |  | $                                   | 375     |    |  | $      | 238     |    |  | $      | 650     |                                                               |  | $      | 947     |    |  | $      | 3,154   |    |  | $      | 12,644   |    |
| Lossfromoperations                                               |  |                                | (11,923 | )  |  |   | (13,021 | )  |  |   | (15,014 | )                                                             |  |   | (16,131 | )  |  |   | (11,035 | )  |  |   | (101,807 | )  |
| Netloss                                                          |  |                                | (11,838 | )  |  |   | (12,310 | )  |  |   | (13,810 | )                                                             |  |   | (14,803 | )  |  |   | (10,769 | )  |  |   | (96,966  | )  |
| Preferredstock dividends andaccretion                            |  |                                | — |    |  |   | — |    |  |   | — |                                                               |  |   | (606    | )  |  |   | (710    | )  |  |   | (18,489  | )  |
| Lossapplicable to commonshareholders                             |  |                                | (11,838 | )  |  |   | (12,310 | )  |  |   | (13,810 | )                                                             |  |   | (15,409 | )  |  |   | (11,479 | )  |  |   | (115,455 | )  |
| Basicand diluted loss applicable to common shareholders pershare |  |                                | (0.36   | )  |  |   | (0.43   | )  |  |   | (0.51   | )                                                             |  |   | (0.64   | )  |  |   | (0.74   | )  |  |   |     |    |
|                                                             |  |                                |    |    |  |   |    |    |  |   |    |                                                               |  |   |    |    |  |   |    |    |  |   |     |    |
| **BalanceSheetData:**                                            |  |                                |    |    |  |   |    |    |  |   |    |                                                               |  |   |    |    |  |   |    |    |  |   |     |    |
| Cash,cash equivalents and short-terminvestments                  |  | $                                   | 15,719  |    |  | $      | 10,131  |    |  | $      | 22,644  |                                                               |  | $      | 24,357  |    |  | $      | 11,038  |    |  |   |     |    |
| Totalassets                                                      |  |                                | 16,376  |    |  |   | 10,923  |    |  |   | 23,601  |                                                               |  |   | 25,660  |    |  |   | 13,934  |    |  |   |     |    |
| Long-termobligations and redeemable preferredstock               |  |                                | — |    |  |   | — |    |  |   | — |                                                               |  |   | — |    |  |   | 5,185   |    |  |   |     |    |
|                                                                  |

ITEM7.    Management's Discussion and Analysis of FinancialCondition and Results of Operations

Overview

Weare a development stage company engaged in the development oftherapeutics and technologies for the treatment of cancer. Ouractivities to date have consisted primarily of research and productdevelopment, obtaining regulatory approval for clinical trials,conducting clinical trials, negotiating and obtaining collaborativeagreements, and obtaining financing in support of these activities. Ourrevenues primarily consist of contract research grants, technologylicense fees and laboratory and research support fees. Since inception,we have generated minimal revenues and have incurred substantialoperating losses from our activities. We expect to incur substantialoperating losses for the next several years due to expenses associatedwith our activities.

Critical Accounting Policies andEstimates

The accompanying discussion and analysis of ourfinancial condition and results of operations are based upon ourfinancial statements and the related disclosures, which have beenprepared in accordance with accounting principles generally accepted inthe United States. The preparation of these financial statementsrequires us to make estimates and assumptions that affect the amountsreported in our financial statements and accompanying notes. Theseestimates form the basis for making judgments about the carrying valuesof assets and liabilities. We base our estimates and judgments onhistorical experience and on various other assumptions that we believeto be reasonable under the circumstances. Actual results could differmaterially from these estimates.

We believe the followingpolicies to be the most critical to an understanding of our financialcondition and results of operations because they require us to makeestimates, assumptions and judgments about matters that are inherentlyuncertain.

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Revenue Recognition

Werecord revenue from contract research grants as the costs are incurred.We are reimbursed for eligible costs after submission of grant reports.We are subject to grant audits as required by the Department of Healthand Human Services. Audits may result in adjustments to the amount ofgrant revenues recorded and funds received.

We record revenueunder technology license agreements related to the following. Actuallicense fees received may vary from recorded estimatedrevenues.

|              |                                                                                                                                                                                     |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Nonrefundable upfrontlicense fees for which no further performance obligations exist arerecognized as revenue on the earlier of when payments are received orcollection is 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 |

|              |                                                                                                        |
|--------------|--------------------------------------------------------------------------------------------------------|
| •  | Milestone payments arerecognized as revenue when milestones, as defined in the agreement, areachieved. |

We record revenue from royalties based onlicensees' sales of our products or technologies. Revenues arerecognized as earned in accordance with the contract terms whenroyalties from licensees can be reliably measured and collectibility isreasonably assured. Royalty estimates are made in advance of amountscollected based on historical and forecasted trends.

We recordrevenue from laboratory and research support as the services areprovided. Actual laboratory and research support fees collected mayvary from revenue recognized.

The effect of any change inrevenues from contract research grants, technology license agreements,or laboratory and research support would be reflected in revenues inthe period such determination was made. Historically, such adjustmentshave been insignificant.

Research and DevelopmentExpenses

We record research and development expenses asincurred. We disclose clinical trials expenses and other research anddevelopment expenses as separate components of research and developmentexpense in our statements of operations to provide more meaningfulinformation to our investors. The classification of expenses into thesecomponents of research and development expense 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 operating loss and tax credit carryforwards.Except for the sales recorded in 2002 and 2003 of certain research anddevelopment tax credits to the State of Connecticut and the 2003provision for minimum state capital taxes paid, we have not recorded aprovision or benefit for income taxes in the financial statements dueto recurring historical losses and based on judgments regarding thetiming of future profitability. Accordingly, we have provided a fullvaluation allowance for our deferred income tax asset as of December31, 2003. In the event we were to determine that we would be able torealize deferred income tax assets in the future, an adjustment toincrease income in that period of determination would be made.

Stock-Based Compensation

We measure stock-basedcompensation expense under Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees and relatedInterpretations, and provide required disclosures under the fair valuerecognition provisions of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation, as amended by FinancialAccounting Standards No. 148.

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Investments

Our investmentsecurities are classified as available-for-sale and carried at fairmarket value. Unrealized gains or losses are recorded in othercomprehensive income until the securities are sold or otherwisedisposed. However, a decline in fair market value below cost that isother than temporary would be accounted for as a realized loss in theperiod such determination was made.

Results of Operations

Year Ended December 31, 2003 Compared to the Year EndedDecember 31, 2002

Revenues**.**    Revenues forthe year ended December 31, 2003, were $0.4 million as compared to $0.2million for 2002. The increase was due primarily to higher revenuesfrom research support fees.

Research andDevelopment**.**    Total research and development expenses(which include clinical trials expenses and other research anddevelopment expenses) were $9.7 million for the year ended December 31,2003, compared to $10.5 million for 2002. Clinical trials expenses were$5.8 million for the year ended December 31, 2003, as compared to $4.9million for 2002. The increase was due to higher costs associated withpatient enrollment in expanded Triapine® trials of $0.9million and CLORETAZINETM (VNP40101M) trials of $0.4million, partially offset by lower costs for TAPET®trials of $0.4 million. Other research and development expensesdecreased to $3.9 million for the year ended December 31, 2003, from$5.6 million for 2002, primarily due to a decrease in employee-relatedexpenses due to fewer research employees and, to a lesser extent, adecrease in spending for external research support.

Generaland Administrative**.**    General and administrativeexpenses were $2.6 million for the year ended December 31, 2003, ascompared to $2.7 million in 2002. The decrease was due to lower patentand other professional fees partially offset by higher legal fees forlicense agreements negotiated during the year and assistance with othertransactions.

Interest Income**.**    Interestincome was $0.1 million for the year ended December 31, 2003, comparedto $0.5 million for 2002. The decrease was due to lower interest ratesand, to a lesser extent, lower levels of invested funds during most ofthe 2003 fiscal year.

Other Expense**.**    Otherexpense related to foreign currency transaction losses was $45,000 forthe year ended December 31, 2003, compared to $0 for 2002. The foreigncurrency transaction losses were related to a contract with a vendoroutside the U.S. that is denominated in a foreign currency.

Income Tax Provision (Benefit)**.**    An income taxprovision of $4,000 was recorded for the year ended December 31, 2003,which reflected minimum state capital taxes paid partially offset bythe sale of certain research and development tax credits to the Stateof Connecticut. For the year ended December 31, 2002, an income taxbenefit of $0.2 million was recognized related to the sale of certainresearch and development tax credits to the State of Connecticut.

Net Loss.    The net loss was $11.8 million, or $0.36 pershare based on weighted-average shares outstanding of 32.8 million, forthe year ended December 31, 2003, as compared to $12.3 million, or$0.43 per share based on weighted-average shares outstanding of 28.9million, for 2002.

Year Ended December 31, 2002 Comparedto the Year Ended December 31, 2001

In May 2002, facing asevere shortage of cash resources, we announced a plan to conserve ourcash resources. The plan included a staff reduction, deferral of aportion of management's salaries, and other decreases inexpenses. We believe the plan reduced net expenses by approximately$3.5 million in 2002.

Revenues**.**    Revenuesfor the year ended December 31, 2002, were $0.2 million as compared to$0.7 million for 2001. The decrease was due primarily to lower 2002revenues from research grants and, to a lesser extent, lower technologylicense fee revenues, partially offset by 2002 revenues from laboratoryand research support fees.

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Research andDevelopment**.**    Total research and development expenses(which include clinical trials expenses and other research anddevelopment expenses) were $10.5 million for the year ended December31, 2002, compared to $12.5 million for 2001. Clinical trials expenseswere $4.9 million for the year ended December 31, 2002, as compared to$3.9 million for 2001. The increase was due to higher costs associatedwith clinical trials of Triapine® and higher patientenrollment associated with expanded trials of CLORETAZINETM(VNP40101M). Other research and development expenses decreased to $5.6million for the year ended December 31, 2002, from $8.6 million for2001. The decrease was due to our plan to cut expenses and conservecash resources, which resulted in lower external research support and,to a lesser extent, lower headcount and elimination of incentivecompensation for 2002.

General andAdministrative**.**    General and administrative expenseswere $2.7 million for the year ended December 31, 2002, as compared to$3.1 million in 2001. The decrease was due to our plan to cut expensesand conserve cash resources, which resulted in lower legal and otherprofessional fees and, to a lesser extent, lower headcount andelimination of incentive compensation for 2002.

InterestIncome**.**    Interest income was $0.5 million for the yearended December 31, 2002, compared to $1.2 million for 2001. Thedecrease was due to lower interest rates and lower levels of investedfunds.

Income Tax Benefit**.**    An income taxbenefit of $0.2 million was recognized during the year ended December31, 2002, related to the sale of certain research and development taxcredits to the State of Connecticut.

Net Loss.    Thenet loss was $12.3 million, or $0.43 per share based onweighted-average shares outstanding of 28.9 million, for the year endedDecember 31, 2002, as compared to $13.8 million, or $0.51 per sharebased on weighted-average shares outstanding of 27.2 million, for2001.

Liquidity and Capital Resources

At December 31,2003, we had cash, cash equivalents and short-term investments of $15.7million, compared to $10.1 million at December 31, 2002. The increasein cash, cash equivalents and short-term investments in 2003 wasprimarily due to net proceeds of $14.9 million received from privateplacements of our Common Stock and warrants in June and September 2003,described below, offset by cash used to fund operating activities of$9.2 million and $5.2 million from purchases, net of maturities, of ourshort-term investments. Our cash used in operations was primarily toadvance our ongoing preclinical and clinical activities.

In June2003, we completed a private placement of 3,846,150 shares of ourCommon Stock at $1.30 per share. The investors also received warrantsto purchase 1,923,075 shares of our Common Stock at $2.20 per share.The warrants expire on June 23, 2008. In September 2003, we completed aprivate placement of 6,475,000 shares of our Common Stock at $1.75 pershare. The investors also received warrants to purchase 6,475,000shares of our Common Stock at $2.50 per share and the placement agentreceived a warrant to purchase 100,000 shares of our Common Stock at$2.50 per share. All of these warrants expire on September 19, 2008.Net proceeds from the private placements of $14.9 million will be usedto fund clinical and preclinical research and development activities,working capital and general corporate purposes.

In August 2003,we reinstated payment of the full salaries of our senior management, aportion of which had been deferred in connection with our May 2002 planto conserve cash resources, described above. The salary deferrals arebeing paid in equal installments over the twelve-month period beginningAugust 1, 2003. As of December 31, 2003, the salary deferral amountedto approximately $238,000 and was included in accrued payroll andpayroll-related expenses in the accompanying balance sheet.

Capital expenditures for the year ended December 31, 2003 wereapproximately $117,000. Capital expenditures for 2004 are not expectedto exceed $300,000.

Subsequent to 2003 year-end, we received netproceeds of $37.3 million from issuances totaling 15,399,771 shares ofour Common Stock in a private placement and pursuant to exercises ofcertain 

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warrants as follows. From January 1 to March12, 2004, 1,845,926 shares of our Common Stock were issued upon theexercise of warrants for proceeds of $4.4 million. In February 2004, wecompleted a private placement of 13,553,845 shares of our Common Stockat $2.60 per share resulting in net proceeds of $32.9 million. Theinvestors also received warrants to purchase 3,388,463 shares of ourCommon Stock at $3.25 per share and the placement agent received awarrant to purchase 300,000 shares of our Common Stock at $3.25 pershare. These warrants expire on February 11, 2009. We plan to use thenet proceeds from these transactions to fund clinical and preclinicaldevelopment activities and for working capital and general corporatepurposes.

We estimate that our existing cash, cash equivalentsand short-term investments totaling $15.7 million at December 31, 2003plus the additional proceeds of $37.3 million from issuances of ourCommon Stock and warrants in 2004 will be sufficient to fund ourplanned operations into 2006. We currently estimate that we need cashof approximately $12.3 million, net of cash inflows from researchgrants, technology license fees and interest, to fund our operationsfor the entire year in 2004. However, we are currently evaluating ouroverall strategic plan and may, therefore, spend more than our currentforecast of $12.3 million in 2004. Our operating plans and cashrequirements may vary materially from the foregoing due to the resultsof 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 raisesubstantial capital to complete our product development and clinicaltrials and to fund operations in 2006 and beyond, however, we cannotassure you that we will be able to raise additional capital, nor can wepredict what the terms of any financing might be.

ContractualObligations

The following table summarizes our significantcontractual obligations and the effect such obligations are expected tohave on our liquidity and cash flow in future periods (inthousands):

|                                       |  |        |       |        |  |        |         |        |  |        |         |                     |  |        |               |        |  |        |               |        |  |        |               |        |  |  |
|---------------------------------------|--|--------|-------|--------|--|--------|---------|--------|--|--------|---------|---------------------|--|--------|---------------|--------|--|--------|---------------|--------|--|--------|---------------|--------|--|--|
|                                  |  | 2004   |       | 2005   |  | 2006   |         | 2007   |  | 2008   |         | 2009&Thereafter |
| Employment agreement(1)               |  | $      | 412   |   |  | $      | 412     |   |  | $      | — |                |  | $      | —       |   |  | $      |  — |   |  | $      | —       |   |
| Employee retention payments(1)        |  |   | 285   |   |  |   | — |   |  |   | — |                |  |   | —       |   |  |   | —       |   |  |   | —       |   |
| Operatingleases(1)                    |  |   | 288   |   |  |   | 299     |   |  |   | 263     |                |  |   | —       |   |  |   | —       |   |  |   | —       |   |
| Researchand development commitment(2) |  |   | 200   |   |  |   | 50      |   |  |   | — |                |  |   | —       |   |  |   | —       |   |  |   | —       |   |
| Totalcontractualobligations           |  | $      | 1,185 |   |  | $      | 761     |   |  | $      | 263     |                |  | $      |  — |   |  | $      | —       |   |  | $      |  — |   |
|                                       |

|  |
|--|
|  |  |
|  |

| (1) | Referto Note 9 to our financial statements for additionaldiscussion. |
|-----|----------------------------------------------------------------------|

| (2) | Includes commitment to fundlaboratory research. Refer to Note 10 to our financial statements foradditional discussion. |
|-----|------------------------------------------------------------------------------------------------------------------------|

Risk Factors

This AnnualReport on Form 10-K contains, in addition to historical information,forward-looking statements that involve risks and uncertainties. Ouractual results could differ materially. Factors that could cause orcontribute to such differences include, but are not limited to, thosediscussed below, as well as those discussed elsewhere in this AnnualReport on Form 10-K, including the documents incorporated byreference.

An investment in our common stock involves a highdegree of risk. You should carefully consider the following factors inevaluating us and our business before you decide to purchase our commonstock. If any of the following risks actually occur, our business,financial conditions or results of operations would likely suffer. Inthis case, the price of our securities could decline or you may loseall or part of your investment.

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If we fail to obtain the capitalnecessary to fund our operations, we will be unable to continue orcomplete our product development.

We will need to raisesubstantial additional capital to fund operations and complete ourproduct development. As of December 31, 2003, we had $15.7 million incash, cash equivalents and short-term investments (not including thenet proceeds of $32.9 million from our recent private placement ofcommon stock and warrants, and additional proceeds of $4.4 million fromrecent exercises of certain other warrants) 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 2006 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.

Theamount of capital we may need depends on many factors,including:

|              |                                                                   |
|--------------|-------------------------------------------------------------------|
| •  | the progress, timing andscope of our product developmentprograms; |

|              |                                                                              |
|--------------|------------------------------------------------------------------------------|
| •  | the progress, timing andscope of our preclinical studies and clinicaltrials; |

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

|              |                                                                                                                                                                                                              |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | the timeand cost necessary to further develop manufacturing processes, arrangefor contract manufacturing or build manufacturing facilities and obtainthe necessary regulatory approvals for thosefacilities; |

|              |                                                                                      |
|--------------|--------------------------------------------------------------------------------------|
| •  | the time and costnecessary to develop sales, marketing and distributioncapabilities; |

|              |                                                                                                       |
|--------------|-------------------------------------------------------------------------------------------------------|
| •  | our ability to enterinto and maintain collaborative, licensing and other commercialrelationships; and |

|              |                                                                                 |
|--------------|---------------------------------------------------------------------------------|
| •  | ourpartners' commitment of time and resource to the development ofour products. |

We have limited access to the capitalmarkets and, if we can raise additional funding, stockholders mayexperience extreme dilution.

We have limited access to thecapital markets to raise capital. The capital markets have beenunpredictable in the past, especially for drug development companiesand unprofitable companies such as ours. In addition, it is difficultto raise capital under current market conditions. The amount of capitalthat a company such as ours is able to raise often depends on variablesthat are beyond our control, such as the share price of our stock andits trading volume. As a result, we may not be able to secure financingon terms attractive to us, or at all. If we are able to consummate afinancing arrangement, the amount raised may not be sufficient to meetour future needs. If adequate funds are not available on acceptableterms, or at all, our business, including our technology licenses,relationships with key suppliers, results of operations, financialcondition and our continued viability will be materially adverselyaffected.

To the extent we encounter additional opportunities toraise cash, we would likely sell additional equity or debt securities.Due to our current stock price and market conditions, and the amount ofcapital we need, any such debt or equity securities are likely to besold at relatively low prices, including prices which are below themarket prices of our stock, and may have substantial rights to controlthe Company. 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.

In connection with our most recent private placement of common stockand warrants in February 2004, we agreed that until the earlier of June10, 2004 or 15 calendar days after the effective date of a

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registration statement related to the privateplacement shares, we shall not effect a sale of our common stock orsecurities convertible into common stock. We further agreed not to fileany registration statement with respect to any such sale of commonstock or convertible securities prior to 15 calendar days after theeffective date of a registration statement related to the privateplacement shares. This delay in our ability to sell securities andeffectuate a financing could have a material adverse effect on ourability to fund our company.

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; |

|              |                                                   |
|--------------|---------------------------------------------------|
| •  | potentially dilutiveissuance of equitysecurities; |

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

|              |                                                                      |
|--------------|----------------------------------------------------------------------|
| •  | difficulties inassimilating the operations of the acquiredcompanies; |

|              |                                                                       |
|--------------|-----------------------------------------------------------------------|
| •  | diverting ourmanagement's attention away from other businessconcerns; |

|              |                                                                               |
|--------------|-------------------------------------------------------------------------------|
| •  | 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.

There may bean adverse effect on the market price of our common stock as a resultof shares being available for sale in the future.

Futureadditional sales of a substantial amount of common stock in the publicmarket or by private placement, or the perception that these sales mayoccur, could adversely affect the market price of our common stock fromtime to time. This could also impair our ability to raise additionalcapital through the sale of our equity securities. We had approximately54.7 million shares of common stock outstanding as of March 10, 2004,including 13,553,845 shares from our recent private placement of commonstock and warrants. Options and warrants to purchase approximately 14.1million shares of common stock, including warrants to purchase3,688,463 shares of our common stock from our recent private placement,were exercisable at March 10, 2004 and other options to purchaseapproximately 0.9 million shares of common stock become exercisable atvarious times through 2008.

If we continue to incuroperating losses, we may be unable to continue our operations.

We have incurred losses since inception. As of December 31, 2003, wehad an accumulated deficit of approximately $115.7 million. If wecontinue to incur operating losses and fail to become a profitablecompany, we may be unable to continue our operations. Since we beganour business, we have focused on research, development and clinicaltrials of product candidates. We expect to continue to operate at a netloss for at least the next several years as we continue our researchand development efforts, continue to conduct clinical trials anddevelop manufacturing, sales, marketing and distribution capabilities.Our future profitability depends on our receiving regulatory approvalof 

24

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our product candidates and our ability tosuccessfully manufacture and market approved drugs. The extent of ourfuture losses and the timing of our profitability are highlyuncertain.

If we do not obtain regulatory approval forour products, we will not be able to sell our products and the value ofour company and our financial results will be harmed.

We cannotsell or market our drugs without regulatory approval. If we cannotobtain regulatory approval for our products, the value of our companyand our financial results will be harmed. In the United States, we mustobtain approval from the U.S. Food and Drug Administration, or FDA, foreach drug that we intend to sell. The current status of our potentialproducts is as follows:

|              |                                                                                                                                                                                                                                                                                         |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Triapine® is beingevaluated in Phase I and Phase II clinical trials in combination withstandard chemotherapies. The National Cancer Institute is alsosponsoring additional Phase I and Phase II trials of Triapine as asingle agent and in combination with standardchemotherapies; |

|              |                                                                                                                                                                              |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | CLORETAZINETM(VNP40101M) is being evaluated in Phase I trials as a single agent andin combination with a standard chemotherapy, and in Phase II trials asa single agent; and |

|              |                                                                                                                    |
|--------------|--------------------------------------------------------------------------------------------------------------------|
| •  | Heterocyclichydrazones, KS119 and a second-generation TAPET® vectorare being evaluated in preclinical studies. |

If and when wecomplete 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 orachieve unfavorable results, we will not be able to obtain regulatoryapprovals for our products.

We must conduct extensive testingof our product candidates before we can obtain regulatory approval forour products. 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 patientenrollment; |

|              |                                                                     |
|--------------|---------------------------------------------------------------------|
| •  | long treatment timerequired to demonstrate safety andeffectiveness; |

|              |                                                     |
|--------------|-----------------------------------------------------|
| •  | lack of sufficientsupplies of the productcandidate; |

|              |                                                           |
|--------------|-----------------------------------------------------------|
| •  | adverse medical events orside effects in treatedpatients; |

|              |                                                                |
|--------------|----------------------------------------------------------------|
| •  | lack of effectiveness ofthe product candidate being tested;and |

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

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

Our business exposes us to potential product liabilityrisks that are inherent in the testing, manufacturing and marketing ofdrug products including, but not limited to, unacceptable side effects.These risks are particularly inherent in human trials of our proposedproducts. Side effects and other liability risks could give rise toviable product liability claims against us. While we have obtainedinsurance coverage for patients enrolled in clinical trials, we may notbe able to maintain this insurance on acceptable terms, insurance maynot provide adequate coverage against potential liabilities and we mayneed additional insurance coverage for expanded clinical trials andcommercial activity. As a result, product liability claims, even ifsuccessfully defended, could have a material adverse effect on ourbusiness, financial condition and results of operations.

25

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If our potential products causeunacceptable side effects, we will not be able to commercializeour products.

Unacceptable side effects may be discoveredduring preclinical and clinical testing of one or more of our potentialproducts. If the side effects are determined unacceptable, we will notbe able to commercialize our products.

If we are foundto be infringing 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 products mayconflict with patents that have been or may be granted to competitors,universities or others, or the trade secrets of those persons andentities. As the drug development industry expands and more patents areissued, the risk increases that our processes and potential productsmay give rise to claims that they infringe the patents or trade secretsof others. These other persons could bring legal actions against usclaiming damages and seeking to enjoin clinical testing, manufacturingand marketing of the affected product or process. If any of theseactions are successful, in addition to any potential liability fordamages, we could be required to obtain a license in order to continueto conduct clinical tests, manufacture or market the affected productor use the affected process. Required licenses may not be available onacceptable terms, if at all, and the results of litigation areuncertain. If we become involved in litigation or other proceedings, itcould consume a substantial portion of our financial resources and theefforts of our personnel.

We rely on confidentialityagreements to protect our trade secrets. If these agreements arebreached by our employees or other parties, our trade secrets maybecome known to our competitors.

We rely on trade secrets thatwe seek to protect through confidentiality agreements with ouremployees and other parties. If these agreements are breached, ourcompetitors may obtain and use our trade secrets to gain a competitiveadvantage over us. We may not have any remedies against our competitorsand any remedies that may be available to us may not be adequate toprotect our business and compensate us for the damaging disclosure. Inaddition, we may have to expend resources to protect our interests frompossible infringement by others.

If we fail to recruitand retain key personnel, our research and development programs may bedelayed.

We are highly dependent upon the efforts of our seniormanagement and scientific personnel, particularly, Alan Kessman, ourchief executive officer and director; Howard Johnson, our president andchief financial officer; Mario Sznol, M.D., our vice president,clinical affairs and Ivan King, Ph.D., our vice president, research anddevelopment. There is intense competition in the drug developmentindustry for qualified scientific and technical personnel. Since ourbusiness is very technical and specialized, we need to continue toattract and retain such people. We may not be able to continue toattract and retain the qualified personnel necessary for developing ourbusiness, particularly in light of our need to raise substantialadditional financing in order to continue our operations in 2006 andbeyond. We have no key man insurance policies on any of the officerslisted above and we only have an employment agreement with Mr. Kessman.If we lose the services of our management and scientific personnel orfail to recruit other scientific and technical personnel, our researchand product development programs will be significantly anddetrimentally affected.

We face intense competition inthe market for anticancer products, and if we are unable tocompete successfully, our business will suffer.

Numerouspharmaceutical and biotechnology companies have publicly announcedtheir intention to develop drugs that target the replication of tumorcells including, in some instances, the development of agents whichtarget ribonucleotide reductase similar to our compoundTriapine®, agents which are alkylating agents similar toour compound CLORETAZINETM (VNP40101M) and 

26

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agents which are drug delivery systems.These companies include, but are not limited to, Bristol-Myers SquibbCompany, Pfizer Inc., Chiron Corporation, Amgen Inc., Genentech Inc.,ImClone Systems Inc., OSI Pharmaceuticals, Inc., Lorus TherapeuticsInc., AstraZeneca PLC, Schering-Plough Corporation and Eli Lilly andCompany. These and other large pharmaceutical companies havesubstantially greater financial and other resources and developmentcapabilities than we do and have substantially greater experience inundertaking preclinical and clinical testing of products, obtainingregulatory approvals, and manufacturing and marketing pharmaceuticalproducts. In addition, our competitors may succeed in obtainingapproval for products more rapidly than us and in developing andcommercializing products that are safer and more effective than thosethat we propose to develop. The existence of these products, otherproducts or treatments of which we are not aware or products ortreatments that may be developed in the future may adversely affect themarketability of our products by rendering them less competitive orobsolete. In addition to competing with universities and other researchinstitutions in the development of products, technologies andprocesses, we may compete with other companies in acquiring rights toproducts or technologies from universities.

If ourcorporate partners, licensors, licensees, collaborators at researchinstitutions and others do not conduct activities in accordancewith our arrangements, our research and development efforts may bedelayed.

Our strategy for the research, development andcommercialization of our products entails entering into variousarrangements with corporate partners, licensors, licensees,collaborators at research institutions and others. We currently dependon the following third parties:

|              |                                                                                                         |
|--------------|---------------------------------------------------------------------------------------------------------|
| •  | YaleUniversity, or Yale, for collaborative research and for technologiesthat are licensed by them tous; |

|              |                                                                                                                                  |
|--------------|----------------------------------------------------------------------------------------------------------------------------------|
| •  | Beijing Pason Pharmaceuticals,Inc. for the development of Triapine in the People's Republic ofChina, Hong Kong, Macao andTaiwan; |

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

|              |                                                                                                                                          |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Clinical researchorganizations in the United States and other countries to monitor andcollect data related to human clinical trials; and |

|              |                                                                                               |
|--------------|-----------------------------------------------------------------------------------------------|
| •  | Contract manufacturers to produce ourproducts for use in preclinical and clinical activities. |

If thethird parties do not conduct activities in accordance with thearrangements we have with them, our research and development effortsmay be delayed. We may also rely on other collaborative partners toobtain regulatory approvals and to manufacture and market our products.The amount and timing of resources to be devoted to these activities bythese other parties may not be within our control.

IfYale does not conduct research relating to products we would like topursue, we may never realize any benefits from our funding provided toYale.

Through December 31, 2003, we have paid approximately$9.9 million 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, 2005. We maycontinue to support certain research projects at Yale. We generally donot have the right to control the research that Yale is conducting withour funding, and our funds may not be used to conduct research relatingto products that we would like to pursue. Additionally, if the researchbeing conducted by Yale results in technologies that Yale has notalready licensed or agreed to license to us, we may need to negotiateadditional license agreements or we may be unable to utilize thosetechnologies.

If environmental laws become stricter inthe future, we may face large capital expenditures in order to complywith environmental laws.

We cannot accurately predict theoutcome or timing of future expenditures that we may be required toexpend to comply with comprehensive federal, state and localenvironmental laws and 

27

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regulations. We must comply withenvironmental laws that govern, among other things, all emissions,waste water discharge and solid and hazardous waste disposal, and theremediation of contamination associated with generation, handling anddisposal activities. To date, we have not incurred significant costsand are not aware of any significant liabilities associated with ourcompliance with federal, state and local laws and regulations. However,environmental laws have changed in recent years and we may becomesubject to stricter environmental standards in the future and may facelarge capital expenditures to comply with environmental laws. We havelimited capital and are uncertain whether we will be able to pay forsignificantly large capital expenditures. Also, future developments,administrative actions or liabilities relating to environmental mattersmay have a material adverse effect on our financial condition orresults of operations.

All of our operations are performed understrict environmental 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.

Even if we obtainregulatory approval for our products, we currently lack the ability andresources to commercialize the products.

If our products areapproved for sale by regulatory authorities, we will need to developmanufacturing and marketing capability or make arrangements with thirdparties to manufacture, distribute and sell our products. We do notcurrently have and are not seeking arrangements for manufacturing ormarketing products on a commercial basis.

If the priceof our common stock declines to below $1.00 per share, our shares couldbe delisted from the Nasdaq SmallCap MarketSM.

Ifthe price of our common stock declines below $1.00 per share, we mayfail to meet Nasdaq's maintenance criteria, which may result inthe delisting of our common stock from the Nasdaq SmallCapMarketSM. In such event, trading, if any, in our commonstock may then continue to be conducted in the non-Nasdaqover-the-counter market in what are commonly referred to as theelectronic bulletin board and the "pinksheets". As a result, an investor may find it moredifficult to dispose of or obtain accurate quotations as to the marketvalue of our common stock. In addition, we would be subject to a Rulepromulgated by the Securities and Exchange Commission that, if we failto meet criteria set forth in such Rule, imposes various practicerequirements on broker-dealers who sell securities governed by the Ruleto persons other than established customers and accredited investors.For these types of transactions, the broker-dealer must make a specialsuitability determination for the purchaser and have received thepurchaser's written consent to the transactions prior to thesale. Consequently, the Rule may have a materially adverse effect onthe ability of broker-dealers to sell our securities, which maymaterially affect the ability of stockholders to sell our securities inthe secondary market.

A delisting from the Nasdaq SmallCapMarketSM will also make us ineligible to use Form S-3 toregister shares of our common stock with the Securities and ExchangeCommission, thereby making it more difficult and expensive for us toregister our common stock and raise additional capital. We would alsoincur additional costs under state blue-sky laws to sell equity if weare delisted.

Additionally, we may decide to, or certain of ourinvestors may require that, we implement a reverse stock split in orderto maintain a higher stock price. The effect of any reverse stock splitof the common stock upon the market price of our common stock cannot bepredicted, and the history of reverse stock splits for companies insimilar circumstances is varied. The trading price of our common stockmay not rise in exact proportion to the reduction in the number ofshares of our common stock outstanding as a result of the reverse stocksplit, and there may not be a sustained increase in the trading priceof our common stock after giving effect to the reverse stock split.Moreover, the trading price may not remain above the thresholdsrequired by the Nasdaq SmallCap Market and we may not be able tocontinue to meet the other continued listing requirements of the NasdaqSmallCap Market.

28

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The resulting decrease in the number ofshares of our common stock outstanding could potentially impact theliquidity of our common stock, especially in the case of larger blocktrades. The reverse stock split would result in some stockholdersowning "odd-lots" of less than 100 shares ofcommon stock. Brokerage commissions and other costs of transactions inodd-lots are generally higher than the costs of transactions in"round-lots" of even multiples of 100shares.

The reverse stock split could also result in a greaterspread between the number of authorized shares and the number ofoutstanding shares, which may have the effect of discouraging anattempt to change control of the Company, especially in the event of ahostile takeover bid, and to make more difficult the removal ofincumbent management.

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

We have in place a stockholderrights plan, or "poison pill", which enablesour board of directors to issue rights to purchase common stock whensomeone acquires 20% or more of the outstanding shares of ourcommon stock. As a result of the plan, anyone wishing to take over thecompany would most likely be forced to negotiate a transaction with ourBoard and management in order not to trigger the pill. The need tonegotiate with the Board or management could frustrate a proposedtakeover particularly where the Board and management wish to remainentrenched. This would prevent our stockholders from participating in atakeover or tender offer, which might be of substantial value tothem.

ITEM 7A.    Quantitative and QualitativeDisclosures about Market Risk

We are exposed to marketrisk, including changes to interest rates associated with our cashequivalents and investments, and foreign currency exchange rates. Thefollowing describes the nature of these risks which we do not believeto be material to us.

Our cash equivalents are generally highlyliquid investments in money market funds. Our short-term investmentsare primarily in U.S. government and state agency securities. Thesesecurities generally are liquidated and repriced every 28 to 45 days,but are classified as short-term investments as they do not have astated maturity date. These investments are subject to risk of default,changes in credit rating, changes in market value and interest raterisk. Due in part to these factors, our future investment income mayfall short of expectations due to changes in interest rates or we maysuffer losses in principal if forced to sell securities that havedeclined in market value due to changes in interest rates. However, theconservative nature of our investments mitigates our interest rateexposure, and our investment policy limits the amount of our creditexposure to any one issue and issuer. Our investments are held forpurposes other than trading and we believe that we currently have nomaterial adverse market risk exposure.

We have a contract with avendor outside the U.S. that is denominated in a foreign currency. Todate, fluctuations in this currency have not materially impacted ourresults of operations. We have no derivative financial instruments. Wedo not believe we have material exposures to changes in foreigncurrency exchange rates.

29

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ITEM8.    Financial Statements and Supplementary Data

Report of Ernst & Young LLP, IndependentAuditors

The Board of Directors andShareholders Vion Pharmaceuticals, Inc.

Wehave audited the accompanying balance sheets of Vion Pharmaceuticals,Inc. (a development stage company) as of December 31, 2003 and 2002,and the related statements of operations, changes inshareholders' equity, and cash flows for each of the three yearsin the period ended December 31, 2003 and for the period from May 1,1994 (inception) to December 31, 2003. These financial statements arethe responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statementsbased on our audits.

We conducted our audits inaccordance with auditing standards generally accepted in the UnitedStates. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principlesused and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to abovepresent fairly, in all material respects, the financial position ofVion Pharmaceuticals, Inc. at December 31, 2003 and 2002, and theresults of its operations and its cash flows for each of the threeyears in the period ended December 31, 2003 and the period from May 1,1994 (inception) to December 31, 2003, in conformity with accountingprinciples generally accepted in the United States.

|  | /s/ Ernst & Young LLP |
|--|---------------------------|

Boston, Massachusetts January 23, 2004, except withrespect to Note 12, as to which the date is March 12,2004

30

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VionPharmaceuticals, Inc. (A Development StageCompany)

BalanceSheets

|                                                                                                                                                                 |  |             |          |         |  |        |          |         |  |  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------|----------|---------|--|--------|----------|---------|--|--|
|                                                                                                                                                            |  | December31, |
| (In thousands,except share and per sharedata)                                                                                                                   |  | 2003        |          | 2002    |
| **ASSETS**                                                                                                                                                      |  |        |     |    |  |   |     |    |
| Currentassets:                                                                                                                                                  |  |        |     |    |  |   |     |    |
| Cash andcashequivalents                                                                                                                                         |  | $           | 1,219    |    |  | $      | 781      |    |
| Short-terminvestments                                                                                                                                           |  |        | 14,500   |    |  |   | 9,350    |    |
| Totalcash, cash equivalents and short-terminvestments                                                                                                           |  |        | 15,719   |    |  |   | 10,131   |    |
| Accountsreceivable                                                                                                                                              |  |        | 27       |    |  |   | 48       |    |
| Interestreceivable                                                                                                                                              |  |        | 11       |    |  |   | 10       |    |
| Prepaidexpenses                                                                                                                                                 |  |        | 224      |    |  |   | 249      |    |
| Totalcurrentassets                                                                                                                                              |  |        | 15,981   |    |  |   | 10,438   |    |
| Property andequipment, net                                                                                                                                      |  |        | 370      |    |  |   | 456      |    |
| Securitydeposits                                                                                                                                                |  |        | 25       |    |  |   | 29       |    |
| Totalassets                                                                                                                                                     |  | $           | 16,376   |    |  | $      | 10,923   |    |
| **LIABILITIESAND SHAREHOLDERS'EQUITY**                                                                                                                          |  |        |     |    |  |   |     |    |
| Currentliabilities:                                                                                                                                             |  |        |     |    |  |   |     |    |
| Accruedpayroll and payroll-relatedexpenses                                                                                                                      |  | $           | 464      |    |  | $      | 411      |    |
| Accounts payableand accruedexpenses                                                                                                                             |  |        | 3,595    |    |  |   | 1,648    |    |
| Deferredrevenue                                                                                                                                                 |  |        | 18       |    |  |   | —  |    |
| Totalcurrentliabilities                                                                                                                                         |  |        | 4,077    |    |  |   | 2,059    |    |
| Deferredrevenue                                                                                                                                                 |  |        | 377      |    |  |   | —  |    |
| Totalliabilities                                                                                                                                                |  |        | 4,454    |    |  |   | 2,059    |    |
| Shareholders'equity:                                                                                                                                            |  |        |     |    |  |   |     |    |
| Preferred stock, $0.01 parvalue, authorized: 5,000,000 shares; issued and outstanding:none                                                                      |  |        | —  |    |  |   | —  |    |
| Common stock,$0.01 par value, authorized: 100,000,000 shares; issued andoutstanding: 39,276,755 and 28,908,872 shares at December 31, 2003 and2002,respectively |  |        | 393      |    |  |   | 289      |    |
| Additionalpaid-incapital                                                                                                                                        |  |        | 127,239  |    |  |   | 112,447  |    |
| Deficitaccumulated during the developmentstage                                                                                                                  |  |        | (115,710 | )  |  |   | (103,872 | )  |
|                                                                                                                                                            |  |        | 11,922   |    |  |   | 8,864    |    |
| Totalliabilities and shareholders'equity                                                                                                                        |  | $           | 16,376   |    |  | $      | 10,923   |    |
|                                                                                                                                                                 |

Theaccompanying notes are an integral part of these financialstatements.

31

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VionPharmaceuticals, Inc. (A Development StageCompany)

Statements ofOperations

|                                                                  |  |        |            |                                   |  |        |            |                                                                   |  |        |            |         |  |        |          |         |  |  |
|------------------------------------------------------------------|--|--------|------------|-----------------------------------|--|--------|------------|-------------------------------------------------------------------|--|--------|------------|---------|--|--------|----------|---------|--|--|
| (Inthousands, except share and per sharedata)                    |  | 2003   |            | For the Year EndedDecember31,2002 |  | 2001   |            | For the Period fromMay 1, 1994 (Inception) throughDecember31,2003 |
| Revenues:                                                        |  |   |       |                              |  |   |       |                                                              |  |   |       |    |  |   |     |    |
| Contractresearchgrants                                           |  | $      | 209        |                              |  | $      | 179        |                                                              |  | $      | 481        |    |  | $      | 2,401    |    |
| Researchsupportfees                                              |  |   | 133        |                              |  |   | 5          |                                                              |  |   | —    |    |  |   | 5,636    |    |
| Technologylicensefees                                            |  |   | 30         |                              |  |   | 28         |                                                              |  |   | 169        |    |  |   | 4,461    |    |
| Laboratorysupportfees                                            |  |   | 3          |                              |  |   | 26         |                                                              |  |   | —    |    |  |   | 146      |    |
| Totalrevenues                                                    |  |   | 375        |                              |  |   | 238        |                                                              |  |   | 650        |    |  |   | 12,644   |    |
| Operatingexpenses:                                               |  |   |       |                              |  |   |       |                                                              |  |   |       |    |  |   |     |    |
| Clinicaltrials                                                   |  |   | 5,772      |                              |  |   | 4,897      |                                                              |  |   | 3,891      |    |  |   | 27,139   |    |
| Otherresearch anddevelopment                                     |  |   | 3,963      |                              |  |   | 5,650      |                                                              |  |   | 8,638      |    |  |   | 62,572   |    |
| Totalresearch anddevelopment                                     |  |   | 9,735      |                              |  |   | 10,547     |                                                              |  |   | 12,529     |    |  |   | 89,711   |    |
| Generalandadministrative                                         |  |   | 2,563      |                              |  |   | 2,712      |                                                              |  |   | 3,135      |    |  |   | 24,740   |    |
| Totaloperatingexpenses                                           |  |   | 12,298     |                              |  |   | 13,259     |                                                              |  |   | 15,664     |    |  |   | 114,451  |    |
| Lossfromoperations                                               |  |   | (11,923    | )                            |  |   | (13,021    | )                                                            |  |   | (15,014    | )  |  |   | (101,807 | )  |
| Interestincome                                                   |  |   | 136        |                              |  |   | 484        |                                                              |  |   | 1,204      |    |  |   | 4,873    |    |
| Interestexpense                                                  |  |   | (2         | )                            |  |   | —    |                                                              |  |   | —    |    |  |   | (210     | )  |
| Otherexpense                                                     |  |   | (45        | )                            |  |   | —    |                                                              |  |   | —    |    |  |   | (45      | )  |
| Lossbefore incometaxes                                           |  |   | (11,834    | )                            |  |   | (12,537    | )                                                            |  |   | (13,810    | )  |  |   | (97,189  | )  |
| Incometax provision(benefit)                                     |  |   | 4          |                              |  |   | (227       | )                                                            |  |   | —    |    |  |   | (223     | )  |
| Netloss                                                          |  |   | (11,838    | )                            |  |   | (12,310    | )                                                            |  |   | (13,810    | )  |  |   | (96,966  | )  |
| Preferredstock dividends andaccretion                            |  |   | —    |                              |  |   | —    |                                                              |  |   | —    |    |  |   | (18,489  | )  |
| Lossapplicable to commonshareholders                             |  | $      | (11,838    | )                            |  | $      | (12,310    | )                                                            |  | $      | (13,810    | )  |  | $      | (115,455 | )  |
| Basicand diluted loss applicable to common shareholders pershare |  | $      | (0.36      | )                            |  | $      | (0.43      | )                                                            |  | $      | (0.51      | )  |  |
| Weighted-averagenumber of shares of common stockoutstanding      |  |   | 32,808,228 |                              |  |   | 28,888,180 |                                                              |  |   | 27,212,034 |    |  |
|                                                                  |

Theaccompanying notes are an integral part of these financialstatements.

32

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VionPharmaceuticals, Inc. (A Development StageCompany)

Statementof Changes in Shareholders'Equity

|                                                                                      |  |                                   |           |                                  |  |             |               |          |  |                   |         |          |  |                               |                     |             |  |                    |           |              |  |         |         |         |  |        |         |        |  |        |         |         |  |        |         |         |  |        |                     |        |  |        |         |         |  |        |         |         |  |  |
|--------------------------------------------------------------------------------------|--|-----------------------------------|-----------|----------------------------------|--|-------------|---------------|----------|--|-------------------|---------|----------|--|-------------------------------|---------------------|-------------|--|--------------------|-----------|--------------|--|---------|---------|---------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------------------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                 |  | ClassA ConvertiblePreferred Stock |           | ClassBConvertiblePreferred Stock |  | CommonStock |               | Treasury |  | AdditionalPaid-in |         | Deferred |  | AccumulatedOtherComprehensive |                     | Accumulated |  | TotalShareholders' |
| (Inthousands, except sharedata)                                                      |  | Shares                            |           | Amount                           |  | Shares      |               | Amount   |  | Shares            |         | Amount   |  | Stock                         |                     | Capital     |  | Compensation       |           | Income(Loss) |  | Deficit |         | Equity  |
| Issuanceof common stock — July and August1994                                  |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               | 2,852,548 |         |  | $       | 29      |    |  |   |    |   |  |   |    |    |  |   |    |    |  |   |                |   |  | $      | (21     | )  |  | $      | 8       |    |
| Netloss                                                                              |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               |      |         |  |    |    |    |  |   |    |   |  |   |    |    |  |   |    |    |  |   |                |   |  |   | (476    | )  |  |   | (476    | )  |
| Balanceat December 31,1994                                                           |  |                              | —   |                             |  | $           |  — |     |  |              | — |     |  | $                             | —             |        |  |               | 2,852,548 |         |  | $       | 29      |    |  | $      | — |   |  | $      | — |    |  | $      | — |    |  | $      | —             |   |  | $      | (497    | )  |  | $      | (468    | )  |
| Stock optionsissued for compensation — February1995                            |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               |      |         |  |    |    |    |  |   |    |   |  |   | 540     |    |  |   |    |    |  |   |                |   |  |   |    |    |  |   | 540     |    |
| Reverseacquisition of MelaRx Pharmaceuticals, Inc. — April1995                 |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               | 2,000,000 |         |  |    | 20      |    |  |   |    |   |  |   | 4,300   |    |  |   |    |    |  |   |                |   |  |   |    |    |  |   | 4,320   |    |
| Sharesrepurchased pursuant to employment agreements — April1995                |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               | (274,859  | )       |  |    | (3      | )  |  |   |    |   |  |   |    |    |  |   |    |    |  |   |                |   |  |   | 2       |    |  |   | (1      | )  |
| Privateplacement of common stock — April1995                                   |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               | 76,349    |         |  |    | — |    |  |   |    |   |  |   | 205     |    |  |   |    |    |  |   |                |   |  |   |    |    |  |   | 205     |    |
| Warrantsissued with bridge notes — April1995                                   |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               |      |         |  |    |    |    |  |   |    |   |  |   | 200     |    |  |   |    |    |  |   |                |   |  |   |    |    |  |   | 200     |    |
| Initialpublic offering of Unit Purchase Options — August 1995 andSeptember1995 |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               | 2,875,000 |         |  |    | 29      |    |  |   |    |   |  |   | 9,667   |    |  |   |    |    |  |   |                |   |  |   |    |    |  |   | 9,696   |    |
| Issuanceof commonstock                                                               |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               | 1,250     |         |  |    | — |    |  |   |    |   |  |   | 1       |    |  |   |    |    |  |   |                |   |  |   |    |    |  |   | 1       |    |
| Netloss                                                                              |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               |      |         |  |    |    |    |  |   |    |   |  |   |    |    |  |   |    |    |  |   |                |   |  |   | (9,531  | )  |  |   | (9,531  | )  |
| Balanceat December 31, 1995                                                          |  |                              | —   |                             |  | $           | —       |     |  |              | — |     |  | $                             | —             |        |  |               | 7,530,288 |         |  | $       | 75      |    |  | $      | — |   |  | $      | 14,913  |    |  | $      | — |    |  | $      | —             |   |  | $      | (10,026 | )  |  | $      | 4,962   |    |
| Issuance ofClass A convertible preferredstock                                        |  |                              | 1,250,000 |                             |  |        | 13            |     |  |              |    |     |  |                          |                |        |  |               |      |         |  |    |    |    |  |   |    |   |  |   | 22,890  |    |  |   |    |    |  |   |                |   |  |   | (11,371 | )  |  |   | 11,532  |    |
| Conversionof Class A convertible preferredstock                                      |  |                              | (164,970  | )                           |  |        | (1            | )   |  |              |    |     |  |                          |                |        |  |               | 458,255   |         |  |    | 5       |    |  |   |    |   |  |   | (4      | )  |  |   |    |    |  |   |                |   |  |   |    |    |  |   | — |    |
| ClassA convertible preferred stockdividend                                           |  |                              | 21,998    |                             |  |        | —       |     |  |              |    |     |  |                          |                |        |  |               |      |         |  |    |    |    |  |   |    |   |  |   | 256     |    |  |   |    |    |  |   |                |   |  |   | (256    | )  |  |   | — |    |
| Issuanceof commonstock                                                               |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               | 29,418    |         |  |    | — |    |  |   |    |   |  |   | 104     |    |  |   |    |    |  |   |                |   |  |   |    |    |  |   | 104     |    |
| Compensationassociated with stock optiongrants                                       |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               |      |         |  |    |    |    |  |   |    |   |  |   | 190     |    |  |   | (190    | )  |  |   |                |   |  |   |    |    |  |   | — |    |
| Amortizationof deferredcompensation                                                  |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               |      |         |  |    |    |    |  |   |    |   |  |   |    |    |  |   | 83      |    |  |   |                |   |  |   |    |    |  |   | 83      |    |
| Netloss                                                                              |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               |      |         |  |    |    |    |  |   |    |   |  |   |    |    |  |   |    |    |  |   |                |   |  |   | (7,609  | )  |  |   | (7,609  | )  |
| Balanceat December 31,1996                                                           |  |                              | 1,107,028 |                             |  | $           | 12            |     |  |              | — |     |  | $                             | —             |        |  |               | 8,017,961 |         |  | $       | 80      |    |  | $      | — |   |  | $      | 38,349  |    |  | $      | (107    | )  |  | $      | —             |   |  | $      | (29,262 | )  |  | $      | 9,072   |    |
| Conversionof Class A convertible preferredstock                                      |  |                              | (396,988  | )                           |  |        | (4            | )   |  |              |    |     |  |                          |                |        |  |               | 1,102,757 |         |  |    | 11      |    |  |   |    |   |  |   | (7      | )  |  |   |    |    |  |   |                |   |  |   |    |    |  |   | — |    |
| ClassA convertible preferred stockdividend                                           |  |                              | 47,592    |                             |  |        | —       |     |  |              |    |     |  |                          |                |        |  |               |      |         |  |    |    |    |  |   |    |   |  |   | 623     |    |  |   |    |    |  |   |                |   |  |   | (623    | )  |  |   | — |    |
| Issuanceof Class B convertible preferredstock                                        |  |                              |      |                             |  |        |          |     |  |              | 4,850   |     |  |                          | —             |        |  |               |      |         |  |    |    |    |  |   |    |   |  |   | 4,852   |    |  |   |    |    |  |   |                |   |  |   | (370    | )  |  |   | 4,482   |    |
| Conversionof Class B convertible preferredstock                                      |  |                              |      |                             |  |        |          |     |  |              | (258    | )   |  |                          | —             |        |  |               | 64,642    |         |  |    | 1       |    |  |   |    |   |  |   | (1      | )  |  |   |    |    |  |   |                |   |  |   |    |    |  |   | — |    |
| Accretionof dividend payable on Class B convertible preferredstock                   |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               |      |         |  |    |    |    |  |   |    |   |  |   | 138     |    |  |   |    |    |  |   |                |   |  |   | (138    | )  |  |   | — |    |
| Extension/reissuanceof underwriterwarrants                                           |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               |      |         |  |    |    |    |  |   |    |   |  |   | 168     |    |  |   |    |    |  |   |                |   |  |   |    |    |  |   | 168     |    |
| Exerciseofwarrants                                                                   |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               | 238       |         |  |    | — |    |  |   |    |   |  |   | — |    |  |   |    |    |  |   |                |   |  |   |    |    |  |   | — |    |
| Issuanceof commonstock                                                               |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               | 598,336   |         |  |    | 6       |    |  |   |    |   |  |   | 3,464   |    |  |   |    |    |  |   |                |   |  |   |    |    |  |   | 3,470   |    |
| Exerciseof stockoptions                                                              |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               | 50,000    |         |  |    | — |    |  |   |    |   |  |   | 20      |    |  |   |    |    |  |   |                |   |  |   |    |    |  |   | 20      |    |
| Compensationassociated with stock optiongrants                                       |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               |      |         |  |    |    |    |  |   |    |   |  |   | 56      |    |  |   |    |    |  |   |                |   |  |   |    |    |  |   | 56      |    |
| Amortizationof deferredcompensation                                                  |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               |      |         |  |    |    |    |  |   |    |   |  |   |    |    |  |   | 35      |    |  |   |                |   |  |   |    |    |  |   | 35      |    |
| Netloss                                                                              |  |                              |      |                             |  |        |          |     |  |              |    |     |  |                          |                |        |  |               |      |         |  |    |    |    |  |   |    |   |  |   |    |    |  |   |    |    |  |   |                |   |  |   | (5,344  | )  |  |   | (5,344  | )  |
| Balanceat December 31,1997                                                           |  |                              | 757,632   |                             |  | $           | 8             |     |  |              | 4,592   |     |  | $                             |   — |        |  |               | 9,833,934 |         |  | $       | 98      |    |  | $      | — |   |  | $      | 47,662  |    |  | $      | (72     | )  |  | $      |   — |   |  | $      | (35,737 | )  |  | $      | 11,959  |    |
|                                                                                      |

33

----

VionPharmaceuticals, Inc. (A Development StageCompany)

Statement ofChanges in Shareholders' Equity(continued)

|                                                                        |  |                                   |          |                                  |  |             |                     |          |  |                   |         |          |  |                               |                     |             |  |                    |            |              |  |         |         |        |  |        |         |         |  |        |         |         |  |        |         |         |  |        |         |        |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------------------------------|--|-----------------------------------|----------|----------------------------------|--|-------------|---------------------|----------|--|-------------------|---------|----------|--|-------------------------------|---------------------|-------------|--|--------------------|------------|--------------|--|---------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                   |  | ClassA ConvertiblePreferred Stock |          | ClassBConvertiblePreferred Stock |  | CommonStock |                     | Treasury |  | AdditionalPaid-in |         | Deferred |  | AccumulatedOtherComprehensive |                     | Accumulated |  | TotalShareholders' |
| (Inthousands, except sharedata)                                        |  | Shares                            |          | Amount                           |  | Shares      |                     | Amount   |  | Shares            |         | Amount   |  | Stock                         |                     | Capital     |  | Compensation       |            | Income(Loss) |  | Deficit |         | Equity |
| Accretionof dividend payable on Class B convertible preferredstock     |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  | $      | 287     |    |  |   |    |    |  |   |    |   |  | $      | (287    | )  |  | $      | — |    |
| Conversion of Class B convertible preferredstock                       |  |                              |     |                             |  |        |                |     |  |              | (4,592  | )   |  | $                             | —             |        |  |               | 1,205,178  |         |  | $       | 12      |   |  |   |    |    |  |   | (12     | )  |  |   |    |    |  |   |    |   |  |   |    |    |  |   | — |    |
| Premiumon conversion dividend on Class B convertible preferredstock    |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               | 585,898    |         |  |    | 6       |   |  |   |    |    |  |   | 2,044   |    |  |   |    |    |  |   |    |   |  |   | (2,049  | )  |  |   | 1       |    |
| Conversionof Class A convertible preferredstock                        |  |                              | (174,981 | )                           |  | $           | (2                  | )   |  |              |    |     |  |                          |                |        |  |               | 486,062    |         |  |    | 5       |   |  |   |    |    |  |   | (3      | )  |  |   |    |    |  |   |    |   |  |   |    |    |  |   | — |    |
| ClassA convertible preferred stockdividend                             |  |                              | 34,005   |                             |  |        | —             |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   | 329     |    |  |   |    |    |  |   |    |   |  |   | (329    | )  |  |   | — |    |
| Discounton Series 1998 convertible preferredstock                      |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   | 1,597   |    |  |   |    |    |  |   |    |   |  |   | (1,597  | )  |  |   | — |    |
| Series1998 convertible preferred stockaccretion                        |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   |    |    |  |   |    |    |  |   |    |   |  |   | (151    | )  |  |   | (151    | )  |
| Commonstock issued in exchange for cancellation of outstandingwarrants |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               | 1,792,952  |         |  |    | 18      |   |  |   |    |    |  |   | (61     | )  |  |   |    |    |  |   |    |   |  |   |    |    |  |   | (43     | )  |
| Exerciseof stockoptions                                                |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               | 32,750     |         |  |    | — |   |  |   |    |    |  |   | 120     |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 120     |    |
| Exerciseofwarrants                                                     |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               | 16,272     |         |  |    | — |   |  |   |    |    |  |   | 11      |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 11      |    |
| Compensationassociated with stock optiongrants                         |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   | 51      |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 51      |    |
| Amortizationof deferredcompensation                                    |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   |    |    |  | $      | 35      |    |  |   |    |   |  |   |    |    |  |   | 35      |    |
| Netloss                                                                |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   |    |    |  |   |    |    |  |   |    |   |  |   | (10,478 | )  |  |   | (10,478 | )  |
| Balanceat December 31,1998                                             |  |                              | 616,656  |                             |  | $           | 6                   |     |  |              | — |     |  | $                             | —             |        |  |               | 13,953,046 |         |  | $       | 139     |   |  | $      | — |    |  | $      | 52,025  |    |  | $      | (37     | )  |  | $      | — |   |  | $      | (50,628 | )  |  | $      | 1,505   |    |
| Conversionof Class A convertible preferredstock                        |  |                              | (144,612 | )                           |  |        | (1                  | )   |  |              |    |     |  |                          |                |        |  |               | 401,707    |         |  |    | 4       |   |  |   |    |    |  |   | (3      | )  |  |   |    |    |  |   |    |   |  |   |    |    |  |   | — |    |
| ClassA convertible preferred stockdividend                             |  |                              | 26,150   |                             |  |        | —             |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   | 385     |    |  |   |    |    |  |   |    |   |  |   | (385    | )  |  |   | — |    |
| Series1998 convertible preferred stockaccretion                        |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   |    |    |  |   |    |    |  |   |    |   |  |   | (325    | )  |  |   | (325    | )  |
| Commonstock issued in exchange for cancellation of outstandingwarrants |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               | 102        |         |  |    | — |   |  |   |    |    |  |   |    |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | — |    |
| Exerciseof stockoptions                                                |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               | 470,886    |         |  |    | 5       |   |  |   | (196    | )  |  |   | 650     |    |  |   |    |    |  |   |    |   |  |   | (40     | )  |  |   | 419     |    |
| Retirementof treasurystock                                             |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               | (35,659    | )       |  |    | — |   |  |   | 196     |    |  |   |    |    |  |   |    |    |  |   |    |   |  |   | (196    | )  |  |   | — |    |
| Exerciseofwarrants                                                     |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               | 26,296     |         |  |    | — |   |  |   |    |    |  |   |    |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | — |    |
| Issuanceof commonstock                                                 |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               | 3,425,741  |         |  |    | 34      |   |  |   |    |    |  |   | 14,955  |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 14,989  |    |
| Amortizationof deferredcompensation                                    |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   |    |    |  |   | 34      |    |  |   |    |   |  |   |    |    |  |   | 34      |    |
| Netloss                                                                |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   |    |    |  |   |    |    |  |   |    |   |  |   | (10,769 | )  |  |   | (10,769 | )  |
| Balanceat December 31,1999                                             |  |                              | 498,194  |                             |  | $           | 5                   |     |  |              | — |     |  | $                             | —             |        |  |               | 18,242,119 |         |  | $       | 182     |   |  | $      | — |    |  | $      | 68,012  |    |  | $      | (3      | )  |  | $      | — |   |  | $      | (62,343 | )  |  | $      | 5,853   |    |
| Conversionof Class A convertible preferredstock                        |  |                              | (502,928 | )                           |  |        | (5                  | )   |  |              |    |     |  |                          |                |        |  |               | 1,397,035  |         |  |    | 14      |   |  |   |    |    |  |   | (9      | )  |  |   |    |    |  |   |    |   |  |   |    |    |  |   | — |    |
| Redemptionof Class A convertible preferredstock                        |  |                              | (545     | )                           |  |        | —             |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   | (5      | )  |  |   |    |    |  |   |    |   |  |   |    |    |  |   | (5      | )  |
| ClassA convertible preferred stockdividend                             |  |                              | 5,279    |                             |  |        | —             |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   | 248     |    |  |   |    |    |  |   |    |   |  |   | (248    | )  |  |   | — |    |
| Series1998 convertible preferred stockaccretion                        |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   |    |    |  |   |    |    |  |   |    |   |  |   | (358    | )  |  |   | (358    | )  |
| Conversionof Series 1998 convertible preferredstock                    |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               | 1,507,024  |         |  |    | 15      |   |  |   |    |    |  |   | 5,523   |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 5,538   |    |
| Exerciseof stockoptions                                                |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               | 650,409    |         |  |    | 7       |   |  |   |    |    |  |   | 2,868   |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 2,875   |    |
| Exerciseofwarrants                                                     |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               | 4,371,055  |         |  |    | 44      |   |  |   |    |    |  |   | 23,270  |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 23,314  |    |
| Compensationassociated with stock optiongrants                         |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   | 120     |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | 120     |    |
| Amortizationof deferredcompensation                                    |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   |    |    |  |   | 3       |    |  |   |    |   |  |   |    |    |  |   | 3       |    |
| Changein net unrealized gains andlosses                                |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   |    |    |  |   |    |    |  |   | 120     |   |  |   |    |    |  |   | 120     |    |
| Netloss                                                                |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   |    |    |  |   |    |    |  |   |    |   |  |   | (14,803 | )  |  |   | (14,803 | )  |
| Comprehensiveloss                                                      |  |                              |     |                             |  |        |                |     |  |              |    |     |  |                          |                |        |  |               |       |         |  |    |    |   |  |   |    |    |  |   |    |    |  |   |    |    |  |   |    |   |  |   |    |    |  |   | (14,683 | )  |
| Balanceat December 31,2000                                             |  |                              | —  |                             |  | $           |   — |     |  |              | — |     |  | $                             |   — |        |  |               | 26,167,642 |         |  | $       | 262     |   |  | $      | — |    |  | $      | 100,027 |    |  | $      | — |    |  | $      | 120     |   |  | $      | (77,752 | )  |  | $      | 22,657  |    |
|                                                                        |

34

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VionPharmaceuticals, Inc. (A Development StageCompany)

Statement ofChanges in Shareholders' Equity(continued)

|                                                   |  |                                   |         |                                  |  |             |         |          |  |                   |         |          |  |                               |         |             |  |                    |            |              |  |         |         |        |  |        |         |        |  |        |         |        |  |        |         |        |  |        |         |         |  |        |          |         |  |        |         |         |  |  |
|---------------------------------------------------|--|-----------------------------------|---------|----------------------------------|--|-------------|---------|----------|--|-------------------|---------|----------|--|-------------------------------|---------|-------------|--|--------------------|------------|--------------|--|---------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|---------|--|--------|----------|---------|--|--------|---------|---------|--|--|
|                                              |  | ClassA ConvertiblePreferred Stock |         | ClassBConvertiblePreferred Stock |  | CommonStock |         | Treasury |  | AdditionalPaid-in |         | Deferred |  | AccumulatedOtherComprehensive |         | Accumulated |  | TotalShareholders' |
| (Inthousands, except sharedata)                   |  | Shares                            |         | Amount                           |  | Shares      |         | Amount   |  | Shares            |         | Amount   |  | Stock                         |         | Capital     |  | Compensation       |            | Income(Loss) |  | Deficit |         | Equity |
| Publicoffering of common stock — August2001 |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               | 2,500,000  |         |  | $       | 25      |   |  |   |    |   |  | $      | 11,386  |   |  |   |    |   |  |   |    |    |  |   |     |    |  | $      | 11,411  |    |
| Exerciseof stockoptions                           |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               | 191,527    |         |  |    | 2       |   |  |   |    |   |  |   | 777     |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 779     |    |
| Exerciseofwarrants                                |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               | 4,015      |         |  |    | — |   |  |   |    |   |  |   | 14      |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 14      |    |
| Compensationassociated with stock optiongrants    |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               |       |         |  |    |    |   |  |   |    |   |  |   | 111     |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 111     |    |
| Issuancesunder employee benefitplans              |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               | 10,189     |         |  |    | — |   |  |   |    |   |  |   | 62      |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 62      |    |
| Changein net unrealized gains andlosses           |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               |       |         |  |    |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  | $      | (126    | )  |  |   |     |    |  |   | (126    | )  |
| Netloss                                           |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               |       |         |  |    |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |    |  | $      | (13,810  | )  |  |   | (13,810 | )  |
| Comprehensiveloss                                 |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               |       |         |  |    |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | (13,936 | )  |
| Balanceat December 31, 2001                       |  |                              | — |                             |  | $           | — |     |  |              | — |     |  | $                             | — |        |  |               | 28,873,373 |         |  | $       | 289     |   |  | $      | — |   |  | $      | 112,377 |   |  | $      | — |   |  | $      | (6      | )  |  | $      | (91,562  | )  |  | $      | 21,098  |    |
| Exerciseof stockoptions                           |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               | 10,395     |         |  |    | — |   |  |   |    |   |  |   | 32      |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 32      |    |
| Issuancesunder employee benefitplans              |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               | 25,104     |         |  |    | — |   |  |   |    |   |  |   | 38      |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 38      |    |
| Changein net unrealized gains andlosses           |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               |       |         |  |    |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   | 6       |    |  |   |     |    |  |   | 6       |    |
| Netloss                                           |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               |       |         |  |    |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |    |  |   | (12,310  | )  |  |   | (12,310 | )  |
| Comprehensiveloss                                 |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               |       |         |  |    |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | (12,304 | )  |
| Balanceat December 31, 2002                       |  |                              | — |                             |  | $           | — |     |  |              | — |     |  | $                             | — |        |  |               | 28,908,872 |         |  | $       | 289     |   |  | $      | — |   |  | $      | 112,447 |   |  | $      | — |   |  | $      | — |    |  | $      | (103,872 | )  |  | $      | 8,864   |    |
| **Privateplacement — June2003**             |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               | 3,846,150  |         |  |    | 38      |   |  |   |    |   |  |   | 4,436   |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 4,474   |    |
| **Privateplacement — September2003**        |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               | 6,475,000  |         |  |    | 65      |   |  |   |    |   |  |   | 10,340  |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 10,405  |    |
| **Exerciseof stockoptions**                       |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               | 5,552      |         |  |    | — |   |  |   |    |   |  |   | 3       |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 3       |    |
| **Issuancesunder employee benefitplans**          |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               | 41,181     |         |  |    | 1       |   |  |   |    |   |  |   | 13      |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 14      |    |
| **Netloss**                                       |  |                              |    |                             |  |        |    |     |  |              |    |     |  |                          |    |        |  |               |       |         |  |    |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |    |  |   | (11,838  | )  |  |   | (11,838 | )  |
| **Balanceat December 31,2003**                    |  |                              | — |                             |  | $           | — |     |  |              | — |     |  | $                             | — |        |  |               | 39,276,755 |         |  | $       | 393     |   |  | $      | — |   |  | $      | 127,239 |   |  | $      | — |   |  | $      | — |    |  | $      | (115,710 | )  |  | $      | 11,922  |    |
|                                                   |

Theaccompanying notes are an integral part of these financialstatements.

35

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VionPharmaceuticals, Inc. (A Development StageCompany)

Statements ofCash Flows

|                                                                                 |  |        |          |                                   |  |        |         |                                                                   |  |        |         |         |  |        |          |         |  |  |
|---------------------------------------------------------------------------------|--|--------|----------|-----------------------------------|--|--------|---------|-------------------------------------------------------------------|--|--------|---------|---------|--|--------|----------|---------|--|--|
| (Inthousands, except share and per sharedata)                                   |  | 2003   |          | For the Year EndedDecember31,2002 |  | 2001   |         | For the Period fromMay 1, 1994 (Inception) throughDecember31,2003 |
| Cashflows from operatingactivities:                                             |  |   |     |                              |  |   |    |                                                              |  |   |    |    |  |   |     |    |
| Netloss                                                                         |  | $      | (11,838  | )                            |  | $      | (12,310 | )                                                            |  | $      | (13,810 | )  |  | $      | (96,966  | )  |
| Adjustmentsto reconcile net loss to net cash used in operatingactivities— |  |   |     |                              |  |   |    |                                                              |  |   |    |    |  |   |     |    |
| Depreciationandamortization                                                     |  |   | 195      |                              |  |   | 239     |                                                              |  |   | 283     |    |  |   | 2,615    |    |
| Losson equipmentdisposals                                                       |  |   | 8        |                              |  |   | — |                                                              |  |   | 4       |    |  |   | 12       |    |
| Increasein deferredrevenue                                                      |  |   | 395      |                              |  |   | — |                                                              |  |   | — |    |  |   | 395      |    |
| Purchasedresearch anddevelopment                                                |  |   | —  |                              |  |   | — |                                                              |  |   | — |    |  |   | 4,481    |    |
| Non-cashcompensation                                                            |  |   | —  |                              |  |   | — |                                                              |  |   | 111     |    |  |   | 1,068    |    |
| Stockissued forservices                                                         |  |   | —  |                              |  |   | — |                                                              |  |   | — |    |  |   | 600      |    |
| Amortizationof financingcosts                                                   |  |   | —  |                              |  |   | — |                                                              |  |   | — |    |  |   | 346      |    |
| Extension/re-issuanceof placement agentwarrants                                 |  |   | —  |                              |  |   | — |                                                              |  |   | — |    |  |   | 168      |    |
| Changesin operating assets andliabilities—                                |  |   |     |                              |  |   |    |                                                              |  |   |    |    |  |   |     |    |
| Receivablesand prepaidexpenses                                                  |  |   | 45       |                              |  |   | 70      |                                                              |  |   | 319     |    |  |   | (261     | )  |
| Otherassets                                                                     |  |   | 4        |                              |  |   | 1       |                                                              |  |   | — |    |  |   | (22      | )  |
| Currentliabilities                                                              |  |   | 2,000    |                              |  |   | (444    | )                                                            |  |   | (494    | )  |  |   | 4,024    |    |
| Netcash used in operatingactivities                                             |  |   | (9,191   | )                            |  |   | (12,444 | )                                                            |  |   | (13,587 | )  |  |   | (83,540  | )  |
| Cashflows from investingactivities:                                             |  |   |     |                              |  |   |    |                                                              |  |   |    |    |  |   |     |    |
| Purchasesof marketablesecurities                                                |  |   | (119,100 | )                            |  |   | (58,997 | )                                                            |  |   | (18,048 | )  |  |   | (259,151 | )  |
| Maturitiesof marketablesecurities                                               |  |   | 113,950  |                              |  |   | 65,652  |                                                              |  |   | 20,083  |    |  |   | 244,651  |    |
| Acquisitionofequipment                                                          |  |   | (117     | )                            |  |   | (145    | )                                                            |  |   | (260    | )  |  |   | (2,053   | )  |
| Netcash provided by (used in) investingactivities                               |  |   | (5,267   | )                            |  |   | 6,510   |                                                              |  |   | 1,775   |    |  |   | (16,553  | )  |
| Cashflows from financingactivities:                                             |  |   |     |                              |  |   |    |                                                              |  |   |    |    |  |   |     |    |
| Initialpublicoffering                                                           |  |   | —  |                              |  |   | — |                                                              |  |   | — |    |  |   | 9,696    |    |
| Netproceeds from issuance of commonstock                                        |  |   | 14,896   |                              |  |   | 70      |                                                              |  |   | 12,252  |    |  |   | 48,785   |    |
| Netproceeds from issuance of preferredstock                                     |  |   | —  |                              |  |   | — |                                                              |  |   | — |    |  |   | 20,716   |    |
| Netproceeds from exercise of Class AWarrants                                    |  |   | —  |                              |  |   | — |                                                              |  |   | — |    |  |   | 5,675    |    |
| Netproceeds from exercise of Class BWarrants                                    |  |   | —  |                              |  |   | — |                                                              |  |   | — |    |  |   | 17,538   |    |
| Netproceeds from exercise of otherwarrants                                      |  |   | —  |                              |  |   | — |                                                              |  |   | 14      |    |  |   | 115      |    |
| Repaymentof equipment capitalleases                                             |  |   | —  |                              |  |   | — |                                                              |  |   | (6      | )  |  |   | (927     | )  |
| Otherfinancing activities,net                                                   |  |   | —  |                              |  |   | — |                                                              |  |   | — |    |  |   | (286     | )  |
| Netcash provided by financingactivities                                         |  |   | 14,896   |                              |  |   | 70      |                                                              |  |   | 12,260  |    |  |   | 101,312  |    |
| Changein cash and cashequivalents                                               |  |   | 438      |                              |  |   | (5,864  | )                                                            |  |   | 448     |    |  |   | 1,219    |    |
| Cashand cash equivalents, beginning ofperiod                                    |  |   | 781      |                              |  |   | 6,645   |                                                              |  |   | 6,197   |    |  |   | —  |    |
| Cashand cash equivalents, end ofperiod                                          |  | $      | 1,219    |                              |  | $      | 781     |                                                              |  | $      | 6,645   |    |  | $      | 1,219    |    |
|                                                                                 |

Supplementalschedule of non-cash investing and financing activities:

|              |                                                                                                                                                                                                                      |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Cash paid for interest was $2 for theyear ended December 31, 2003, and $210 for the period from May 1, 1994(inception) through December 31, 2003. No interest was paid for theyears ended December 31, 2002 and2001. |

|              |                                                                                                                                                                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Cash paid for income taxes was$17 for the year ended December 31, 2003 and for the period from May 1,1994 (inception) through December 31, 2003. No income taxes were paidfor the years ended December 31, 2002 and 2001. |

Theaccompanying notes are an integral part of these financialstatements.

36

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VionPharmaceuticals, Inc. (A Development Stage Company)

Notes to Financial Statements

1.    TheCompany

Vion Pharmaceuticals, Inc.(the "Company") is a development stagecompany engaged in the development of therapeutics and technologies forthe treatment of cancer. The Company was incorporated in March 1992 asa Delaware corporation and began operations on May 1, 1994.

InApril 1995, the Company merged into OncoRx Research Corp., awholly-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 of MelaRx's nettangible assets was treated as purchased research and development andexpensed immediately.

In August 1995, the Company completed aninitial public offering (refer to Note 4) resulting in net proceeds tothe Company of $9.7 million.

In April 1996, the Company'sname was changed to Vion Pharmaceuticals, Inc.

2.    Summaryof Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make judgments, estimates and assumptions that affect theamounts reported in the financial statements and accompanying notes.Actual results could differ materially from those estimates.

Reclassifications

Certain reclassifications of the prioryear's amounts have been made to the balance sheet and statementof cash flows to conform to the current year's presentation.These adjustments included the reclassification of certain investmentsfrom cash equivalents to short-term investments as of December31, 2002.

Cash Equivalents

Cash equivalents includeinvestments with maturities of three months or less when purchased.

Fair Value of Financial Instruments

The estimated fairvalue of amounts reported in the financial statements has beendetermined by using available market information and appropriatevaluation methodologies. Carrying values for all financial instrumentsincluded in current assets and current liabilities approximate fairvalue, because of their short-term nature.

Investments

Short-term investments consist primarily of U.S. government andstate agency securities. These securities generally are liquidated andrepriced every 28 to 45 days, but are classified as short-terminvestments as they do not have a stated maturity date. Thesesecurities are classified as 

37

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available-for-sale and are carried at cost,which approximates fair value. There have been no realized investmentgains or losses incurred through December 31, 2003.

Propertyand Equipment

Property and equipment are stated at cost.Depreciation of equipment is computed under the straight-line methodover the estimated useful lives of the assets ranging from three toseven years. Leasehold improvements are carried at cost and amortizedon a straight-line basis over the shorter of the lease term or theestimated useful lives of the assets.

The following is a summaryof property and equipment as of December 31 (inthousands):

|                                         |  |        |        |         |  |        |        |         |  |  |
|-----------------------------------------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                    |  | 2003   |        | 2002    |
|                                    |  |   |   |    |  |   |   |    |
| Officeand computerequipment             |  | $      | 357    |    |  | $      | 504    |    |
| Furnitureand fixtures                   |  |   | 210    |    |  |   | 211    |    |
| Laboratoryequipment                     |  |   | 1,734  |    |  |   | 1,693  |    |
| Leaseholdimprovements                   |  |   | 378    |    |  |   | 378    |    |
|                                    |  |   | 2,679  |    |  |   | 2,786  |    |
| Accumulateddepreciation andamortization |  |   | (2,309 | )  |  |   | (2,330 | )  |
| Propertyand equipment,net               |  | $      | 370    |    |  | $      | 456    |    |
|                                         |

Depreciationexpense was $0.2 million, $0.2 million, and $0.3 million for the yearsended December 31, 2003, 2002 and 2001, respectively, and $2.6 millionfor the period from May 1, 1994 (inception) through December 31,2003.

Income Taxes

Deferred income taxes are recognizedfor the future tax consequences of temporary differences between thefinancial statement carrying amounts and the tax basis of assets andliabilities, and for net operating loss and tax credit carryforwards. Avaluation allowance is provided to reduce deferred income tax assets toan estimated realizable value.

Revenue Recognition

Contract Research Grants.    The Company has receivedgrants from the National Cancer Institute for various researchprojects. The grants provide for reimbursement of project costs.Revenues from these grants of $0.2 million, $0.2 million, $0.5 millionand $2.4 million have been recognized as the costs were incurred forthe years ended December 31, 2003, 2002 and 2001, and for the periodfrom May 1, 1994 (inception) to December 31, 2003, respectively.

Technology License Fees.    The Company has recognizedrevenue from fees, including non-refundable upfront fees, under licenseagreements with Beijing Pason Pharmaceuticals, Inc., San-MarLaboratories and others (refer to Note 3) totaling $30,000, $28,000,$169,000, and $4.5 million for the years ended December 31, 2003, 2002,and 2001, and the period from May 1, 1994 (inception) through December31, 2003, respectively. Non-refundable upfront fees are recognized asrevenue ratably over the performance period.

Laboratory andResearch Support Fees.    The Company recognizes revenue fromlaboratory and research support as the services are performed.

Research and Development Expenses

The Company recordsresearch and development expenses as incurred. The Company disclosesclinical trials expenses and other research and development expenses asseparate components of research and development expense in itsstatements of operations to provide more meaningful information toinvestors. The classification of expenses into these components ofresearch and development expense are based, in part, on estimates ofcertain costs when incurred. The effect of any change in the clinicaltrials expenses and other research and development expenses would bereflected in the period such determination was made.

38

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Other Expense

Other expense of$45,000 for the year ended December 31, 2003 represents foreigncurrency transaction losses related to a contract that is denominatedin a foreign currency with a vendor outside the U.S.

Per ShareData

The following table sets forth the computation of basicand diluted loss per share (in thousands, except per sharedata):

|                                                            |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                       |  | 2003   |         | 2002    |  | 2001   |
| Netloss                                                    |  | $      | (11,838 | )  |  | $      | (12,310 | )  |  | $      | (13,810 | )  |
| Weighted-averagenumber of shares of commonstockoutstanding |  |   | 32,808  |    |  |   | 28,888  |    |  |   | 27,212  |    |
| Basicand diluted loss pershare                             |  | $      | (0.36   | )  |  | $      | (0.43   | )  |  | $      | (0.51   | )  |
|                                                            |

Foradditional disclosures regarding warrants and preferred stock, refer toNote 4. For additional disclosures regarding stock options, refer toNote 5. These potentially dilutive securities were not included in thecalculation of the diluted loss per share as the effect would beantidilutive.

Stock-Based Compensation

The Companyfollows Accounting Principles Board Opinion No. 25, Accounting forStock Issued to Employees ("APB 25") andrelated interpretations in accounting for stock-based compensationissued to employees rather than the alternative fair value accountingmethod provided for under Statement of Financial Accounting StandardsNo. 123, Accounting for Stock-Based Compensation("SFAS 123"). Under APB 25, no compensationexpense is recognized if the terms of the option are fixed and theexercise price of the option granted equals the market price of theunderlying stock on the date of grant. Other than compensation expenseof $0.1 million recognized for the year ended December 31, 2001, nostock-based compensation cost is reflected in the Company'sreported net loss.

The following table illustrates theassumptions used and the effect on net loss and net loss per share ifthe Company had applied the fair value recognition provisions of SFAS123 to employee stock-based compensation. The Company has computed thepro forma disclosures required under SFAS 123, as amended by SFAS 148,for all employee stock options granted using the Black-Scholes optionpricing model prescribed by SFAS123.

|                                                              |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|--------------------------------------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                         |  | 2003   |         | 2002    |  | 2001   |
| Risk-freeinterestrate                                        |  |   | 3.73    | %  |  |   | 4.30    | %  |  |   | 4.58    | %  |
| Expectedvolatility                                           |  |   | 145     | %  |  |   | 217     | %  |  |   | 100     | %  |
| Expectedlife (inyears)                                       |  |   | 5.88    |    |  |   | 5.76    |    |  |   | 7       |    |
| Expecteddividendyield                                        |  |   | – |    |  |   | – |    |  |   | – |    |
| Weighted-averagefair value of options granted during theyear |  | $      | 0.33    |    |  | $      | 1.53    |    |  | $      | 5.08    |    |
|                                                              |

Thefollowing information regarding net income and earnings per share hasbeen determined as if we had accounted for our employee stock optionsunder the fair value method prescribed by SFAS 123 (in thousands,except per share amounts). Prior year amounts have been restated toreflect actual forfeitures rather than estimatedforfeitures.

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|                                                                                                                  |  |        |         |         |  |        |         |                                                 |  |        |         |         |  |        |          |         |  |  |
|------------------------------------------------------------------------------------------------------------------|--|--------|---------|---------|--|--------|---------|-------------------------------------------------|--|--------|---------|---------|--|--------|----------|---------|--|--|
|                                                                                                             |  | 2003   |         | 2002    |  | 2001   |         | FromInception (May 1, 1994) to December 31,2003 |
|                                                                                                             |  |   |    |    |  |   |    |                                            |  |   |    |    |  |   |     |    |
| Netloss asreported                                                                                               |  | $      | (11,838 | )  |  | $      | (12,310 | )                                          |  | $      | (13,810 | )  |  | $      | (96,966  | )  |
| Add:Stock-based employee compensation expense included in reported netloss                                       |  |   | – |    |  |   | – |                                            |  |   | 111     |    |  |   | 768      |    |
| Deduct:Total stock-based employee compensation expense determined under thefair value based method for allawards |  |   | (3,009  | )  |  |   | (4,622  | )                                          |  |   | (4,312  | )  |  |   | (19,114  | )  |
| Proforma netloss                                                                                                 |  |   | (14,847 | )  |  |   | (16,932 | )                                          |  |   | (18,011 | )  |  |   | (115,312 | )  |
| Proforma preferred stock dividend andaccretion                                                                   |  |   | – |    |  |   | – |                                            |  |   | – |    |  |   | (18,489  | )  |
| Proforma loss applicable to commonshareholders                                                                   |  | $      | (14,847 | )  |  | $      | (16,932 | )                                          |  | $      | (18,011 | )  |  | $      | (133,801 | )  |
| Proforma basic and diluted loss applicable to common shareholders pershare                                       |  | $      | (0.45   | )  |  | $      | (0.59   | )                                          |  | $      | (0.66   | )  |  |
|                                                                                                                  |

3.    Researchand License Agreements

Agreements with Yale University

Since 1988, the Company or its predecessor companies have enteredinto a series of agreements under which the Company has funded researchat Yale University ("Yale") and licensedinventions from Yale. The license agreements with Yale grant theCompany exclusive licenses to make, use, sell and practice theinventions 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.

License Agreementwith Yale University – September 1990.    Pursuant to alicense agreement entered into in September 1990 between the Companyand Yale, the Company has a license to a synthetic form of melanin,which the Company has named MELASYN®. Under the terms ofthe license agreement, the Company pays a license fee to Yale based ona percentage of net sales and sublicensing revenues. Through December31, 2003, the Company has paid royalties on sublicensing revenues of$0.1 million to Yale under this agreement.

In 1998, the Companyagreed to be the exclusive selling agent for MELASYN and entered into anon-exclusive sublicense for the MELASYN technology with San-MarLaboratories ("San-Mar"). Under the terms ofthe amended sublicense agreement, the Company received a sublicense feefor products sold by San-Mar with guaranteed minimum annual royaltiesof $50,000 per year. This amended sublicense agreement expired onFebruary 28, 2003. In March 2004, the Company entered into anon-exclusive sublicense agreement for MELASYN with Johnson and JohnsonConsumer Companies, Inc. The terms of the agreement do not include anyupfront or milestone payments. If products including theCompany's technology are developed, the Company will receive aroyalty based on sales in countries where it has issued patents.

Research Agreement with Yale University – July1992**.**    In July 1992, the Company entered into aresearch agreement with Yale, subsequently renewed in 1998, to providefunding through September 30, 2002 for certain research projects.Technology licensed by the Company from research conducted under thisagreement includes the inventions collectively known asTAPET®. In October 2000, the Company restructured theagreement to provide gifts to Yale to support the research projectsthrough September 30, 2002. For the year ended December 31, 2001, theCompany recorded as research and development expense a gift when madeof $0.7 million in accordance with Statement of Financial AccountingStandards No. 116, Accounting for Contributions Received andContributions Made.

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License Agreement with Yale University– August 1994.    The Company is a party to a licenseagreement with Yale entered into in August 1994 and subsequentlyamended in six amendments, most recently in March 2003. Under thisamended license, Yale granted to the Company a non-transferableworldwide exclusive license to make, have made, use, sell and practiceinventions under certain patents and patent applications fortherapeutic and diagnostic purposes. We also have a non-exclusivelicense to two patents under this amended license. The patents andpatent applications under this license and its amendments coverTriapine®, CLORETAZINETM (VNP40101M), KS119,and β-L-Fd4C. The term of the license is the expiration of anypatents relating to any inventions or, with respect to non-patentedinventions or research, 17 years. Yale is entitled to royalties onsales, if any, of resulting products and sublicensing revenues and,with regard to several patents, milestone payments based on the statusof clinical trials and/or regulatory approvals.

Pursuant to theoriginal agreement, the Company issued to Yale 159,304 shares of theCompany's common stock and made a payment of $50,000. In June1997, this license agreement and another license agreement datedDecember 1995 were amended pursuant to which the Company issued 150,000shares of its common stock to Yale valued at $0.6 million. ThroughDecember 31, 2003, the Company has paid royalties on sublicensingrevenues of $0.1 million to Yale under this agreement.

License Agreements with Yale University – December1995**.**    In December 1995, the Company and Yale enteredinto a license agreement pursuant to which the Company received anon-transferable worldwide exclusive license, expiring over the livesof the patents, to three inventions relating to gene therapy formelanoma. Technology licensed under this agreement relates toTAPET®. In June 1997, pursuant to the license agreement,the Company paid Yale a $0.1 million initial fixed royalty fee.

In December 1995, the Company and Yale entered into another licenseagreement pursuant to which the Company received a non-transferableworldwide exclusive license, expiring over the lives of the patents, toan invention relating to whitening skin.

Under the licensingagreements, Yale is entitled to milestone payments based on the statusof clinical trials and regulatory approvals. In addition, Yale isentitled to royalties on sales, if any, of resulting products andsublicense revenues. There are no amounts due under these agreements asof December  31, 2003.

Other Agreements

Cooperative Research and Development Agreement.    InApril 2000, the Company entered into a Cooperative Research andDevelopment Agreement ("CRADA") with theNational Institutes of Health, National Cancer Institute, Division ofClinical Sciences, Surgery Branch for "Development ofTAPET-Based Immunotherapies Targeted Against Cancer."Under the terms of the CRADA, the Company provided funding for researchand development projects performed by the Surgery Branch through May2002. For the years ended December 31, 2002 and 2001, the Companyrecorded $0.2 million and $0.4 million, respectively, as research anddevelopment expense under the CRADA. In June 2002, payments to the NCIunder the CRADA were suspended by mutual agreement. Initial work underthe CRADA had been completed and no additional work is planned pendingthe development of a second-generation TAPET vector.

Research Services Agreement with Eli Lilly andCompany.    In September 2003, the Company entered into aresearch services agreement with Eli Lilly and Company("Lilly") related to the Phase II trials ofTriapine in combination with Lilly's anticancer agent,Gemzar®. Under this agreement, Lilly will supply Gemzarwithout cost to the Company for the trials sponsored by theCompany.

License Agreement with Beijing PasonPharmaceuticals, Inc.    In September 2003, the Company enteredinto a license agreement with Beijing Pason Pharmaceuticals, Inc.("Pason") whereby Pason obtained theexclusive rights to develop, manufacture and market Triapine in thePeople's Republic of China, Taiwan, Hong Kong and Macao (the"Territory"). Under the terms of theagreement, the Company received an initial payment in November 2003 of$0.5 million and may receive $4.75 million in potential additionalmilestone payments and potential royalty payments of 11% of anyTriapine revenues in the Pason Territory. In accordance with theSecurities and Exchange Commission's Staff 

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Accounting Bulletin No. 104, RevenueRecognition, the Company will recognize $0.4 million, whichrepresents the initial payment received from Pason net of royaltiespaid to Yale, over the life of the agreement. For the year endedDecember 31, 2003, the Company recognized revenue related to thisagreement of approximately $5,000.

Research Collaborationand Option Agreement with Austrian Inventors and AustriaWirtschaftsservice Gesellschaft m.b.H.    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. During the 17-monthagreement term, the Company will investigate several heterocyclichydrazones in preclinical research studies in order to identify a leadproduct candidate. During this period, the Company will also have theright to enter into an exclusive worldwide license agreement for thecompounds. In December 2003, the Company recorded as research anddevelopment expense an initial payment of $25,000 to enter into theagreement, and an additional payment of $75,000 will be required if theCompany exercises the option to enter into the exclusive worldwidelicense. The license agreement calls for milestone payments to be paidbased on the progress of product development, and royalties based onproduct revenues.

4.    Shareholders' Equity

InApril 1995, 2,000,000 shares of common stock valued at $2.16 per sharewere issued in conjunction with the merger with MelaRx resulting in netproceeds to the Company of $4.3 million (refer to Note 1). Shortlyprior to the consummation of the merger, the Company issued 76,349shares of common stock for net proceeds of $0.2 million.

InAugust 1995, the Company completed an initial public offering("IPO") of 2,875,000 Unit Purchase Options("UPOs"), consisting of an aggregate of2,875,000 shares of common stock, 2,875,000 redeemable Class A Warrantsand 2,875,000 redeemable Class B Warrants at $4.00 per UPO. The netproceeds to the Company from the IPO were $9.7 million before repaymentof certain bridge financing. In addition to the 2,875,000 UPOs, theCompany granted to the underwriter an option to purchase up to 250,000UPOs at $5.20 per UPO, subsequently adjusted due to antidilutionprovisions. Each Class A Warrant entitled the holder to purchase oneshare of common stock and one Class B Warrant. Each Class B Warrantentitled the holder to purchase one share of common stock. The Class Aand Class B Warrants were exercisable through August 14, 2000, and wereexchanged, exercised or redeemed prior to that date, resulting inaggregate net proceeds to the Company of $23.2 million.

Commencing with its IPO through December 31, 2003, the Company hasraised gross proceeds of $103.5 million through the issuance of commonstock, preferred stock and warrants.

Issuance and Extension ofPlacement Agent Warrants

In connection with its role asplacement agent for two private financings of the Company'spredecessor, MelaRx, Inc., D.H. Blair Investment Banking Corporationwas issued warrants to purchase 202,486 shares of common stock atprices ranging from $3.56 to $4.44 per share, expiring on July 5, 1998(the "Expiration Date"). As of the ExpirationDate, holders of warrants to purchase 94,336 shares elected a cashlessexercise into 13,949 shares of common stock and the remaining warrantsto purchase 108,150 shares expired.

Class A ConvertiblePreferred Stock

In May 1996, the Company completed a privateplacement of 1,250,000 shares of Class A Convertible Preferred Stock("Class A Stock"), at $10.00 per share,resulting in net proceeds to the Company of $11.5 million. Each shareof Class A Stock was convertible at the option of the holder into2.777777 shares of the Company's common stock. The Companyrecorded an imputed one-time non-cash dividend of approximately $11.4million as a result of the difference between the conversion price andthe quoted market price of the Company's common stock as of thedate of issuance as required by the 

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Financial Accounting Standards Board EmergingIssues Task 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 paid semi-annualdividends of 5% per annum, payable in additional shares of ClassA Stock. The Company recorded non-cash dividends from 1996 through 2000totaling $1.8 million based on the quoted market price of the commonstock as of the date of the issuance of the preferred dividends. Allnon-cash dividends have been recognized as a charge against theaccumulated deficit with a corresponding increase in additional paid-incapital. The non-cash dividends have been included in the dividendrequirement on Preferred Stock and the loss applicable to commonshareholders.

In connection with the foregoing transaction, theCompany issued warrants to the placement agent, expiring May 22, 2001(the "Expiration Date"), to purchase anaggregate of 546,875 shares of the Company's common stock atprices ranging from $3.96 to $12.00. As of the Expiration Date, holdersof warrants to purchase 257,321 shares elected cash or cashlessexercises into 174,572 shares of common stock and the remainingwarrants to purchase 289,554 shares expired. The issuance of the ClassA Stock at closing also triggered certain antidilution adjustmentprovisions of the Company's other outstanding warrants, resultingin the issuance of additional warrants.

In accordance with theterms of the Class A Stock, the Company notified the holders ofoutstanding shares of its intention to redeem their Class A stock onDecember 26, 2000 ("Redemption Date"), at aredemption price of $10.00 per share. All outstanding shares of Class AStock were converted by the holders into shares of common stock withthe exception of 545 shares of Class A Stock that were redeemed for anaggregate of $5,450 and cancelled as of the Redemption Date.

Class B Convertible 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 were immediatelyconvertible into shares of 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 conversion priceand the quoted market price of the Company's common stock at thedate of issuance. Shares of the Class B Stock were eligible, undercertain circumstances, to receive dividends paid in Class C ConvertiblePreferred Stock ("Class C Stock") which wereimmediately convertible into shares of the Company's commonstock. Conversions of Class B Stock in 1998 resulted in Class Cdividends representing 180,141 shares of common stock valued at $0.6million. In addition, the Company recorded accretion of 37,168 sharesof common stock valued at $0.1 million in 1997 and 61,078 shares ofcommon stock valued at $0.3 million in 1998. All non-cash dividendswere recorded as a charge against the accumulated deficit with acorresponding increase in additional paid-in capital. The non-cashdividends have been included in the dividend requirement on PreferredStock and the loss applicable to common shareholders.

In August1998, the Company reached agreement with each of the holders of itsClass B Stock to convert an aggregate of 2,892 shares of Class B Stock,constituting all of the outstanding Class B Stock, into an aggregate of1,070,423 shares of common stock. This included Class C dividendsrepresenting 304,188 shares of common stock valued at $1.1 million, andaccretion of 6,553 shares of common stock valued at $23,000. As part ofthis agreement, an additional 101,569 common shares were issued toholders of the Class B Stock. In accordance with Financial AccountingStandards Board Emerging Issues Task Force D-42, The Effect on theCalculation of Earnings Per Share for the Redemption or InducedConversion of Preferred Stock, the excess of $0.4 million of thefair value of the common stock issued upon conversion over the fairvalue of the common stock issuable pursuant to the original conversionterms has been added to the dividend requirement to arrive at lossapplicable to common shareholders. Holders of the Class B Stock waivedtheir antidilution rights arising from the issuance of the 5%Redeemable Convertible Preferred Stock Series 1998.

5%Redeemable Convertible Preferred Stock Series 1998

In June1998, the Company completed a private placement of 5,000 shares ofnon-voting 5% Redeemable Convertible Preferred Stock Series 1998("Series 1998 Preferred Stock"). The Series1998 

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Preferred Stock was issued at $1,000 pershare, resulting in net proceeds to the Company of $4.7 million. Theshares of Series 1998 Preferred Stock accrued dividends of 5%per annum payable in-kind. Each share of Series 1998 Preferred Stockwas convertible into common stock based on the formula of issued priceplus accrued dividends divided by $3.60. In connection with the sale ofthe Series 1998 Preferred Stock, the Company imputed a one-timenon-cash dividend of approximately $1.6 million as a result of thedifference between the conversion price and the quoted market price ofthe Company's common stock at the date of issuance as required byEITF D-60. Such amount was recognized upon issuance of the Series 1998Preferred Stock as a charge against the accumulated deficit with acorresponding increase to additional paid-in capital. The imputednon-cash dividend was included in the dividend requirement on PreferredStock and the loss applicable to common shareholders. The dividendrequirement on Preferred Stock also reflects the amortization of thecosts of completing the offering and the accretion of the 5% perannum dividend. The 5% accretion resulted in a charge againstthe accumulated deficit with a corresponding increase to additionalpaid-in-capital from 1998 through 2000 of $0.8 million. The issuance ofthe Series 1998 Preferred Stock at closing also triggered certainantidilution adjustment provisions of the Company's outstandingwarrants, resulting in the issuance of additional warrants.

Inaccordance with the terms of the Series 1998 Preferred Stock, all ofthe outstanding preferred shares having a redemption value of $5.4million were automatically converted into 1,507,024 common shares atthe $3.60 conversion price, effective February 22, 2000.

Antidilution Adjustment to Class A and Class B Warrants

Asa result of the sale in May 1996 of Class A Stock, an antidilutionadjustment was made to the exercise price of the Class A Warrants andthe Class B Warrants and there was a corresponding distribution ofadditional Class A Warrants and Class B Warrants. Each holder of aClass A Warrant was issued an additional 0.1 Class A Warrant and theexercise price of the Class A Warrants was reduced from $5.20 to $4.73.Each holder of a Class B Warrant was issued an additional 0.1 Class BWarrant and the exercise price of the Class B Warrants was reduced from$7.00 to $6.37.

Subsequently, as a result of the sale in June1998 of Series 1998 Preferred Stock, an additional antidilutionadjustment was made to the exercise price of the Class A Warrants andthe Class B Warrants with a corresponding distribution of additionalClass A Warrants and Class B Warrants. Each holder of a Class A Warrantwas issued an additional 0.02 Class A Warrant and the exercise price ofthe Class A Warrants was reduced from $4.73 to $4.63. Each holder of aClass B Warrant was issued an additional 0.02 Class B Warrant and theexercise price of the Class B Warrant was reduced from $6.37 to$6.23.

Class A and Class B Warrant Exchange Offers

In1998, the Company offered to exchange each outstanding Class A Warrant,at the holder's option, for either 0.438 shares of common stockor 0.254 shares of common stock and $0.66 in cash. The Companysimultaneously offered to exchange each outstanding Class B Warrant, atthe holder's option, for either 0.212 shares of common stock or0.123 shares of common stock and $0.32 in cash. As a result of theexchange offers, 3,209,806 Class A Warrants and 1,881,835 Class BWarrants were exchanged for 1,395,027 and 397,925 shares of theCompany's common stock and $39,000 and $3,700 in cash,respectively.

Redemption of Class A Warrants

The ClassA Warrants entitled the holder to purchase one share of common stockand one Class B Warrant for an exercise price of $4.63. In February2000, the Company notified holders of its outstanding Class A Warrantsof its intention to redeem the warrants on March 13, 2000 (the"Redemption Date"). As of the RedemptionDate, the Company received net proceeds of $5.1 million from theexercise of 1.2 million Class A Warrants. Subsequently, the Companyreceived additional net proceeds of $0.6 million from the exercise of0.1 million Class A Warrants resulting from the exercises of UPOs bythe underwriter of the 1995 IPO.

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Redemption of Class B Warrants

The Class B Warrants entitled the holder to purchase one share ofcommon stock at an exercise price of $6.23. In March 2000, the Companynotified holders of its outstanding Class B Warrants of its intentionto redeem the warrants on April 27, 2000 (the "RedemptionDate"). As of the Redemption Date, the Company receivednet proceeds of $15.9 million from the exercise of 2.6 million Class BWarrants. Subsequently, the Company received additional net proceeds of$1.6 million from the exercise of 0.3 million Class B Warrantsresulting from the exercises of UPOs by the underwriter of the 1995IPO.

Private Placement of Common Stock – April 1999

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

Public Offering of CommonStock – October 1999

In October and November 1999, theCompany completed the sale of 2,530,000 shares of common stock at $5.00per share, in an underwritten public offering. The net proceeds fromthis offering were approximately $11.1 million. In conjunction with theoffering, the underwriter was granted warrants to purchase 220,000shares of common stock at $6.00 per share, expiring October 25, 2004.Through December 31, 2003, holders of warrants to purchase 12,000shares elected cashless exercises into 6,786 shares of commonstock.

Public Offering of Common Stock – August 2001

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

Private Placement of Common Stock – June2003

In June 2003, the Company completed a private placement of3,846,150 shares of its common stock at $1.30 per share and warrants topurchase 1,923,075 shares of common stock at $2.20 per share. Thewarrants expire on June 23, 2008. The net proceeds from this offeringwere $4.4 million.

Private Placement of Common Stock –September 2003

In September 2003, the Company completed aprivate placement of 6,475,000 shares of its common stock at $1.75 pershare and warrants to purchase 6,475,000 shares of common stock at$2.50 per share. A warrant to purchase an additional 100,000 shares ofcommon stock at $2.50 per share was issued to the placement agent andvalued at $.0.2 million. All of these warrants expire on September 19,2008. Beginning April 9, 2005, if the volume weighted average price ofthe common 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, were$10.4 million.

Reserved Shares

As of December 31, 2003,the Company has reserved 15,119,769 shares of its common stock forissuances related to potential future exercises of warrants outstandingand stock options outstanding and available for grant (see Note 5), aswell as potential future purchases of common stock under the employeestock purchase plan (see Note 6).

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Warrants Outstanding

A summaryof the outstanding warrants to purchase shares of the Company'scommon stock, as described above, as of December 31, 2003 is asfollows:

|                                        |  |                                                                       |           |                                                 |  |                            |        |        |  |        |            |        |  |  |
|----------------------------------------|--|-----------------------------------------------------------------------|-----------|-------------------------------------------------|--|----------------------------|--------|--------|--|--------|------------|--------|--|--|
| Warrantsissued in connection with      |  | Number of Shares of CommonStock to be Issued Upon Exercise ofWarrants |           | Exercise Price Per Share of OutstandingWarrants |  | Expiration Date ofWarrants |
|                                   |  |                                                                  |      |                                            |  |                       |   |   |  |   |       |   |
| Publicoffering – October1999     |  |                                                                  | 208,000   |                                            |  | $                          | 6.00   |   |  |   | 10/25/2004 |   |
| Privateplacement – June2003      |  |                                                                  | 1,923,075 |                                            |  | $                          | 2.20   |   |  |   | 6/23/2008  |   |
| Privateplacement – September2003 |  |                                                                  | 6,575,000 |                                            |  | $                          | 2.50   |   |  |   | 9/19/2008  |   |
| Total                                  |  |                                                                  | 8,706,075 |                                            |  |                       |   |   |  |   |       |   |
|                                        |

5.    EmployeeStock Option Plans

On September 9, 2003, the Board of Directorsof the Company adopted the 2003 Stock Option Plan (the"2003 Option Plan") which was approved by theCompany's stockholders at the 2003 Annual Meeting ofStockholders. The Option Plan provides for the granting of bothincentive stock options and non-qualified stock options to employees,officers, directors and consultants of the Company to purchase up to anaggregate of 2 million shares of common stock. No option may be grantedunder the 2003 Option Plan after September 9, 2013. The Company'sAmended and Restated 1993 Stock Option Plan (the "1993Option Plan") expired on April 15, 2003. The Company nolonger grants options under the 1993 Option Plan, but stock optionsgranted prior to the Plan's expiration remain outstanding underthe plan and will continue to vest according to schedule.

Incentive options granted to employees under the 2003 Option Planand 1993 Option Plan (the "Option Plans")vest in equal annual installments over periods ranging from one to fouryears commencing no earlier than the first anniversary of the date ofgrant, or earlier on change of control. Incentive options expire theearlier of: (i) ten years after the date of grant, or (ii) three monthsafter termination of service as an employee. Incentive options whichare not vested expire immediately upon termination of service as anemployee. The exercise price for incentive options shall be equal tothe fair market value of the common stock on the date of grant, exceptthat the term of an incentive option granted to a stockholder owningmore than 10% of the outstanding voting power may not exceedfive years and its exercise price may not be less than 110% ofthe fair market value of the common stock on the date of grant.

The Option Plans provide for the automatic grant of non-qualifiedstock options to purchase shares of common stock to directors of theCompany who are not employees or principal stockholders. Eligibledirectors are granted an option to purchase 20,000 shares of commonstock on the date such person is first elected or appointed a director.Further, on the day immediately following the date of each annualmeeting of stockholders, each eligible director, other than directorswho received an initial director option within 180 days preceding suchannual meeting, is granted an option to purchase 15,000 shares ofcommon stock (20,000 shares in the case of the Chairman of the Board)on the day immediately following the date of each annual meeting ofstockholders. The exercise price for each share subject to a directoroption shall be equal to the fair market value of the common stock onthe date of grant. Director options vest after one year under the 2003Option Plan and two years under the 1993 Option Plan, or earlier on achange of control. Generally, director options will expire the earlierof: (i) 10 years after the date of grant, or (i) one year aftertermination of service as a director under the 2003 Stock Option Planor 90 days after termination of service as a director under the 1993Stock Option Plan. Director options which are not vested expireimmediately upon termination of service as a director. Options grantedto directors totaled 135,694, 202,271 and 104,346 in 2003, 2002 and2001, respectively.

Options outstanding outside the Option Plansinclude stock options granted in 1999 to purchase 980,000 shares ofcommon stock to the Company's Chief Executive Officer under theSenior Executive Stock Option Plan. There are no additional sharesavailable for issuance under this plan.

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A summary of the Company's stockoption activity under all option plans and related information is asfollows:

|                                   |  |                  |         |                               |  |                  |         |                               |  |                  |         |                               |  |        |         |        |  |        |         |         |  |        |         |        |  |  |
|-----------------------------------|--|------------------|---------|-------------------------------|--|------------------|---------|-------------------------------|--|------------------|---------|-------------------------------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|--------|--|--|
|                              |  | 2003             |         | 2002                          |  | 2001             |
|                              |  | Options(in000's) |         | Weighted-AverageExercisePrice |  | Options(in000's) |         | Weighted-AverageExercisePrice |  | Options(in000's) |         | Weighted-AverageExercisePrice |
| Outstanding at beginning ofyear   |  |             | 4,127   |                          |  | $                | 5.08    |                          |  |             | 3,712   |                          |  | $      | 6.85    |   |  |   | 3,279   |    |  | $      | 7.28    |   |
|     Granted   |  |             | 518     |                          |  |             | 1.51    |                          |  |             | 1,340   |                          |  |   | 1.54    |   |  |   | 1,081   |    |  |   | 5.88    |   |
|     Exercised |  |             | (6      | )                        |  |             | 0.55    |                          |  |             | (10     | )                        |  |   | 3.07    |   |  |   | (191    | )  |  |   | 4.09    |   |
|     Forfeited |  |             | (142    | )                        |  |             | 4.83    |                          |  |             | (915    | )                        |  |   | 7.10    |   |  |   | (457    | )  |  |   | 8.83    |   |
|     Expired   |  |             | – |                          |  |             | – |                          |  |             | – |                          |  |   | – |   |  |   | – |    |  |   | – |   |
| Outstandingat end ofyear          |  |             | 4,497   |                          |  | $                | 4.68    |                          |  |             | 4,127   |                          |  | $      | 5.08    |   |  |   | 3,712   |    |  | $      | 6.85    |   |
| Exercisableat end ofyear          |  |             | 3,390   |                          |  | $                | 5.00    |                          |  |             | 1,976   |                          |  | $      | 6.35    |   |  |   | 1,397   |    |  | $      | 6.12    |   |
|                              |  |             |    |                          |  |             |    |                          |  |             |    |                          |  |   |    |   |  |   |    |    |  |   |    |   |
|                                   |

Asummary of the Company's ranges of exercise prices andweighted-average remaining life and exercise price of optionsoutstanding and of weighted-average exercise price of options currentlyexercisable under the Option Plans as of December 31, 2003, is asfollows:

|                        |  |                            |       |                                       |  |                               |     |        |  |                            |       |                               |  |        |        |        |  |        |       |        |  |        |       |        |  |  |
|------------------------|--|----------------------------|-------|---------------------------------------|--|-------------------------------|-----|--------|--|----------------------------|-------|-------------------------------|--|--------|--------|--------|--|--------|-------|--------|--|--------|-------|--------|--|--|
|                   |  | OptionsOutstanding         |       |                                  |  | OptionsExercisable            |
| RangeofExercise Prices |  | NumberOutstanding(in000's) |       | Weighted-AverageRemaining Life(Years) |  | Weighted-AverageExercisePrice |     |   |  | NumberExercisable(in000's) |       | Weighted-AverageExercisePrice |
| $0.36 -$1.67           |  |                       | 1,382 |                                  |  |                          | 9.1 |   |  | $                          | 0.92  |                          |  |   |   |   |  |   | 815   |   |  | $      | 0.56  |   |
| $2.22-$3.03            |  |                       | 88    |                                  |  |                          | 4.4 |   |  |                       | 2.80  |                          |  |   |   |   |  |   | 88    |   |  |   | 2.80  |   |
| $3.63-$5.25            |  |                       | 1,422 |                                  |  |                          | 6.5 |   |  |                       | 4.55  |                          |  |   |   |   |  |   | 1,024 |   |  |   | 4.70  |   |
| $5.38-$7.15            |  |                       | 897   |                                  |  |                          | 5.2 |   |  |                       | 5.85  |                          |  |   |   |   |  |   | 897   |   |  |   | 5.85  |   |
| $7.20-$9.88            |  |                       | 348   |                                  |  |                          | 7.0 |   |  |                       | 7.48  |                          |  |   |   |   |  |   | 280   |   |  |   | 7.48  |   |
| $12.25-$17.88          |  |                       | 360   |                                  |  |                          | 6.3 |   |  |                       | 14.48 |                          |  |   |   |   |  |   | 286   |   |  |   | 14.35 |   |
|                   |  |                       | 4,497 |                                  |  |                          | 7.0 |   |  | $                          | 4.68  |                          |  |   |   |   |  |   | 3,390 |   |  | $      | 5.00  |   |
|                        |

6.    StockPurchase Plan

A total of 450,000 shares of common stock areauthorized for issuance under the Company's employee stockpurchase plan (the "Stock Purchase Plan")effective January 1, 2001. The Stock Purchase Plan permits eligibleemployees to purchase up to 2,000 shares of common stock at the lowerof 85% of the fair market value of the common stock at thebeginning or at the end of each six-month offering period. 31,782shares, 7,918 shares and 4,457 shares were issued in 2003, 2002 and2001, respectively, under the Stock Purchase Plan.

7.    401(k) Savings Plan

In 2000, the Company commencedmatching contributions under a 401(k) Savings Plan in either cash orits common stock, at the election of the employee. For stock matches,the contribution rate is 40% of an employee'scontribution, up to an annual maximum match of stock valued at $1,500.For cash matches, the contribution rate is 30% of anemployee's contributions, up to an annual maximum match of$1,000. The expense for the matching contribution was $25,000, $46,000and $46,000 for the years ended December 31, 2003, 2002 and 2001,respectively, and $0.2 million for the period from May 1, 1994(inception) through December 31, 2003. 9,399 shares, 17,186 shares and5,732 shares were issued in 2003, 2002 and 2001, respectively, for thestock matching contribution. Beginning January 1, 2004, all matchingcontributions will be made in cash.

8.    Income Taxes

At December 31, 2003, the Company has available for federal incometax purposes net operating loss carryforwards, subject to review by theInternal Revenue Service, totaling $81.5 million and a general

47

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business tax credit of $2.6 million expiringin 2010 through 2023. The difference between the deficit accumulatedduring the development stage for financial reporting purposes and thenet operating loss carryforwards for tax purposes is primarily due tocertain costs which are not currently deductible for tax purposes anddifferences in accounting and tax basis resulting from the mergerdescribed in Note 1. The ability of the Company to realize a future taxbenefit from a portion of its net operating loss carryforwards andgeneral business credits may be limited due to changes in ownership ofthe Company.

Significant components of the deferred income taxesare as follows (inthousands):

|                                                       |  |             |         |         |  |        |         |         |  |  |
|-------------------------------------------------------|--|-------------|---------|---------|--|--------|---------|---------|--|--|
|                                                  |  | December31, |
|                                                  |  | 2003        |         | 2002    |
| Operatinglosscarryforwards                            |  | $           | 32,557  |    |  | $      | 26,513  |    |
| Generalbusiness tax creditcarryforwards               |  |        | 2,614   |    |  |   | 2,612   |    |
| AMT taxcreditcarryforwards                            |  |        | 10      |    |  |   | 10      |    |
| Contributions                                         |  |        | 1,139   |    |  |   | 954     |    |
| Compensationrelated                                   |  |        | 218     |    |  |   | 107     |    |
| Other                                                 |  |        | 355     |    |  |   | 154     |    |
|     Totaldeferred income taxasset |  |        | 36,893  |    |  |   | 30,350  |    |
|     Valuationallowance            |  |        | (36,893 | )  |  |   | (30,350 | )  |
|     Deferredincome tax asset, net |  | $           | – |    |  | $      | – |    |
|                                                       |

The valuation allowance increased by $6.5million and $5.3 million during 2003 and 2002, respectively.

Forthe year ended December 31, 2003, the Company recorded approximately$26,000 related to minimum state capital taxes paid, net of a state taxbenefit of approximately $22,000 for the sale of research anddevelopment tax credits to the State of Connecticut (the"State"). For the year ended December 31,2002, the Company recognized a state tax benefit of approximately$227,000 for the sale of research and development tax credits to theState.

9.    Commitments and Contingencies

Leases

The Company has non-cancelable operating leases forits facility and its laboratory and office equipment expiring through2006. Rental expense under the facility lease is recognized on astraight-line basis. Rental expense under the operating leases was $0.3million, $0.3 million, $0.2 million and $2.1 million for the yearsended December 31, 2003, 2002, and 2001, and for the period from May 1,1994 (inception) through December 31, 2003, respectively. As ofDecember 31, 2003, future minimum lease payments due undernon-cancelable operating lease agreements with initial terms in excessof one year are $0.3 million each year from 2004 to 2006.

TheCompany's capital leases for equipment expired in 2001.Amortization expense for the equipment under capital leases was $6,000and $1.0 million for the year ended December 31, 2001 and for theperiod from May 1, 1994 (inception) through December 31, 2003,respectively.

Agreements

Under the terms of anemployment agreement, the Company is obligated to pay its ChiefExecutive Officer ("CEO") a minimum annualsalary of $412,000 through December 31, 2005. The CEO is also eligiblefor a bonus of up to 50% of his base salary based on theachievement of specified objectives. In the event the CEO'semployment is terminated by the Company for any reason other than causeor disability, or if the CEO terminates for good reason as defined inthe agreement, the Company is obligated to pay him two times the sum ofhis base salary plus his average annual bonus for the prior two yearsand to continue payment of certain insurance costs on his behalf.

The Company has entered into severance agreements with its presidentand vice presidents pursuant to which each of these officers would beentitled to certain payments in the event such officer loses his

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employment during the twelve-month periodfollowing a "change of control", as definedin the agreement. Specifically, the officer would be entitled to a lumpsum severance payment equal to the sum of twelve months of theofficer's monthly base salary plus the average of the last twocash 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.

The Company has committed to makeretention payments in 2004 to its employees and officers, excluding itsCEO. The total retention payments are estimated to be $285,000 and arepayable one-third in June 2004 and two-thirds in November 2004.

A former director of the Company is a party to a Consulting andFinder's Agreement with the Company dated June 4, 1992, andamended February 17, 1995. This agreement entitles him to receive anannual fee equal to 10% of the net after-tax profits of theCompany attributable to the sale or licensing of products or technologyrelated to TAPET® licensed pursuant to theCompany's December 1995 license agreement with Yale (refer toNote 3), 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 December 31, 2003, noamounts are due or have been paid under this agreement.

TheCompany has various commitments relating to its research and licenseagreements (refer to Note  3).

10.    Related PartyTransactions

The Company recorded research and developmentexpense of $400,000, $200,000 and $200,000 for the years ended December31, 2003, 2002 and 2001, respectively, related to gifts to fundresearch through March 31, 2005 at the laboratory headed by one of itsdirectors, an affiliate of Yale. Included in the Company'scurrent liabilities at December 31, 2003, was $250,000 for the balanceof the gifts to be paid in five equal quarterly installments throughthe first quarter of 2005.

In December 2001, the Company enteredinto a consulting agreement with PS Capital LLC, an entity of which itsCEO is a member. The consulting agreement provided that the Companywould pay $100,800 to PS Capital LLC in exchange for consultingservices provided in 2002 consisting primarily of financial andinvestment advice as directed by its CEO. In connection with thisagreement, its CEO's base salary for 2002 was reduced by$100,800.

11.    Selected Quarterly Financial Data(Unaudited)

The following is a summary of unaudited selectedquarterly financial data for the years ended December 31, 2003 and 2002(in thousands, except per shareamounts):

|                                |  |         |        |          |  |        |        |         |  |        |        |         |  |        |        |         |  |        |         |         |  |  |
|--------------------------------|--|---------|--------|----------|--|--------|--------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--------|---------|---------|--|--|
|                           |  | Quarter |        | Year2003 |
| 2003                           |  | First   |        | Second   |  | Third  |        | Fourth  |  |
|                           |  |    |   |     |  |   |   |    |  |   |   |    |  |   |   |    |  |   |    |    |
| Revenues                       |  | $       | 69     |     |  | $      | 102    |    |  | $      | 94     |    |  | $      | 110    |    |  | $      | 375     |    |
| Netloss                        |  |    | (2,425 | )   |  |   | (3,136 | )  |  |   | (2,975 | )  |  |   | (3,302 | )  |  |   | (11,838 | )  |
| Basicand diluted loss pershare |  |    | (0.08  | )   |  |   | (0.11  | )  |  |   | (0.09  | )  |  |   | (0.08  | )  |  |   | (0.36   | )  |
|                           |  |    |   |     |  |   |   |    |  |   |   |    |  |   |   |    |  |   |    |    |
|                           |  | Quarter |        | Year2002 |
| **2002**                       |  | First   |        | Second   |  | Third  |        | Fourth  |  |
|                           |  |    |   |     |  |   |   |    |  |   |   |    |  |   |   |    |  |   |    |    |
| Revenues                       |  | $       | 47     |     |  | $      | 37     |    |  | $      | 74     |    |  | $      | 80     |    |  | $      | 238     |    |
| Netloss                        |  |    | (4,029 | )   |  |   | (3,309 | )  |  |   | (2,483 | )  |  |   | (2,489 | )  |  |   | (12,310 | )  |
| Basicand diluted loss pershare |  |    | (0.14  | )   |  |   | (0.11  | )  |  |   | (0.09  | )  |  |   | (0.09  | )  |  |   | (0.43   | )  |
|                                |

12.    SubsequentEvents

In February 2004, the Company received net proceeds of$32.9 million from a private placement of 13,553,845 shares of itscommon stock at $2.60 per share and warrants to purchase 3,388,463shares of 

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common stock at $3.25 per share. A warrantto purchase an additional 300,000 shares of common stock at $3.25 pershare was issued to the placement agent. All of these warrants expireon February 11, 2009. The Company is required to file and makeeffective a registration statement on Form S-3 covering the resale ofall shares of common stock and common stock issuable upon exercise ofthe warrants. If the registration statement is not declared effectiveby the  SEC on or before May 21, 2004, or June 20, 2004 if theregistration statement is reviewed by the SEC, or if after theregistration statement has been declared effective by the SEC, sales ofthe shares of common stock covered by the registration statement cannotbe made pursuant to the registration statement for any reason, then atthe time of the event, the Company would be required to make paymentsequal to 2% of the aggregate purchase price paid by theinvestors. The Company would be required to make additional payments of2% of the aggregate purchase price for each additional monththereafter until it has complied with its obligations under theregistration rights agreement. After a period of twelve monthsfollowing the effective date of the registration statement, if thevolume weighted-average price of the common stock is at or above $4.875per share for 20 consecutive trading days, then the warrants shallbecome callable by the Company upon written notice within 10 tradingdays of such period.

From January 1 to March 12, 2004, theCompany issued 1,845,926 shares of its common stock upon exercises ofcertain warrants resulting in proceeds of $4.4million.

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ITEM9.    Changes in and Disagreements with Accountants on Accountingand Financial Disclosure

None.

ITEM9A.    Controls and Procedures

An evaluation wasconducted under the supervision and with the participation of theCompany's management, including the Chief Executive Officer (CEO)and Chief Financial Officer (CFO), of the effectiveness of the designand operation of the Company's disclosure controls and proceduresas of December 31, 2003. Based on that evaluation, the CEO and CFOconcluded that the Company's disclosure controls and procedureswere effective as of such date to ensure that information required tobe disclosed in the reports that it files or submits under theSecurities and Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified in Securities andExchange Commission rules and forms. Such officers also confirm thatthere was no change in the Company's internal control overfinancial reporting during the year ended December 31, 2003 that hasmaterially affected, or is reasonably likely to materially affect, theCompany's internal control over financial reporting.

PARTIII

ITEM 10.    Directors and Executive Officers of theRegistrant

Executive Officers and Directors

Thefollowing table contains the names and positions of our executiveofficers anddirectors:

|                            |  |                                              |  |  |  |  |
|----------------------------|--|----------------------------------------------|--|--|--|--|
| Name                       |  | Position                                     |
| AlanKessman                |  | ChiefExecutive Officer and Director          |
| Howard B. Johnson          |  | President and Chief Financial Officer        |
| IvanKing, Ph.D.            |  | Vice President—Research andDevelopment |
| Mario Sznol, M.D.          |  | VicePresident—Clinical Affairs         |
| Terrence W. Doyle,Ph.D.    |  | Vice President—Chief ScientificOfficer |
| William R. Miller (1,2,3)  |  | Chairmanof the Board                         |
| Stephen K. Carter, M.D.    |  | Director                                     |
| Frank T. Cary (1,2,3)      |  | Director                                     |
| Charles K. MacDonald (1,3) |  | Director                                     |
| Alan C. Sartorelli, Ph.D.  |  | Director                                     |
| Walter B. Wriston (2,3)    |  | Director                                     |
|                            |

|  |
|--|
|  |  |
|  |

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

| (2) | Member of the Audit Committee of the Board ofDirectors. |
|-----|---------------------------------------------------------|

| (3) | Member of the Nominating andGovernance Committee of the Board of Directors. |
|-----|-----------------------------------------------------------------------------|

AlanKessman, age 57, has been our Chief Executive Officer since January1999 and has served on our Board of Directors since October 1998. Mr.Kessman also served as our President from April 1999 to January 2004.Mr. Kessman is a partner of PS Capital LLC, an international investmentand management advisor, and a director of Comdial Corporation, adeveloper and marketer of voice communication solutions. From 1983 to1998, 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 44, has been our President since January 2004 and our ChiefFinancial Officer since March 2002. Mr. Johnson was a vice presidentand a consultant for Nutrition 21, Inc., a nutri-ceutical company, fromNovember 2001 until March 2002. From May 1999 until February 2001, Mr.Johnson was chief financial officer of IBS Interactive, Inc. (nowDigital Fusion, Inc.), an 

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information technology services company. Mr.Johnson founded and from 1996 to 1999 was chairman and chief executiveofficer of MedWorks Corporation, a privately held medical devicecompany. From 1983 to 1993, Mr. Johnson was an investment banker atPaineWebber Group, Inc.

Ivan King, Ph.D., age 48, hasbeen our Vice President of Research and Development since January 2004.Dr. King was our Vice President of Research from July 1998 to January2004 and Senior Director of Biology from October 1995 to July 1998.From 1990 to 1995, Dr. King was a section leader in the department oftumor biology at Schering-Plough Research Institute in charge of thecell biology and in vivo biology groups where he was responsible foridentifying targets, developing high throughput assays, evaluating invitro and in vivo activities of drug candidates and recommendingcandidates for clinical development. Dr. King's first industrialposition was as a senior research scientist at Bristol-Myers SquibbCompany.

Mario Sznol, M.D., age 46, has been our VicePresident of Clinical Affairs since September 1999. From 1994 to 1999,Dr. Sznol served as head of the Biologics Evaluation Section,Investigational Drug Branch, Cancer Therapy Evaluation Program,Division of Cancer Treatment and Diagnosis of the National CancerInstitute, or NCI, an institute of the National Institutes of Health.Prior to joining the NCI, Dr. Sznol conducted his fellowship in MedicalOncology, Department of Neoplastic Diseases of Mt. Sinai School ofMedicine in New York City, and his residency in Internal Medicine atBaylor College of Medicine in Houston.

Terrence W. Doyle,Ph.D., age 61, has been our Vice President and Chief ScientificOfficer since January 2004. Prior to that, Dr. Doyle was our VicePresident of Research and Development since the merger with OncoRx,Inc. and served in the same capacity for OncoRx, Inc. from January 1994until the merger. From 1967 to 1993, Dr. Doyle was an employee of theBristol-Myers Squibb Company, including from 1990 to 1993 an executivedirector with Bristol-Myers Squibb Company. Dr. Doyle is the originalholder of 47 U.S. patents for anti-infective, anti-inflammatory andanti-tumor agents and the author of over 170 published researcharticles and abstracts on cancer chemotherapy.

William R.Miller, age 75, has been Chairman of our Board since April 1995.From February 1995 until April 1995, Mr. Miller was Chairman of theBoard of OncoRx, Inc., which merged into the Company (then known asMelaRx, Inc.) in April 1995. Mr. Miller is currently a director ofImClone Systems, Inc., a biotechnology company. From 1964 until hisretirement in 1991, Mr. Miller was employed by Bristol-Myers SquibbCompany in various positions, including vice chairman of the boardcommencing in 1985.

Stephen K. Carter, M.D., age 66, hasbeen a director since 2001. Dr. Carter is a director of Cytogen Corp.,Alfacell Corp. and Emisphere Technologies Inc. (each a biotechnologycompany). From 1998 to 2000, Dr. Carter was senior vice president,clinical and regulatory affairs of SUGEN, Inc. (subsequently acquiredby Pharmacia & Upjohn, Inc.). From 1995 to 1996, Dr. Carter wassenior vice president, research and development with BoehringerIngelheim Pharmaceuticals, Inc. and from 1982 to 1995 held variouspositions with Bristol-Myers Squibb Company, including senior vicepresident, worldwide clinical research and development.

FrankT. Cary, age 83, has been a director since 1995. Mr. Cary is adirector of Celgene Corporation (a biopharmaceutical company), Cygnus,Inc. (a developer and marketer of glucose monitoring systems), ICOSCorporation (a biopharmaceutical company), Lincare Holdings Inc. (aprovider of respiratory therapy services) and Lexmark International,Inc. (a computer peripherals company). From 1973 to 1981, Mr. Cary waschairman of the board and chief executive officer of IBM.

Charles K. MacDonald, age 45, has been a director since 2000.Mr. MacDonald is the principal and founder of Morgandane ManagementCorp., an investment advisory firm, since 1997. Mr. MacDonald alsoserves as a consultant to Elliott Management Corp. From 1987 to 1995,Mr. MacDonald was an analyst and, later, portfolio manager atStonington Management Corp. (an investment company now known as ElliottManagement Corp.).

Alan C. Sartorelli, Ph.D., age 72, hasbeen a director since 1995. Dr. Sartorelli has been an Alfred GilmanProfessor of Pharmacology at Yale University School of Medicine since1967 and Chairman of 

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our Scientific Advisory Board since April1995. Dr. Sartorelli was Chairman of the OncoRx, Inc. ScientificAdvisory Board from May 1993 to April 1995 and director of YaleComprehensive Cancer Center from 1984 to 1993.

Walter B.Wriston, age 84, has been a director since 1995. Mr. Wriston is adirector of ICOS Corporation and Cygnus, Inc. Mr. Wriston retired aschairman and chief executive officer of Citicorp and its principalsubsidiary, Citibank, N.A., in 1984 after having served as chiefexecutive officer for 17 years.

Our directors are electedannually to serve until the next annual meeting of stockholders anduntil their successors shall have been duly elected and shall qualify.Our executive officers are elected by the board annually and serve forsuch period or until their earlier resignation or removal by theboard.

Audit Committee Financial Expert

Our board ofdirectors has determined that Mr. Wriston who serves on its auditcommittee qualifies as "audit committeeexpert" (as that term is defined in the rules promulgatedby the Securities and Exchange Commission pursuant to theSarbanes-Oxley Act of 2002). Our board of directors has also determinedthat all members of the audit committee are"independent", as that term is defined inRule 4200(a)(15) of the NASD listing standards.

Section 16(a)Beneficial Ownership Reporting Compliance

Section 16(a) of theSecurities Exchange Act of 1934 requires our executive officers anddirectors, and persons who beneficially own more than ten percent ofour Common Stock, to file initial reports of ownership and reports ofchanges in ownership with the United States Securities and ExchangeCommission (SEC) and the NASDAQ Stock Market. Executive officers,directors and greater than ten percent beneficial owners are requiredby the SEC to furnish us with copies of all Section 16(a) forms theyfile.

Based upon a review of the forms furnished to us andwritten representations from our executive officers and directors, webelieve that during fiscal 2003 all Section 16(a) filing requirementsapplicable to our executive officers, directors and greater than tenpercent beneficial owners were complied with except for one Form 4 foreach non-employee director which was filed late.

Code ofEthics

In 2003, we adopted a Code of Conduct and BusinessEthics that applies to our chief executive officer, chief financialofficer and other senior financial officers. This Code has been postedto our website, www.vionpharm.com.

ITEM 11.    ExecutiveCompensation

The following table sets forth informationconcerning all cash and non-cash compensation awarded to, earned by orpaid to our Chief Executive Officer and each of our four other mosthighly compensated executive officers during the 2003 fiscal year forservices rendered to us in all capacities during the three fiscal yearsended December 31, 2003.

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|                                                                                              |  |        |      |                    |  |                       |         |                         |  |                                          |         |                          |  |        |        |         |  |        |         |        |  |        |         |            |  |  |
|----------------------------------------------------------------------------------------------|--|--------|------|--------------------|--|-----------------------|---------|-------------------------|--|------------------------------------------|---------|--------------------------|--|--------|--------|---------|--|--------|---------|--------|--|--------|---------|------------|--|--|
|                                                                                         |  |   |      | AnnualCompensation |  | Long-TermCompensation |
| Name and PrincipalPosition                                                                   |  | Year   |      | Salary($)          |  | Bonus($)              |         | OtherAnnualCompensation |  | SecuritiesUnderlyingOptions/SARs(14) (#) |         | AllOther Compensation($) |
| Alan Kessman                                                                                 |  |   | 2003 |               |  | $                     | 412,000 | (2)                |  |                                     | — |                     |  |   | (3     | )  |  |   | 80,000  |   |  | $      | 14,200  | (4)   |
|     —   Chief Executive Officer(1)                       |  |   | 2002 |               |  | $                     | 412,000 | (5)                |  |                                     | — |                     |  |   | (3     | )  |  |   | 150,000 |   |  | $      | 15,010  | (6)   |
|                                                                                         |  |   | 2001 |               |  | $                     | 412,000 |                    |  |                                     | — |                     |  |   | (3     | )  |  |   | 114,783 |   |  | $      | 12,445  | (7)   |
| TerrenceW. Doyle, Ph.D.                                                                      |  |   | 2003 |               |  | $                     | 216,320 | (2)                |  |                                     | — |                     |  |   | (3     | )  |  |   | 10,000  |   |  | $      | 1,500   | (8)   |
|     —   Vice President,Chief                             |  |   | 2002 |               |  | $                     | 216,320 | (9)                |  |                                     | — |                     |  |   | (3     | )  |  |   | 38,415  |   |  | $      | 1,500   | (8)   |
|             ScientificOfficer    |  |   | 2001 |               |  | $                     | 208,000 |                    |  | $                                        | 4,992   |                     |  |   | (3     | )  |  |   | 50,852  |   |  | $      | 1,500   | (8)   |
| HowardB. Johnson                                                                             |  |   | 2003 |               |  | $                     | 200,000 | (2)                |  |                                     | — |                     |  |   | (3     | )  |  |   | 60,000  |   |  |   | — |       |
|     —   President  andChief                              |  |   | 2002 |               |  | $                     | 200,000 | (9)                |  |                                     | — |                     |  |   | (3     | )  |  |   | 422,499 |   |  |   | — |       |
|             FinancialOfficer(10) |  |   | 2001 |               |  |                  | — |                    |  |                                     | — |                     |  |   |   |    |  |   | — |   |  |   | — |       |
| IvanKing, Ph.D.                                                                              |  |   | 2003 |               |  | $                     | 200,000 | (2)                |  |                                     | — |                     |  |   | (3     | )  |  |   | 40,000  |   |  | $      | 1,000   | (8)   |
| —   Vice President,Research                                                  |  |   | 2002 |               |  | $                     | 200,000 | (9)                |  |                                     | — |                     |  |   | (3     | )  |  |   | 65,000  |   |  | $      | 1,500   | (8)   |
|             andDevelopment       |  |   | 2001 |               |  | $                     | 178,500 |                    |  | $                                        | 6,248   |                     |  |   | (3     | )  |  |   | 53,582  |   |  | $      | 1,500   | (8)   |
| MarioSznol, M.D.                                                                             |  |   | 2003 |               |  | $                     | 225,576 | (2)                |  |                                     | — |                     |  |   | (3     | )  |  |   | 50,000  |   |  | $      | 1,000   | (8)   |
|     —   Vice President,Clinical                          |  |   | 2002 |               |  | $                     | 225,576 | (9)                |  |                                     | — |                     |  |   | (3     | )  |  |   | 65,936  |   |  | $      | 1,500   | (8)   |
|             Affairs              |  |   | 2001 |               |  | $                     | 216,900 |                    |  | $                                        | 5,206   |                     |  |   | (3     | )  |  |   | 56,317  |   |  | $      | 42,467  | (11)  |
|                                                                                              |

|  |
|--|
|  |  |
|  |

| (1) | Weare a party to an employment agreement with Mr.  Kessman. See"— Employment Agreements." Mr.Kessman became our Chief Executive Officer in January 1999. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Includes salary deferred in connection with our planto conserve cash resources announced in May 2002 net of payments of thedeferred salary beginning August 1, 2003, as follows: Mr. Kessman— $14,274; Dr. Doyle — $4,203; Mr. Johnson — $3,889;Dr. King — $3,889; and Dr. Sznol — $4,387. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Aggregate amount of such compensation is less thanthe lesser of $50,000 or 10% of the total salary and bonusreported for the indicated person. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Consistsof life and disability insurance payments. |
|-----|----------------------------------------------------|

| (5) | Includes $77,000 paid pursuant to our December 2001consulting agreement with PS Capital LLC of which Mr.  Kessman isa controlling member. See "— Certain Relationshipsand Related Transactions." Includes $100,333 of salary andconsulting payments to PS Capital deferred as part of the realignmentplan we announced in May 2002. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | Consists oflife and disability insurance payments of $13,510 and matchingcontribution to the Company's 401(k) Savings Plan of$1,500. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------|

| (7) | Consists of life and disabilityinsurance payments of $10,945 and matching contribution to theCompany's 401(k) Savings Plan of $1,500. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------|

| (8) | Consists of matching contribution to theCompany's 401(k) Savings Plan. |
|-----|------------------------------------------------------------------------|

| (9) | Includes salary deferred in connection with ourrealignment plan announced in May 2002 as follows: Dr. Doyle —$25,237; Mr. Johnson — $23,333; Dr. King — $23,333; Dr.Sznol — $26,317. In August 2003, we reinstated the full salariesof our named executive officers and will repay the salary deferralsover the twelve month period ended July 31, 2004. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (10) | Mr. Johnson was hired on March 18, 2002. |
|------|------------------------------------------|

| (11) | Consists of relocation assistance of $41,467 andmatching contribution to the Company's 401(k) Savings Plan of$1,000. |
|------|----------------------------------------------------------------------------------------------------------------------|

54

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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, 2003 to the persons named in theSummary CompensationTable:

|                        |  |                                                        |        |                                                               |  |                                     |      |                   |  |                                                                                              |      |        |  |        |            |        |  |   |         |        |  |   |         |        |  |  |
|------------------------|--|--------------------------------------------------------|--------|---------------------------------------------------------------|--|-------------------------------------|------|-------------------|--|----------------------------------------------------------------------------------------------|------|--------|--|--------|------------|--------|--|---|---------|--------|--|---|---------|--------|--|--|
| Name(a)                |  | Number of Securities UnderlyingOptions Granted (1) (b) |        | % ofTotal Options Granted to Employees in FiscalPeriod (2)(c) |  | Exercise of BasePrice ($/Sh) (3)(d) |      | ExpirationDate(e) |  | Potential Realizable Value atAssumed Annual Rates of Stock Price Appreciation forOption Term |
| 5%($)(f)               |  | 10% ($)(g)                                             |        |
| AlanKessman            |  |                                                   | 80,000 |                                                          |  |                                | 15.4 | %            |  | $                                                                                            | 1.57 |   |  |   | 12/10/2013 |   |  | $ | 203,346 |   |  | $ | 325,806 |   |
| TerrenceW. Doyle,Ph.D. |  |                                                   | 10,000 |                                                          |  |                                | 1.9  | %            |  | $                                                                                            | 1.57 |   |  |   | 12/10/2013 |   |  | $ | 25,418  |   |  | $ | 40,726  |   |
| HowardB. Johnson       |  |                                                   | 60,000 |                                                          |  |                                | 11.6 | %            |  | $                                                                                            | 1.57 |   |  |   | 12/10/2013 |   |  | $ | 152,510 |   |  | $ | 244,355 |   |
| IvanKing,Ph.D.         |  |                                                   | 40,000 |                                                          |  |                                | 7.7  | %            |  | $                                                                                            | 1.57 |   |  |   | 12/10/2013 |   |  | $ | 101,673 |   |  | $ | 162,903 |   |
| MarioSznol,M.D.        |  |                                                   | 50,000 |                                                          |  |                                | 9.7  | %            |  | $                                                                                            | 1.57 |   |  |   | 12/10/2013 |   |  | $ | 127,092 |   |  | $ | 203,629 |   |
|                        |

|  |
|--|
|  |  |
|  |

| (1) | Mr.Kessman's option grant vests 50% on December 10, 2004 and100% on December 10, 2005. All other option grants vest33 1/3% on December 10, 2004,66 2/3% on December 10, 2005 and 100% onDecember 10, 2006. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Computed based on anaggregate of 517,894 shares issuable upon exercise of options grantedto employees during the year ended December 31, 2003. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | For all option grants, the exercise price was equalto the market value of the underlying Common Stock at the date ofgrant. |
|-----|----------------------------------------------------------------------------------------------------------------------------|

Aggregated Option Exercises in Last Fiscal Year andFiscal Year-End Option Values

The following table sets forthinformation with respect to stock options exercised in 2003 andunexercised stock options held by the persons named in the SummaryCompensation Table at December 31,2003.

|                         |  |                                   |         |                       |  |                                                                          |         |                                                                      |  |        |           |        |  |        |         |        |  |   |         |        |  |   |     |        |  |  |
|-------------------------|--|-----------------------------------|---------|-----------------------|--|--------------------------------------------------------------------------|---------|----------------------------------------------------------------------|--|--------|-----------|--------|--|--------|---------|--------|--|---|---------|--------|--|---|-----|--------|--|--|
| Name (a)                |  | Shares Acquired on Exercise(#)(b) |         | Value Realized ($)(c) |  | Number of Securities UnderlyingUnexercised Optionsat Fiscal Year-End (#) |         | Value of UnexercisedIn- the-Money Options at Fiscal Year-End ($) (1) |
| Exercisable(d)          |  | Unexercisable(e)                  |         | Exercisable(f)        |  | Unexercisable(g)                                                         |         |
| Alan Kessman            |  |                              | — |                  |  | $                                                                        | — |                                                                 |  |   | 1,292,927 |   |  |   | 100,000 |   |  | $ | 154,500 |   |  | $ | 800 |   |
| TerrenceW. Doyle, Ph.D. |  |                              | — |                  |  | $                                                                        | — |                                                                 |  |   | 186,867   |   |  |   | 47,000  |   |  | $ | 39,568  |   |  | $ | 100 |   |
| HowardB. Johnson        |  |                              | — |                  |  | $                                                                        | — |                                                                 |  |   | 159,999   |   |  |   | 322,500 |   |  | $ | 74,674  |   |  | $ | 600 |   |
| IvanKing, Ph.D.         |  |                              | — |                  |  | $                                                                        | — |                                                                 |  |   | 261,632   |   |  |   | 86,250  |   |  | $ | 66,950  |   |  | $ | 400 |   |
| MarioSznol, M.D.        |  |                              | — |                  |  | $                                                                        | — |                                                                 |  |   | 326,753   |   |  |   | 107,500 |   |  | $ | 67,914  |   |  | $ | 500 |   |
|                         |

|  |
|--|
|  |  |
|  |

| (1) | Computedbased upon the difference between the closing price of theCompany's Common Stock on December 31, 2003 ($1.58) and theexercise price. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------|

Employment Agreements

In November2003, we entered into an employment agreement effective January 1, 2004with Alan Kessman, our Chief Executive Officer. Pursuant to thisagreement, which terminates on December 31, 2005, Mr. Kessman receivesa minimum base salary of $412,000 per year and is eligible for a bonusof up to 50% of his base salary based on the achievement ofspecified objectives. In the event Mr. Kessman's employment isterminated by us for any reason other than cause or disability, or ifMr. Kessman terminates for good reason, we are obligated to pay him twotimes the sum of his base salary plus his average annual bonus for theprior two years and to continue payment of certain insurance costs onhis behalf. Under Mr. Kessman's employment agreement, it shallconstitute "good reason" for Mr. Kessman toterminate his employment and receive the amounts described above ifthere is a change in control and the Company or its successors, as thecase may be, fails to agree in 

55

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writing to extend the expiration date of theemployment agreement to the two-year anniversary of the change ofcontrol. On January 11, 1999, we granted to Mr. Kessman options topurchase an aggregate of 980,000 shares of our Common Stock. Theforegoing grants consist of (1) an option to purchase 760,000 shares atan exercise price of $5.775, representing a 10% premium to themarket price on the date prior to the date of grant, such option havingvested 25% on July 11, 2000, 50% on July 11, 2001,75% on July 11, 2002 and 100% on July 11, 2003, and (2)an option to purchase 220,000 shares at an exercise price of $5.25,representing the market price on the date prior to the date of grant,such option having vested in full on July 11, 1999, six months from thedate of grant.

Severance Agreements

We entered intoseverance agreements with Howard B. Johnson, our President and ChiefFinancial Officer, Dr. Terrence W. Doyle, our Vice President and ChiefScientific Officer, Dr. Ivan King, our Vice President of Research andDevelopment, and Dr. Mario Sznol, our Vice President of ClinicalAffairs, 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 incontrol," as defined in the agreement. Specifically, if a"change in control" occurs, the officer shallbe entitled to a lump sum severance payment equal to the sum of twelvemonths of the officer's monthly base salary as in effect as ofthe date of termination or immediately prior to the change in control,whichever is greater, plus the average of the last two cash bonuspayments made to the officer prior to the change in control. Theofficer would also be entitled to all payments necessary to provide himwith group health insurance benefits substantially similar to thosewhich he was receiving immediately prior to the date of terminationuntil the earlier of 18 months after such termination or the date hehas obtained new full-time employment. The foregoing amounts are notpayable if termination of the officer is because of his death, by usfor cause, or by the officer other than for good reason.

Retention Payments

The Company has committed to makeretention payments in 2004 to its employees and officers, excluding itsCEO. The total retention payments are estimated to be $285,000 and arepayable one-third in June 2004 and two-thirds in November 2004.

Compensation of Directors

Directors are reimbursed forexpenses actually incurred in attending a board or committee meeting.We also pay the Chairman of the Board $4,000 in cash or stock optionsfor each meeting of the Board of Directors attended and each othernon-employee or non-consultant director $1,000 in cash or stock optionsfor each such meeting attended. Directors received stock options foreach such meeting attended in 2003 and will receive cash for each suchmeeting attended in 2004. Directors who are not employees or principalstockholders are also entitled to automatic grants of options under ourAmended and Restated 1993 Stock Option Plan.

Our Amended andRestated 1993 Stock Option Plan (the "1993 Stock OptionPlan") which expired on April 15, 2003 and our 2003 StockOption Plan (the "2003 Stock Option Plan")provide for the automatic grant of non-qualified stock options topurchase shares of Common Stock to our directors who are not employeesor principal stockholders. Eligible directors are granted an option topurchase 20,000 shares of Common Stock on the date such person is firstelected or appointed a director. Further, on the day immediatelyfollowing the date of each annual meeting of stockholders, eacheligible director, other than directors who received an initialdirector option within 180 days preceding such annual meeting, isgranted an option to purchase 15,000 shares of Common Stock (20,000shares in the case of the Chairman of the Board) on the day immediatelyfollowing the date of each annual meeting of stockholders. The exerciseprice for each share subject to a director option shall be equal to thefair market value of the Common Stock on the date of grant. Directoroptions vest after two years under the 1993 Stock Option Plan and oneyear under the 2003 Stock Option Plan or earlier on a change ofcontrol. Generally, director options will expire the earlier of: (i) 10years after the date of grant, or (ii) 90 days after termination ofservice as a director under the 1993 

56

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Stock Option Plan or one year aftertermination of service as a director under the 2003 Stock Option Plan.Director options which are not vested expire immediately upontermination of service as a director. During 2003, Mr. MacDonald, Mr.Wriston, Dr. Carter and Dr. Sartorelli were each granted ten-yearoptions to purchase 2,778, 1,811 and 15,000 shares of Common Stock andMr. Cary was granted ten-year options to purchase 2,778, 1,207 and15,000 shares of Common Stock at exercise prices of $0.36, $1.67 and$1.57, respectively. Mr. Miller was granted ten-year options topurchase 11,111, 7,242 and 20,000 shares of Common Stock at exerciseprice of $0.36, $1.67 and $1.57, respectively.

CompensationCommittee Interlocks and Insider Participation

Mr. MacDonaldserves as a consultant to Elliott Management Corp. and providesinvestment advisory services to it. Elliott Management Corp. providesinvestment advisory services to Elliott Associates, L.P. and ElliottInternational, L.P., which combined are beneficial owners of5.5% of our outstanding Common Stock as of March 1, 2004.

Compensation Committee Report on Executive Compensation

This Executive Compensation Report discusses the Company'sexecutive compensation policies and the basis for the compensation paidto the Executive Officers during the year ended December 31, 2003.

Compensation Policy.    The Committee's policy withrespect to executive compensation has been designed to:

|              |                                                                                                                                                                                                                                                                                                    |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Adequately and fairly compensate executiveofficers in relation to responsibilities, capabilities andcontributions to the Company and in a manner that is commensurate withcompensation paid by companies of comparable size and at a comparablestage of development within the Company's industry; |

|              |                                                                                                                                    |
|--------------|------------------------------------------------------------------------------------------------------------------------------------|
| •  | Reward executive officers for theachievement of short-term goals and for the enhancement of thelong-term value of the Company; and |

|              |                                                                                                                                                                                          |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Align the interests of the executiveofficers with those of the stockholders with respect to short-termoperating goals and long-term increases in the value of theCompany's Common Stock. |

The components of compensationgenerally paid to executive officers consist of: (a) base salary and(b) incentive compensation in the form of annual bonus payments andstock options awarded by the Company under the Company's 2003Stock Option Plan. The Company's Compensation Committee isresponsible for reviewing and approving cash compensation paid by theCompany to its executive officers and members of the Company'ssenior management team, including annual bonuses and stock optionsawarded, selecting the individual executives and members of seniormanagement who will be awarded bonuses and stock options, and fordetermining the timing, pricing and amount of all stock options grantedto executives and members of senior management under theCompany's 2003 Stock Option Plan. In fiscal 2003, due to theCompany's cash resource constraints, no bonuses or base salaryincreases were granted to executive employees or senior management.Accordingly, the Company used stock options to the extent possible toprovide incentive compensation to the Company's management

The Company's executive compensation program historically hasemphasized the use of incentive-based compensation to reward theCompany's executive officers and members of senior management forindividual contributions to the achievement of the Company'sbusiness, research and product development objectives established bythe Board of Directors. The Company uses stock options to provide anincentive for a substantial number of its officers and employees,including members of management, and to reward such officers andemployees for achieving the Company's business objectives. TheCompany believes its incentive compensation plan rewards managementwhen the Company and its stockholders have benefited from achieving theCompany's business objectives 

57

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and targeted clinical, research anddevelopment objectives, all of which the Compensation Committee feelswill dictate, in large part, the Company's future operatingresults. The Compensation Committee believes that its policy ofcompensating officers and employees with incentive-based compensationfairly and adequately compensates those individuals in relation totheir responsibilities, capabilities and contribution to the Company,and in a manner that is commensurate with compensation paid bycompanies of comparable size and at a comparable stage of developmentwithin the Company'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:

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Base Salary.    The CompensationCommittee periodically reviews the base salary paid by the Company toits executive officers and members of the senior management team.Adjustments to base salaries are determined based upon a number offactors, including the Company's performance (to the extent suchcan fairly be attributed or related to each executive'sperformance), as well as the nature of each executive'sresponsibilities, capabilities and contributions. In addition, theCompensation Committee periodically reviews the base salaries of itssenior management personnel in an attempt to ascertain whether thosesalaries fairly reflect job responsibilities and prevailing marketconditions and rates of pay. The Compensation Committee believes thatbase salaries for the Company's executive officers havehistorically been reasonable in relation to the Company's sizeand performance in comparison with the compensation paid by similarlysized companies or companies within the Company's industry. Dueto the Company's cash resource constraints in fiscal 2003, noexecutive officer or member of senior management was granted anincrease in base salary in 2003. For most of 2003, the Company'sexecutives deferred a portion of their base salary until the Companycould raise funds for operations. The Company began paying thedeferrals amounts in August 2003. |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Incentive Compensation.    Asdiscussed above, a substantial portion of each executiveofficer's compensation package is in the form of incentivecompensation designed to reward the achievement of short-term operatinggoals and long-term increases in stockholder value. Annual bonuspayments are based on the individual's and the Company'sperformance. Due to the Company's cash resource constraints in2003, the Company paid no cash bonuses to its executives for 2003. TheCompany's 2003 Stock Option Plan allows the Board of Directors orthe Compensation Committee to grant stock options to executive officersand employees for the purchase of shares of the Company's CommonStock. Under the terms of the 2003, the Board of Directors and theCompensation Committee have authority to select the executive officersand employees who will be granted stock options and to determine thetiming, pricing and number of stock options to be awarded. TheCompensation Committee believes that the stock option grants rewardexecutive officers only to the extent that stockholders have benefitedfrom increases in the value of the Company's Common Stock. |

Compensation of the Chief Executive Officer.    The Companyhas entered into an executive employment agreement 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 in relation tohis responsibilities, capabilities, contributions and dedication to theCompany and secures for the Company the benefit of his leadership,management and financial skills and capabilities. Moreover, theCompensation Committee believes that the salary and other benefits arereasonable in relation to the responsibilities, capabilities,contributions and dedication of Mr. Kessman to the Company and are inline with the compensation earned by chief executive officers employedby companies of comparable size and stage of development within theCompany's industry.

Tax Deductibility.    Section162(m) of the Internal Revenue Code of 1986, as amended, generallydenies publicly-held corporations a federal income tax deduction forcompensation exceeding $1,000,000 paid to Named Executive Officers,excluding performance-based compensation. Through 

58

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December 31, 2003, this provision has notlimited our ability to deduct executive compensation, but theCompensation Committee will continue to monitor the potential impact ofSection 162(m) on our ability to deduct executivecompensation.

Conclusion.    The CompensationCommittee believes that the concepts discussed above further thestockholder interests because a significant part of executivecompensation is based upon the Company achieving its productdevelopment and other specific goals set by the Board of Directors. Atthe same time, the Compensation Committee believes that the programencourages responsible management of the Company in the short-term. TheCompensation Committee regularly considers plan design so that thetotal program is as effective as possible in furthering stockholderinterests.

The Compensation Committee bases its review on theexperience of its own members, on information requested from managementpersonnel, and on discussions with and information compiled by variousindependent consultants retained by theCompany.

|  | Submitted by the CompensationCommittee: |
|--|-----------------------------------------|

|  | Frank T. Cary, ChairmanCharlesK. MacDonaldWilliam R. Miller |
|--|-------------------------------------------------------------|

59

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Performance Graph

The followingline graph compares the five-year cumulative total stockholder'sreturn on our Common Stock to: (i) the change in the cumulative totalreturn on the Nasdaq Composite Index for U.S. Companies and (ii) thechange in the cumulative total return on the Nasdaq BiotechnologyIndex, which includes biotechnology companies, assuming an investmentof $100 made in each and assuming the reinvestment of anydividends.

|                                       |                                                                                              |
|---------------------------------------|----------------------------------------------------------------------------------------------|
| ITEM12.      | Security Ownership of CertainBeneficial Owners and Management and Related StockholderMatters |

The following table sets forth information as ofMarch 1, 2004 (except as otherwise noted in the footnotes) regardingthe beneficial ownership (as defined by the Securities and ExchangeCommission (the "SEC")) of our Common Stock:(i) each person known by us to own beneficially more than five percentof our outstanding 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 agroup. Except as otherwise specified, the named beneficial owner hasthe sole voting and investment power over the shares listed and theaddress of each beneficial owner is c/o Vion P harmaceuticals, Inc., 4Science Park, New Haven, Connecticut 06511.

60

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|                                                                                                                                                                                                              |  |                                    |           |                                             |  |                                                                                                                           |  |  |  |  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|------------------------------------|-----------|---------------------------------------------|--|---------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| Directorsand Officers                                                                                                                                                                                        |  | Number of Shares BeneficiallyOwned |           | Percent of Outstanding Shares ofCommonStock |
|                                                                                                                                                                                                         |  |                               |      |                                        |  |                                                                                                                      |
| StephenK. Carter,M.D.                                                                                                                                                                                        |  |                               | 42,740    | (1)                                    |  |                     * |
| FrankT.Cary                                                                                                                                                                                                  |  |                               | 145,458   | (2)                                    |  |                     * |
| AlanKessman                                                                                                                                                                                                  |  |                               | 1,350,074 | (3)                                    |  |                 2.4%                      |
| CharlesK.MacDonald                                                                                                                                                                                           |  |                               | 57,740    | (4)                                    |  |                     * |
| WilliamR.Miller                                                                                                                                                                                              |  |                               | 324,117   | (5)                                    |  |                     * |
| AlanC. Sartorelli,Ph.D.                                                                                                                                                                                      |  |                               | 482,402   | (6)                                    |  |                     * |
| WalterB.Wriston                                                                                                                                                                                              |  |                               | 140,458   | (7)                                    |  |                     * |
| TerrenceW. Doyle,Ph.D                                                                                                                                                                                        |  |                               | 436,560   | (8)                                    |  |                     * |
| HowardB.Johnson                                                                                                                                                                                              |  |                               | 247,499   | (9)                                    |  |                     * |
| IvanKing,Ph.D                                                                                                                                                                                                |  |                               | 289,076   | (10)                                   |  |                     * |
| MarioSznol,M.D.                                                                                                                                                                                              |  |                               | 352,995   | (11)                                   |  |                     * |
| Alldirectors and executive officers as a group (11 persons)                                                                                                                                                  |  |                               | 3,869,119 | (12)                                   |  |                 6.8%                      |
|                                                                                                                                                                                                         |  |                               |      |                                        |  |                                                                                                                      |
| OtherBeneficial Owners                                                                                                                                                                                       |  |                               |      |                                        |  |                                                                                                                      |
| ElliottAssociates, L.P.Elliott International, L.P. (f/k/a WestgateInternational, L.P.)Elliott International Capital Advisors,Inc.c/o Elliott Associates, L.P. 712 Fifth Avenue,36th Floor New York, NY10019. |  |                               | 2,966,113 | (13)                                   |  |                 5.5%                      |
| LangleyPartners L.P.Langley Management, LLCLangley Capital,LLCJeffrey Thorp     535 Madison Avenue, 7thFloor     New York, NY10022                                   |  |                               | 3,238,170 | (14)                                   |  |                 5.8%                      |
| GalleonManagement, L.P. 135 East 57th Street, 16th Floor New York,NY10022                                                                                                                                    |  |                               | 3,500,000 | (15)                                   |  |                 6.4%                      |
|                                                                                                                                                                                                              |

|  |
|--|
|  |  |
|  |

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

| (1) | Reflects 42,740 sharesissuable upon exercise of options. |
|-----|----------------------------------------------------------|

| (2) | Reflects82,740 shares issuable upon exercise of options. |
|-----|----------------------------------------------------------|

| (3) | Reflects 12,756 shares held by a family trust ofwhich Mr. Kessman is a controlling member. Also reflects 1,305,427shares issuable upon exercise of options. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Reflects 57,740 shares issuable upon exercise ofoptions. |
|-----|----------------------------------------------------------|

| (5) | Reflects 134,711 shares issuableupon exercise of options. |
|-----|-----------------------------------------------------------|

| (6) | Reflects 190,874shares beneficially owned by Dr. Sartorelli's wife, as to whichDr. Sartorelli disclaims beneficial ownership. Also reflects 82,197shares issuable upon exercise of options. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7) | Reflects 86,490 shares issuable upon exercise ofoptions. |
|-----|----------------------------------------------------------|

| (8) | Reflects 43,400 shares held by Dr.Doyle's wife, as to which Dr. Doyle disclaims beneficialownership. Also reflects 196,867 shares issuable upon exercise ofoptions. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (9) | Reflects 247,499 shares issuableupon exercise of options. |
|-----|-----------------------------------------------------------|

| (10) | Reflects 276,632shares issuable upon exercise of options. |
|------|-----------------------------------------------------------|

| (11) | Reflects 345,503 shares issuable upon exercise ofoptions. |
|------|-----------------------------------------------------------|

| (12) | Reflects 2,858,546 sharesissuable upon exercise of options. |
|------|-------------------------------------------------------------|

61

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| (13) | Beneficial ownershipinformation is based upon data set forth in a Schedule 13D AmendmentNo. 9 filed with the SEC on February 15, 2001 by Elliott Associates,L.P, which owns 1,481,844 shares of our Common Stock. ElliottInternational, L.P. (f/k/a Westgate International, L.P.), which has itsbusiness address at c/o Midland Bank Trust Corporation (Cayman)Limited, P.O. Box 1109, Mary Street, Grand Cayman, Cayman Islands,British West Indies, owns 1,484,269 shares of our Common Stock. ElliottInternational Capital Advisors, Inc. is the investment manager forElliott International, L.P. and has shared voting and dispository powerover the shares held by Elliott International, L.P. |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (14) | Beneficial ownership information is based upon dataset forth in a Schedule 13G filed with the SEC on February 19, 2004 byLangley Partners L.P. ("Langley L.P."),Langley Management, LLC, Langley Capital, LLC and Jeffrey Thorp("Thorp"). 1,200,000 shares of our CommonStock are owned of record by Langley L.P. and 2,038,170 shares of ourCommon Stock are issuable to Langley L.P. upon exercise of warrants.Langley Capital, LLC is the general partner of Langley L.P. Thorp isthe sole member and manager of Langley Capital, LLC. LangleyManagement, LLC is the investment manager of Langley L.P. Thorp holds a99.9% membership interest in Langley Management, LLC and is thesole manager thereof. As a result, each of Langley Management, LLC,Langley Capital, LLC and Thorp are considered to share the power tovote or direct the vote of, and the power to dispose or direct thedisposition of, the shares of our Common Stock directly andbeneficially owned by Langley L.P. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (15) | Beneficial ownership information is based upon dataset forth in a Schedule 13G filed with the SEC on February 20, 2004 byGalleon Management, L.P. Of the shares of our Common Stock beingreported as beneficially owned by Galleon Management, L.P.: (i)2,177,350 shares are held by Galleon Healthcare Offshore, Ltd., anoffshore entity of which the Galleon Management, L.P. is its investmentmanager; (ii) 780,000 are held by an offshore entity of which theGalleon Management, L.P. is its investment manager; (iii) 322,650 areheld by a limited partnership of which the Galleon Management, L.P. isits management company; and (iv) 220,000 are held by a limitedpartnership of which the Galleon Management, L.P. is its managementcompany. Each of the entities named or described in (i) - (iv) of thisItem 6 has the right to receive or the power to direct the receipt ofdividends from, or the proceeds from the sale of, the shares of ourCommon Stock. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Equity Compensation Plan Information

The following table provides information about shares of our CommonStock that may be issued upon the exercise of options and rights underall of the Company's existing equity compensation plans as ofDecember 31, 2003.

|                                                          |  |                                                                              |           |                                                        |  |                                                                                                        |        |         |  |        |           |        |  |  |
|----------------------------------------------------------|--|------------------------------------------------------------------------------|-----------|--------------------------------------------------------|--|--------------------------------------------------------------------------------------------------------|--------|---------|--|--------|-----------|--------|--|--|
| PlanCategory                                             |  | Number of Shares ofCommon Stock tobe IssuedUponExercise ofOutstandingOptions |           | Weighted-AverageExercise PriceofOutstanding Options($) |  | Number of Shares ofCommon Stock Remaining Available for Future Issuance UnderEquity Compensation Plans |
| Plansapproved bystockholders:                            |  |                                                                         |      |                                                   |  |                                                                                                   |   |    |  |   |      |   |
|     2003Stock OptionPlan             |  |                                                                         | 489,393   |                                                   |  | $                                                                                                      | 1.57   |    |  |   | 1,510,607 |   |
|     1993Stock Option Plan(1)         |  |                                                                         | 3,059,707 |                                                   |  | $                                                                                                      | 4.87   |    |  |   | —   |   |
|     2000Stock PurchasePlan           |  |                                                                         | (2        | )                                                 |  |                                                                                                   | (2     | )  |  |   | 405,843   |   |
|                                                     |  |                                                                         |      |                                                   |  |                                                                                                   |   |    |  |   |      |   |
| Equitycompensation plans not approved by stockholders(3) |  |                                                                         | 9,554,219 |                                                   |  | $                                                                                                      | 2.83   |    |  |   | —   |   |
|                                                          |

|  |
|--|
|  |  |
|  |

| (1) | Weno longer grant stock options under our 1993 Stock Option Plan, whichexpired on April 15, 2003. |
|-----|---------------------------------------------------------------------------------------------------|

| (2) | Under our 2000Employee Stock Purchase Plan, participants are permitted to purchaseour Common Stock during the stock offering period. Accordingly, thesenumbers are not determinable. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Reflects thefollowing: |
|-----|------------------------|

|  | (a) | outstanding warrantsto purchase 208,000 shares of our Common Stock at $6.00 per shareissued to an underwriter in connection with our 1999 public offeringexpiring on October 25, 2004. The shares of Common Stock issuable uponexercise of the warrants are not registered, but the warrant holdershave piggyback registration rights; |
|--|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (b) | outstanding warrants to purchase 1,923,075shares of our Common Stock at $2.20 per share issued to investors inconnection with our June 2003 private placement expiring on June 23,2008. We have subsequently registered the resale of these shares by theinvestors pursuant to a registration statement on Form S-3, whichbecame effective on July 24, 2003; |
|--|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (c) | outstanding warrants to purchase 6,475,000shares of our Common Stock at $2.50 per share issued to investors and aplacement agent in connection with our private placement expiring onSeptember 19, 2008.  We have subsequently registered the resaleof these shares by the investors and placement agent pursuant to aregistration statement on Form S-3, which became effective on October8, 2003; and |
|--|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (d) | outstanding optionsto purchase 948,144 shares of our Common Stock granted under our SeniorExecutive Stock Option Plan (the "SeniorPlan") to Mr. Kessman in January 1999 at exercise pricesranging from $5.25 to $5.775 in connection with his employmentagreement. The shares  of Common Stock issuable upon exercise ofthe options granted to Mr. Kessman under the  Senior Option Planhave not been registered. |
|--|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

62

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The following summarizes the principalterms of the Senior Plan, which was adopted by our Board of Directorson January 11, 1999.

Eligibility.    Options may begranted under the Senior Plan to our Chief Executive Officer and to adirector or officers who are considered a Reporting Persons under Rule16b-3.

Administration.    The Board has appointed itsCompensation Committee (the "Committee") toadminister the plan. Subject to the limitations of the plan, theCommittee has broad authority under the plan

AvailableShares.    The maximum number of shares of Common Stock that maybe issued under the Senior Plan is 980,000, subject to customaryantidilution and other adjustments provided for in the plan, and themaximum number of shares of Common Stock with respect to such optionsthat may be granted to any individual in any calendar year is 980,000shares. Shares of Common Stock available for issuance under the Planmay be authorized and unissued or held by the Company in itstreasury.

Types of Options.    Options issued underthe Senior Plan are non-qualified stock options to purchase shares ofCommon Stock.

Option Term.  All optionsexpire not more than 10 years after the date of grant. 

Exercise Price.    The exercise price for each share ofCommon Stock covered by an option will be determined by the Committeeat the time of grant.

Exercise of Options.    TheCommittee may establish vesting and other conditions or restrictions onthe exercise of an option and/or upon the issuance of Common Stock inconnection with the exercise of an option as it deems appropriate. Nooption will be exercisable during the first 6 months after the date ofgrant. The Committee may provide in the option agreement for theacceleration of the exercise date upon the occurrence of specifiedevents and/or accelerate the exercise date of an option at any timeprior to the option termination.

Restrictions onTransfer.    Benefits under the plan are generallynon-transferable, except by will or the laws of descent anddistribution, or by gift to a family member.

Termination ofEmployment or Other Service.    If an optionee'semployment or service terminates, the portion of an option notexercisable on the date of termination shall immediately terminate andthe portion of an option that is exercisable on the date of terminationshall remain exercisable for a period of time following the terminationdate, as follows: (i) if due to death or disability, for one year; (ii)if due to cause, immediately terminates; and (iii) for any othertermination, for 3 months.

Adjustment.    The maximumnumber and class of shares available for issuance under the plan, themaximum number and class of shares with respect to which an option maybe granted to any employee during the calendar year, the number andclass of shares to be subject to future awards of director options andthe number and class of shares and exercise price per share in effectunder each outstanding option are subject to adjustment upon capitaladjustments and stock dividends, and are subject to conversion uponcertain mergers, consolidations, acquisitions of property or stock,separations or reorganizations, as the Committee determines to benecessary or appropriate.

Termination of or Changes to thePlan.    The Plan will terminate on September 9, 2013, unlesssooner terminated by the Board. The Board may amend or terminate thePlan at any time. Any amendment, except as provided under the Plan inthe event of capital changes, reorganization or sale, which requiresstockholder approval will be subject to the approval of theCompany's stockholders. No amendment or termination may adverselyaffect the rights of the holder of an outstanding option without his orher consent.

Exchange of Options.    With the consentof optionees, the Committee has the authority to amend the terms of anyoutstanding options to provide an exercise price per share which ishigher or lower than the current exercise price of such outstandingoptions.

U.S. Federal Income Tax Consequences.    Theholder of a non-qualified option will not recognize taxable income uponthe grant of the option. In general, the holder of a non-qualifiedoption will 

63

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recognize ordinary income upon the exerciseof the option in an amount equal to the excess of the fair market valueof the shares of Common Stock with respect to which the option isexercised at such time over the aggregate exercise price of such shares(i.e., the option spread). The Company generally will receive acorresponding tax deduction at such time. Upon a later sale of theCommon Stock, the optionee will recognize capital gain or loss equal tothe difference between the sale price and the sum of the exercise priceplus the amount of ordinary income recognized on exercise.

Ingeneral, Section 162(m) of the Code denies a publicly-held corporationa deduction for federal income tax purposes for remuneration paid inexcess of $1,000,000 per year per person to its chief executive officerand the four other officers whose compensation is disclosed in itsproxy statement, subject to certain exceptions. Although the Plan hasbeen designed so that remuneration attributable to the exercise ofnon-qualified options granted under the Plan will qualify for anexception from the deduction limitation, it is possible that, incertain instances, remuneration attributable to options granted underthe Plan will not be deductible by us by virtue of Section 162(m) ofthe Code.

Rules covering the taxation of stock options arecomplex and subject to change. The preceding summary is only a summaryof the basic U.S. federal income tax consequences with respect tooptions granted under the Plan, based upon management'sunderstanding of existing federal income tax laws. Participants areurged to consult with their own tax advisors regarding the specific taxconsequences associated with their participation in the Plan.

ITEM 13.    Certain Relationships and RelatedTransactions

Mr. MacDonald serves as a consultant toElliott Management Corp. and provides investment advisory services toit. Elliott Management Corp. provides investment advisory services toElliott Associates, L.P. and Elliott International, L.P., whichcombined are beneficial owners of 5.5% of our outstanding CommonStock as of March 1, 2004.

We recorded research and developmentexpense of $400,000 during 2003 related to gifts to fund researchthrough March 31, 2005 at the laboratory headed by Dr. Sartorelli. Thebalance of the gifts of $250,000 at December 31, 2003 will be paid infive equal quarterly installments through the first quarter of2005.

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 public accountants, in 2003 and2002:

|                    |  |                         |         |        |  |   |         |        |  |  |
|--------------------|--|-------------------------|---------|--------|--|---|---------|--------|--|--|
|               |  | Years ended December31, |
|               |  | 2003                    |         | 2002   |
| Audit fees         |  | $                       | 104,750 |   |  | $ | 83,000  |   |
| Audit related fees |  | $                       | 9,800   |   |  | $ | — |   |
| Tax fees           |  | $                       | 25,760  |   |  | $ | 26,230  |   |
| All other fees     |  | $                       | — |   |  | $ | 1,500   |   |
| Total              |  | $                       | 140,310 |   |  | $ | 110,730 |   |
|                    |

Audit Fees consist of fees billedfor the annual audit of our financial statements and other auditservices including the provision of consents and the review ofdocuments filed with the SEC. The fees for 2003 include $62,150 ofaccrued audit fees for the 2003 year-end audit that were not billeduntil 2004. The fees for 2002 include $43,000 of accrued audit fees forthe 2002 year-end audit that were not billed until 2003.

Audit Related Fees consist of fees billed for transactionconsultations.

Tax Fees consist of fees billed for taxcompliance services.

All Other Fees consist of asubscription fee for an online accounting research database.

64

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Audit Committee Pre-approval Policiesand Procedures

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 auditors (the "Policy").

Under the Policy, proposed services either (i) may be pre-approvedby the Audit Committee without consideration of specific case-by-caseservices as "general pre-approval"; or (ii)require the specific pre-approval of the Audit Committee as"specific pre-approval". The Audit Committeemay delegate either type of pre-approval authority to one or more ofits members. The appendices to the Policy set out the audit,audit-related, tax and other services that have received the generalpre-approval of the Audit Committee, including those described in thefootnotes to the table, above; these services are subject to annualreview by the Audit Committee. All other audit, audit-related, tax andother services must receive a specific pre-approval from the AuditCommittee.

The Audit Committee establishes budgeted fee levelsannually for each of the four categories of audit and non-auditservices that are pre-approved under the Policy, namely, audit,audit-related, tax and other services. Requests or applications toprovide services that require specific approval by the Audit Committeeare submitted to the Audit Committee by both the external auditor andthe chief financial officer. At each regular meeting of the AuditCommittee, the external auditor provides a report in order for theAudit Committee to review the services that the external auditor isproviding, as well as the status and cost of thoseservices.

65

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PART IV

ITEM15.    Exhibits, Financial Statement Schedules, and Reports onForm 8-K

**(a) 1.    FinancialStatements**

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

|                                                                                                                                                       |  |        |    |        |  |  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--|--------|----|--------|--|--|
|                                                                                                                                                  |  | Page   |
| Report of Independent Auditors                                                                                                                        |  |   | 30 |   |
| Balance Sheets as of December 31, 2003 and2002                                                                                                        |  |   | 31 |   |
| Statements of Operations for theYears Ended December 31, 2003, 2002 and 2001 and for the Period fromMay 1, 1994 (Inception) through December 31, 2003 |  |   | 32 |   |
| Statement of Changes in Shareholders' Equity for thePeriod from May 1, 1994 (Inception) Through December 31,2003                                      |  |   | 33 |   |
| Statements of Cash Flows for theYears Ended December 31, 2003, 2002 and 2001 and for the Period fromMay 1, 1994 (Inception) through December 31, 2003 |  |   | 36 |   |
| Notes to FinancialStatements                                                                                                                          |  |   | 37 |   |
|                                                                                                                                                       |

2.    Financial StatementSchedules

Schedules not included herein are omitted becausethey 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 item andincluded in this report or incorporated herein by reference are asfollows:

|            |  |             |  |                                                                                                                                                                                                                                                                            |  |  |  |  |  |  |
|------------|--|-------------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| ExhibitNo. |  | Description |
| 2.1        |  | —     |  | Agreementand Plan of Merger among MelaRx Pharmaceuticals, Inc., OncoRx ResearchCorp. and OncoRx, Inc. dated as of April 19, 1995(1)                                                                                                                                        |
| 2.2        |  | —     |  | Certificate ofMerger, dated April 20, 1995(1)                                                                                                                                                                                                                              |
| 3.1        |  | —     |  | Restated Certificateof Incorporation, as amended(2)                                                                                                                                                                                                                        |
| 3.2        |  | —     |  | By-laws, as amended(2)                                                                                                                                                                                                                                                     |
| 3.3        |  | —     |  | Certificate ofAmendment to the Certificate of Incorporation of Vion Pharmaceuticals,Inc. dated as of July 26, 2001(13)                                                                                                                                                     |
| 4.1        |  | —     |  | Rights Agreementdated as of October 26, 1998 between Vion Pharmaceuticals, Inc. andAmerican Stock Transfer & Trust Company (includes form of RightCertificate attached as Exhibit A and a Summary of Rights to PurchaseCommon Shares attached as Exhibit B thereto)(3) |
| 4.2        |  | —     |  | Revised form ofWarrant Agreement by and between Vion Pharmaceuticals, Inc. and BreanMurray & Co., Inc.(4)                                                                                                                                                              |
| 4.3        |  | —     |  | Form ofUnderwriter's Warrant (included as Exhibit A to Exhibit 4.2above) (4)                                                                                                                                                                                               |
| 10.1       |  | —     |  | LicenseAgreement between Yale University and OncoRx, Inc. dated as of August31, 1994 (1,16)                                                                                                                                                                                |
| 10.2       |  | —     |  | LetterAgreement between Yale University and OncoRx, Inc. dated August 19,1994 (1)                                                                                                                                                                                          |
| 10.3       |  | —     |  | ExtensionAgreement between Yale University and MelaRx Pharmaceuticals, Inc.,dated as of July 1, 1992 (1)                                                                                                                                                                   |
|            |

66

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|            |  |             |  |                                                                                                                                                                        |  |  |  |  |  |  |
|------------|--|-------------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| ExhibitNo. |  | Description |
| 10.4       |  | —     |  | LicenseAgreement between Yale University and OncoRx Corporation dated as ofNovember 15, 1995 (15)                                                                      |
| 10.5       |  |        |  | LetterAgreement between Yale University and MelaRx Pharmaceuticals, Inc.,dated as of February 2, 1995(1)                                                               |
| 10.6       |  | —     |  | Reserved                                                                                                                                                               |
| 10.7       |  | —     |  | Reserved                                                                                                                                                               |
| 10.8       |  | —     |  | LicenseAgreement between Yale University and OncoRx, Inc. dated as of December15, 1995(15)                                                                             |
| 10.9       |  | —     |  | Reserved                                                                                                                                                               |
| 10.10      |  | —     |  | Reserved                                                                                                                                                               |
| 10.11      |  | —     |  | Reserved                                                                                                                                                               |
| 10.12      |  | —     |  | Consultingand Finder's Agreement between MelaRx Pharmaceuticals, Inc. andJacob A. Melnick, dated June 4, 1992, as amended by Agreement datedFebruary 17, 1995(1)       |
| 10.13      |  | —     |  | Clinical TrialsAgreement between Vion Pharmaceuticals, Inc. and the Division of CancerTreatment and Diagnosis, NCI, dated January 9, 2003(15)                          |
| 10.14      |  | —     |  | Letter Agreementbetween Yale University and OncoRx, Inc. (formerly MelaRxPharmaceuticals, Inc.), dated July 5, 1995(1)                                                 |
| 10.15      |  | —     |  | Reserved                                                                                                                                                               |
| 10.16      |  | —     |  | Reserved                                                                                                                                                               |
| 10.17      |  | —     |  | Saleand Leaseback Agreement and Master Equipment Lease Agreement betweenFINOVA Technology Finance, Inc. and Vion Pharmaceuticals, Inc. dated asof October 17, 1996 (8) |
| 10.18      |  | —     |  | Reserved                                                                                                                                                               |
| 10.19      |  | —     |  | AmendmentNo. 1 to License Agreement between Yale University and VionPharmaceuticals, Inc. (f/k/a OncoRx, Inc.) dated as of June 12, 1997(9)                            |
| 10.20      |  | —     |  | Amendment No. 2 toLicense Agreement between Yale University and Vion Pharmaceuticals,Inc. (f/k/a OncoRx, Inc.) dated as of June 12, 1997(9)                            |
| 10.21      |  | —     |  | CollaborativeDevelopment and Distribution Agreement between Boehringer IngelheimInternational GmbH and Vion Pharmaceuticals, Inc. dated November 24,1997 (6, 22)       |
| 10.22      |  | —     |  | Reserved                                                                                                                                                               |
| 10.23      |  | —     |  | AmendmentNo. 5 to a License Agreement between Yale University and VionPharmaceuticals, Inc. (f/k/a OncoRx, Inc.) dated as of March 3, 2003(16, 22)                     |
| 10.24      |  | —     |  | Amendment No.3 to a License Agreement between Yale University and VionPharmaceuticals, Inc. (f/k/a OncoRx, Inc.) dated as of September 25,1998 (10)                    |
| 10.25      |  | —     |  | Form ofSeverance Agreement between the Company and Terrence W. Doyle, IvanKing, Howard B. Johnson, Mario Sznol, Thomas Mizelle and BijanAlmassian (11)                 |
| 10.26      |  | —     |  | Reserved                                                                                                                                                               |
| 10.27      |  | —     |  | SeniorExecutive Stock Option Plan (11)                                                                                                                                 |
|            |

67

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|            |  |             |  |                                                                                                                                                                                                                                                                                                        |  |  |  |  |  |  |
|------------|--|-------------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| ExhibitNo. |  | Description |
| 10.28      |  | —     |  | Reserved                                                                                                                                                                                                                                                                                               |
| 10.29      |  | —     |  | Development and License Agreement dated December 1,1999 between the Company and Boehringer Ingelheim International GmbH(12, 22)                                                                                                                                                                        |
| 10.30      |  | —     |  | Reserved                                                                                                                                                                                                                                                                                               |
| 10.31      |  | —     |  | Amendment No. 4 to a License Agreement between YaleUniversity and Vion Pharmaceuticals, Inc. (f/k/a OncoRx, Inc.) dated asof January 31, 2000 (13, 22)                                                                                                                                                 |
| 10.32      |  | —     |  | Lease between Science Park Development Corporationand Vion Pharmaceuticals, Inc. dated November 1, 2001(14)                                                                                                                                                                                            |
| 10.33      |  | —     |  | VionPharmaceuticals, Inc. Amended and Restated 1993 Stock Option Plan, asAmended (14)                                                                                                                                                                                                                  |
| 10.34      |  | —     |  | Securities Purchase Agreement as of June 19, 2003(17)                                                                                                                                                                                                                                                  |
| 10.35      |  | —     |  | RegistrationRights Agreement as of June 19, 2003 (17)                                                                                                                                                                                                                                                  |
| 10.36      |  | —     |  | Form of Warrant (17)                                                                                                                                                                                                                                                                                   |
| 10.37      |  | —     |  | Securities Purchase Agreement as of September 8,2003 (18)                                                                                                                                                                                                                                              |
| 10.38      |  | —     |  | Registration Rights Agreement as of September 8,2003 (18)                                                                                                                                                                                                                                              |
| 10.39      |  | —     |  | Form ofWarrant (18)                                                                                                                                                                                                                                                                                    |
| 10.40      |  | —     |  | ResearchServices Agreement between Vion Pharmaceuticals, Inc. and Eli Lilly andCompany as of September 8, 2003 (19,22)                                                                                                                                                                                 |
| 10.41      |  | —     |  | License Agreement between Vion Pharmaceuticals,Inc. and Beijing Pason Pharmaceuticals, Inc. dated September 12, 2003(19, 22)                                                                                                                                                                           |
| 10.42      |  | —     |  | EmploymentAgreement between Vion Pharmaceuticals, Inc. and Alan Kessman dated asof November 3, 2003 (19)                                                                                                                                                                                               |
| 10.43      |  | —     |  | Research Collaboration and Option Agreement 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. and VionPharmaceuticals, Inc. dated November 24, 2003(23) |
| 10.44      |  | —     |  | SecuritiesPurchase Agreement as of February 9, 2004(20)                                                                                                                                                                                                                                                |
| 10.45      |  | —     |  | RegistrationRights Agreement as of February 9, 2004(20)                                                                                                                                                                                                                                                |
| 10.46      |  | —     |  | Form of Warrant(20)                                                                                                                                                                                                                                                                                    |
| 10.47      |  | —     |  | LicenseAgreement between Johnson & Johnson Consumer Companies, Inc. andVion Pharmaceuticals, Inc. dated March 1, 2004 (21,23)                                                                                                                                                                      |
| 21.1       |  | —     |  | Subsidiaries of theRegistrant                                                                                                                                                                                                                                                                          |
| 23.1       |  | —     |  | Consent ofErnst & Young LLP, IndependentAuditors                                                                                                                                                                                                                                                   |
| 24.1       |  | —     |  | Power ofAttorney (included on signaturepage)                                                                                                                                                                                                                                                           |
| 31.1       |  | —     |  | Certification ofthe Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of2002                                                                                                                                                                                                    |
| 31.2       |  | —     |  | Certification ofthe Chief Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002                                                                                                                                                                                                   |
|            |

68

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|            |  |             |  |                                                                                                     |  |  |  |  |  |  |
|------------|--|-------------|--|-----------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| ExhibitNo. |  | Description |
| 32.1       |  | —     |  | Certificationof the Chief Executive Officer pursuant to Section 906 of theSarbanes-Oxley Act of2002 |
| 32.2       |  | —     |  | Certification ofthe Chief Financial Officer pursuant to Section 906 of theSarbanes-Oxley Act of2002 |
|            |

|  |
|--|
|  |  |
|  |

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

| (2) | Incorporated by referenceto the Company's Quarterly Report on Form 10-QSB for thequarterly period ended June 30,1998. |
|-----|-----------------------------------------------------------------------------------------------------------------------|

| (3) | Incorporated by referenceto the Company's Current Report on Form 8-K filed on October 26,1998. |
|-----|------------------------------------------------------------------------------------------------|

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

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

| (6) | Incorporatedby reference to the Company's Annual Report on Form 10-KSB forthe fiscal year ended December 31,1997. |
|-----|-------------------------------------------------------------------------------------------------------------------|

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

| (8) | Incorporatedby reference to the Company's Annual Report on Form 10-KSB forthe fiscal year ended December 31,1996. |
|-----|-------------------------------------------------------------------------------------------------------------------|

| (9) | Incorporated by referenceto the 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 fiscal yearended 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 fiscal yearended 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 fiscal yearended December 31,2002. |
|------|-------------------------------------------------------------------------------------------------------------------|

| (17) | Incorporated by referenceto the Company's Current Report on Form 8-K filed on June 20,2003. |
|------|---------------------------------------------------------------------------------------------|

| (18) | Incorporated by referenceto the Company's Current Report on Form 8-K filed on September10, 2003. |
|------|--------------------------------------------------------------------------------------------------|

| (19) | Incorporated byreference to the Company's Quarterly Report on Form 10-Q for thequarter ended September 30,2003. |
|------|-----------------------------------------------------------------------------------------------------------------|

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

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| (21) | Incorporatedby reference to the Company's Current Report on Form 8-K/A filedon March 18, 2004. |
|------|------------------------------------------------------------------------------------------------|

| (22) | Certainportions of this exhibit have been omitted pursuant to an ordergranting confidential treatment by the Securities and ExchangeCommission. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------|

| (23) | Certain portions ofthis exhibit have been omitted pursuant to a request for an ordergranting confidential treatment by the Securities and ExchangeCommission. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

(b)    Reports on Form 8-K

TheRegistrant filed the following reports on Form 8-K during the quarterended December 31, 2003:

|          |                                                                                                                                                                                                                                                                                                                                                                                    |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.  | OnOctober 22, 2003, under Item 5 and Item 7 to announce the Company hadentered into a license agreement with Beijing Pason Pharmaceuticals,Inc. ("Pason") whereby Pason obtained theexclusive rights to develop, manufacture and market Triapine®anticancer and antiviral uses in the mainland of the People'sRepublic of China, Taiwan, Hong Kong and Macao (the"Territory"). |

|          |                                                                                                                                                                         |
|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.  | On November 12, 2003, under Item 5and Item 7 to announce the Company had received an initial payment of$0.5 million from Pason under the terms of the licenseagreement. |

|          |                                                                                                                                                    |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.  | On November 13, 2003,under Item 5 and Item 7 to announce the Company's results for thethird quarter and nine-month period ended September 30,2003. |

|          |                                                                                                                                                                                                                                                     |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.  | On December 5, 2003, underItem 5 and Item 7 to announce the Company had entered into a researchcollaboration and option agreement for certain novel anticancercompounds with a group of inventors and Austria WirtschaftsserviceGesellschaft m.b.H. |

|          |                                                                                                                                                                |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 5.  | On December10, 2003, under Item 5 and Item 7 to announce the Company would presenta corporate update at its Annual Meeting of Stockholders on December 9,2003. |

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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, in the City of New Haven, State of Connecticut on March 29,2004.

|        |  |                               |  |                                     |  |  |  |  |  |  |
|--------|--|-------------------------------|--|-------------------------------------|--|--|--|--|--|--|
|   |  | **VIONPHARMACEUTICALS, INC.** |
|   |  | By:                           |  | /s/ Alan Kessman                    |
|   |  |                          |  | Alan KessmanChief Executive Officer |
|        |

POWER OFATTORNEY

KNOWN ALL MEN BY THESE PRESENTS, that eachperson whose signature appears below constitutes and appoints AlanKessman and Howard B. Johnson, and each of them, his true and lawfulattorneys-in-fact and agents, with full power of substitution andresubstitution, for him and in his name, place and stead, in any andall capacities, to sign any and all amendments to this Annual Report,and to file the same, with all exhibits thereto, and other documents inconnection therewith, with the Securities and Exchange Commission,granting to said attorneys-in-fact and agents, and each of them, fullpower and authority to do and perform such and every act and thingrequisite and necessary to be done, as fully to all intents andpurposes as he might or could do in person, hereby ratifying andconfirming all that said attorneys-in-fact and agents, or any of them,or their or his substitute or substitutes, may lawfully do or cause tobe done by virtue thereof.

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacitiesand on the dates indicated.

|                              |  |                                                                                |  |  |
|------------------------------|--|--------------------------------------------------------------------------------|--|--|
| Signature                    |  | Title                                                                          |  |  |
|                              |
| /s/William R. Miller         |  | Chairman of theBoard                                                           |  |  |
|                              |
| William R.Miller             |
|                              |
| /s/ AlanKessman              |  | Chief ExecutiveOfficer and Director(Principal ExecutiveOfficer)                |  |  |
|                              |
| Alan Kessman                 |
|                              |
| /s/ Howard B.Johnson         |  | President andChief Financial Officer(Principal Financial and AccountingOfficer |  |  |
|                              |
| Howard B. Johnson            |
|                              |
| /s/ KarenSchmedlin           |  | Controller andSecretary                                                        |  |  |
|                              |
| Karen Schmedlin              |
|                              |
| /s/ Stephen K. Carter,M.D.   |  | Director                                                                       |  |  |
|                              |
| Stephen K. Carter,M.D.       |
|                              |
| /s/Frank T. Cary             |  | Director                                                                       |  |  |
|                              |
| Frank T.Cary                 |
|                              |
| /s/Charles K. MacDonald      |  | Director                                                                       |  |  |
|                              |
| Charles K.MacDonald          |
|                              |
| /s/Alan C. Sartorelli, Ph.D. |  | Director                                                                       |  |  |
|                              |
| Alan C. Sartorelli,Ph.D.     |
|                              |
| /s/Walter B. Wriston         |  | Director                                                                       |  |  |
|                              |
| Walter B.Wriston             |
|                              |

Date:March 29, 2004

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