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, 2004

OR

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

For the transition period from                 to                  

Commission File Number 000-26534

VIONPHARMACEUTICALS, INC.

(Exact name ofregistrant as specified in itscharter)

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| Delaware                                                     |  | 13-3671221                         |
| (State or other jurisdiction ofincorporation ororganization) |  | (I.R.S. EmployerIdentificationNo.) |
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| 4Science ParkNew Haven, Connecticut                          |  | 06511                              |
| (Address ofprincipal 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 to Section12(g) of the Act:

Title of Class CommonStock, $0.01 par value (together with associated Common Stock PurchaseRights)

Indicate by check mark whether the registrant (1)has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days. Yes     No 

Indicate by checkmark 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. 

Indicateby check mark whether the registrant is an accelerated filer (asdefined in Rule 12b-2 of the Act). Yes  No     

The aggregate market value of the common stock held bynon-affiliates of the registrant as of June 30, 2004 was $208,726,428based on the last sale price for the common stock on that date asreported by the Nasdaq SmallCapMarketSM.

The number of sharesoutstanding of the registrant's common stock as of March 10, 2005was 65,886,904.

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VIONPHARMACEUTICALS, INC.

TABLE OF CONTENTS

PARTI

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|     |  |                                                                                                       |  | Page   |
| Item1.   |  | Business                                                                                                   |  | 2      |
| Item2.   |  | Properties                                                                                                 |  | 16     |
| Item3.   |  | Legal Proceedings                                                                                          |  | 16     |
| Item4.   |  | Submission of Matters to a Vote of SecurityHolders                                                         |  | 16     |
|     |  | **PARTII**                                                                                                 |  |   |
| Item 5.  |  | Market forRegistrant's Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities |  | 17     |
| Item 6.  |  | Selected FinancialData                                                                                     |  | 17     |
| Item 7.  |  | Management'sDiscussion and Analysis of Financial Condition and Results ofOperations                        |  | 18     |
| Item 7A. |  | Quantitativeand Qualitative Disclosures About Market Risk                                                  |  | 31     |
| Item 8.  |  | Financial Statements and SupplementaryData                                                                 |  | 32     |
| Item 9.  |  | Changes in andDisagreements with Accountants on Accounting and FinancialDisclosure                         |  | 54     |
| Item 9A. |  | Controls andProcedures                                                                                     |  | 54     |
| Item 9B. |  | OtherInformation                                                                                           |  | 54     |
|     |  | **PARTIII**                                                                                                |  |   |
| Item 10. |  | Directors andExecutive Officers of the Registrant                                                          |  | 55     |
| Item 11. |  | Executive Compensation                                                                                     |  | 57     |
| Item 12. |  | Security Ownership of Certain BeneficialOwners and Management and Related StockholderMatters               |  | 64     |
| Item 13. |  | CertainRelationships and Related Transactions                                                              |  | 68     |
| Item 14. |  | Principal Accountant Fees andServices                                                                      |  | 68     |
|     |  | **PARTIV**                                                                                                 |  |   |
| Item 15. |  | Exhibits, FinancialStatementSchedules                                                                      |  | 70     |
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**SIGNATURES**

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

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All statementsother than statements of historical fact included in this Annual Reporton Form 10-K, including without limitation statements under"Management's Discussion and Analysis of FinancialCondition and Results of Operations" and"Business," regarding our financial position,business strategy, and plans and objectives of our management forfuture operations, are forward-looking statements. When used in thisAnnual Report on Form 10-K, words such as"may," "will,""should," "could,""potential,""seek," "project,""predict,""anticipate,""believe,""estimate,""expect," "intend"and similar expressions, as they relate to us or our management,identify forward-looking statements. Forward-looking statements arebased on the beliefs of our management as well as assumptions made byand information currently available to our management. These statementsare subject to risks and uncertainties that may cause actual resultsand events to differ significantly. A detailed discussion of risksattendant to the forward-looking statements is included under"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 novel therapeutics for the treatment of cancer. We wereincorporated in March 1992 as a Delaware corporation and beganoperations on May 1, 1994. For the years ended December 31, 2004, 2003and 2002, we spent $13.8 million, $9.7 million and $10.5 million,respectively, on research, development and clinical activities.

Our portfolio of potential products consists of two distinct smallmolecule anticancer agents in clinical development, and additionalsmall molecules and a drug delivery system in preclinical development.'Preclinical development' or 'preclinicalstudies' indicate that the product candidates selected fordevelopment 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 efficacy testing in a limited patient population.'Phase III' indicates safety, dosing and efficacy testingin a large patient population, typically against standard treatments. A'complete response' in a clinical trial means that thepatient shows no evidence of tumor or cancer as assessed by physicalexam, x-ray studies and/or tissue biopsies. A 'partialresponse' in a clinical trial means that the patient showsapproximately a 50% reduction in the volume of the tumor.

Our product development programs are based on technologies that welicense from Yale University (Yale) and other cancer research centers.Our product development strategy consists of two approaches. First, weengage in product development with respect to novel anticancertherapeutics through in-house preclinical and clinical development andthrough collaboration with academic institutions. Second, depending onfinancial and pharmaceutical market conditions and required resources,we determine the best method and/or partnership to develop, andeventually market, our products.

Products in ClinicalDevelopment

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| •  | Our lead product,CLORETAZINETM (VNP40101M), is a sulfonylhydrazinealkylating (DNA-damaging) agent. Our primary registration strategy forthis compound is for the treatment of relapsed acute myelogenousleukemia (AML). We also plan to evaluate it in other hematologic(blood-related) malignancies and solid tumors. A Phase III trial ofCLORETAZINETM (VNP40101M) in combination with cytosinearabinoside (Ara-C) in |

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|   | relapsed AML is planned to commence in thefirst part of 2005. In February 2005, we reached agreement with theU.S. Food and Drug Administration (FDA) on a Special ProtocolAssessment (SPA) for this Phase III trial. We are currently evaluatingCLORETAZINETM (VNP40101M) in a Phase II single agenttrial in AML and high risk myelodysplastic syndromes (a disorder ofblood-forming elements that can lead to leukemia) that commenced inMarch 2004. In March 2004, we announced thatCLORETAZINETM (VNP40101M) was designated as a fasttrack program by the FDA in relapsed or refractory AML. In October2004, we received orphan drug designation from the FDA forCLORETAZINETM (VNP40101M) in AML. In May 2004, weinitiated a Phase II trial of CLORETAZINETM (VNP40101M)in human glioma (brain cancer) under an investigator-initiatedInvestigational New Drug Application (IND). Additional Phase II trialsin pediatric brain tumors and small-cell lung cancer are planned tocommence in 2005. |

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| •  | Our second clinicalcompound, Triapine®, is a small molecule that inhibitsthe enzyme ribonucleotide reductase, and therefore prevents thereplication of tumor cells by blocking a critical step in DNAsynthesis. We are evaluating an intravenous formulation ofTriapine® in a Phase II combination trial withgemcitabine in pancreatic cancer. We plan to evaluate an oralformulation of Triapine® in a Phase I trial to beinitiated in 2005. Intravenous Triapine® is also beingevaluated in several Phase I and Phase II single agent and combinationclinical trials sponsored by the National Cancer Institute (NCI). TheNCI is also expected to sponsor a Phase I clinical trial of an oralformulation of Triapine® which should be initiated in2005. |

Products in PreclinicalDevelopment

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| •  | KS119 is anadditional cytotoxic (cell-damaging) compound from thesulfonylhydrazine class. KS119 has been demonstrated in preclinicalstudies to be highly selective for hypoxic (poorly oxygenated) cellswhich are found in tumors and are often hard to treat with conventionalanticancer agents. We are evaluating KS119 in preclinicalstudies. |

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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 knowncommercially available anticancer agents. In December 2003, we enteredinto an exclusive research collaboration and option agreement relatedto these compounds, and we are currently evaluating heterocyclichydrazones in preclinical studies. In March 2005, we will decidewhether to exercise the option to license thesecompounds. |

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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 generationTAPET® bacterium, VNP20009, was previously evaluated inPhase I trials. Based on the clinical evidence provided by VNP20009, wedeveloped two second-generation TAPET® vectors designedfor improved colonization of human tumors. Both of these vectors havebeen evaluated in veterinary clinical trials in dogs with spontaneoustumors. In September 2004, we determined to seek a partner for furtherdevelopment of TAPET®. |

Overview of Cancer andTreatment Methods

Cancer is the second leading cause of deathin the United States, exceeded only by heart disease. It is adevastating disease with tremendous unmet medical needs. In 2005, theAmerican Cancer Society estimates that 1.4 million new cases of cancerwill be diagnosed in the United States and 570,280 Americans areexpected to die from cancer.

Cancer is a group of diseasescharacterized by uncontrolled cell division resulting in thedevelopment of a mass of cells, commonly known as a tumor, as well asthe invasion and spreading of these cells. Cancerous tumors can arisein any tissue or organ within the human body. Cancer is believed tooccur as a result of a number of factors, such as geneticpredisposition, chemical agents, viruses and radiation. These factorsresult in genetic changes affecting the ability of cells to regulatetheir growth and differentiation.

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

The effectiveness of current cancer treatments withrespect to any particular patient varies greatly, and these treatmentsgenerally have adverse side effects. Therefore, a significant needexists for new therapies which are more effective and/or have reducedside effects.

Our Product Development Programs

We aredeveloping several potential products for the treatment of cancer. Twoof our small molecule anticancer chemotherapy agents are in humanclinical trials, and additional small molecules are in preclinicaldevelopment. In addition, we are seeking a partner to develop a drugdelivery system which is in preclinical development. The discussionbelow sets forth the development status of our product candidates as ofDecember 31, 2004.

Products in Clinical Development

CLORETAZINETM (VNP40101M)

CLORETAZINETM (VNP40101M) is a sulfonylhydrazinealkylating agent. Alkylating agents damage DNA, which results in celldeath. Alkylating agents are generally known to be among the mosthighly effective agents in the treatment of cancer.

Preclinicaldata on CLORETAZINETM (VNP40101M) showed broadanti-tumor activity in in vivo models. It was curative incertain preclinical leukemia models, including mice bearing certainderivatives of a leukemia cell line that was resistant to standardalkylating agents. CLORETAZINETM (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.

Based on earlyindications of activity in Phase I trials and a Phase II trial, ourprimary registration strategy for CLORETAZINETM(VNP40101M) is for the treatment of relapsed AML, but we also plan toevaluate it in other hematologic malignancies and solid tumors. Inhematologic malignancies, clinical development ofCLORETAZINETM (VNP40101M) has included a single agentPhase I trial, and a Phase I trial of CLORETAZINETM(VNP40101M) in combination with Ara-C. An additional Phase I trial ofCLORETAZINETM (VNP40101M) in combination withtemozolomide in hematologic malignancies is underway. Our ongoing PhaseII single agent trial in hematologic malignancies is focused on thetreatment of AML and high risk myelodysplastic syndromes. In solidtumors, we have conducted two single-agent Phase I trials, and a PhaseII trial under an investigator-initiated IND is ongoing in recurrentadult glioma.

In March 2004, we received fast track designationfrom the FDA for CLORETAZINETM (VNP40101M) in relapsedor refractory AML. The FDA's fast track programs are designed tofacilitate the development of new drugs that are intended to treatserious or life-threatening conditions and demonstrate the potential toaddress unmet medical needs.

In October 2004, we received orphandrug designation from the FDA for CLORETAZINETM(VNP40101M) in AML. Orphan drug designation may be granted to productsthat treat rare diseases or conditions that affect fewer than 200,000people in the United States. Orphan drug designation 

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does not convey any advantage or shorten theduration of the FDA review and approval process. The designation mayprovide eligibility for a seven-year period of market exclusivity aftermarketing approval, potential tax credits for research, grant fundingfor research and development, possibly reduced filing fees formarketing applications, and assistance with the review of clinicaltrial protocols.

    CLORETAZINETM(VNP40101M) in Hematologic Malignancies

We plan tocommence a Phase III trial of CLORETAZINETM (VNP40101M)in combination with cytosine arabinoside (Ara-C) in relapsed AML in thefirst part of 2005. In February 2005, we reached agreement with the FDAon a SPA for this Phase III trial. We are evaluatingCLORETAZINETM (VNP40101M) in a Phase II single agenttrial in AML and high risk myelodysplastic syndromes that commenced inMarch 2004. In September 2004, we announced that this Phase II trialhad accrued 50 patients, and that initial complete responses had beenobserved. Initial responses in a limited number of patients are notpredictive of final results.

We have conducted two Phase Istudies of CLORETAZINETM (VNP40101M) in hematologicmalignancies. These studies were designed to determine the safety andmaximum tolerated dose (MTD) of the drug in different treatmentschedules in this indication.

In August 2002, we initiated aPhase I trial of CLORETAZINETM (VNP40101M) administeredby 15- to 90-minute intravenous infusion to patients with advancedhematologic malignancies. Results from this trial were presented at theAmerican Society for Clinical Oncology (ASCO) Annual Meeting in June2003. Overall, 38 patients with advanced or refractory hematologicmalignancies were entered in this trial. 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 a complete response in a patient with myelodysplastic syndrome and apatient with AML.

In July 2003, we initiated a Phase I trial ofCLORETAZINETM (VNP40101M) in combination with Ara-C inadvanced leukemia. Results from this trial were presented at the ASCOAnnual Meeting in June 2004. In the trial, Ara-C was administered at adose of 1500 mg/m2 as a continuous infusion over twenty-fourhours on days 1 to 4 in patients less than 65 years old and on days 1to 3 in patients more than 64 years old. CLORETAZINETM(VNP40101M) was administered intravenously in doses ranging from 200 to600 mg/m2 over 15 to 60 minutes on day 2 at least twelvehours after the start of the Ara-C. The CLORETAZINETM(VNP40101M) dose was escalated in cohorts of 3 to 6 patients, withexpansion of the cohort at the MTD. In addition to the data presentedat ASCO, six more patients were treated with a three-day dose of Ara-Cand 600 mg/m2 of CLORETAZINETM (VNP40101M).Overall, 40 patients with advanced or relapsed hematologicmalignancies, including 32 patients with AML and 6 with acutelymphoblastic leukemia (ALL) were entered in the trial. Of the 32patients with AML, 15 had not responded to initial standard treatment(primary refractory), and 13 were in first or subsequent relapse.

CLORETAZINETM (VNP40101M) 600 mg/m2 withAra-C 1500 mg/m2 for three days was selected as the MTD. Thetoxicity profile of the combination at the MTD was similar to thatexpected for a similar dose and schedule of Ara-C alone.

Fourcomplete responses (CRs) were observed among 31 patients receivingCLORETAZINETM (VNP40101M) at dose levels 400 to 600mg/m2. In the same group of 31 patients, an additional sixpatients achieved all criteria for CR except recovery of the plateletcount to more than 100,000/mm3 (defined in the protocol asCRp). Overall, the rate of CR plus CRp at dose levels 400 to 600mg/m2 was 32%. Two of the responses occurred inpatients who had failed to respond to a different schedule of high-doseAra-C in the most recent induction attempt. The other responsesoccurred in patients who were considered to have poor prognosis or hadreceived substantial prior treatment.

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    CLORETAZINETM(VNP40101M) in Solid Tumors

In May 2004, a Phase II trialof CLORETAZINETM (VNP40101M) was initiated under aninvestigator's IND in recurrent adult glioma. An additional PhaseII trial in pediatric glioma is expected to be initiated in 2005 underan investigator's IND. We also plan to initiate a Phase II trialin small-cell lung cancer in 2005.

We have conducted two Phase Istudies of CLORETAZINETM (VNP40101M) in solid tumors.These studies were designed to determine the safety and MTD of the drugin different treatment schedules.

In June 2001, we initiated aPhase I trial of CLORETAZINETM (VNP40101M),administered by fifteen-minute intravenous infusion every four to sixweeks, in patients with advanced or metastatic solid tumors. InNovember 2002, we reported clinical results from this trial at theEORTC-NCI-AACR Meeting on "Molecular Targets and CancerTherapeutics." Overall, the trial enrolled 26 patientswith advanced cancer of different origins that was consideredunresponsive to or had progressed after standard treatments. Overall,CLORETAZINETM (VNP40101M) was well-tolerated across alldose levels. The highest dose tested was deemed suitable for conductingPhase II trials.

An additional Phase I trial ofCLORETAZINETM (VNP40101M) to explore a weeklyadministration schedule in solid tumors commenced in February 2003.Results from this trial were presented at the ASCO Annual Meeting inJune 2004. In the trial, CLORETAZINETM (VNP40101M) wasadministered intravenously in doses ranging from 80 to 155mg/m2 weekly for three consecutive weeks. The dose wasescalated in cohorts of 3 to 6 patients. Cycles of three weeks oftreatment were repeated every 4 weeks or as tolerated. Data werepresented on 23 patients with advanced or metastatic solid tumors orlymphomas, including 22 who had received prior chemotherapy.

Inthis trial, CLORETAZINETM (VNP40101M) waswell-tolerated in most patients and produced minimal non-hematologictoxicity. The most common adverse events were reductions in blood(platelet and neutrophil) counts. The frequency with which cycles couldbe repeated was dependent on dose, and two schedules were determined tobe appropriate for Phase II trials: 125 mg/m2 weekly threeweeks out of every six weeks or 100 mg/m2 weekly three weeksout of every four weeks. No objective responses were observed in thetrial, but evidence of anti-tumor effect consisting of stable diseasefor several cycles or tumor shrinkage was observed in threepatients.

Triapine®

Triapine® inhibits the enzyme ribonucleotidereductase. Ribonucleotide reductase inhibition is thought to arrest thegrowth of, or kill, cancer cell lines, by blocking a critical step inDNA synthesis. Inhibition of this enzyme has also been shown invitro and in vivo to enhance the anti-tumor activity ofseveral standard anticancer agents.

Based on its mechanism ofaction and preclinical data generated by us and other researchers, wehave focused our clinical development strategy forTriapine® in combination with gemcitabine. In additionto our efforts to evaluate Triapine® in combination withgemcitabine, Triapine® is also being evaluated inseveral Phase I and Phase II combination trials sponsored by the NCI,including trials of Triapine® in combination withgemcitabine in pancreatic cancer, non-small-cell lung cancer, breastcancer, and gall bladder and biliary duct cancer. These trials began in2004.

We have also evaluated Triapine® in fivesingle agent Phase I trials and three single agent Phase II trials. ThePhase I trials explored various schedules of administration anddetermined maximum tolerated doses for both solid tumors andhematologic malignancies. The single agent Phase II trials employed oneschedule of administration. Overall, evidence of biologic andanti-tumor activity was observed, however, in the tumor types studiedto date, Triapine® as a single agent has notdemonstrated sufficient activity to continue development beyond PhaseII. Additional single agent Phase II trials in other malignancies underour collaboration with the NCI began in 2004.

Clinical testingof more optimal single agent administration schedules may be possiblewith the oral form of Triapine®, which to date has beenstudied in a small number of patients to determine its 

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absorption in the bloodstream following asingle dose. We expect to initiate a Phase I trial of an oralformulation of Triapine® in 2005. A Phase I trial of adifferent schedule of an oral formulation of Triapine®to be sponsored by the NCI is also expected to commence in 2005.

    Triapine® in Combination withGemcitabine 

Phase I Combination Clinical Trial withGemcitabine in Solid Tumors

In August 2001, we initiated aPhase 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 ASCO Annual Meeting in June 2003. The trial enrolled26 patients with advanced cancer of different origins whose disease hadprogressed after standard therapy or for which standard therapy was notconsidered effective. Triapine® was administered at afixed dose intravenously over two to four hours followed by athirty-minute infusion of gemcitabine. Treatment was repeated weeklyfor three weeks followed by a week of rest. The gemcitabine dose wasincreased in successive cohorts of three to six patients. The studydemonstrated that Triapine® could be administered safelywith a standard single-agent dose and schedule of gemcitabine. Serumconcentrations of Triapine® were achieved in the trialat a level capable of enhancing gemcitabine in tumor cell lines. Among22 patients evaluable for tumor response, a complete response wasobserved in one patient with an adenocarcinoma (a type of cancer thatarises from glandular tissues) of unknown origin, and two patientsachieved a partial response. The partial responses occurred in apatient with non-small-cell lung cancer and in a patient withesophageal cancer. Eight additional patients received four or morecycles of treatment.

Phase II Combination Clinical Trialswith Gemcitabine in Solid Tumors

In May 2003, we initiatedPhase II trials of Triapine® in combination withgemcitabine in non-small-cell lung cancer and pancreatic cancer. Inthese trials, Triapine® was given in a 4-hour infusionprior to gemcitabine treatment.

Initial data from the pancreaticcancer trial was announced in September 2004 and later updated inDecember 2004. Additional data from this trial were presented inJanuary 2005 at the ASCO 2005 Gastrointestinal Cancers Symposium.Patients in the pancreatic cancer trial had no prior chemotherapy formetastatic or unresectable disease. The analysis presented in January2005 included all 60 patients receiving at least a single dose oftreatment on the study. This analysis indicated that, as of December 1,2004, the objective response rate was 11%, medianprogression-free survival was 4.7 months, and median survival was 7.1months.

Initial data from the lung cancer trial was announced inSeptember 2004. Patients in the lung cancer trial had received aminimum of one, but not more than two prior regimens of cytotoxicchemotherapy. As of September 2004, 38 patients were evaluable forresponse. The response rate among these patients was 5.3%. As ofSeptember 1, 2004, with a median follow-up for survival for all 45patients of 4 months, median progression-free survival was 2.1 months,and median survival was 6.8 months.

Recent preclinical dataindicate that the interaction of Triapine® withgemcitabine is optimized by increasing the duration of theTriapine® exposure from 4 hours to 24 hours. Based onboth these preclinical data and the initial results in the pancreaticcancer trial with the 4-hour Triapine® infusion, weextended the pancreatic cancer study to enroll 25-35 additionalpatients who will receive 24-hour infusions of Triapine®prior to administration of gemcitabine. Accrual to this amendedprotocol was initiated in September 2004. In January 2005, we announcedthat we would reduce the dose of Triapine® in this studywhile maintaining the 24-hour duration of infusion.

In additionto our ongoing trial with the 24-hour infusion ofTriapine® before treatment of gemcitabine, the NCI isconducting Phase II trials of the combination in pancreatic cancer,non-small-cell lung cancer, breast cancer and gall bladder and biliaryduct cancer. Based on the results of some or all of these studies, wewill decide how to pursue further development ofTriapine® in combination with gemcitabine.

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    Triapine®Collaborations

Collaboration with the National CancerInstitute

In November 2002, we announced that theNCI's Division of Cancer Treatment and Diagnosis had approved acollaboration for the clinical development of Triapine®.As part of the collaboration, the NCI's Cancer Therapy EvaluationProgram will sponsor clinical trials of Triapine® tofurther explore its activity as a single agent or in combination withother agents in patients with cancer. We provide the product to be usedin these trials. In early 2003, we announced that a Clinical TrialsAgreement had been executed with the NCI and in January 2004, the firsttrial opened under NCI sponsorship.

Research ServicesAgreement with Eli Lilly and Company

In September 2003, weentered into a research services agreement with Eli Lilly and Company(Lilly) related to the Phase II trials of Triapine® incombination with Lilly's anticancer agent, Gemzar®(gemcitabine). The agreement relates to the measurement of theexpression of several genes in tumor tissue from patients participatingin the Phase II trials of the combination therapy in non-small-celllung cancer and pancreatic cancer.

License Agreement withBeijing Pason Pharmaceuticals, Inc.

In October 2003, weentered into a license with Beijing Pason Pharmaceuticals, Inc. (Pason)providing them with the exclusive rights to develop, manufacture andmarket Triapine® in the People's Republic ofChina, Taiwan, Hong Kong and Macao. In November 2003, we received aninitial payment of $500,000 from Pason related to this license.

    Additional Forms ofTriapine®

We are also developing an oraldosage form of Triapine®. This alternative form may beeasier to administer and could increase the anti-tumor effect ofTriapine® as a single agent. In December 2002, weannounced initial clinical results from six patients treated with asingle dose of the oral formulation. At the higher dose level of 100mg, oral absorption of the drug from the stomach into the blood inexcess of 60% was observed in three patients. Two Phase I trialsof different dosing schedules of the oral formulation, one eachsponsored by us and the NCI, are expected to commence in 2005.

    Additional Applications forTriapine®

In October 2003, we announced thatwe had received a Small Business Innovation Research grant from theNational Institutes of Health/National Institute of Allergy andInfectious Diseases to support preclinical studies intended to assessthe activity of Triapine® in combination with variousnucleoside analogues against human immunodeficiency virus (HIV),hepatitis B virus (HBV) and herpes simplex virus (HSV). In 2004, thesestudies were conducted in collaboration with the Yale University Schoolof Medicine.

Products in Preclinical Development

KS119

KS119, an additional compound from thesulfonyl hydrazine class, has been demonstrated in preclinical studiesto be highly selective for hypoxic (poorly oxygenated) cells which arefound in tumors and are often hard to treat with conventionalanticancer agents. We are evaluating KS119 in preclinical studies.

Heterocyclic Hydrazones

Heterocyclic hydrazonesare anticancer compounds that have demonstrated potent anti-tumoreffects in preclinical studies. The mechanisms of action for thesecompounds are unidentified at this time but appear to be unlike anycommercially available anticancer agents of which we know. In

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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. We made aninitial payment of $25,000 in December 2003 to enter into theagreement. In March 2005, we must decide whether to make an additionalpayment of $75,000 in order to exercise the option to enter into theexclusive worldwide license. If we decide to enter into the licenseagreement, we must make milestone payments based on the progress ofproduct development, and pay royalties based on product revenues.

TAPET® (Tumor Amplified Protein ExpressionTherapy)

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

In May2002, we announced cumulative results from the intravenous infusionstudies of VNP20009, our first-generation TAPET® vector.In three clinical trials of VNP20009 delivered intravenously over 30minutes or four hours, 49 patients were treated, and biopsies weretaken from tumors of 18 patients who received the three highest doselevels administered in the trials. Of these 18 biopsies, 17 could beevaluated and bacteria were detected in 5 out of 17 or 29%. Anacceptable level of bacterial colonization of the tumor was achieved in2 out of 17 or 12%.

Based on the clinical evidenceprovided by VNP20009, we developed two second-generationTAPET® vectors designed for improved colonization ofhuman tumors. Both of these vectors have been evaluated in veterinaryclinical trials in dogs with spontaneous tumors.

In September2004, we announced that we will seek a partner to assist with futuredevelopment of TAPET® vectors. The process ofidentifying potential partners is underway.

Other Products andProduct Candidates for Conditions Other than Cancer

MELASYN®

MELASYN® isa patented, synthetic form of melanin that dissolves readily in water.Melanin is a pigment formed by cells in the skin that gives skin itscolor and protects it from sun damage by absorbing ultraviolet rays. Webelieve that MELASYN® is the first water-soluble,synthetic version of melanin, making it a novel and potentially usefulingredient for formulation of skin care products and cosmetics.

Our MELASYN® patent and technology is licensed fromYale. In 1998, we agreed to be the exclusive selling agent forMELASYN® and sublicensed the MELASYN®patent and technology to San-Mar Laboratories (San-Mar). Under theterms of the amended sublicense agreement, we granted to San-Mar aworldwide, non-exclusive sublicense for the manufacture and sale ofproducts containing MELASYN® to a specific customer.This licensed expired in February 2003.

In March 2004, weentered into a non-exclusive sublicense agreement forMELASYN® with Johnson and Johnson Consumer Companies,Inc. The terms of the agreement do not include any upfront or milestonepayments. If products including our technology are developed, we willreceive a royalty based on sales in countries where we have issuedpatents.

Novel Nucleoside Analogs

We havelicensed patents and patent applications related to a nucleosideanalogue, or synthetic molecule, known as β-L-Fd4C from Yale.β-L-Fd4C is an antiviral drug capable of inhibiting the

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replication of the HBV. HBV is a causativeagent of both acute and chronic forms of hepatitis that affect millionsof people worldwide. HBV also predisposes its victims to thedevelopment of liver cancer. β-L-Fd4C may also be useful for thetreatment of HIV.

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 approximately $10.1 million through December 31, 2004 to fundcertain research at Yale, including research in the laboratories of Dr.Alan Sartorelli, one of our directors, Dr. Yung-Chi Cheng, a member ofour scientific advisory board, and Dr. John Pawelek. We have agreed topay an additional $250,000 to support the research activities of Dr.Sartorelli through the first quarter of 2006. Yale has sole discretionto use these funds to conduct research relating to products that itdesires to pursue. Additionally, to the extent that such researchresults in technologies not covered by our license agreements withYale, we may be unable to utilize such technologies unless we negotiateadditional license agreements.

Yale/Vion (formerly MelaRxPharmaceuticals, Inc.) License Agreement – September1990

Under a license agreement with Yale dated September1990, we have a license to a synthetic form of melanin, which we havenamed MELASYN®. Under the terms of the licenseagreement, we pay a license fee to Yale based on a percentage of netsales and sublicensing revenues.

Yale/Vion (formerly MelaRxPharmaceuticals, 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 five 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 amendmentscover Triapine®, 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 

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opportunities for the licensed inventions,Yale will give us a first option to negotiate a commercial license forthe commercial opportunities. Yale is entitled to royalties on sales,if any, of resulting products, sublicensing revenues and, with regardto several patents, milestone payments based on the status of clinicaltrials and/or regulatory approvals.

We have agreed with Yalethat we will plan and implement appropriate research and developmentwith respect to commercialization of products based on the licensedinventions. In the event that the agreement is terminated for breach,all rights under licenses previously granted terminate. Accordingly, adefault as to one product could affect our rights in other products. Inaddition, Yale, at its sole option, can terminate any sublicenses thatwe grant.

Pursuant to the original agreement, we issued to Yale159,304 shares of our common stock and made a payment of $50,000. InJune 1997, this license agreement and another license agreement datedDecember 1995 were amended pursuant to which Yale agreed to reducecertain amounts payable by us in exchange for 150,000 shares of ourcommon stock issued to Yale and valued at $600,000.

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

In December 1995, we entered into a licenseagreement with Yale pursuant to which we received a non-transferableworldwide exclusive license, expiring over the lives of the patents, tothree inventions relating to gene therapy for melanoma. Technologylicensed by us under this agreement relates to TAPET®.Pursuant to the license agreement, we paid Yale a $100,000 fee.

In December 1995, we entered into another license agreement withYale pursuant to which we received a non-transferable worldwideexclusive license, expiring over the lives of the patents, to aninvention 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.

Other Agreements

Clinical Trials Agreement with the National CancerInstitute

In January 2003, we entered into a ClinicalTrials Agreement with the Cancer Therapy Evaluation Program of theNCI's Division of Cancer Treatment and Diagnosis. The ClinicalTrials Agreement covers the conduct of clinical trials sponsored by theNCI to explore the activity of Triapine® as a singleagent and in combination with other drugs for the treatment ofcancer.

Research Services Agreement with Eli Lilly andCompany

In September 2003, we entered into a researchservices agreement with Lilly related to the Phase II trials ofTriapine® in combination with Lilly's anticanceragent, Gemzar® (gemcitabine). The agreement relates tothe measurement of the expression of several genes in tumor tissue andblood samples from patients participating in the Phase II trials of thecombination therapy in non-small-cell lung cancer and pancreaticcancer.

License Agreement with Beijing PasonPharmaceuticals, 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'sRepublic of China, Taiwan, Hong Kong and Macao (the Pason Territory).The terms of the agreement included an initial payment of $500,000which we received in November 2003, $4.75 million in potentialadditional milestone payments, and potential royalty payments of11% of any Triapine® revenues in the PasonTerritory. Pason will fund the preclinical and clinical developmentnecessary for regulatory approval of Triapine® in thePason Territory.

Research Collaboration and OptionAgreement with Austrian Inventors and Austria WirtschaftsserviceGesellschaft m.b.H.

In December 2003, we entered into aresearch collaboration and option agreement for certain novelcompounds, heterocyclic hydrazones, with a group of inventors from theInstitute 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.

In December 2003, we made an initial paymentof $25,000 to enter into the agreement. In March 2005, we must decidewhether to make an additional payment of $75,000 to exercise the optionto enter into the exclusive worldwide license, or return the technologyto its original inventors. If we enter into the license agreement, wemust make milestone payments based on the progress of productdevelopment, and pay royalties based on product revenues.

Consulting Agreement with Gemin X, Inc.

In January2004, we entered into a consulting agreement with Gemin X, Inc. (GeminX), a privately-held company developing novel oncology therapeutics.Under this agreement, our chief scientific officer, Dr. Terrence Doyle,renders consulting services to Gemin X. Gemin X pays us, based on anhourly rate, for up to 80% of Dr. Doyle's time peryear.

Cooperative Research and DevelopmentAgreement

In April 2000, we entered into a CooperativeResearch and Development Agreement (CRADA) with the NCI, under thedirect supervision of Steven A. Rosenberg, M.D., Ph.D., Chief ofSurgery in the NCI's Division of Clinical Sciences, a renownedcancer researcher and a leading authority on the application ofcytokines, tumor vaccines and other biological agents in cancerpatients, for "Development of TAPET-Based ImmunotherapiesTargeted Against Cancer." Under the terms of the CRADA,our scientific team worked with Dr. Rosenberg's laboratory toevaluate VNP20009 using CRADA funds and other resources supplied byus.

In June 2002, payments to the NCI under the CRADA weresuspended by mutual agreement. Initial work under the CRADA had beencompleted and no additional work is planned.

Competition

Competition in the biopharmaceutical industry is intense and basedon scientific and technological factors, the availability of patent andother protection for technology and products, the ability to financeand commercialize technological developments, and the ability to obtaingovernmental approval for testing, manufacturing and marketing.Numerous pharmaceutical and biotechnology companies have publiclyannounced their intention to develop drugs that target the replicationof tumor cells including, in some instances, agents to be used for thetreatment of leukemia or alkylating agents like our compoundCLORETAZINETM (VNP40101M), or agents that targetribonucleotide reductase like our compound Triapine®.These companies include, but are not limited to Amgen Inc., AstraZenecaPLC, Bristol-Myers Squibb Company, Chiron Corporation, Eli Lilly andCo., Genentech Inc., Genzyme Corporation, ImClone Systems Inc., Johnson& Johnson, Lorus Therapeutics Inc., MGI Pharma, Inc., OSIPharmaceuticals, Inc., Pfizer Inc., Pharmion Corp. and Schering-PloughCorporation. 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 and indeveloping and commercializing products that are safer and moreeffective than those that we propose to develop. The existence of theseproducts, other products or treatments of which we are not aware orproducts or treatments that may be developed in the future mayadversely affect the marketability of our products by rendering themless competitive or obsolete. These companies, as well as academicinstitutions, governmental agencies and private research organizations,also compete with us in acquiring rights to products or technologiesfrom universities, and recruiting and retaining highly qualifiedscientific personnel and consultants.

The timing of marketintroduction of our potential products or of the products of otherswill be an important competitive factor. Accordingly, the relativespeed with which we can develop products, complete preclinical testing,clinical trials and regulatory approval processes, and supplycommercial 

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quantities to market will influence ourability to bring a product to market. In addition, we may apply fororphan drug designation by the FDA for our proposed products. To theextent that a competitor of ours develops and receives orphan drugdesignation and marketing approval for a drug to treat the sameindication prior to us, we may be precluded from marketing our productfor a period of seven years.

Patents, Licenses and TradeSecrets

Our policy is to protect our technology by, among othermeans, filing patent applications for technology that we considerimportant to the development of our business. We intend to fileadditional patent applications, when appropriate, relating to newdevelopments or improvements in our technology and other specificproducts that we develop. We also rely on trade secrets, know-how andcontinuing technological innovations, as well as patents we havelicensed or may license from other parties to develop and maintain ourcompetitive position.

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

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

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

|              |                                                                                                                                              |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| •  | β-L-Fd4C, its composition and its usefor the treatment of HBV and HIV infections, and its use in combinationwith other anti-AIDS drugs. |

We are also the exclusive licenseeof Yale of one issued U.S. and a number of foreign patents and pendingpatent applications relating to synthetic melanin and methods for usingsynthetic melanin, such as for sunscreen or self-tanning agentsrelevant to our MELASYN® technology.

Pursuant toour license agreement with Yale dated December 1995 entered into as aresult of our research agreement with Yale dated July 1992, we are theexclusive licensee of a number of issued patents and pending patentapplications, U.S. and foreign, relating to our TAPET®technology, which include claims for methods of diagnosing and/ortreating various solid tumor cancers, including melanoma, lung cancer,breast cancer and colon cancer. We also have rights, either by licenseand/or by assignment, to issued patents and pending patentapplications, U.S. and foreign, relating to our TAPET®technology. In addition, we have pending a number of U.S. provisionaland non-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.

We cannotpredict whether our patent applications or our competitors'patent applications will result in valid patents being issued. Anissued patent is entitled to a presumption of validity. The presumptionmay be challenged in litigation; a court could find any patent of oursor of our competitors invalid and/or unenforceable. Litigation, whichcould result in substantial cost to us, may also be necessary toenforce our patent and proprietary rights and/or to determine the scopeand validity of the proprietary rights of others.

The patentposition of biotechnology and pharmaceutical firms generally is highlyuncertain and involves complex legal and factual questions. To date, noconsistent policy has emerged regarding the breadth of claims allowedin biotechnology and pharmaceutical patents.

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Government Regulation

Overview.    Regulation by state and federal governmentalauthorities in the U.S. and foreign countries is a significant factorin the development of our anticancer products, and will be asignificant factor in manufacturing and marketing of these products, ifthey are successfully developed and approved for sale. All of ourproducts will require regulatory clearances or approvals prior tocommercialization. In particular, drugs, biological agents and medicaldevices are subject to rigorous testing and other approval requirementsby the FDA pursuant to the Federal Food, Drug, and Cosmetic Act and thePublic Health Service Act and its regulations, as well as by similarhealth authorities in foreign countries. Various federal statutes andregulations also govern or influence the testing, manufacturing,safety, labeling, packaging, advertising, storage, registration,listing and recordkeeping related to marketing of such products.Regulatory approval often takes a number of years and involves theexpenditure of substantial resources. Approval time also depends on anumber of factors, including the severity of the disease in question,the availability of alternative treatments and the risks and benefitsdemonstrated in clinical trials. We cannot be certain that any requiredFDA or other regulatory approval will be granted or, if granted, willnot be withdrawn.

The development of a therapeutic drugtypically first requires preclinical testing. Preclinical developmentof therapeutic drugs and biological agents is generally conducted inthe laboratory to evaluate the safety and the potential efficacy of acompound by relevant in vitro and in vivo testing. When aproduct is tested prospectively to determine its safety for purposes ofobtaining FDA approvals or clearances, such testing must be performedin accordance with good laboratory practices for non-clinical studies.The results of preclinical testing are submitted to the FDA as part ofan IND. The IND must become effective, the study must be approved by aninstitutional review board, and informed consent must be obtained fromthe clinical subjects, before human clinical trials can begin.

Typically, clinical evaluation involves a three-phase process. InPhase I, clinical trials are conducted with a small number of subjectsto determine the tolerated drug dose, early safety profile, properscheduling and the pattern of drug distribution, absorption andmetabolism. In Phase II, clinical trials are conducted with groups ofpatients afflicted with a specific disease in order to determineefficacy, dose-response relationships and expanded evidence of safety.In Phase III, large-scale, multi-center, controlled clinical trials areconducted in order to:

|              |                                                                 |
|--------------|-----------------------------------------------------------------|
| •  | provide enoughdata for statistical proof of safety andefficacy; |

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

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|--------------|-----------------------------------------------------------------|
| •  | uncoverany unexpected safety problems, such as side-effects;and |

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

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

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

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

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We also will be subject to widely varyingforeign regulations governing clinical trials and pharmaceutical sales.Whether or not FDA approval has been obtained, approval of a product bythe comparable regulatory authorities of foreign countries must beobtained before marketing the product in those countries. The approvalprocess varies from country to country and the time may be longer orshorter than that required for FDA approval. We intend, to the extentpossible, to rely on foreign licensees to obtain regulatory approval tomarket our products in foreign countries.

In October 2004, wereceived orphan drug designation for CLORETAZINETM(VNP40101M) in AML. Under the Orphan Drug Act, a sponsor may obtaindesignation by the FDA of a drug or biologic as an 'orphan'drug for a particular indication. Orphan drug designation is granted todrugs for rare diseases or conditions, including many cancers, with aprevalence of less than 200,000 cases in the United States. The sponsorof a drug that has obtained orphan drug designation and which is thefirst to obtain approval of a marketing application for such drug,which approval cannot be assured, is entitled to marketing exclusivityfor a period of seven years for the designated indication. This meansthat no other company can market the same orphan drug for the sameindication approved by the FDA for seven years after approval unlesssuch company proves its drug is clinically superior or the approvedorphan drug marketer cannot supply demand for the drug. Legislation isperiodically considered that could significantly affect the Orphan Druglaw. We intend to seek additional orphan drug designations 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.

FDA regulatoryprocedures established in 1988 are intended to speed further theavailability of new drugs intended to treat life-threatening andseverely debilitating illnesses. These procedures provide for early andcontinuous consultation with the FDA regarding preclinical and clinicalstudies necessary to gain marketing approval. This regulatory frameworkalso provides that if Phase I results demonstrate potential, Phase IIclinical trials may be designed that obviate the need for lengthy,expensive Phase III testing. Notwithstanding the foregoing, approvalmay be denied by the FDA or traditional Phase III studies may berequired. The FDA may also seek our agreement to perform post-approvalPhase IV studies, which confirm product safety and efficacy.

Inaddition to regulations relating to drug development, we are subject tofederal, state and local environmental laws and regulations, includingthose promulgated 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.

We have made,and will continue to make, expenditures for our facilities to complywith current and future environmental laws. To date, we have notincurred significant costs and are not aware of any significantliabilities associated with our compliance with federal, state andlocal environmental laws and regulations. However, environmental lawshave changed in recent years and we may become subject to stricterenvironmental standards in the future and may face large capitalexpenditures to comply with environmental laws. We have limited capitaland are uncertain whether we will be able to pay for significantlylarge capital expenditures. Also, future developments, administrativeactions or liabilities relating to environmental matters may have amaterial adverse effect on our financial condition or results ofoperations.

All of our operations are performed under strictenvironmental and health safety controls consistent with OSHA, EPA andNRC regulations. We cannot be certain that we will be able to controlall health and safety problems. If we cannot control those problems, wemay be held liable and may be required to pay the costs of remediation.These liabilities and costs could be material.

Manufacturingand Marketing

We do not have experience in manufacturing ormarketing products and have not yet commercially introduced anyproducts. We do not currently have the resources to manufacture or

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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 31,2004, we had 32 full-time employees, of which 23 were engaged inresearch, development and clinical activities, and 9 were inadministration and finance.

Available Information

Thefollowing information can be found on our website athttp://www.vionpharm.com or may be obtained free of charge bycontacting our Investor Relations Department at (203) 498-4210 or bysending an e-mail message toinfo@vionpharm.com:

|              |                                                                                                                                                                                                                                                         |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | our annualreport on Form 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K and any amendments to those reports, as soon as reasonablypracticable after such material is electronically filed with theSecurities and Exchange Commission; |

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

|              |                                                              |
|--------------|--------------------------------------------------------------|
| •  | the charter of the 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 $296,000. 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.

ITEM 4.    Submission of Matters to a Vote ofSecurity Holders

None.

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PART II

|               |                                                                                                            |
|---------------|------------------------------------------------------------------------------------------------------------|
| ITEM 5.  | Market for Registrant's CommonEquity, Related Stockholder Matters and Issuer Purchases of EquitySecurities |

Market Information for Common Stock

Our common stock has traded under the symbol"VION" on the Nasdaq SmallCapMarketSM sinceDecember 19, 2002, and on the Nasdaq National Market®from October 25, 1999 until December 18, 2002. The followingtable reflects the range of high and low closing sales prices of ourcommon stock for each of the calendar quarters in 2004 and 2003 asreported by the Nasdaq SmallCap Market.

|               |  |      |      |        |  |      |      |        |  |        |      |        |  |        |      |        |  |  |
|---------------|--|------|------|--------|--|------|------|--------|--|--------|------|--------|--|--------|------|--------|--|--|
|          |  | 2004 |      | 2003   |
|          |  | High |      | Low    |  | High |      | Low    |
| FirstQuarter  |  | $    | 4.01 |   |  | $    | 1.59 |   |  | $      | 0.48 |   |  | $      | 0.30 |   |
| SecondQuarter |  | $    | 5.31 |   |  | $    | 3.32 |   |  |   | 2.53 |   |  |   | 0.30 |   |
| ThirdQuarter  |  | $    | 4.46 |   |  | $    | 2.89 |   |  |   | 2.14 |   |  |   | 1.27 |   |
| FourthQuarter |  | $    | 5.06 |   |  | $    | 4.14 |   |  |   | 2.25 |   |  |   | 1.49 |   |
|               |

Holders

At March 10, 2005, there were 466 holders of record of our commonstock, one of which is Cede & Co., a nominee for Depository TrustCompany (DTC). All of the shares of common stock held by brokeragefirms, banks and other financial institutions as nominees forbeneficial owners are deposited into participant accounts at DTC, andare therefore considered to be held of record by Cede & Co. as onestockholder.

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

During the year ended December31, 2004, we issued 730,726 shares of our common stock at $2.20 pershare pursuant to exercises of warrants issued to institutionalinvestors in a private placement in June 2003. Net proceeds from theexercises were approximately $1.6 million. We registered the resale ofthese shares by the investors pursuant to an effective registrationstatement on Form S-3.

During the year ended December 31, 2004,we issued an additional 2,135,687 shares of our common stock at $2.50per share pursuant to exercises of warrants issued to institutionalinvestors in a private placement in September 2003. Net proceeds fromthe exercises were approximately $5.3 million. We registered the resaleof these shares by the investors pursuant to an effective registrationstatement on Form S-3.

During the year ended December 31, 2004,we issued an additional 121,154 shares of our common stock at $3.25 pershare pursuant to exercises of warrants issued to institutionalinvestors in a private placement in February 2004. Net proceeds fromthe exercises were approximately $394,000. We registered the resale ofthese shares by the investors pursuant to an effective registrationstatement on Form S-3.

Net proceeds from these warrant exerciseshave been and will be used to fund clinical and preclinical productdevelopment activities, working capital and general corporatepurposes.

ITEM 6.    Selected Financial Data

The following selected financial data for each of the five years inthe period ended December 31, 2004, and for the period from May 1, 1994(inception) through December 31, 2004, are derived from 

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

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|------------------------------------------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------------------------------------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|----------|---------|--|--|
|                                                             |  | 2004   |         | 2003    |  | 2002   |         | 2001    |  | 2000   |         | Forthe PeriodFrom May 1,1994(Inception)throughDecember31,2004 |
| **Statement of OperationsData:**                                 |  |   |    |    |  |   |    |    |  |   |    |                                                          |  |   |    |    |  |   |    |    |  |   |     |    |
| Totalrevenues                                                    |  | $      | 275     |    |  | $      | 375     |    |  | $      | 238     |                                                          |  | $      | 650     |    |  | $      | 947     |    |  | $      | 12,919   |    |
| Lossfromoperations                                               |  |   | (16,501 | )  |  |   | (11,923 | )  |  |   | (13,021 | )                                                        |  |   | (15,014 | )  |  |   | (16,131 | )  |  |   | (118,308 | )  |
| Netloss                                                          |  |   | (16,055 | )  |  |   | (11,838 | )  |  |   | (12,310 | )                                                        |  |   | (13,810 | )  |  |   | (14,803 | )  |  |   | (113,021 | )  |
| Preferredstock dividends andaccretion                            |  |   | — |    |  |   | — |    |  |   | — |                                                          |  |   | — |    |  |   | (606    | )  |  |   | (18,489  | )  |
| Lossapplicable to commonshareholders                             |  |   | (16,055 | )  |  |   | (11,838 | )  |  |   | (12,310 | )                                                        |  |   | (13,810 | )  |  |   | (15,409 | )  |  |   | (131,510 | )  |
| Basicand diluted loss applicable to common shareholders pershare |  |   | (0.30   | )  |  |   | (0.36   | )  |  |   | (0.43   | )                                                        |  |   | (0.51   | )  |  |   | (0.64   | )  |  |   |     |    |
|                                                             |  |   |    |    |  |   |    |    |  |   |    |                                                          |  |   |    |    |  |   |    |    |  |   |     |    |
| **BalanceSheetData:**                                            |  |   |    |    |  |   |    |    |  |   |    |                                                          |  |   |    |    |  |   |    |    |  |   |     |    |
| Cash,cash equivalents and short-terminvestments                  |  | $      | 41,729  |    |  | $      | 15,719  |    |  | $      | 10,131  |                                                          |  | $      | 22,644  |    |  | $      | 24,357  |    |  |   |     |    |
| Totalassets                                                      |  |   | 42,644  |    |  |   | 16,376  |    |  |   | 10,923  |                                                          |  |   | 23,601  |    |  |   | 25,660  |    |  |   |     |    |
| Long-termobligations and redeemable preferredstock               |  |   | — |    |  |   | — |    |  |   | — |                                                          |  |   | — |    |  |   | — |    |  |   |     |    |
|                                                                  |

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

Overview

Weare a development stage company engaged in the development of noveltherapeutics for the treatment of cancer. Our activities to date haveconsisted primarily of research and product development, obtainingregulatory approval for clinical trials, conducting clinical trials,negotiating and obtaining collaborative agreements, and obtainingfinancing in support of these activities. Our revenues primarilyconsist of contract research grants, technology license fees, andresearch and laboratory support fees. Since inception, we havegenerated minimal revenues and have incurred substantial operatinglosses from our activities. We expect to incur substantial operatinglosses for the next several years due to expenses associated with ouractivities.

We have five major research and developmentprojects, which include two product candidates in clinical trials(CLORETAZINETM (VNP40101M) andTriapine®), two product development programs inpreclinical development (KS119 and heterocyclic hydrazones) and oneproduct development program for which we are seeking a developmentpartner (TAPET®). The following table providesinformation on clinical trials sponsored by us that were open foraccrual as of March 10, 2005.

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|                               |  |                                                                                        |  |                       |  |  |  |  |  |  |
|-------------------------------|--|----------------------------------------------------------------------------------------|--|-----------------------|--|--|--|--|--|--|
| Product                       |  | Trial                                                                                  |  | TrialCommencementDate |
| CLORETAZINETM(VNP40101M) |  | Phase II trial in acutemyeloid leukemia and myelodysplastic syndromes                  |  | March2004             |
|                          |  | Phase I trialin combination with temozolomide in patients with hematologicmalignancies |  | October2004           |
| Triapine®                 |  | PhaseII trial of 24-hour infusion in combination with gemcitabine inpancreatic cancer  |  | September2004         |
|                               |

In addition to the above-listedclinical trials for CLORETAZINETM (VNP40101M), a PhaseII trial in primary brain tumors was initiated in May 2004 under aninvestigator's IND. We provide product for this trial and incurcertain costs related to patient enrollment.

In addition to theabove-listed clinical trial for Triapine, the National Cancer Institute(NCI) is also sponsoring several Phase I and Phase II single agent orcombination clinical trials of that compound. In January 2004, weannounced the first trial to open under NCI sponsorship. We provideproduct for the NCI trials.

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

If we enter intoPhase III or registrational clinical trials of a product and achievesuccessful completion of those trials, of which there can be nocertainty, we intend to submit the results to the FDA to supportregulatory approval of the product. However, we cannot be certain thatany of our products will prove to be safe or effective, will achievethe safety and efficacy needed to enter into Phase III orregistrational clinical trials, will receive regulatory approvals, orwill be successfully commercialized. Our clinical trials might provethat our product candidates may not be effective in treating thedisease or have undesirable or unintended side effects, toxicities orother characteristics that require us to cease further development ofthe project. The cost to take a product candidate through clinicaltrials is dependent upon, among other things, the disease indications,the timing, the size and dosing schedule of each clinical trial, thenumber of patients enrolled in each trial and the speed at whichpatients are enrolled and treated. We could incur increased productdevelopment costs if we experience delays in trial enrollment, theevaluation of clinical trial results or regulatory approvals.Significant delays could allow our competitors to bring products tomarket before we do and impair our ability to commercialize our productcandidates. These uncertainties and variability make it difficult toaccurately predict the future cost of or timing to complete our productdevelopment projects

We budget and monitor our research anddevelopment costs by category. Significant categories of costs includepersonnel, clinical, third party research and development services, andlaboratory supplies.

Given the uncertainties related topharmaceutical product development, we are currently unable to reliablyestimate when, if ever, our product candidates will generate revenueand cash flows. We do not expect to receive net cash inflows from anyof our major research and development projects until and unless aproduct candidate becomes a profitable commercial product.

Critical Accounting Policies and Estimates

The accompanyingdiscussion and analysis of our financial condition and results ofoperations are based upon our financial statements and the relateddisclosures, which have been prepared in 

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accordance with accounting principlesgenerally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates and assumptions thataffect the amounts reported in our financial statements andaccompanying notes. These estimates form the basis for making judgmentsabout the carrying values of assets and liabilities. We base ourestimates and judgments on historical experience and on various otherassumptions that we believe to be reasonable under the circumstances.Actual results could differ materially from these estimates.

Webelieve the following policies to be the most critical to anunderstanding of our financial condition and results of operationsbecause they require us to make estimates, assumptions and judgmentsabout matters that are inherently uncertain.

RevenueRecognition

We record revenue from contract research grants asthe eligible costs are incurred. We are reimbursed for eligible costsafter submission of grant reports. We are subject to grant audits asrequired by the Department of Health and Human Services. Audits mayresult in adjustments to the amount of grant revenues recorded andfunds received.

We record revenue under technology licenseagreements related to the following. Actual license fees received mayvary from recorded estimatedrevenues.

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

|              |                                                                                                                                                                                                                                   |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Nonrefundable upfrontlicense fees including guaranteed, time-based payments that requirecontinuing involvement in the form of development or other efforts byus are recognized as revenue ratably over the performance period;and |

|              |                                                                                                         |
|--------------|---------------------------------------------------------------------------------------------------------|
| •  | Milestone payments are recognized asrevenue when milestones, as defined in the agreement, are achieved. |

We record revenue from royalties based on licensees' sales ofour products or technologies. Revenues are recognized as earned inaccordance with the contract terms when royalties from licensees can bereliably measured and collectibility is reasonably assured. Royaltyestimates are made in advance of amounts collected based on historicaland forecasted trends.

We record revenue from research andlaboratory support as the services are provided. Actual research andlaboratory support fees collected may vary from revenue recognized.

The effect of any change in revenues from contract research grants,technology license agreements, or research and laboratory support wouldbe reflected in revenues in the period such determination was made.Historically, such adjustments have been insignificant.

Research and Development Expenses

We record researchand development expenses as incurred. We disclose clinical trialsexpenses and other research and development expenses as separatecomponents of research and development expense in our consolidatedstatements of operations to provide more meaningful information to ourinvestors. 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.

Income Taxes

We provide deferred income taxes forthe future tax consequences of temporary differences between thefinancial statement carrying amounts and the tax basis of assets andliabilities, and on operating loss and tax credit carryforwards. Exceptfor the sales recorded in 2002 and 2003 of certain research anddevelopment tax credits to the State of Connecticut and the provisionsrecorded in 2003 and 2004 for minimum state capital taxes paid, we havenot recorded a provision or benefit for income 

20

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taxes in the financial statements due torecurring historical losses and based on judgments regarding the timingof future profitability. Accordingly, we have provided a full valuationallowance for our deferred income tax asset as of December 31, 2004. Inthe event we were to determine that we would be able to realizedeferred income tax assets in the future, an adjustment to increaseincome in that period of determination would be made.

Investments

Our investment securities are classifiedas available-for-sale and carried at fair market value. Unrealizedgains or losses are recorded in other comprehensive income until thesecurities are sold or otherwise disposed. However, a decline in fairmarket value below cost that is other than temporary would be accountedfor as a realized loss in the period such determination was made.

Stock-Based Compensation

We measure stock-basedcompensation expense under Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees and relatedInterpretations ("APB 25"), and providerequired pro forma disclosures under the fair value recognitionprovisions of Financial Accounting Standards No. 123, Accounting forStock–Based Compensation ("SFAS123"), as amended by Financial Accounting Standards No.148, Accounting for Stock-Based Compensation – Transition andDisclosure.

Recently Enacted Pronouncements

There may be potential new accounting pronouncements or regulatoryrulings, which may have an impact on our future financial position andresults of operations. In December 2004, the Financial AccountingStandards Board issued the revised Statement of Financial AccountingStandards No. 123, Share-Based Payment ("SFAS123R"). SFAS 123R replaces SFAS 123 and supersedes APB 25.SFAS 123R requires public companies to measure the cost of employeeservices received in exchange for an award of equity instruments basedon the grant-date fair value of these instruments. Companies will berequired to recognize an expense for compensation cost related toshare-based payment arrangements, including grants of stock options andpurchases under employee stock purchase plans, for all awards grantedafter the effective date and to awards modified, repurchased orcanceled after that date. SFAS 123R is effective for companies forreporting periods beginning after June 15, 2005. The cumulative effectof adoption, if any, will be measured and recognized on July 1, 2005.As of the required effective date, companies will apply SFAS 123R usinga modified version of prospective application. For periods before therequired effective date, companies may elect to apply a modifiedversion of retrospective application. We currently measure share-basedcompensation expense under APB 25 and provide pro forma disclosuresrequired by SFAS 123. We will be required to adopt SFAS 123R andrecognize an expense for share-based compensation in our financialstatements for the quarter ended September 30, 2005. See Note 2 in ourNotes to Consolidated Financial Statements for the pro forma net lossand net loss per share amounts for the periods presented as if we hadused a fair-value-based method similar to the methods required underSFAS 123R to measure compensation expense for share-based payments toemployees. We are currently evaluating our option valuationmethodologies and assumptions, and have not yet determined whether theadoption of SFAS 123R will result in amounts similar to the current proforma disclosures under SFAS 123. We expect the adoption of SFAS 123Rto have a significant adverse impact on our consolidated statements ofoperations and net loss per share.

Results of Operations

Year Ended December 31, 2004 Compared to the Year EndedDecember 31, 2003

Revenues**.**    Revenues forthe year ended December 31, 2004, were $275,000 as compared to $375,000for 2003. The decrease was due primarily to lower revenues fromcontract research grants. All revenues under contract research grantshave been fully recognized as all grants have expired.

Research and Development**.**    Total research anddevelopment ("R&D") expenses were $13.8million for the year ended December 31, 2004, compared to $9.7 millionfor 2003 as a result of higher 

21

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clinical trials expenses of $3.6 million andhigher other R&D expenses of $471,000. The increase in clinicaltrials expenses was due primarily to higher spending forCLORETAZINETM (VNP40101M) trials of $3.2 millionprimarily as a result of patient accrual to a Phase II trial in acutemyeloid leukemia and myelodysplastic syndromes initiated in March 2004,as well as higher drug production expense of $645,000 for Triapine andCLORETAZINETM (VNP40101M), and higher clinicalconsulting fees of $331,000, partially offset by lower spending of$809,000 for Triapine® trials. The increase in otherR&D expenses was primarily due to costs associated with twopreclinical product development programs (KS119 and heterocyclichydrazones) and higher payroll-related costs. We expect total researchand development expenses to increase over time mainly due to conductinglarger clinical trials, including planned commencement of a Phase IIIclinical trial of CLORETAZINETM (VNP40101M) in thefirst part of 2005, and additional development of our preclinicalproducts.

General andAdministrative**.**    General and administrative expenseswere $3.0 million for the year ended December 31, 2004, as compared to$2.6 million in 2003. The increase was primarily due to higherpayroll-related costs and higher professional fees for financialservices and employee recruiting as we moved into late-stage clinicaltrials of products, partially offset by lower legal fees as a result ofnon-recurring legal fees in 2003 for license agreements and assistancewith other transactions.

Interest Income**.**    Interest income was $547,000 for the year ended December 31,2004, compared to $136,000 for 2003. The increase was primarily due tohigher levels of invested funds in 2004 as a result of net proceedsreceived from a private placement of our common stock in February 2004and net proceeds from warrant exercises during 2004.

OtherExpense**.**    Other expense related to foreign currencytransaction losses was $73,000 for the year ended December 31, 2004,compared to $45,000 for 2003. The foreign currency transaction losseswere related to a contract with a vendor outside the U.S. that isdenominated in a foreign currency.

Income TaxProvision**.**    An income tax provision of $28,000 wasrecorded for the year ended December 31, 2004, for minimum statecapital taxes paid. For the year ended December 31, 2003, an income taxprovision of $4,000 was recorded for minimum state capital taxes paidnet of proceeds from the sale of certain research and development taxcredits to the State of Connecticut.

NetLoss.    The net loss was $16.1 million, or $0.30 per sharebased on weighted-average shares outstanding of 53.5 million, for theyear ended December 31, 2004, as compared to $11.8 million, or $0.36per share based on weighted-average shares outstanding of 32.8 million,for 2003.

Year Ended December 31, 2003 Compared to theYear Ended December 31, 2002

Revenues**.**    Revenues for the year ended December31, 2003, were $375,000 as compared to $238,000 for 2002. The increasewas due primarily to higher revenues from research support fees.

Research and Development**.**    Total research anddevelopment expenses (which include clinical trials expenses and otherresearch and development expenses) were $9.7 million for the year endedDecember 31, 2003, compared to $10.5 million for 2002. Clinical trialsexpenses were $5.8 million for the year ended December 31, 2003, ascompared to $4.9 million for 2002. The increase was due to higher costsassociated with patient enrollment in expanded Triapine®trials of $927,000 and CLORETAZINETM (VNP40101M) trialsof $378,000, partially offset by lower costs for TAPET®trials of $449,000. Other research and development expenses decreasedto $3.9 million for the year ended December 31, 2003, from $5.6 millionfor 2002, primarily due to a decrease in employee-related expenses dueto fewer research employees and, to a lesser extent, a decrease inspending for external research support.

General andAdministrative**.**    General and administrative expenseswere $2.6 million for the year ended December 31, 2003, as compared to$2.7 million in 2002. The decrease was due to lower patent and otherprofessional fees partially offset by higher legal fees for licenseagreements negotiated during the year and assistance with othertransactions.

Interest Income**.**    Interestincome was $136,000 for the year ended December 31, 2003, compared to$484,000 for 2002. The decrease was due to lower interest rates and, toa lesser extent, lower levels of invested funds in 2003.

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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 net of proceeds fromthe sale of certain research and development tax credits to the Stateof Connecticut. For the year ended December 31, 2002, an income taxbenefit of $227,000 was recognized from the sale of certain researchand development tax credits to the State of Connecticut.

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

Liquidity and Capital Resources

At December31, 2004, we had cash and cash equivalents of $41.7 million, comparedto cash, cash equivalents and short-term investments of $15.7 millionat December 31, 2003. The increase in 2004 was primarily due to netproceeds of $33.0 million from a private placement of securities inFebruary 2004 and proceeds of $7.3 million from exercises of warrants,described below, offset by cash used to fund operating activities of$14.0 million and acquisitions of capital equipment of $358,000. Cashused in operations was primarily to advance our ongoing preclinical andclinical activities.

Cash Used in OperatingActivities

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

Receivables and prepaidexpenses increased $113,000 during the year ended December 31, 2004compared to a decrease of $45,000 for 2003. The increase in 2004 wasprimarily due to a deposit paid to a clinical research organization inconnection with a clinical research agreement, partially offset by areduction of prepaid insurance expense. The decrease in 2003 wasprimarily due to a reduction of prepaid insurance expense as the timingof insurance premium payments differs from the recognition of insuranceexpense.

Current liabilities increased $2.0 million during eachof the years ended December 31, 2004 and 2003. The increases in 2004and 2003 were primarily due to increases in our clinical trialsliability as the timing of payments to clinical vendors differs fromthe recognition of clinical trials expenses.

CashProvided by or Used in Investing Activities

Cash provided by orused in investing activities primarily relates to the purchases andmaturities of investments and acquisitions of capital equipment. Forthe year ended December 31, 2004, purchases of marketable securitiestotaled $61.9 million and maturities of marketable securities totaled$76.4 million. Cash provided by the maturities of these short-terminvestments in marketable securities was reinvested during the secondquarter of 2004 in U.S. Treasury securities classified as cashequivalents. As a result, short-term investments were reduced to $0.For the year ended December 31, 2003, purchases of marketablesecurities totaled $119.1 million and maturities of marketablesecurities totaled $114.0 million. Capital expenditures were $358,000for the year ended December 31, 2004 and $117,000 for 2003. Theincrease in 2004 capital expenditures was due primarily to the purchaseof laboratory equipment. Capital expenditures for fiscal 2005 are notexpected to exceed $500,000.

Cash Provided by FinancingActivities

Cash provided by financing activities is primarilyrelated to capital raised, warrant exercise proceeds and proceeds fromcommon stock issuances under our employee stock plans. For the yearended December 31, 2004, we received net proceeds of $33.0 million froma private placement of 

23

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common stock in February 2004 and proceeds of$7.3 million from exercises of warrants, described below. For the yearended December 31, 2003, we received $14.9 million due to net proceedsfrom two private placements of common stock in June and September 2003,described below.

In June 2003, we completed a private placementof 3,846,150 shares of our common stock at $1.30 per share and warrantsto purchase 1,923,075 shares of common stock at $2.20 per share. Netproceeds from this private placement totaled $4.5 million. The warrantsexpire 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 common stock at $2.50 per share and the placement agentreceived a warrant to purchase an additional 100,000 shares of ourcommon stock at $2.50 per share. Net proceeds from this privateplacement totaled $10.4 million. All of these warrants expire onSeptember 19, 2008.

In February 2004, we completed a privateplacement of 13,553,845 shares of our common stock at $2.60 per share.The investors also received warrants to purchase 3,388,463 shares ofcommon stock at $3.25 per share and the placement agent received awarrant to purchase an additional 300,000 shares of common stock at$3.25 per share. All of these warrants expire on February 11, 2009. Netproceeds from this private placement totaled $33.0 million.

Forthe year ended December 31, 2004, we issued 2,987,567 shares of ourcommon stock upon exercises of warrants issued in connection withprivate placements in 2003 and 2004, resulting in proceeds of $7.3million.

Subsequent to year-end, we received net proceeds of $30million from a registered direct offering in January 2005 of 10 millionshares of our common stock at $3.25 per share.

FutureCash Requirements

Based on our current operating plan, weestimate that our existing cash and cash equivalents totaling $41.7million at December 31, 2004 in addition to net proceeds ofapproximately $30 million from the sale of 10 million shares of ourcommon stock in a registered direct offering completed in January 2005will be sufficient to fund our operations into 2007. Our operatingplans and cash requirements may vary materially from the foregoing dueto the results of preclinical development, clinical trials, producttesting, relationships with strategic partners, changes in focus anddirection of our preclinical and clinical development programs,competitive and technological advances, the regulatory process in theUnited States and abroad, and other factors. In the future, we willneed to raise substantial capital to complete our product developmentand clinical trials and to fund operations in 2007 and beyond, however,we cannot assure you that we will be able to raise additional capital,nor can we predict what the terms of any financing might be.

Off-Balance Sheet Financing

We have no off-balance sheetarrangements that have a material current effect or that are reasonablylikely to have a material future effect on our financial position orresults of operations.

Contractual Obligations

Thefollowing table summarizes our significant contractual obligationswhich are not recorded on the balance sheet at December 31, 2004 andthe future periods in which such obligations are expected to be settledin cash. Additional details regarding these obligations are provided infootnotes to the consolidated financial statements, as referenced inthe table:

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|                                             |  |                       |       |                  |  |          |       |           |  |                  |         |        |  |        |         |        |  |        |         |        |  |  |
|---------------------------------------------|--|-----------------------|-------|------------------|--|----------|-------|-----------|--|------------------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                        |  | PaymentsDue by Period |
| (Inthousands)                               |  | Total                 |       | Less than 1 year |  | 1-3years |       | 3-5 years |  | More than 5years |
| Employment agreement (Note9)                |  | $                     | 412   |             |  | $        | 412   |      |  | $                | — |   |  | $      | — |   |  | $      | — |   |
| Operating leaseobligations (Note9)          |  |                  | 633   |             |  |     | 338   |      |  |             | 295     |   |  |   | — |   |  |   | — |   |
| Researchand development commitment (Note10) |  |                  | 250   |             |  |     | 200   |      |  |             | 50      |   |  |   | — |   |  |   | — |   |
| Purchaseobligations(1)                      |  |                  | 178   |             |  |     | 178   |      |  |             |    |   |  |   |    |   |  |   |    |   |
| Total                                       |  | $                     | 1,473 |             |  | $        | 1,128 |      |  | $                | 345     |   |  | $      | — |   |  | $      | — |   |
|                                             |

|  |
|--|
|  |  |
|  |

|  |                                                                                                           |
|--|-----------------------------------------------------------------------------------------------------------|
|  | (1)    Purchaseobligations include commitments related to contract drugmanufacturing. |

Under our executed license agreements (referto Note 3), we are obligated to make milestone payments totaling$1,850,000 upon achieving specified milestones and to pay royalties toour licensors. These contingent milestone and royalty paymentobligations are not included in the above table.

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

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 under "Risk Factors", as well asthose discussed elsewhere in this Annual Report on Form 10-K, includingthe documents incorporated by reference.

An investment in oursecurities is risky. Prior to making a decision about investing in oursecurities, you should carefully consider the specific risks discussedunder "Risk Factors" in both this Form 10-Kand the documents incorporated by reference. The risks anduncertainties described below are not the only ones facing us.Additional risks and uncertainties not presently known to us, or thatwe currently see as immaterial, may also harm our business. If any ofthe risks or uncertainties described below or any such additional risksand uncertainties actually occur, our business, results of operationsand financial condition could be materially and adversely affected. Inthis case, the trading price of our securities could decline and youmight lose all or part of your investment.

If we fail toobtain the capital necessary to fund our operations, we will be unableto continue or complete our product development.

Wewill need to raise substantial additional capital to fund operationsand complete our product development. As of December 31, 2004, we had$41.7 million in cash and cash equivalents (not including the netproceeds of $30.0 million from a registered direct offering of 10million shares of our common stock in January 2005) to fund ouroperations and continue our product development. We will not have anapproved and marketable product for the foreseeable future.Accordingly, we will need to raise substantial additional capital tohave sufficient capital to fund our operations in 2007 and beyond.

We may not get funding when we need it or on favorable terms. If wecannot raise adequate funds to satisfy our capital requirements, we mayhave to delay, scale-back or eliminate our research and developmentactivities, clinical studies or future operations. We might have tolicense our technology to others. This could result in sharing revenueswhich we might otherwise retain for ourselves. Any of these actions mayharm our business, financial condition and results of operations.

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

|              |                                                                   |
|--------------|-------------------------------------------------------------------|
| •  | theprogress, timing and scope of our product developmentprograms; |

|              |                                                                              |
|--------------|------------------------------------------------------------------------------|
| •  | the progress, timing and scopeof 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 cost necessaryto develop sales, marketing and distributioncapabilities; |

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

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

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

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

To the extentwe encounter additional opportunities to raise cash, we would likelysell additional equity or debt securities. Due to our current stockprice and market conditions, and the amount of capital we need, anysuch debt or equity securities are likely to be sold at relatively lowprices, including prices which are below the market prices of ourstock, and may have substantial rights to control the Company. Forexample, in our private placement in June 2003, shares of common stockwere sold at $1.30 per share which was approximately 64% ofmarket price at the time. Stockholders are likely to experience extremedilution as well as subordination of their rights. We do not have anycontractual restrictions on our ability to incur debt. Any indebtednesscould contain covenants that restrict our operations.

Ifwe continue to incur operating losses, we may be unable to continue ouroperations.

We have incurred losses since inception. As ofDecember 31, 2004, we had an accumulated deficit of approximately$131.8 million. If we continue to incur operating losses and fail tobecome a profitable company, we may be unable to continue ouroperations. Since we began our business, we have focused on research,development and clinical trials of product candidates. We expect tocontinue to operate at a net loss for at least the next several yearsas we continue our research and development efforts, continue toconduct clinical trials and develop manufacturing, sales, marketing anddistribution capabilities. Our future profitability depends on ourreceiving regulatory approval of our product candidates and our abilityto successfully manufacture and market approved drugs. The extent ofour future 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 

26

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

|              |                                                                                                                                        |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------|
| •  | CLORETAZINETM(VNP40101M) is in a Phase II clinical trial as a single agent and in aPhase I trial in combination withtemozolomide; |

|              |                                                                                                                                                                                                                                                                                           |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Triapine®is being evaluated in a Phase II clinical trial in combination withgemcitabine in pancreatic cancer. The National Cancer Institute is alsosponsoring additional Phase I and Phase II trials of Triapine as asingle agent and in combination with standard chemotherapies;and |

|              |                                                                              |
|--------------|------------------------------------------------------------------------------|
| •  | Heterocyclic hydrazones and KS119are 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 or achieveunfavorable results, we will not be able to obtain regulatoryapprovals for our products.

We must conduct extensivetesting of our product candidates before we can obtain regulatoryapproval for our products. We need to conduct human clinical trials.These tests and trials may not achieve favorable results. We would needto reevaluate any drug that did not test favorably and either alter thedrug or dose, or abandon the drug development project. In suchcircumstances, we would not be able to obtain regulatory approval on atimely basis, if ever.

Factors that can cause delay ortermination in our clinical trialsinclude:

|              |                         |
|--------------|-------------------------|
| •  | slow patientenrollment; |

|              |                                                                     |
|--------------|---------------------------------------------------------------------|
| •  | long treatment time requiredto demonstrate safety andeffectiveness; |

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

|              |                                                            |
|--------------|------------------------------------------------------------|
| •  | adverse medical events orside effects in treated patients; |

|              |                                                                |
|--------------|----------------------------------------------------------------|
| •  | lackof effectiveness of the 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. These risks are particularly inherent in human trials ofour proposed products. Unacceptable side effects may be discoveredduring preclinical and clinical testing of one or more of our potentialproducts. 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. If the sideeffects are determined to be unacceptable, we will not be able tocommercialize our products.

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

Our manufacturing processes and potential products mayconflict with patents that have been or may be granted to competitors,universities or others, or the trade secrets of those persons and

27

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entities. As the drug development industryexpands and more patents are issued, the risk increases that ourprocesses and potential products may give rise to claims that theyinfringe the patents or trade secrets of others. These other personscould bring legal actions against us claiming damages and seeking toenjoin clinical testing, manufacturing and marketing of the affectedproduct or process. If any of these actions are successful, in additionto any potential liability for damages, we could be required to obtaina license in order to continue to conduct clinical tests, manufactureor market the affected product or use the affected process. Requiredlicenses may not be available on acceptable terms, if at all, and theresults of litigation are uncertain. If we become involved inlitigation or other proceedings, it could consume a substantial portionof our financial resources and the efforts of our personnel.

We rely on confidentiality agreements to protect our tradesecrets. If these agreements are breached by our employees or otherparties, our trade secrets may become known to our competitors.

We rely on trade secrets that we seek to protect throughconfidentiality agreements with our employees and other parties. Ifthese agreements are breached, our competitors may obtain and use ourtrade secrets to gain a competitive advantage over us. We may not haveany remedies against our competitors and any remedies that may beavailable to us may not be adequate to protect our business andcompensate us for the damaging disclosure. In addition, we may have toexpend resources to protect our interests from possible infringement byothers.

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

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

We face intense competition in the market foranticancer products, and if we are unable to competesuccessfully, 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 which arealkylating agents similar to our compound CLORETAZINETM(VNP40101M) and agents which target ribonucleotide reductase similar toour compound Triapine®. These companies include, but arenot limited to, Bristol-Myers Squibb Company, Pfizer Inc., ChironCorporation, Amgen Inc., Genentech Inc., ImClone Systems Inc., OSIPharmaceuticals, Inc., Lorus Therapeutics Inc., AstraZeneca PLC,Schering-Plough Corporation and Eli Lilly and Company. These and otherlarge pharmaceutical companies have substantially greater financial andother resources and development capabilities than we do and havesubstantially greater experience in undertaking preclinical andclinical testing of products, obtaining regulatory approvals, andmanufacturing and marketing pharmaceutical products. In addition, ourcompetitors may succeed in obtaining approval for products more rapidlythan us and in developing and commercializing products that are saferand more effective than those that we propose to develop. The existenceof these products, other products or treatments of which we are notaware or products or treatments that may be developed in the future mayadversely affect the marketability of our products by rendering themless competitive or obsolete. In addition to competing withuniversities and other research institutions in the development ofproducts, technologies and processes, we may compete with othercompanies in acquiring rights to products or technologies fromuniversities.

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If our corporate partners,licensors, licensees, collaborators at research institutions and othersdo not conduct activities in accordance with our arrangements, ourresearch and development efforts may be delayed.

Ourstrategy for the research, development and commercialization of ourproducts entails entering into various arrangements with corporatepartners, licensors, licensees, collaborators at research institutionsand others. We currently depend on the following thirdparties:

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

|              |                                                                                                       |
|--------------|-------------------------------------------------------------------------------------------------------|
| •  | YaleUniversity (Yale) for collaborative research and for technologies thatare licensed by them to us; |

|              |                                                                                                                                  |
|--------------|----------------------------------------------------------------------------------------------------------------------------------|
| •  | BeijingPason Pharmaceuticals, Inc. for the development of Triapine in thePeople's Republic of China, Hong Kong, Macao andTaiwan; |

|              |                                                                                                                                                                                         |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Duke University ComprehensiveCancer Center for clinical development of CLORETAZINETM(VNP40101M) in adult patients with recurrent gliomas (brain cancer)under an investigator'sIND; |

|              |                                                                                                                |
|--------------|----------------------------------------------------------------------------------------------------------------|
| •  | Healthcare facilities in the UnitedStates and other countries to perform human clinical trials of ourproducts; |

|              |                                                                                                                                          |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------|
| •  | 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, 2004, we have paid approximately$10.1 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, 2006. 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.

Even if we obtain regulatory approval forour products, we currently lack the ability and resources tocommercialize the products.

If our products are approved forsale by regulatory authorities, we will need to develop manufacturingand marketing capability or make arrangements with third parties tomanufacture, distribute and sell our products. We do not currently haveand are not seeking arrangements for manufacturing or marketingproducts on a commercial basis.

If environmental lawsbecome stricter in the future, we may face large capital expendituresin order to comply with environmental laws.

We cannotaccurately predict the outcome or timing of future expenditures that wemay be required to expend to comply with comprehensive federal, stateand local environmental laws and regulations. We must comply withenvironmental laws that govern, among other things, all emissions,

29

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

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

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

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

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

|              |                                                   |
|--------------|---------------------------------------------------|
| •  | potentiallydilutive issuance of equitysecurities; |

|              |                                                                                                                                  |
|--------------|----------------------------------------------------------------------------------------------------------------------------------|
| •  | incurrence of debtand contingent liabilities, some of which may be difficult orimpossible to identify at the time ofacquisition; |

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

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

|              |                                                                               |
|--------------|-------------------------------------------------------------------------------|
| •  | risks of enteringmarkets in which we have limited or no direct experience;and |

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

Wecannot assure you that any acquisition will result in short-term orlong-term benefits to us. We may incorrectly judge the value or worthof an acquired company or business. In addition, our future successwould depend in part on our ability to manage the rapid growthassociated with some of these acquisitions. We cannot assure you thatwe will be able to make the combination of our business with that ofacquired businesses or companies work or be successful. Furthermore,the development or expansion of our business or any acquired businessor companies 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.

Our common stockcould be delisted from the Nasdaq SmallCapMarketSM.

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

In January 2005, wenotified The NASDAQ Stock Market that, due to one vacancy on the auditcommittee that resulted from the recent death of a committee member, wefailed to comply with the audit committee composition requirementsunder Marketplace Rule 4350(d)(2)(A). We have begun our search for aqualified director to fill the vacancy on the audit committee. InJanuary 2005, we received notice from The NASDAQ Stock Market that wewill be provided a cure period, consistent with Marketplace Rule4350(d)(4), until the earlier of our annual shareholders' meetingor January 19, 2006 in order to regain compliance with the auditcommittee requirements. The letter states that if we do not regaincompliance within this period, Nasdaq will provide written notificationthat our common stock will be delisted from the Nasdaq SmallCapMarketSM.

30

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In such the event of delisting, trading,if any, in our common stock may then continue to be conducted in thenon-Nasdaq over-the-counter market in what are commonly referred to asthe electronic 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 usineligible to use Form S-3 to register shares of our common stock withthe Securities and Exchange Commission, thereby making it moredifficult and expensive for us to register our common stock and raiseadditional capital. We would also incur additional costs under stateblue-sky laws to sell equity if we are delisted.

Therights that have been and may in the future be granted to ourstockholders may allow our Board and management to deter a potentialacquisition in which the Board and management are to be replaced.

We have in place a stockholder rights plan, or "poisonpill", which enables our board of directors to issuerights to purchase common stock when someone acquires 20% ormore of the outstanding shares of our common stock. As a result of theplan, anyone wishing to take over the company would most likely beforced to negotiate a transaction with our Board and management inorder not to trigger the pill. The need to negotiate with the Board ormanagement could frustrate a proposed takeover particularly where theBoard and management wish to remain entrenched. This would prevent ourstockholders from participating in a takeover or tender offer, whichmight be of substantial value to them.

The large numberof our shares that may be held in the market may depress the marketprice of our stock and could result in substantial dilution to theholders of our shares of common stock.

Sale or issuance of asubstantial number of shares of our common stock in the future couldcause the market price of our common stock to decline. It may alsoimpair our ability to obtain additional financing. As of March 1, 2005,we had outstanding warrants to purchase 9,198,971 shares of our commonstock at exercise prices ranging from $2.20 to $3.25 per share. Allsuch shares have been registered for resale on registration statementsfiled with the Securities and Exchange Commission and will be freelytradable when issued upon exercise of the warrants. In addition, as ofMarch 1, 2005, there were 5,131,449 shares of common stock issuableupon exercise of options granted by us. We may also issue options underour existing stock option plan to purchase up to an additional 781,907shares of common stock.

ITEM 7A.    Quantitative andQualitative Disclosures About Market Risk

We are exposedto market risk, including changes to interest rates associated with ourcash equivalents and investments, and foreign currency exchange rates.The following describes the nature of these risks which we do notbelieve to be material to us.

Our cash equivalents are generallyhighly liquid investments in money market funds and U.S. governmentsecurities. These investments are subject to interest rate risk and, assuch, our future investment income may fall short of expectations dueto changes in interest rates. However, the conservative nature of ourinvestments mitigates our interest rate exposure. Our investments areheld for purposes other than trading and we believe that we currentlyhave no material adverse market risk exposure.

We have acontract with a vendor outside the U.S. that is denominated in aforeign currency. To date, fluctuations in this currency have notmaterially impacted our results of operations. We have no derivativefinancial instruments. We do not believe we have material exposures tochanges in foreign currency exchange rates.

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ITEM8.    Financial Statements and Supplementary Data

Report of Independent Registered Public AccountingFirm

The Board of Directors and ShareholdersofVion Pharmaceuticals, Inc.

We have audited theaccompanying consolidated balance sheets of Vion Pharmaceuticals, Inc.and subsidiary as of December 31, 2004 and 2003, and the relatedconsolidated statements of operations, shareholders' equity, andcash flows for each of the three years in the period ended December 31,2004 and for the period from May 1, 1994 (inception) to December 31,2004. These financial statements are the responsibility of theCompany's management. Our responsibility is to express an opinionon these financial statements based on our audits.

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

In our opinion, the financialstatements referred to above present fairly, in all material respects,the consolidated financial position of Vion Pharmaceuticals, Inc. andsubsidiary at December 31, 2004 and 2003, and the consolidated resultsof their operations and its their cash flows for each of the threeyears in the period ended December 31, 2004 and the period from May 1,1994 (inception) to December 31, 2004, in conformity with U.S.generally accepted accounting principles.

We also have audited,in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of VionPharmaceutical, Inc.'s internal control over financial reportingas of December 31, 2004, based on criteria established in InternalControl-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February21, 2005 expressed an unqualified opinion thereon.

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

Boston,Massachusetts February 21, 2005

32

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Report of IndependentRegistered Public Accounting Firm

The Board ofDirectors and Shareholders ofVion Pharmaceuticals, Inc.

We have audited management's assessment, included inthe accompanying Form 10-K, that Vion Pharmaceuticals, Inc. maintainedeffective internal control over financial reporting as of December 31,2004, based on criteria established in InternalControl—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (the COSOcriteria). Vion Pharmaceuticals, Inc.'s management is responsiblefor maintaining effective internal control over financial reporting andfor its assessment of the effectiveness of internal control overfinancial reporting. Our responsibility is to express an opinion onmanagement's assessment and an opinion on the effectiveness ofthe company's internal control over financial reporting based onour audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal controlover financial reporting was maintained in all material respects. Ouraudit included obtaining an understanding of internal control overfinancial reporting, evaluating management's assessment, testingand evaluating the design and operating effectiveness of internalcontrol, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company's internalcontrol over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. Acompany's internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations ofmanagement and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company's assets thatcould have a material effect on the financial statements.

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections ofany evaluation of effectiveness to future periods are subject to therisk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies orprocedures may deteriorate.

In our opinion, management'sassessment that Vion Pharmaceuticals, Inc. maintained effectiveinternal control over financial reporting as of December 31, 2004, isfairly stated, in all material respects, based on the COSO criteria.Also, in our opinion, Vion Pharmaceuticals, Inc. maintained, in allmaterial respects, effective internal control over financial reportingas of December 31, 2004, based on the COSO criteria**.**

Wealso have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidatedbalance sheets of Vion Pharmaceuticals, Inc. as of December 31, 2004and 2003, and the related consolidated statements of operations,shareholders' equity, and cash flows for each of the three yearsin the period ended December 31, 2004 and the period from May 1, 1994(inception) to December 31, 2004 and our report dated February 21, 2005expressed an unqualified option thereon.

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

Boston,Massachusetts February 21, 2005

33

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VionPharmaceuticals, Inc. (A Development StageCompany)

ConsolidatedBalanceSheets

|                                                                                                                                                                |  |             |          |         |  |        |          |         |  |  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------|----------|---------|--|--------|----------|---------|--|--|
|                                                                                                                                                           |  | December31, |
| (In thousands,except share and per sharedata)                                                                                                                  |  | 2004        |          | 2003    |
| **ASSETS**                                                                                                                                                     |  |        |     |    |  |   |     |    |
| Currentassets:                                                                                                                                                 |  |        |     |    |  |   |     |    |
| Cash andcashequivalents                                                                                                                                        |  | $           | 41,729   |    |  | $      | 1,219    |    |
| Short-terminvestments                                                                                                                                          |  |        | —  |    |  |   | 14,500   |    |
| Totalcash, cash equivalents and short-terminvestments                                                                                                          |  |        | 41,729   |    |  |   | 15,719   |    |
| Accountsreceivable                                                                                                                                             |  |        | 13       |    |  |   | 27       |    |
| Interestreceivable                                                                                                                                             |  |        | —  |    |  |   | 11       |    |
| Prepaidexpenses                                                                                                                                                |  |        | 362      |    |  |   | 224      |    |
| Totalcurrentassets                                                                                                                                             |  |        | 42,104   |    |  |   | 15,981   |    |
| Property andequipment, net                                                                                                                                     |  |        | 515      |    |  |   | 370      |    |
| Securitydeposits                                                                                                                                               |  |        | 25       |    |  |   | 25       |    |
| Totalassets                                                                                                                                                    |  | $           | 42,644   |    |  | $      | 16,376   |    |
| **LIABILITIESAND SHAREHOLDERS'EQUITY**                                                                                                                         |  |        |     |    |  |   |     |    |
| Currentliabilities:                                                                                                                                            |  |        |     |    |  |   |     |    |
| Accrued payroll andpayroll-relatedexpenses                                                                                                                     |  | $           | 354      |    |  | $      | 464      |    |
| Accountspayable                                                                                                                                                |  |        | 567      |    |  |   | 972      |    |
| Accruedexpenses                                                                                                                                                |  |        | 5,130    |    |  |   | 2,623    |    |
| Deferredrevenue                                                                                                                                                |  |        | 18       |    |  |   | 18       |    |
| Totalcurrentliabilities                                                                                                                                        |  |        | 6,069    |    |  |   | 4,077    |    |
| Deferredrevenue                                                                                                                                                |  |        | 360      |    |  |   | 377      |    |
| Totalliabilities                                                                                                                                               |  |        | 6,429    |    |  |   | 4,454    |    |
| Shareholders'equity:                                                                                                                                           |  |        |     |    |  |   |     |    |
| Preferred stock, $0.01 parvalue, authorized: 5,000,000 shares;issued and outstanding:none                                                                      |  |        | —  |    |  |   | —  |    |
| Common stock,$0.01 par value, authorized: 150,000,000 shares;issued andoutstanding: 55,860,313 and 39,276,755 shares at December 31, 2004 and2003,respectively |  |        | 559      |    |  |   | 393      |    |
| Additionalpaid-incapital                                                                                                                                       |  |        | 167,421  |    |  |   | 127,239  |    |
| Deficitaccumulated during the developmentstage                                                                                                                 |  |        | (131,765 | )  |  |   | (115,710 | )  |
|                                                                                                                                                           |  |        | 36,215   |    |  |   | 11,922   |    |
| Totalliabilities and shareholders'equity                                                                                                                       |  | $           | 42,644   |    |  | $      | 16,376   |    |
|                                                                                                                                                                |

SeeNotes to Consolidated Financial Statements

34

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VionPharmaceuticals, Inc. (A Development StageCompany)

Consolidated StatementsofOperations

|                                                                  |  |        |            |                                   |  |        |            |                                                                   |  |        |            |         |  |        |          |         |  |  |
|------------------------------------------------------------------|--|--------|------------|-----------------------------------|--|--------|------------|-------------------------------------------------------------------|--|--------|------------|---------|--|--------|----------|---------|--|--|
| (Inthousands, except share and per sharedata)                    |  | 2004   |            | For the Year EndedDecember31,2003 |  | 2002   |            | For the Periodfrom May 1, 1994 (Inception) throughDecember31,2004 |
| Revenues:                                                        |  |   |       |                              |  |   |       |                                                              |  |   |       |    |  |   |     |    |
| Researchand laboratory supportfees                               |  | $      | 149        |                              |  | $      | 136        |                                                              |  | $      | 31         |    |  | $      | 5,931    |    |
| Contractresearchgrants                                           |  |   | 100        |                              |  |   | 209        |                                                              |  |   | 179        |    |  |   | 2,501    |    |
| Technologylicensefees                                            |  |   | 26         |                              |  |   | 30         |                                                              |  |   | 28         |    |  |   | 4,487    |    |
| Totalrevenues                                                    |  |   | 275        |                              |  |   | 375        |                                                              |  |   | 238        |    |  |   | 12,919   |    |
| Operatingexpenses:                                               |  |   |       |                              |  |   |       |                                                              |  |   |       |    |  |   |     |    |
| Clinicaltrials                                                   |  |   | 9,373      |                              |  |   | 5,772      |                                                              |  |   | 4,897      |    |  |   | 36,512   |    |
| Otherresearch anddevelopment                                     |  |   | 4,434      |                              |  |   | 3,963      |                                                              |  |   | 5,650      |    |  |   | 67,006   |    |
| Totalresearch anddevelopment                                     |  |   | 13,807     |                              |  |   | 9,735      |                                                              |  |   | 10,547     |    |  |   | 103,518  |    |
| Generalandadministrative                                         |  |   | 2,969      |                              |  |   | 2,563      |                                                              |  |   | 2,712      |    |  |   | 27,709   |    |
| Totaloperatingexpenses                                           |  |   | 16,776     |                              |  |   | 12,298     |                                                              |  |   | 13,259     |    |  |   | 131,227  |    |
| Lossfromoperations                                               |  |   | (16,501    | )                            |  |   | (11,923    | )                                                            |  |   | (13,021    | )  |  |   | (118,308 | )  |
| Interestincome                                                   |  |   | 547        |                              |  |   | 136        |                                                              |  |   | 484        |    |  |   | 5,420    |    |
| Interestexpense                                                  |  |   | —    |                              |  |   | (2         | )                                                            |  |   | —    |    |  |   | (210     | )  |
| Otherexpense                                                     |  |   | (73        | )                            |  |   | (45        | )                                                            |  |   | —    |    |  |   | (118     | )  |
| Lossbefore incometaxes                                           |  |   | (16,027    | )                            |  |   | (11,834    | )                                                            |  |   | (12,537    | )  |  |   | (113,216 | )  |
| Incometax provision(benefit)                                     |  |   | 28         |                              |  |   | 4          |                                                              |  |   | (227       | )  |  |   | (195     | )  |
| Netloss                                                          |  |   | (16,055    | )                            |  |   | (11,838    | )                                                            |  |   | (12,310    | )  |  |   | (113,021 | )  |
| Preferredstock dividends andaccretion                            |  |   | —    |                              |  |   | —    |                                                              |  |   | —    |    |  |   | (18,489  | )  |
| Lossapplicable to commonshareholders                             |  | $      | (16,055    | )                            |  | $      | (11,838    | )                                                            |  | $      | (12,310    | )  |  | $      | (131,510 | )  |
| Basicand diluted loss applicable to common shareholders pershare |  | $      | (0.30      | )                            |  | $      | (0.36      | )                                                            |  | $      | (0.43      | )  |  |   |     |    |
| Weighted-averagenumber of shares of common stockoutstanding      |  |   | 53,464,140 |                              |  |   | 32,808,228 |                                                              |  |   | 28,888,180 |    |  |   |     |    |
|                                                                  |

SeeNotes to Consolidated FinancialStatements

35

----

VionPharmaceuticals, Inc. (A Development StageCompany)

Consolidated Statement of Changes inShareholders' Equity

|                                                                                       |  |                                    |           |                                    |  |             |         |                |  |                           |         |                       |  |                                             |         |                     |  |                           |           |         |  |        |         |         |  |        |         |        |  |        |         |         |  |        |         |         |  |        |         |        |  |        |         |         |  |        |         |         |  |  |
|---------------------------------------------------------------------------------------|--|------------------------------------|-----------|------------------------------------|--|-------------|---------|----------------|--|---------------------------|---------|-----------------------|--|---------------------------------------------|---------|---------------------|--|---------------------------|-----------|---------|--|--------|---------|---------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                  |  | ClassA Convertible Preferred Stock |           | Class BConvertible Preferred Stock |  | CommonStock |         | Treasury Stock |  | AdditionalPaid-in Capital |         | Deferred Compensation |  | Accumulated Other ComprehensiveIncome(Loss) |         | Accumulated Deficit |  | Total Shareholders'Equity |
| (Inthousands, except sharedata)                                                       |  | Shares                             |           | Amount                             |  | Shares      |         | Amount         |  | Shares                    |         | Amount                |  |
| 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  |    |
|                                                                                       |

36

----

VionPharmaceuticals, Inc. (A Development StageCompany)

ConsolidatedStatement of Changes in Shareholders' Equity (continued)

|                                                                        |  |                                    |          |                                    |  |             |         |                |  |                           |         |                       |  |                                             |         |                     |  |                          |            |         |  |        |         |        |  |        |         |         |  |        |         |         |  |        |         |         |  |        |         |        |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------------------------------|--|------------------------------------|----------|------------------------------------|--|-------------|---------|----------------|--|---------------------------|---------|-----------------------|--|---------------------------------------------|---------|---------------------|--|--------------------------|------------|---------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                   |  | ClassA Convertible Preferred Stock |          | Class BConvertible Preferred Stock |  | CommonStock |         | Treasury Stock |  | AdditionalPaid-in Capital |         | Deferred Compensation |  | Accumulated Other ComprehensiveIncome(Loss) |         | Accumulated Deficit |  | TotalShareholders'Equity |
| (Inthousands, except sharedata)                                        |  | Shares                             |          | Amount                             |  | Shares      |         | Amount         |  | Shares                    |         | Amount                |  |
| 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  |    |
|                                                                        |

37

----

VionPharmaceuticals, Inc. (A Development StageCompany)

ConsolidatedStatement of Changes in Shareholders' Equity (continued)

|                                                   |  |                                    |         |                                    |  |             |         |                |  |                           |         |                       |  |                                             |         |                     |  |                          |            |        |  |        |         |        |  |        |         |        |  |        |         |        |  |        |         |        |  |        |         |         |  |        |          |         |  |        |         |         |  |  |
|---------------------------------------------------|--|------------------------------------|---------|------------------------------------|--|-------------|---------|----------------|--|---------------------------|---------|-----------------------|--|---------------------------------------------|---------|---------------------|--|--------------------------|------------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|---------|--|--------|----------|---------|--|--------|---------|---------|--|--|
|                                              |  | ClassA Convertible Preferred Stock |         | Class BConvertible Preferred Stock |  | CommonStock |         | Treasury Stock |  | AdditionalPaid-in Capital |         | Deferred Compensation |  | Accumulated Other ComprehensiveIncome(Loss) |         | Accumulated Deficit |  | TotalShareholders'Equity |
| (Inthousands, except sharedata)                   |  | Shares                             |         | Amount                             |  | Shares      |         | Amount         |  | Shares                    |         | Amount                |  |
| 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 and comprehensiveloss                     |  |                               |    |                               |  |        |    |           |  |                      |    |                  |  |                                        |    |                |  |                     |       |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |    |  |   | (11,838  | )  |  |   | (11,838 | )  |
| BALANCEAT DECEMBER 31, 2003                       |  |                               | — |                               |  | $           | — |           |  |                      | — |                  |  | $                                           | — |                |  |                     | 39,276,755 |   |  | $      | 393     |   |  | $      | — |   |  | $      | 127,239 |   |  | $      | — |   |  | $      | — |    |  | $      | (115,710 | )  |  | $      | 11,922  |    |
| Privateplacement — February2004             |  |                               |    |                               |  |        |    |           |  |                      |    |                  |  |                                        |    |                |  |                     | 13,553,845 |   |  |   | 136     |   |  |   |    |   |  |   | 32,791  |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 32,927  |    |
| Exerciseof stockoptions                           |  |                               |    |                               |  |        |    |           |  |                      |    |                  |  |                                        |    |                |  |                     | 35,454     |   |  |   | — |   |  |   |    |   |  |   | 71      |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 71      |    |
| Exerciseofwarrants                                |  |                               |    |                               |  |        |    |           |  |                      |    |                  |  |                                        |    |                |  |                     | 2,987,567  |   |  |   | 30      |   |  |   |    |   |  |   | 7,311   |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 7,341   |    |
| Issuancesunder employee benefitplans              |  |                               |    |                               |  |        |    |           |  |                      |    |                  |  |                                        |    |                |  |                     | 6,692      |   |  |   | — |   |  |   |    |   |  |   | 9       |   |  |   |    |   |  |   |    |    |  |   |     |    |  |   | 9       |    |
| Netloss and comprehensiveloss                     |  |                               |    |                               |  |        |    |           |  |                      |    |                  |  |                                        |    |                |  |                     |       |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |   |  |   |    |    |  |   | (16,055  | )  |  |   | (16,055 | )  |
| BALANCEAT DECEMBER 31, 2004                       |  |                               | — |                               |  | $           | — |           |  |                      | — |                  |  | $                                           | — |                |  |                     | 55,860,313 |   |  | $      | 559     |   |  | $      | — |   |  | $      | 167,421 |   |  | $      | — |   |  | $      | — |    |  | $      | (131,765 | )  |  | $      | 36,215  |    |
|                                                   |

SeeNotes to Consolidated FinancialStatements

38

----

VionPharmaceuticals, Inc. (A Development Stage Company)

Consolidated Statements of CashFlows

|                                                                                 |  |        |         |                               |  |        |          |                                                               |  |        |         |         |  |        |          |         |  |  |
|---------------------------------------------------------------------------------|--|--------|---------|-------------------------------|--|--------|----------|---------------------------------------------------------------|--|--------|---------|---------|--|--------|----------|---------|--|--|
|                                                                            |  |   |         | Forthe Year EndedDecember 31, |  |   |          | For the PeriodFrom May 1, 1994 (Inception) throughDecember31, |
| (Inthousands)                                                                   |  | 2004   |         | 2003                          |  | 2002   |          | 2004                                                          |
| Cashflows from operatingactivities:                                             |  |   |    |                          |  |   |     |                                                          |  |   |    |    |  |   |     |    |
| Netloss                                                                         |  | $      | (16,055 | )                        |  | $      | (11,838  | )                                                        |  | $      | (12,310 | )  |  | $      | (113,021 | )  |
| Adjustmentsto reconcile net loss to net cash used in operatingactivities— |  |   |    |                          |  |   |     |                                                          |  |   |    |    |  |   |     |    |
| Depreciationandamortization                                                     |  |   | 213     |                          |  |   | 195      |                                                          |  |   | 239     |    |  |   | 2,828    |    |
| Losson equipmentdisposals                                                       |  |   | — |                          |  |   | 8        |                                                          |  |   | — |    |  |   | 12       |    |
| (Decrease)increase in deferredrevenue                                           |  |   | (17     | )                        |  |   | 395      |                                                          |  |   | — |    |  |   | 378      |    |
| Purchasedresearch anddevelopment                                                |  |   | — |                          |  |   | —  |                                                          |  |   | — |    |  |   | 4,481    |    |
| Non-cashcompensation                                                            |  |   | — |                          |  |   | —  |                                                          |  |   | — |    |  |   | 1,068    |    |
| Stockissued forservices                                                         |  |   | — |                          |  |   | —  |                                                          |  |   | — |    |  |   | 600      |    |
| Amortizationof financingcosts                                                   |  |   | — |                          |  |   | —  |                                                          |  |   | — |    |  |   | 346      |    |
| Extension/re-issuanceof placement agentwarrants                                 |  |   | — |                          |  |   | —  |                                                          |  |   | — |    |  |   | 168      |    |
| Changesin operating assets andliabilities—                                |  |   |    |                          |  |   |     |                                                          |  |   |    |    |  |   |     |    |
| Receivablesand prepaidexpenses                                                  |  |   | (113    | )                        |  |   | 45       |                                                          |  |   | 70      |    |  |   | (374     | )  |
| Otherassets                                                                     |  |   | — |                          |  |   | 4        |                                                          |  |   | 1       |    |  |   | (22      | )  |
| Currentliabilities                                                              |  |   | 1,992   |                          |  |   | 2,000    |                                                          |  |   | (444    | )  |  |   | 6,016    |    |
| Netcash used in operatingactivities                                             |  |   | (13,980 | )                        |  |   | (9,191   | )                                                        |  |   | (12,444 | )  |  |   | (97,520  | )  |
|                                                                            |  |   |    |                          |  |   |     |                                                          |  |   |    |    |  |   |     |    |
| Cashflows from investingactivities:                                             |  |   |    |                          |  |   |     |                                                          |  |   |    |    |  |   |     |    |
| Purchasesof marketablesecurities                                                |  |   | (61,901 | )                        |  |   | (119,100 | )                                                        |  |   | (58,997 | )  |  |   | (321,052 | )  |
| Maturitiesof marketablesecurities                                               |  |   | 76,401  |                          |  |   | 113,950  |                                                          |  |   | 65,652  |    |  |   | 321,052  |    |
| Acquisitionofequipment                                                          |  |   | (358    | )                        |  |   | (117     | )                                                        |  |   | (145    | )  |  |   | (2,411   | )  |
| Netcash provided by (used in) investingactivities                               |  |   | 14,142  |                          |  |   | (5,267   | )                                                        |  |   | 6,510   |    |  |   | (2,411   | )  |
|                                                                            |  |   |    |                          |  |   |     |                                                          |  |   |    |    |  |   |     |    |
| Cashflows from financingactivities:                                             |  |   |    |                          |  |   |     |                                                          |  |   |    |    |  |   |     |    |
| Initialpublicoffering                                                           |  |   | — |                          |  |   | —  |                                                          |  |   | — |    |  |   | 9,696    |    |
| Netproceeds from issuance of commonstock                                        |  |   | 33,007  |                          |  |   | 14,896   |                                                          |  |   | 70      |    |  |   | 81,792   |    |
| 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                                      |  |   | 7,341   |                          |  |   | —  |                                                          |  |   | — |    |  |   | 7,456    |    |
| Repaymentof equipment capitalleases                                             |  |   | — |                          |  |   | —  |                                                          |  |   | — |    |  |   | (927     | )  |
| Otherfinancing activities,net                                                   |  |   | — |                          |  |   | —  |                                                          |  |   | — |    |  |   | (286     | )  |
| Netcash provided by financingactivities                                         |  |   | 40,348  |                          |  |   | 14,896   |                                                          |  |   | 70      |    |  |   | 141,660  |    |
|                                                                            |  |   |    |                          |  |   |     |                                                          |  |   |    |    |  |   |     |    |
| Changein cash and cashequivalents                                               |  |   | 40,510  |                          |  |   | 438      |                                                          |  |   | (5,864  | )  |  |   | 41,729   |    |
| Cashand cash equivalents, beginning ofperiod                                    |  |   | 1,219   |                          |  |   | 781      |                                                          |  |   | 6,645   |    |  |   | —  |    |
| Cashand cash equivalents, end ofperiod                                          |  | $      | 41,729  |                          |  | $      | 1,219    |                                                          |  | $      | 781     |    |  | $      | 41,729   |    |
| Supplementaldisclosure of cash flow information:                                |  |
| Cashpaid forinterest                                                            |  | $      | — |                          |  | $      | 2        |                                                          |  | $      | — |    |  | $      | 210      |    |
| Cashpaid fortaxes                                                               |  | $      | 7       |                          |  | $      | 17       |                                                          |  | $      | — |    |  | $      | 24       |    |
|                                                                                 |

SeeNotes to Consolidated FinancialStatements

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

1.    The Company

VionPharmaceuticals, Inc. (the "Company") is adevelopment stage company engaged in the development of noveltherapeutics for the treatment of cancer. The Company was incorporatedin March 1992 as a Delaware corporation and began operations on May 1,1994.

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

In November 2004,the Company established a wholly-owned subsidiary in the United Kingdomto act as the Company's legal representative for clinical trialssponsored by the Company in the european economic area.

2.    Summary of Significant Accounting Policies

Principals of Consolidation

The consolidated financialstatements of the Company include the accounts of Vion Pharmaceuticals,Inc. and its subsidiary after elimination of intercompany accounts andtransactions.

Use of Estimates

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financialstatements and notes thereto. Actual results may differ materially fromthose estimates.

Cash Equivalents

Cash equivalentsinclude investments with maturities of three months or less whenpurchased.

Fair Value of Financial Instruments

Theestimated fair value of amounts reported in the financial statementshas been determined by using available market information andappropriate valuation methodologies. Carrying values for all financialinstruments included in current assets and current liabilitiesapproximate fair value, because of their short-term nature.

Investments

Short-term investments consist primarily ofU.S. government and state agency securities. These securities generallyare liquidated and repriced every 28 to 45 days, but are classified asshort-term 

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investments as they do not have a statedmaturity date. These securities are classified as available-for-saleand are carried at cost, which approximates fair value. There have beenno realized investment gains or losses incurred through December 31,2004.

Property and Equipment

Property and equipment arestated at cost. Depreciation of equipment is computed under thestraight-line method over the estimated useful lives of the assetsranging from three to seven years. Leasehold improvements are carriedat cost and amortized on a straight-line basis over the shorter of thelease term or the estimated useful lives of the assets.

Thefollowing is a summary of property and equipment as of December 31 (inthousands):

|                                         |  |        |        |         |  |        |        |         |  |  |
|-----------------------------------------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                    |  | 2004   |        | 2003    |
| Officeand computerequipment             |  | $      | 412    |    |  | $      | 357    |    |
| Furnitureand fixtures                   |  |   | 210    |    |  |   | 210    |    |
| Laboratoryequipment                     |  |   | 2,034  |    |  |   | 1,734  |    |
| Leaseholdimprovements                   |  |   | 381    |    |  |   | 378    |    |
|                                    |  |   | 3,037  |    |  |   | 2,679  |    |
| Accumulateddepreciation andamortization |  |   | (2,522 | )  |  |   | (2,309 | )  |
| Propertyand equipment,net               |  | $      | 515    |    |  | $      | 370    |    |
|                                         |

Depreciationexpense was approximately $213,000, $195,000 and $239,000 for the yearsended December 31, 2004, 2003 and 2002, respectively, and $2.8 millionfor the period from May 1, 1994 (inception) through December 31,2004.

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

Research and Laboratory Support Fees.    The Companyrecognizes revenue from research and laboratory support as the servicesare performed.

Contract Research Grants.    TheCompany has received grants from the National Cancer Institute forvarious research projects. The grants provide for reimbursement ofproject costs. Revenues from these grants of $100,000, $209,000,$179,000 and $2.5 million have been recognized as the costs wereincurred for the years ended December 31, 2004, 2003 and 2002, and forthe period from May 1, 1994 (inception) to December 31, 2004,respectively.

Technology License Fees.    The Companyhas recognized revenue from fees, including non-refundable upfrontfees, under license agreements with Beijing Pason Pharmaceuticals,Inc., San-Mar Laboratories and others (refer to Note 3) totaling$26,000, $30,000, $28,000, and $4.5 million for the years endedDecember 31, 2004, 2003, and 2002, and the period from May 1, 1994(inception) through December 31, 2004, respectively. Non-refundableupfront fees are recognized as revenue ratably over the performanceperiod.

Research and Development Expenses

The Companyrecords research and development expenses as incurred. The Companydiscloses clinical trials expenses and other research and developmentexpenses as separate components of research and development expense inits statements 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.

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Other Expense

Other expense of$73,000, $45,000 and $118,000 for the years ended December 31, 2004 and2003, and the period from May 1, 1994 (inception) through December 31,2004, respectively, represents foreign currency transaction lossesrelated to a contract that is denominated in a foreign currency with avendor outside the U.S.

Per Share Data

The followingtable sets forth the computation of basic and diluted loss per share(in thousands, except per sharedata):

|                                                             |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|-------------------------------------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                        |  | 2004   |         | 2003    |  | 2002   |
| Netloss                                                     |  | $      | (16,055 | )  |  | $      | (11,838 | )  |  | $      | (12,310 | )  |
| Weighted-averagenumber of shares of common stockoutstanding |  |   | 53,464  |    |  |   | 32,808  |    |  |   | 28,888  |    |
| Basicand diluted loss pershare                              |  | $      | (0.30   | )  |  | $      | (0.36   | )  |  | $      | (0.43   | )  |
|                                                             |

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. No stock-based compensation costis reflected in the Company's reported net loss for the yearsended December 31, 2004, 2003 and 2002.

The following tableillustrates the assumptions used and the effect on net loss and netloss per share if the Company had applied the fair value recognitionprovisions of SFAS 123 to employee stock-based compensation. TheCompany has computed the pro forma disclosures required under SFAS 123,as amended by Statement of Financial Accounting Standards No. 148,Accounting for Stock-Based Compensation – Transition andDisclosure ("SFAS 148"), forpurchases under the employee stock purchase plan and for all employeestock option grants using the Black-Scholes option pricing modelprescribed by SFAS123.

|                                                              |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|--------------------------------------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                         |  | 2004   |         | 2003    |  | 2002   |
| Risk-freeinterestrate                                        |  |   | 3.75    | %  |  |   | 3.73    | %  |  |   | 4.30    | %  |
| Expectedvolatility                                           |  |   | 72      | %  |  |   | 146     | %  |  |   | 217     | %  |
| Expectedlife (inyears)                                       |  |   | 5.95    |    |  |   | 5.88    |    |  |   | 5.76    |    |
| Expecteddividendyield                                        |  |   | – |    |  |   | – |    |  |   | – |    |
| Weighted-averagefair value of options granted during theyear |  | $      | 2.97    |    |  | $      | 0.33    |    |  | $      | 1.53    |    |
|                                                              |

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).

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|                                                                                                            |  |        |         |         |  |        |         |                                                 |  |        |         |         |  |        |          |         |  |  |
|------------------------------------------------------------------------------------------------------------|--|--------|---------|---------|--|--------|---------|-------------------------------------------------|--|--------|---------|---------|--|--------|----------|---------|--|--|
|                                                                                                       |  | 2004   |         | 2003    |  | 2002   |         | FromInception (May 1, 1994) to December 31,2004 |
| Reported netloss                                                                                           |  | $      | (16,055 | )  |  | $      | (11,838 | )                                          |  | $      | (12,310 | )  |  | $      | (113,021 | )  |
| Add:Stock-based employee compensation expense included in reported netloss                                 |  |   | – |    |  |   | – |                                            |  |   | – |    |  |   | 768      |    |
| Deduct:Stock-based employee compensation expense determined under thefair value based method for allawards |  |   | (1,888  | )  |  |   | (3,009  | )                                          |  |   | (4,622  | )  |  |   | (21,002  | )  |
| Proforma netloss                                                                                           |  |   | (17,943 | )  |  |   | (14,847 | )                                          |  |   | (16,932 | )  |  |   | (133,255 | )  |
| Proforma preferred stock dividend andaccretion                                                             |  |   | – |    |  |   | – |                                            |  |   | – |    |  |   | (18,489  | )  |
| Proforma loss applicable to commonshareholders                                                             |  | $      | (17,943 | )  |  | $      | (14,847 | )                                          |  | $      | (16,932 | )  |  | $      | (151,744 | )  |
| Proforma basic and diluted loss applicable to common shareholders pershare                                 |  | $      | (0.34   | )  |  | $      | (0.45   | )                                          |  | $      | (0.59   | )  |  |   |     |    |
|                                                                                                            |

RecentlyIssued Accounting Standards

In December 2004, the FinancialAccounting Standards Board issued the revised Statement of FinancialAccounting Standards No. 123, Share-Based Payment("SFAS 123R"). SFAS 123R replaces SFAS 123and supersedes APB 25. The cumulative effect of adoption, if any, willbe measured and recognized on July 1, 2005. As of the requiredeffective date, companies will apply SFAS 123R using a modified versionof prospective application. For periods before the required effectivedate, companies may elect to apply a modified version of retrospectiveapplication. We currently measure share-based compensation expense forgrants of stock options and purchases under the employee stock purchaseplan under APB 25 and provide pro forma disclosures required by SFAS123, as amended by SFAS 148. We will be required to adopt SFAS 123R andrecognize an expense for share-based compensation to employees based onthe grant-date fair value of these instruments in our financialstatements for the quarter ended September 30, 2005. The pro forma netloss and net loss per share amounts shown in the above table weredetermined as if we had used a fair-value-based method similar to themethods required under SFAS 123R to measure compensation expense forshare-based payments to employees. We are currently evaluating ouroption valuation methodologies and assumptions, and have not yetdetermined whether the adoption of SFAS 123R will result in amountssimilar to the current pro forma disclosures under SFAS 123. We expectthe adoption of SFAS 123R to have a significant adverse impact on ourconsolidated statements of operations and net loss per share.

3.    Research and License Agreements

Agreements withYale University

Since 1988, the Company or its predecessorcompanies have entered into a series of agreements under which theCompany has funded research at Yale University("Yale") and licensed inventions from Yale.The license agreements with Yale grant the Company exclusive licensesto make, use, sell and practice the inventions covered by variouspatents and patent applications. Each license agreement requires theCompany to pay royalties, and in some cases milestone payments to Yale.Certain licenses are terminable in the event the Company does notexercise due diligence in commercializing the licensed technology.

License Agreement with Yale University – September1990.    Pursuant to a license agreement entered into inSeptember 1990 between the Company and Yale, the Company has a licenseto a synthetic form of melanin, which the Company has namedMELASYN®. Under the terms of the license agreement, theCompany pays a license fee to Yale based on a percentage of net salesand 

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sublicensing revenues. Through December 31,2004, the Company has paid royalties on sublicensing revenues of$80,000 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 a researchagreement with Yale, subsequently renewed in 1998, to provide fundingthrough September 30, 2002 for certain research projects. Technologylicensed by the Company from research conducted under this agreementincludes the inventions collectively known as TAPET®. InOctober 2000, the Company restructured the agreement to provide giftsto Yale to support the research projects through September 30,2002.

License Agreement with Yale University – August1994.    The Company is a party to a license agreement with Yaleentered into in August 1994 and subsequently amended in fiveamendments, most recently in March 2003. Under this amended license,Yale granted to the Company a non-transferable worldwide exclusivelicense to make, have made, use, sell and practice inventions undercertain patents and patent applications for therapeutic and diagnosticpurposes. We also have a non-exclusive license to two patents underthis amended license. The patents and patent applications under thislicense and its amendments cover Triapine®,CLORETAZINETM (VNP40101M), KS119, and β-L-Fd4C.The term of the license is the expiration of any patents relating toany inventions or, with respect to non-patented inventions or research,17 years. Yale is entitled to royalties on sales, if any, of resultingproducts and sublicensing revenues and, with regard to several patentsrelated to Triapine and Sulfonyl Hydrazine Prodrugs (includingCLORETAZINETM (VNP40101M) and KS119), potentialmilestone payments totaling $850,000 based on the completion of PhaseII clinical trials, regulatory filings and regulatory approvals. Nomilestone payments have been paid or are due under the licenseagreement, as amended, through December 31, 2004.

Pursuant tothe original agreement, the Company issued to Yale 159,304 shares ofthe Company'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 $600,000. Through December31, 2004, the Company has paid royalties on sublicensing revenues ofapproximately $107,000 to Yale under this agreement.

LicenseAgreements with Yale University – December 1995.    InDecember 1995, the Company and Yale entered into a license agreementpursuant to which the Company received a non-transferable worldwideexclusive license, expiring over the lives of the patents, to threeinventions relating to gene therapy for melanoma. Technology licensedunder this agreement relates to TAPET®. In June 1997,pursuant to the license agreement, the Company paid Yale a $100,000initial fixed royalty fee.

In December 1995, the Company andYale entered into another license agreement pursuant to which theCompany received a non-transferable worldwide exclusive license,expiring over the lives of the patents, to an invention relating towhitening skin.

Under the licensing agreements, Yale is entitledto potential milestone payments totaling $1 million based on thecompletion of Phase II clinical trials, regulatory filings andregulatory approvals. In addition, Yale is entitled to royalties onsales, if any, of resulting products and sublicense revenues. There areno amounts due under these agreements as of December 31, 2004.

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Other Agreements

CooperativeResearch and Development Agreement – April 2000.    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. In June 2002, payments to the NCI were suspended by mutualagreement as initial work under the CRADA had been completed. For theyear ended December 31, 2002, the Company recorded approximately$217,000 as research and development expense under the CRADA.

Research Services Agreement with Eli Lilly and Company –September 2003.    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 acertain amount of Gemzar® without cost to the Companyfor the trials sponsored by the Company.

License Agreementwith Beijing Pason Pharmaceuticals, Inc. – September2003.    In September 2003, the Company entered into a licenseagreement with Beijing Pason Pharmaceuticals, Inc.("Pason") whereby Pason obtained theexclusive rights to develop, manufacture and marketTriapine® in the People'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$500,000 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 Accounting BulletinNo. 104, Revenue Recognition, the Company will recognizeapproximately $400,000, which represents the initial payment receivedfrom Pason net of royalties paid to Yale, over the life of theagreement. For the years ended December 31, 2004 and 2003, the Companyrecognized revenue related to this agreement of approximately $18,000and $4,000, respectively.

Research Collaboration and OptionAgreement with Austrian Inventors and Austria WirtschaftsserviceGesellschaft m.b.H. – November 2003.    In November 2003,the Company entered into a research collaboration and option agreementfor certain 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 theoption agreement, and an additional payment of $75,000 will be requiredby March 2005 if the Company exercises the option to enter into theexclusive worldwide license. The form of license agreement calls forpotential milestone payments totaling $775,000 based on regulatoryfilings, commencement of a Phase III clinical trial or pivotalregistration study, and regulatory approvals, as well as royaltiesbased on product revenues.

4.    Shareholders'Equity

In April 1995, 2,000,000 shares of common stock valuedat $2.16 per share were issued in conjunction with the merger withMelaRx resulting in net proceeds to the Company of $4.3 million (referto Note 1). Shortly prior to the consummation of the merger, theCompany issued 76,349 shares of common stock for net proceeds of $0.2million.

In August 1995, the Company completed an initial publicoffering ("IPO") of 2,875,000 Unit PurchaseOptions ("UPOs"), consisting of an aggregateof 2,875,000 shares of common stock, 2,875,000 redeemable Class AWarrants and 2,875,000 redeemable Class B Warrants at $4.00 per UPO.The net proceeds to the Company from the IPO were $9.7 million beforerepayment of certain bridge financing. In addition, the Company grantedto the underwriter an option to purchase up to 250,000 UPOs at $5.20per UPO, subsequently adjusted due to antidilution provisions. EachClass A Warrant 

45

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entitled the holder to purchase one share ofcommon stock and one Class B Warrant. Each Class B Warrant entitled theholder to purchase one share of common stock. The Class A and Class BWarrants were exercisable through August 14, 2000, and were exchanged,exercised or redeemed prior to that date, resulting in aggregate netproceeds to the Company of $23.2 million.

Commencing with itsIPO through December 31, 2004, the Company has raised gross proceeds of$138.7 million through the issuance of common stock, preferred stockand warrants.

Issuance and Extension of Placement AgentWarrants

In connection with two private financings of theCompany's predecessor, MelaRx, Inc., the placement agent wasissued warrants to purchase 202,486 shares of common stock at pricesranging from $3.56 to $4.44 per share, expiring on July 5, 1998 (the"Expiration Date"). Through 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 of common stock expired.

Class AConvertible Preferred Stock

In May 1996, the Company completeda private placement of 1,250,000 shares of Class A ConvertiblePreferred Stock ("Class A Stock"), at $10.00per share, resulting in net proceeds to the Company of $11.5 million.Each share of Class A Stock was convertible at the option of the holderinto 2.777777 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 Financial Accounting StandardsBoard Emerging Issues Task Force D-60, Accounting for the Issuanceof Convertible Preferred Stock and Debt Securities with a NondetachableConversion Feature (EITF D-60). The shares of Class A Stock paidsemi-annual dividends of 5% per annum, payable in additionalshares of Class A Stock. The Company recorded non-cash dividends from1996 through 2000 totaling $1.8 million based on the quoted marketprice of the common stock as of the dividend date. All non-cashdividends have been recognized as a charge against the accumulateddeficit with a corresponding increase in additional paid-in capital.The non-cash dividends have been included in the loss applicable tocommon shareholders.

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

In accordance with the terms of the Class A Stock, theCompany notified the holders of outstanding shares of its intention toredeem their Class A stock on December 26, 2000 (the"Redemption Date") at a redemption price of$10.00 per share. All outstanding shares of Class A Stock wereconverted by the holders into shares of common stock with the exceptionof 545 shares of Class A Stock that were redeemed for an aggregate of$5,450 and cancelled as of the Redemption Date.

Class BConvertible Preferred Stock

In August 1997, the Companycompleted a private placement of 4,850 shares of non-voting Class BConvertible Preferred Stock ("Class B Stock")at $1,000 per share, resulting in net proceeds to the Company of $4.5million. Shares of Class B Stock were immediately convertible intoshares of common stock including an accretion of 8% per annum.The Company recorded an imputed one-time charge of $0.4 million as aresult of the difference between the conversion price and the quotedmarket price of the Company's common stock at the date ofissuance. Shares of the Class B Stock were eligible to receivedividends paid in Class C Convertible Preferred Stock("Class C Stock") which were immediatelyconvertible into shares of the Company's common stock.Conversions of 

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Class B Stock in 1998 resulted in theissuance of 180,141 shares of common stock valued at $0.6 million. Inaddition, the Company recorded accretion of 37,168 shares of commonstock valued at $0.1 million in 1997 and 61,078 shares of common stockvalued at $0.3 million in 1998. All non-cash dividends were recorded asa charge against the accumulated deficit with a corresponding increasein additional paid-in capital. The non-cash dividends have beenincluded in the loss applicable to common shareholders.

InAugust 1998, the Company reached agreement with 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. The conversions of Class B Stockresulted in the issuance of 304,188 shares of common stock valued at$1.1 million, and accretion of 6,553 shares of common stock valued at$23,000. As part of this agreement, an additional 101,569 common shareswere issued to holders of the Class B Stock. In accordance withFinancial Accounting Standards Board Emerging Issues Task Force D-42,The Effect on the Calculation of Earnings Per Share for theRedemption or Induced Conversion of Preferred Stock, the excess of$0.4 million of the fair value of the common stock issued uponconversion over the fair value of the common stock issuable pursuant tothe original conversion terms was included in the loss applicable tocommon shareholders. Holders of the Class B Stock waived theirantidilution 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 Preferred Stock was issued at $1,000 per share, resulting in netproceeds to the Company of $4.7 million. The shares of Series 1998Preferred Stock accrued dividends of 5% per annum payablein-kind. Each share of Series 1998 Preferred Stock was convertible intocommon stock based on the formula of issued price plus accrueddividends divided by $3.60. In connection with the sale of the Series1998 Preferred Stock, the Company imputed a one-time non-cash dividendof approximately $1.6 million as a result of the difference between theconversion price and the quoted market price of the Company'scommon stock at the date of issuance as required by EITF D-60. Suchamount was recognized upon issuance of the Series 1998 Preferred Stockas a charge against the accumulated deficit with a correspondingincrease to additional paid-in capital. The imputed non-cash dividendwas included in the loss applicable to common shareholders. Thedividend requirement on Preferred Stock also reflects the amortizationof the costs of completing the offering and the accretion of the5% per annum dividend. The 5% accretion resulted in acharge against the accumulated deficit with a corresponding increase toadditional paid-in-capital from 1998 through 2000 of $0.8 million. Theissuance of the Series 1998 Preferred Stock at closing also triggeredcertain antidilution adjustment provisions of the Company'soutstanding warrants, resulting in the issuance of additionalwarrants.

In accordance with the terms of the Series 1998Preferred Stock, all of the outstanding preferred shares having aredemption value of $5.4 million were automatically converted into1,507,024 common shares at the $3.60 conversion price, effectiveFebruary 22, 2000.

Antidilution Adjustment to Class A and ClassB Warrants

As a result of the sale in May 1996 of Class AStock, an antidilution adjustment was made to the exercise price of theClass A Warrants and the Class B Warrants and there was a correspondingdistribution of additional Class A Warrants and Class B Warrants. Eachholder of a Class A Warrant was issued an additional 0.1 Class AWarrant and the exercise price of the Class A Warrants was reduced from$5.20 to $4.73. Each holder of a Class B Warrant was issued anadditional 0.1 Class B Warrant and the exercise price of the Class BWarrants was reduced from $7.00 to $6.37.

Subsequently, as aresult of the sale in June 1998 of Series 1998 Preferred Stock, anadditional antidilution adjustment was made to the exercise price ofthe Class A Warrants and the Class B Warrants with a correspondingdistribution of additional Class A Warrants and Class B Warrants. Eachholder of a Class A Warrant was issued an additional 0.02 Class AWarrant and the exercise 

47

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price of the Class A Warrants was reducedfrom $4.73 to $4.63. Each holder of a Class B Warrant was issued anadditional 0.02 Class B Warrant and the exercise price of the Class BWarrant was reduced from $6.37 to $6.23.

Class A and Class BWarrant Exchange Offers

In 1998, the Company offered toexchange each outstanding Class A Warrant, at the holder'soption, for either 0.438 shares of common stock or 0.254 shares ofcommon stock and $0.66 in cash. The Company simultaneously offered toexchange each outstanding Class B Warrant, at the holder'soption, for either 0.212 shares of common stock or 0.123 shares ofcommon stock and $0.32 in cash. As a result of the exchange offers,3,209,806 Class A Warrants and 1,881,835 Class B Warrants wereexchanged for 1,395,027 and 397,925 shares of the Company'scommon stock, and $39,000 and $3,700 in cash, respectively.

Redemption of Class A Warrants

The Class A Warrantsentitled the holder to purchase one share of common stock and one ClassB Warrant for an exercise price of $4.63. In February 2000, the Companynotified holders of its outstanding Class A Warrants of its intentionto redeem the warrants on March 13, 2000 (the "RedemptionDate"). The Company received net proceeds of $5.7 millionfrom the exercise of 1.3 million Class A Warrants.

Redemptionof Class B Warrants

The Class B Warrants entitled the holder topurchase one share of common stock at an exercise price of $6.23. InMarch 2000, the Company notified holders of its outstanding Class BWarrants of its intention to redeem the warrants on April 27, 2000 (the"Redemption Date"). The Company received netproceeds of $17.5 million from the exercise of 2.9 million Class BWarrants.

Private Placement of Common Stock – April1999

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

Public Offering ofCommon Stock – October 1999

In October and November 1999,the Company completed the sale of 2,530,000 shares of common stock at$5.00 per share, in an underwritten public offering. The net proceedsfrom this offering were approximately $11.1 million. In conjunctionwith the offering, the underwriter was granted warrants to purchase220,000 shares of common stock at $6.00 per share, expiring October 25,2004. Through the expiration date, holders of warrants to purchase12,000 shares elected cashless exercises into 6,786 shares of commonstock and the remaining warrants to purchase 208,000 shares of commonstock expired.

Public Offering of Common Stock – August2001

In August 2001, the Company completed the sale of2,500,000 shares of common stock at $5.00 per share, in an underwrittenpublic offering. The net proceeds from this offering were approximately$11.4 million.

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 approximately $4.5 million.

Private Placement of CommonStock – September 2003

In September 2003, the Companycompleted a private placement of 6,475,000 shares of its common stockat $1.75 per share and warrants to purchase 6,475,000 shares of commonstock at $2.50 per 

48

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share. A warrant to purchase an additional100,000 shares of common stock at $2.50 per share was issued to theplacement agent and valued at approximately $172,000. All of thesewarrants expire on September  19, 2008. Beginning April 9, 2005,if the volume weighted average price of the common stock is at or above$3.50 per share for a period of 20 consecutive trading days, then thewarrants shall become callable by the Company upon written noticewithin 3 trading days of such period. The net proceeds, afterconsideration of cash offering costs, were approximately $10.4million.

Private Placement of Common Stock – February2004

In February 2004, the Company completed a privateplacement of 13,553,845 shares of its common stock at $2.60 per shareand warrants to purchase 3,388,463 shares of common stock at $3.25 pershare. A warrant to purchase an additional 300,000 shares of commonstock at $3.25 per share was issued to the placement agent and valuedat approximately $667,000. All of these warrants expire on February 11,2009. Beginning May 27, 2005, if the volume weighted average price ofthe common stock is at or above $4.875 per share for a period of 20consecutive trading days, then the warrants shall become callable bythe Company upon written notice within 10 trading days of such period.The net proceeds, after consideration of cash offering costs, wereapproximately $33 million.

Reserved Shares

As ofDecember 31, 2004, the Company has reserved 15,553,907 shares of itscommon stock for issuances related to potential future exercises ofwarrants outstanding and stock options outstanding and available forgrant (see Note 5), as well as potential future purchases of commonstock under the employee stock purchase plan (see Note 6). In addition,shares are reserved for the following but the number of reserved sharesis not fixed. The Company may from time to time sell up to an aggregateof $75 million of its common stock or warrants under an effective FormS-3 shelf registration statement including 10 million shares of commonstock issued in January 2005 (see Note 12). The Company also has astockholder rights plan whereby each share of its outstanding commonstock has the right to purchase one share of common stock as set forthin the rights agreement.

Warrants Outstanding

A summaryof the outstanding warrants to purchase shares of the Company'scommon stock, as described above, as of December 31, 2004 is asfollows:

|                                        |  |                                                                                  |           |                                                 |  |                 |        |        |  |        |           |        |  |  |
|----------------------------------------|--|----------------------------------------------------------------------------------|-----------|-------------------------------------------------|--|-----------------|--------|--------|--|--------|-----------|--------|--|--|
| Warrantsissued in connection with      |  | Number of Shares ofCommonStock to be Issued Upon Exercise of OutstandingWarrants |           | Exercise Price Per Share of OutstandingWarrants |  | Expiration Date |
| Privateplacement – June2003      |  |                                                                             | 1,192,349 |                                            |  | $               | 2.20   |   |  |   | 6/23/2008 |   |
| Privateplacement – September2003 |  |                                                                             | 4,439,313 |                                            |  | $               | 2.50   |   |  |   | 9/19/2008 |   |
| Privateplacement – February2004  |  |                                                                             | 3,567,309 |                                            |  | $               | 3.25   |   |  |   | 2/11/2009 |   |
| Total                                  |  |                                                                             | 9,198,971 |                                            |  |            |   |   |  |   |      |   |
|                                        |

5.    EmployeeStock Option Plans

The 2003 Stock Option Plan (the"2003 Option Plan") provides for the grantingof both incentive stock options and non-qualified stock options toemployees, officers, directors and consultants of the Company topurchase up to an aggregate of 2 million shares of common stock. Nooption may be granted under the 2003 Option Plan after September 9,2013. The Company's Amended and Restated 1993 Stock Option Plan(the "1993 Option Plan") expired on April 15,2003. As such, the Company no longer grants options under the 1993Option Plan, but stock options granted prior to the Plan'sexpiration remain outstanding under the plan and will continue to vestaccording to schedule.

Incentive options granted to employeesand officers under the 2003 Option Plan and 1993 Option Plan (the"Option Plans") vest in equal annualinstallments over periods ranging from one to four years 

49

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commencing no earlier than the firstanniversary of the date of grant, or earlier on change of control.Incentive options expire the earlier of: (i) ten years after the dateof grant, or (ii) three months after termination of service. Incentiveoptions which are not vested expire immediately upon termination ofservice. The exercise price for incentive options shall be equal to thefair market value of the common stock on the date of grant, except thatthe term of an incentive option granted to a stockholder owning morethan 10% of the outstanding voting power may not exceed fiveyears and its exercise price may not be less than 110% of thefair market value of the common stock on the date of grant.

TheOption Plans provide for the automatic grant of non-qualified stockoptions to purchase shares of common stock to directors of the Companywho are not employees or principal stockholders. Eligible directors aregranted an option to purchase 20,000 shares of common stock on the datesuch person is first elected or appointed a director. Further, on theday immediately following the date of each annual meeting ofstockholders, each eligible director, other than directors who receivedan initial director option within 180 days preceding such annualmeeting, is granted an option to purchase 15,000 shares of common stock(20,000 shares in the case of the Chairman of the Board) on the dayimmediately following the date of each annual meeting of stockholders.The exercise price for each share subject to a director option shall beequal to the fair market value of the common stock on the date ofgrant. Director options vest after one year under the 2003 Option Planand two years under the 1993 Option Plan, or earlier on a change ofcontrol. Generally, director options will expire the earlier of: (i) 10years after the date of grant, or (i) one year after termination ofservice as a director under the 2003 Stock Option Plan or 90 days aftertermination of service as a director under the 1993 Stock Option Plan.Director options which are not vested expire immediately upontermination of service as a director. Options granted to directorstotaled 115,000, 135,694 and 202,271 in 2004, 2003 and 2002,respectively.

Options outstanding outside the Option Plansrepresent 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.

A summary of theCompany's stock option activity under all option plans andrelated information is asfollows:

|                                 |  |                  |       |                               |  |                  |      |                               |  |                  |         |                               |  |        |         |        |  |        |         |         |  |        |         |        |  |  |
|---------------------------------|--|------------------|-------|-------------------------------|--|------------------|------|-------------------------------|--|------------------|---------|-------------------------------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|--------|--|--|
|                            |  | 2004             |       | 2003                          |  | 2002             |
|                            |  | Options(in000's) |       | Weighted-AverageExercisePrice |  | Options(in000's) |      | Weighted-AverageExercisePrice |  | Options(in000's) |         | Weighted-AverageExercisePrice |
| Outstanding at beginning ofyear |  |             | 4,497 |                          |  | $                | 4.68 |                          |  |             | 4,127   |                          |  | $      | 5.08    |   |  |   | 3,712   |    |  | $      | 6.85    |   |
| Granted                         |  |             | 746   |                          |  |             | 4.53 |                          |  |             | 518     |                          |  |   | 1.51    |   |  |   | 1,340   |    |  |   | 1.54    |   |
| Exercised                       |  |             | (35   | )                        |  |             | 2.21 |                          |  |             | (6      | )                        |  |   | 0.55    |   |  |   | (10     | )  |  |   | 3.07    |   |
| Forfeited                       |  |             | (24   | )                        |  |             | 2.85 |                          |  |             | (142    | )                        |  |   | 4.83    |   |  |   | (915    | )  |  |   | 7.10    |   |
| Expired                         |  |             | (10   | )                        |  |             | 5.98 |                          |  |             | – |                          |  |   | – |   |  |   | – |    |  |   | – |   |
| Outstandingat end ofyear        |  |             | 5,174 |                          |  | $                | 4.68 |                          |  |             | 4,497   |                          |  | $      | 4.68    |   |  |   | 4,127   |    |  | $      | 5.08    |   |
| Exercisableat end ofyear        |  |             | 3,955 |                          |  | $                | 4.93 |                          |  |             | 3,390   |                          |  | $      | 5.00    |   |  |   | 1,976   |    |  | $      | 6.35    |   |
|                                 |

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 all option plans as of December 31, 2004, is asfollows:

50

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|                        |  |                            |       |                                       |  |                               |     |        |  |                            |       |                               |  |        |        |        |  |        |       |        |  |        |       |        |  |  |
|------------------------|--|----------------------------|-------|---------------------------------------|--|-------------------------------|-----|--------|--|----------------------------|-------|-------------------------------|--|--------|--------|--------|--|--------|-------|--------|--|--------|-------|--------|--|--|
|                   |  | OptionsOutstanding         |       |                                  |  | OptionsExercisable            |
| RangeofExercise Prices |  | NumberOutstanding(in000's) |       | Weighted-AverageRemaining Life(Years) |  | Weighted-AverageExercisePrice |     |   |  | NumberExercisable(in000's) |       | Weighted-AverageExercisePrice |
| $0.36 -$0.78           |  |                       | 873   |                                  |  |                          | 7.4 |   |  | $                          | 0.57  |                          |  |   |   |   |  |   | 872   |   |  | $      | 0.57  |   |
| $1.57-$2.56            |  |                       | 511   |                                  |  |                          | 8.6 |   |  |                       | 1.63  |                          |  |   |   |   |  |   | 280   |   |  |   | 1.68  |   |
| $3.03-$3.98            |  |                       | 483   |                                  |  |                          | 6.5 |   |  |                       | 3.77  |                          |  |   |   |   |  |   | 279   |   |  |   | 3.69  |   |
| $4.00-$6.06            |  |                       | 2,560 |                                  |  |                          | 6.0 |   |  |                       | 5.08  |                          |  |   |   |   |  |   | 1,779 |   |  |   | 5.30  |   |
| $7.00-$9.88            |  |                       | 387   |                                  |  |                          | 5.9 |   |  |                       | 7.43  |                          |  |   |   |   |  |   | 385   |   |  |   | 7.43  |   |
| $12.25-$17.88          |  |                       | 360   |                                  |  |                          | 5.2 |   |  |                       | 14.48 |                          |  |   |   |   |  |   | 360   |   |  |   | 14.48 |   |
|                   |  |                       | 5,174 |                                  |  |                          | 6.5 |   |  | $                          | 4.68  |                          |  |   |   |   |  |   | 3,955 |   |  | $      | 4.93  |   |
|                        |

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").The Stock Purchase Plan permits eligible employees to purchase up to2,000 shares of common stock at the lower of 85% of the fairmarket value of the common stock at the beginning or at the end of eachsix-month offering period. 6,692 shares, 31,782 shares and 7,918 shareswere issued in 2004, 2003 and 2002, respectively, under the StockPurchase Plan.

7.    401(k) Savings Plan

The Companymakes matching contributions under a 401(k) Savings Plan in cash up toan annual maximum match of $1,000 per employee or, prior to January 1,2004, its common stock at the election of the employee. The expense forthe matching contribution was $23,000, $25,000 and $46,000 for theyears ended December 31, 2004, 2003 and 2002, respectively, and$197,000 for the period from May 1, 1994 (inception) through December31, 2004. 9,399 shares and 17,186 shares were issued in 2003 and 2002,respectively, for the stock matching contribution.

8.    Income Taxes

At December 31, 2004, the Company hasavailable for federal income tax purposes net operating losscarryforwards, subject to review by the Internal Revenue Service,totaling $97.4 million and a general business tax credit of $3.1million expiring in 2010 through 2024. The difference between thedeficit accumulated during the development stage for financialreporting purposes and the net operating loss carryforwards for taxpurposes is primarily due to certain costs which are not currentlydeductible for tax purposes and differences in accounting and tax basisresulting from the merger described in Note 1. The ability of theCompany to realize a future tax benefit from a portion of its netoperating loss carryforwards and general business credits may belimited due to changes in ownership of the Company.

51

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Significant components of the deferredincome taxes are as follows (inthousands):

|                                         |  |             |         |         |  |        |         |         |  |  |
|-----------------------------------------|--|-------------|---------|---------|--|--------|---------|---------|--|--|
|                                    |  | December31, |         |    |
|                                    |  | 2004        |         | 2003    |
|                                    |  |        |    |    |  |   |    |    |
| Operatinglosscarryforwards              |  | $           | 39,129  |    |  | $      | 32,557  |    |
| Generalbusiness tax creditcarryforwards |  |        | 3,072   |    |  |   | 2,614   |    |
| AMT taxcreditcarryforwards              |  |        | 10      |    |  |   | 10      |    |
| Contributions                           |  |        | 1,241   |    |  |   | 1,139   |    |
| Compensationrelated                     |  |        | 168     |    |  |   | 218     |    |
| Other                                   |  |        | 375     |    |  |   | 355     |    |
| Totaldeferred income taxasset           |  |        | 43,995  |    |  |   | 36,893  |    |
| Valuationallowance                      |  |        | (43,995 | )  |  |   | (36,893 | )  |
| Deferredincome tax asset, net           |  | $           | – |    |  | $      | – |    |
|                                         |

The valuation allowance increased by $7.1million and $6.5 million during 2004 and 2003, respectively.

Forthe year ended December 31, 2004, the Company recorded approximately$28,000 related to minimum state capital taxes paid.

9.    Commitments and Contingencies

Leases

TheCompany has non-cancelable operating leases for its facility and itslaboratory and office equipment expiring through 2007. Rental expenseunder the facility lease is recognized on a straight-line basis. Rentalexpense under the operating leases was approximately $298,000, $284,000and $288,000 for the years ended December 31, 2004, 2003 and 2002,respectively, and $2.4 million for the period from May 1, 1994(inception) through December 31, 2004. As of December 31, 2004, futureminimum lease payments due under non-cancelable operating leaseagreements with initial terms in excess of one year are $338,000 for2005, $289,000 for 2006 and $6,000 for 2007.

Agreements

Under the terms of an employment agreement, the Company is obligatedto pay its Chief Executive Officer ("CEO") aminimum annual salary of $412,000 through December 31, 2005. The CEO isalso eligible for a bonus of up to 50% of his base salary basedon the achievement of specified objectives. In the event theCEO's employment is terminated by the Company for any reasonother than cause or disability, or if the CEO terminates for goodreason as defined in the agreement, the Company is obligated to pay himtwo times the sum of his base salary plus his average annual bonus forthe prior two years and to continue payment of certain insurance costson his behalf.

The Company has entered into severance agreementswith its officers pursuant to which each of these officers would beentitled to certain payments in the event such officer loses hisemployment during the twelve-month period following a"change of control", as defined in theagreement. Specifically, the officer would be entitled to a lump sumseverance 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.

A former director of the Company is aparty to a Consulting and Finder's Agreement with the Companydated June 4, 1992, and amended February 17, 1995. This agreemententitles him to receive an annual fee equal to 10% of the netafter-tax profits of the Company attributable to the sale or licensingof products or technology related to TAPET® licensedpursuant to the Company's December 1995 license agreement withYale (refer to Note 3), until the cumulative total of such fees equals$3 million. Such fee continues to be payable notwithstanding thedirector's death until the $3 million has been paid. ThroughDecember 31, 2004, no amounts are due or have been paid under thisagreement.

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The Company has various commitmentsrelating to its research and license agreements (refer to Note3).

10.    Related Party Transactions

The Companyrecorded research and development expense of $200,000, $400,000 and$200,000 for the years ended December 31, 2004, 2003 and 2002,respectively, related to gifts to fund research through March 31, 2006at the laboratory headed by one of its directors, an affiliate of Yale.Included in the Company's current liabilities at December 31,2004, was $250,000 for the balance of the gifts to be paid in fiveequal quarterly installments through the first quarter of 2006.

In December 2001, the Company entered into a consulting agreementwith PS Capital LLC, an entity of which its CEO is a member. Theconsulting agreement provided that the Company would pay $100,800 to PSCapital LLC in exchange for consulting services provided in 2002consisting primarily of financial and investment advice as directed byits CEO. In connection with this agreement, its CEO's base salaryfor 2002 was reduced by $100,800.

11.    Selected QuarterlyFinancial Data (Unaudited)

The following is a summary ofunaudited selected quarterly financial data for the years endedDecember 31, 2004 and 2003 (in thousands, except per shareamounts):

|                                |  |         |        |          |  |        |        |         |  |        |        |         |  |        |        |         |  |        |         |         |  |  |
|--------------------------------|--|---------|--------|----------|--|--------|--------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--------|---------|---------|--|--|
|                           |  | Quarter |        | Year2004 |
| 2004                           |  | First   |        | Second   |  | Third  |        | Fourth  |  |
| Revenues                       |  | $       | 96     |     |  | $      | 125    |    |  | $      | 50     |    |  | $      | 4      |    |  | $      | 275     |    |
| Netloss                        |  |    | (3,258 | )   |  |   | (3,669 | )  |  |   | (3,906 | )  |  |   | (5,222 | )  |  |   | (16,055 | )  |
| Basicand diluted loss pershare |  |    | (0.07  | )   |  |   | (0.07  | )  |  |   | (0.07  | )  |  |   | (0.09  | )  |  |   | (0.30   | )  |
|                                |

|                                |  |         |        |          |  |        |        |         |  |        |        |         |  |        |        |         |  |        |         |         |  |  |
|--------------------------------|--|---------|--------|----------|--|--------|--------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--------|---------|---------|--|--|
| 2003                           |  | Quarter |        | Year2003 |
|                           |  | 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   | )  |
|                                |

12.    SubsequentEvent

In January 2005, the Company received net proceeds of $30million from a registered direct offering of 10 million shares of itscommon stock at $3.25 per share.

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

None.

ITEM9A.    Controls and Procedures

Controls andProcedures

Based on their evaluation as ofDecember  31, 2004, our Chief Executive Officer and ChiefFinancial Officer, have concluded that our disclosure controls andprocedures (as defined in Rules  13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended) were sufficientlyeffective to ensure that the information required to be disclosed inthe reports that we file or submit under the Securities Exchange Act of1934, as amended, is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and ExchangeCommission rules and forms.

Management's Report onInternal Control over Financial Reporting

Ourmanagement is responsible for establishing and maintaining adequateinternal control over financial reporting (as defined in Rule13a-15(f) under the Securities Exchange Act of 1934, as amended). Ourmanagement assessed the effectiveness of our internal control overfinancial reporting as of December  31, 2004. In making thisassessment, our management used the criteria set forth by the Committeeof Sponsoring Organizations of the Treadway Commission("COSO") in Internal Control-IntegratedFramework. Our management has concluded that, as of December  31,2004, our internal control over financial reporting is effective basedon these criteria. Our independent registered public accounting firm,Ernst & Young LLP, have issued an audit report on our assessment ofour internal control over financial reporting, which is includedherein.

There was no change in our internal control overfinancial reporting during the quarter ended December  31, 2004that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

All internal control systems, no matter how welldesigned, have inherent limitations. Therefore, even those systemsdetermined to be effective can provide only reasonable assurance withrespect to financial statement preparation and presentation.

ITEM 9B.    Other Information

None.

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PART III

ITEM10.    Directors and Executive Officers of theRegistrant

Executive Officers and Directors

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

|                           |  |                                              |  |  |  |  |
|---------------------------|--|----------------------------------------------|--|--|--|--|
| Name                      |  | Position                                     |
| AlanKessman               |  | Chief Executive Officer andDirector          |
| Howard B. Johnson         |  | President andChief Financial Officer         |
| Ivan King,Ph.D.           |  | Vice President—Research andDevelopment |
| Ann Cahill                |  | VicePresident—Clinical Development     |
| 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                                     |
| Mario Sznol,M.D.          |  | 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. |

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

Alan Kessman, age 58, has been ourChief Executive Officer since January 1999 and has served on our Boardof Directors since October 1998. Mr. Kessman also served as ourPresident from April 1999 to January 2004. Mr. Kessman is a partner ofPS Capital LLC, an international investment and management advisor, anda director of Comdial Corporation, a developer and marketer of voicecommunication solutions. From 1983 to 1998, Mr. Kessman was chairman,chief executive officer and president of Executone Information Systems,Inc., a developer and marketer of voice and data communicationssystems.

Howard B. Johnson, age 45, has been ourPresident since January 2004 and our Chief Financial Officer sinceMarch 2002. Mr. Johnson was a vice president and a consultant forNutrition 21, Inc., a nutri-ceutical company, from November 2001 untilMarch 2002. From May 1999 until February 2001, Mr. Johnson was chieffinancial officer of IBS Interactive, Inc. (now Digital Fusion, Inc.),an information technology services company. Mr. Johnson founded andfrom 1996 to 1999 was chairman and chief executive officer of MedWorksCorporation, a privately held medical device company. From 1983 to1993, Mr. Johnson was an investment banker at PaineWebber Group,Inc.

Ivan King, Ph.D., age 49, has been our VicePresident of Research and Development since January 2004. Dr. King wasour Vice President of Research from July 1998 to January 2004, SeniorDirector of Biology from April 1997 to July 1998 and Director ofBiology from October 1995 to April 1997. From 1990 to 1995, Dr. Kingwas a section leader in the department of tumor biology atSchering-Plough Research Institute in charge of the cell biology and invivo biology groups where he was responsible for identifying targets,developing high throughput assays, evaluating in vitro and in vivoactivities of drug candidates and recommending candidates for clinicaldevelopment. Dr. King's first industrial position was as a seniorresearch scientist at Bristol-Myers Squibb Company.

Ann LeeCahill age 44, has been our Vice President of Clinical Developmentsince October 2004. Ms. Cahill was our Senior Director of ClinicalAffairs from October 2003 to October 2004 and Director of ClinicalAffairs from January 2002 to October 2003. From 1997 to 2002, Ms.Cahill was a member of the project management group of Schering-PloughCorporation, including leadership roles in clinical affairs forhepatitis and medical oncology. From 1985 to 1997, Ms. Cahill was aphysician associate in a medical oncology practice.

55

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Terrence W. Doyle, Ph.D., age 62,has been our Vice President and Chief Scientific Officer since January2004. Prior to that, Dr. Doyle was our Vice President of Research andDevelopment since the merger with OncoRx, Inc. and served in the samecapacity for OncoRx, Inc. from January 1994 until the merger. From 1967to 1993, Dr. Doyle was an employee of the Bristol-Myers Squibb Company,including from 1990 to 1993 an executive director with Bristol-MyersSquibb Company. Dr. Doyle is the original holder of 47 U.S. patents foranti-infective, anti-inflammatory and anti-tumor agents and the authorof over 170 published research articles and abstracts on cancerchemotherapy.

William R. Miller, age 76, has beenChairman of our Board since April 1995. From February 1995 until April1995, Mr. Miller was Chairman of the Board of OncoRx, Inc., whichmerged into the Company (then known as MelaRx, Inc.) in April 1995. Mr.Miller is currently a director of ImClone Systems, Inc., abiotechnology company. From 1964 until his retirement in 1991, Mr.Miller was employed by Bristol-Myers Squibb Company in variouspositions, including vice chairman of the board commencing in 1985.

Stephen K. Carter, M.D., age 67, has been a director since2001. Dr. Carter is a director of Cytogen Corp., Alfacell Corp. andEmisphere Technologies Inc. (each a biotechnology company). From 1998to 2000, Dr. Carter was senior vice president, clinical and regulatoryaffairs of SUGEN, Inc. (subsequently acquired by Pharmacia &Upjohn, Inc.). From 1995 to 1996, Dr. Carter was senior vice president,research and development with Boehringer Ingelheim Pharmaceuticals,Inc. and from 1982 to 1995 held various positions with Bristol-MyersSquibb Company, including senior vice president, worldwide clinicalresearch and development.

Frank T. Cary, age 84, has beena director since 1995. Mr. Cary is a director of Celgene Corporation (abiopharmaceutical company), Cygnus, Inc. (a developer and marketer ofglucose monitoring systems), ICOS Corporation (a biopharmaceuticalcompany), Lincare Holdings Inc. (a provider of respiratory therapyservices) and Lexmark International, Inc. (a computer peripheralscompany). From 1973 to 1981, Mr. Cary was chairman of the board andchief executive officer of IBM.

Charles K. MacDonald, age46, has been a director since 2000. Mr. MacDonald is the principal andfounder of Morgandane Management Corp., an investment advisory firm,since 1997. Mr. MacDonald also serves as a consultant to ElliottManagement Corp. From 1987 to 1995, Mr. MacDonald was an analyst and,later, portfolio manager at Stonington Management Corp. (an investmentcompany now known as Elliott Management Corp.).

Alan C.Sartorelli, Ph.D., age 73, has been a director since 1995. Dr.Sartorelli has been an Alfred Gilman Professor of Pharmacology at YaleUniversity School of Medicine since 1967 and Chairman of our ScientificAdvisory Board since April 1995. Dr. Sartorelli was Chairman of theOncoRx, Inc. Scientific Advisory Board from May 1993 to April 1995 anddirector of Yale Comprehensive Cancer Center from 1984 to 1993.

Mario Sznol, M.D., age 47, has been a director since October2004. Dr. Sznol is a member of the Faculty, Medical Oncology at YaleUniversity School of Medicine. Dr. Sznol was our Vice President ofClinical Affairs from September 1999 to October 2004. From 1994 to1999, 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.

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.

56

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Audit Committee Financial Expert

Our board of directors has determined that Mr. Miller who serves onits audit committee qualifies as "audit committeefinancial expert" (as that term is defined in the rulespromulgated by the Securities and Exchange Commission pursuant to theSarbanes-Oxley Act of 2002). Our board of directors has aseparately-designated standing audit committee established inaccordance with Section 3(a)(58)A of the Securities Exchange Act of1934 and has also determined that all members of the audit committeeare "independent", as that term is used inItem 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of1934. Currently, our audit committee members are William R. Miller andFrank T. Cary.

Section 16(a) Beneficial Ownership ReportingCompliance

Section 16(a) of the Securities Exchange Act of 1934requires our executive officers and directors, and persons whobeneficially own more than ten percent of our Common Stock, to fileinitial reports of ownership and reports of changes in ownership withthe United States Securities and Exchange Commission (SEC) and theNASDAQ Stock Market. Executive officers, directors and greater than tenpercent beneficial owners are required by the SEC to furnish us withcopies of all Section 16(a) forms they file.

Based upon a reviewof the forms furnished to us and written representations from ourexecutive officers and directors, we believe that during fiscal 2004all Section 16(a) filing requirements applicable to our executiveofficers, directors and greater than ten percent beneficial owners werecomplied with.

Code of Ethics

We have adopted a Code ofEthics and Business Conduct applying to our directors, officers andemployees, as well as a Code of Ethics that applies to our chiefexecutive officer and senior financial officers. The codes have beenposted on our website, www.vionpharm.com.

ITEM11.    Executive Compensation

The following tablesets forth information concerning all cash and non-cash compensationawarded to, earned by or paid to our Chief Executive Officer, to ourfour most highly compensated current executive officers and to oneformer executive officer during the 2004 fiscal year for servicesrendered to us in all capacities during the three fiscal years endedDecember 31, 2004.

57

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|                                                     |  |        |      |                    |  |                       |         |                         |  |                                          |         |                          |  |        |         |         |  |        |         |        |  |        |         |            |  |        |
|-----------------------------------------------------|--|--------|------|--------------------|--|-----------------------|---------|-------------------------|--|------------------------------------------|---------|--------------------------|--|--------|---------|---------|--|--------|---------|--------|--|--------|---------|------------|--|--------|
|                                                |  |   |      | AnnualCompensation |  | Long-TermCompensation |
| Name and PrincipalPosition                          |  | Year   |      | Salary($)          |  | Bonus($)              |         | OtherAnnualCompensation |  | SecuritiesUnderlyingOptions/SARs(14) (#) |         | AllOther Compensation($) |
| Alan Kessman                                        |  |   | 2004 |               |  | $                     | 412,000 | (11)               |  | $                                        | 100,000 |                     |  |   | (3      | )  |  |   | 150,000 |   |  | $      | 1,000   | (8)   |
| —   Chief Executive Officer(1)                |  |   | 2003 |               |  | $                     | 412,000 | (2)                |  |                                     | — |                     |  |   | (3      | )  |  |   | 80,000  |   |  | $      | 14,200  | (4)   |
|                                                |  |   | 2002 |               |  | $                     | 412,000 | (5)                |  |                                     | — |                     |  |   | (3      | )  |  |   | 150,000 |   |  | $      | 15,010  | (6)   |
| HowardB.Johnson                                     |  |   | 2004 |               |  | $                     | 250,000 | (11)               |  | $                                        | 25,001  |                     |  |   | (3      | )  |  |   | 100,000 |   |  |   | — |       |
| —  President  and ChiefFinancial              |  |   | 2003 |               |  | $                     | 200,000 | (2)                |  |                                     | — |                     |  |   | (3      | )  |  |   | 60,000  |   |  |   | — |       |
|       Officer(10)     |  |   | 2002 |               |  | $                     | 200,000 | (9)                |  |                                     | — |                     |  |   | (3      | )  |  |   | 422,499 |   |  |   | — |       |  |   |   |   |
| IvanKing,Ph.D.                                      |  |   | 2004 |               |  | $                     | 208,000 | (11)               |  | $                                        | 20,800  |                     |  |   | (3      | )  |  |   | 50,000  |   |  | $      | 1,000   | (8)   |
| —  Vice President, Researchand                |  |   | 2003 |               |  | $                     | 200,000 | (2)                |  |                                     | — |                     |  |   | (3      | )  |  |   | 40,000  |   |  | $      | 1,000   | (8)   |
|       Development     |  |   | 2002 |               |  | $                     | 200,000 | (9)                |  |                                     | — |                     |  |   | (3      | )  |  |   | 65,000  |   |  | $      | 1,500   | (8)   |
| AnnLeeCahill                                        |  |   | 2004 |               |  | $                     | 184,800 |                    |  | $                                        | 15,400  |                     |  |   | (3      | )  |  |   | 105,000 |   |  | $      | 1,000   | (8)   |
| —  Vice President,Clinical                    |  |   | 2003 |               |  |                  | — |                    |  |                                     | — |                     |  |   | — |    |  |   | — |   |  |   | — |       |
|       Development(12) |  |   | 2002 |               |  |                  | — |                    |  |                                     | — |                     |  |   | — |    |  |   | — |   |  |   | — |       |
| TerrenceW. Doyle,Ph.D.                              |  |   | 2004 |               |  | $                     | 224,973 | (11)               |  | $                                        | 4,500   |                     |  |   | (3      | )  |  |   | — |   |  | $      | 1,000   | (8)   |
| —  Vice President, ChiefScientific            |  |   | 2003 |               |  | $                     | 216,320 | (2)                |  |                                     | — |                     |  |   | (3      | )  |  |   | 10,000  |   |  | $      | 1,500   | (8)   |
|       Officer(7)      |  |   | 2002 |               |  | $                     | 216,320 | (9)                |  |                                     | — |                     |  |   | (3      | )  |  |   | 38,415  |   |  | $      | 1,500   | (8)   |
| MarioSznol, M.D.                                    |  |   | 2004 |               |  | $                     | 234,600 | (11)               |  | $                                        | 7,819   |                     |  |   | (3      | )  |  |   | — |   |  | $      | 42,893  | (13)  |
| —  Vice President,Clinical                    |  |   | 2003 |               |  | $                     | 225,576 | (2)                |  |                                     | — |                     |  |   | (3      | )  |  |   | 50,000  |   |  | $      | 1,000   | (8)   |
|      Affairs(14)           |  |   | 2002 |               |  | $                     | 225,576 | (9)                |  |                                     | — |                     |  |   | (3      | )  |  |   | 65,936  |   |  | $      | 1,500   | (8)   |
|                                                     |

|  |
|--|
|  |  |
|  |

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

|     |                                                                                                                                                                                                                                                                                                                          |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (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; Mr. Johnson — $3,889; Dr. King — $3,889;Dr. Doyle — $4,203; 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. Includes $100,333 of salary and consultingpayments to PS Capital deferred as part of the realignment plan weannounced in May 2002. In August 2003, we reinstated the full salariesof our named executive officers and repaid the salary deferrals overthe twelve month period ended July 31, 2004. |

|     |                                                                                                                                       |
|-----|---------------------------------------------------------------------------------------------------------------------------------------|
| (6) | Consists of life and disability insurance paymentsof $13,510 and matching contribution to the Company's 401(k)Savings Plan of $1,500. |

|     |                                                                                                                                                                                                                                           |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (7) | In January 2004, weentered into a consulting agreement with Gemin X, Inc. (Gemin X), underwhich Dr. Doyle renders consulting services to Gemin X. Gemin X paid us$213,325 for Dr. Doyle's consulting for the year ended December31, 2004. |

|     |                                                                        |
|-----|------------------------------------------------------------------------|
| (8) | Consists of matching contributionto the Company's 401(k) Savings Plan. |

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

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

|      |                                                                                                                                                                                                                                                                              |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (11) | Excludes 2004 payments of salary deferrals in2002-2003 in connection with our realignment plan announced in May 2002as follows: Mr. Kessman — $114,607; Mr. Johnson — $27,222;Dr. King — $27,222; Dr. Doyle — $29,440; and Dr. Sznol— $30,704. |

|      |                                                               |
|------|---------------------------------------------------------------|
| (12) | Ms. Cahill was named anexecutive officer on October 15, 2004. |

|      |                                                                                                                            |
|------|----------------------------------------------------------------------------------------------------------------------------|
| (13) | Consists of payment of accrued vacation of $41,893and matching contribution to the Company's 401(k) Savings Plan of$1,000. |

|      |                                                                                                                                                                            |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (14) | Dr. Sznol resigned on October 15,2004 and joined our Board of Directors. He was granted an initialdirector option on October 15, 2004. See "— DirectorCompensation." |

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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, 2004 to the persons named in theSummary CompensationTable:

|                        |  |                                                        |         |                                                               |  |                                     |         |                    |  |                                                                                              |         |        |  |            |  |        |         |        |  |        |           |        |  |        |        |        |
|------------------------|--|--------------------------------------------------------|---------|---------------------------------------------------------------|--|-------------------------------------|---------|--------------------|--|----------------------------------------------------------------------------------------------|---------|--------|--|------------|--|--------|---------|--------|--|--------|-----------|--------|--|--------|--------|--------|
| Name (a)               |  | Number of Securities Underlying OptionsGranted (1) (b) |         | % of TotalOptions Granted to Employees in Fiscal Period(2)(c) |  | Exercise of Base Price($/Sh) (3)(d) |         | Expiration Date(e) |  | Potential Realizable Value at Assumed Annual Ratesof Stock Price Appreciation for OptionTerm |
| 5%($)(f)               |  | 10% ($)(g)                                             |         |
| AlanKessman            |  |                                                   | 150,000 |                                                          |  |                                | 20.1    | %             |  | $                                                                                            | 4.70    |   |  | 12/8/2014  |  | $      | 443,371 |   |  | $      | 1,123,588 |   |  |   |   |   |
| HowardB.Johnson        |  |                                                   | 100,000 |                                                          |  |                                | 13.4    | %             |  | $                                                                                            | 4.70    |   |  | 12/8/2014  |  | $      | 295,580 |   |  | $      | 749,059   |   |  |   |   |   |
| IvanKing,Ph.D.    |  |                                                   | 50,000  |                                                          |  |                                | 6.7     | %             |  | $                                                                                            | 4.70    |   |  | 12/8/2014  |  | $      | 147,790 |   |  | $      | 374,529   |   |  |   |   |   |
| AnnLeeCahill           |  |                                                   | 55,000  |                                                          |  |                                | 7.4     | %             |  | $                                                                                            | 4.31    |   |  | 10/15/2014 |  | $      | 149,079 |   |  | $      | 377,797   |   |  |   |   |   |
|                   |  |                                                   | 50,000  |                                                          |  |                                | 6.7     | %             |  | $                                                                                            | 4.70    |   |  | 12/8/2014  |  | $      | 147,790 |   |  | $      | 374,529   |   |  |   |   |   |
| TerrenceW. Doyle,Ph.D. |  |                                                   | — |                                                          |  |                                | — |               |  |                                                                                         | — |   |  | —    |  |   | — |   |  |   | —   |   |  |   |   |   |
| MarioSznol, M.D.(4)    |  |                                                   | — |                                                          |  |                                | — |               |  |                                                                                         | — |   |  | —    |  |   | — |   |  |   | —   |   |  |   |   |   |
|                        |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                                    |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Mr.Kessman's option grant vests 100% on December 8, 2005. Ms.Cahill's option grant for 55,000 shares of common stock vests25% on October 15, 2005, 50% on October 15, 2006,75% on October 15, 2007 and 100% on October 15, 2008. Allother option grants vest 25% on December 8, 2005, 50% onDecember 8, 2006, 75% on December 8, 2007 and 100% onDecember 8, 2008. |

|     |                                                                                                                                                |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Computed based on anaggregate of 745,700 shares issuable upon exercise of options grantedto employees during the year ended December 31, 2004. |

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

|     |                                                                                                                                                                            |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | Dr. Sznol resigned on October 15,2004 and joined our Board of Directors. He was granted an initialdirector option on October 15, 2004. See "— DirectorCompensation." |

Aggregated Option Exercises inLast Fiscal Year and Fiscal Year-End Option Values

Thefollowing table sets forth information with respect to stock optionsexercised in 2004 and unexercised stock options held by the personsnamed in the Summary Compensation Table at December 31,2004.

|                         |  |                                   |         |                      |  |                                                                          |         |                                                                     |  |        |           |        |  |        |         |        |  |   |         |        |  |   |         |        |  |  |
|-------------------------|--|-----------------------------------|---------|----------------------|--|--------------------------------------------------------------------------|---------|---------------------------------------------------------------------|--|--------|-----------|--------|--|--------|---------|--------|--|---|---------|--------|--|---|---------|--------|--|--|
| Name (a)                |  | Shares Acquired on Exercise(#)(b) |         | ValueRealized ($)(c) |  | Number of Securities UnderlyingUnexercised Optionsat Fiscal Year-End (#) |         | Value of UnexercisedIn- the-Money Options at Fiscal Year-End ($)(1) |
| Exercisable(d)          |  | Unexercisable(e)                  |         | Exercisable(f)       |  | Unexercisable(g)                                                         |         |
| AlanKessman             |  |                              | — |                 |  | $                                                                        | — |                                                                |  |   | 1,352,927 |   |  |   | 190,000 |   |  | $ | 788,340 |   |  | $ | 124,800 |   |
| HowardB. Johnson        |  |                              | — |                 |  | $                                                                        | — |                                                                |  |   | 267,499   |   |  |   | 315,000 |   |  | $ | 504,296 |   |  | $ | 266,550 |   |
| IvanKing, Ph.D.         |  |                              | — |                 |  | $                                                                        | — |                                                                |  |   | 311,215   |   |  |   | 86,667  |   |  | $ | 347,944 |   |  | $ | 83,201  |   |
| AnnLee Cahill           |  |                              | — |                 |  | $                                                                        | — |                                                                |  |   | 30,833    |   |  |   | 119,167 |   |  | $ | 93,199  |   |  | $ | 41,701  |   |
| TerrenceW. Doyle, Ph.D. |  |                              | — |                 |  | $                                                                        | — |                                                                |  |   | 217,200   |   |  |   | 16,667  |   |  | $ | 191,391 |   |  | $ | 20,801  |   |
| MarioSznol, M.D.(2)     |  |                              | — |                 |  | $                                                                        | — |                                                                |  |   | 389,669   |   |  |   | 44,584  |   |  | $ | 324,973 |   |  | $ | 104,002 |   |
|                         |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                              |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Computedbased upon the difference between the closing price of theCompany's common stock on December 31, 2004 ($4.69) and theexercise price. |

|     |                                                                                                                                                                                          |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Dr. Sznol resigned onOctober 15, 2004 and joined our Board of Directors. Excludes an initialdirector option granted to Dr. Sznol on October 15, 2004. See"— DirectorCompensation." |

59

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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 writing to extend the expiration date ofthe employment agreement to the two-year anniversary of the change ofcontrol.

Severance Agreements

We entered into severanceagreements with Howard B. Johnson, our President and Chief FinancialOfficer, Dr. Ivan King, our Vice President of Research and Development,Ann Lee Cahill, our Vice President of Clinical Development and Dr.Terrence W. Doyle, our Vice President and Chief Scientific Officer,pursuant to which each of these officers would be entitled to certainpayments in the event such officer loses his employment during thetwelve-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.

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 director $1,000 in cash or stock options for each suchmeeting attended. Directors received cash for each such meetingattended in 2004. Directors who are not employees or principalstockholders are also entitled to automatic grants of options under our2003 Stock Option Plan. 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 one year or earlier on a change of control.Generally, director options will expire the earlier of: (i) 10 yearsafter the date of grant, or (ii) one year after termination of serviceas a director. Director options which are not vested expire immediatelyupon termination of service as a director. During 2004, Mr. MacDonald,Mr.  Cary, Dr.  Carter, Dr. Sartorelli and a formerdirector were each granted a ten-year option to purchase 15,000 sharesof common stock and Mr. Miller was granted a ten-year option topurchase 20,000 shares of common stock at an exercise price of $4.04.Dr. Sznol was granted a ten-year option to purchase 20,000 shares ofcommon stock at an exercise price of $4.31 when he was first elected adirector on October 15, 2004.

60

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During the year, we modified certainoptions to Dr. Sznol upon his termination as an employee andappointment to the Board of Directors. The options were modified, asallowed under the stock option plan agreements, to permit retentionupon termination of employment, in connection with his on-going serviceto the Company as a non-employee director.

CompensationCommittee Interlocks and Insider Participation

There are noCompensation Committee interlocks or insider participation.

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, 2004.

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.

The Company'sexecutive compensation program historically has emphasized the use ofincentive-based compensation to reward the Company's executiveofficers and members of senior management for individual contributionsto the achievement of the Company's business, research andproduct development objectives established by the Board of Directors.The Company uses stock options to provide an incentive for asubstantial number of its officers and employees, including members ofmanagement, and to reward such officers and employees for achieving theCompany's business objectives. The Company believes its incentivecompensation plan rewards management when the Company and itsstockholders have benefited from achieving the Company's businessobjectives and targeted clinical, research and development objectives,all of which the Compensation Committee feels will dictate, in largepart, the Company's future operating results. The CompensationCommittee believes that its policy of compensating officers andemployees with incentive-based compensation fairly and adequatelycompensates those individuals in relation to their responsibilities,capabilities and contribution to the Company, and in a manner that iscommensurate with compensation paid by companies of comparable size andat a comparable stage of development within the Company'sindustry.

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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. Formost of 2003, the Company's executives deferred a portion oftheir base salary until the Company could raise funds for operations.In August 2003, the Company reinstated the full salaries for itsexecutive officers and repaid the deferrals amounts during the twelvemonth period ended July 31, 2004. |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | 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. The Company's 2003 Stock Option Plan allows theBoard of Directors or the Compensation Committee to grant stock optionsto executive officers and employees for the purchase of shares of theCompany's Common Stock. Under the terms of the 2003 Stock OptionPlan, the Board of Directors and the Compensation Committee haveauthority to select the executive officers and employees who will begranted stock options and to determine the timing, pricing and numberof stock options to be awarded. The Compensation Committee believesthat the stock option grants reward executive officers only to theextent that stockholders have benefited from increases in the value ofthe Company's Common Stock. |

Compensation of the ChiefExecutive Officer.    The Company has entered into an executiveemployment agreement with Mr. Kessman. For material terms of thisexecutive employment agreement see "EmploymentAgreements". The Compensation Committee believes thatthe monthly compensation under the agreement adequately and fairlycompensates Mr. Kessman in relation to his responsibilities,capabilities, contributions and dedication to the Company and securesfor the Company the benefit of his leadership, management and financialskills and capabilities. Moreover, the Compensation Committee believesthat the salary and other benefits are reasonable in relation to theresponsibilities, capabilities, contributions and dedication of Mr.Kessman to the Company and are in line with the compensation earned bychief executive officers employed by companies of comparable size andstage of development within the Company's industry.

TaxDeductibility.    Section 162(m) of the Internal Revenue Code of1986, as amended, generally denies publicly-held corporations a federalincome tax deduction for compensation exceeding $1,000,000 paid toNamed Executive Officers, excluding performance-based compensation.Through December 31, 2004, this provision has not limited our abilityto deduct executive compensation, but the Compensation Committee willcontinue to monitor the potential impact of Section 162(m) on ourability to deduct executive compensation.

Conclusion.    The Compensation Committee believes that theconcepts discussed above further the stockholder interests because asignificant part of executive compensation is based upon the Companyachieving its product development and other specific goals set by theBoard of Directors. At the same time, the Compensation Committeebelieves that the program encourages responsible management of theCompany in the short-term. The Compensation Committee regularlyconsiders plan design so that the total program is as effective aspossible in furthering stockholder interests.

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The Compensation Committee bases itsreview on the experience of its own members, on information requestedfrom management personnel, and on discussions with and informationcompiled by various independent consultants retained by theCompany.

|  | Submitted by theCompensation Committee: |
|--|-----------------------------------------|

|  | Frank T.Cary, ChairmanCharles K. MacDonaldWilliam R.Miller |
|--|------------------------------------------------------------|

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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 Certain BeneficialOwners and Management and Related Stockholder Matters |

Thefollowing table sets forth information as of March 1, 2005 (except asotherwise noted in the footnotes) regarding the beneficial ownership(as defined by the Securities and Exchange Commission (the"SEC")) of our Common Stock: (i) each personknown by us to own beneficially more than five percent of ouroutstanding Common Stock; (ii) each of our current directors; (iii)each executive officer named in the Summary Compensation Table; and(iv) all of our current directors and executive officers as a group.Except as otherwise specified, the named beneficial owner has the solevoting and investment power over the shares listed and the address ofeach beneficial owner is c/o Vion Pharmaceuticals, Inc., 4 SciencePark, New Haven, Connecticut 06511.

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|                                                                                      |  |                                    |           |                                             |  |        |  |  |  |  |
|--------------------------------------------------------------------------------------|--|------------------------------------|-----------|---------------------------------------------|--|--------|--|--|--|--|
| Directors and Officers                                                               |  | Number ofShares Beneficially Owned |           | Percent of OutstandingShares of CommonStock |
| Stephen K. Carter,M.D.                                                               |  |                               | 67,051    | (1)                                    |  | *      |
| FrankT. Cary                                                                         |  |                               | 169,165   | (2)                                    |  | *      |
| Charles K.MacDonald                                                                  |  |                               | 82,051    | (3)                                    |  | *      |
| William R.Miller                                                                     |  |                               | 361,359   | (4)                                    |  | *      |
| Alan C.Sartorelli, Ph.D.                                                             |  |                               | 506,713   | (5)                                    |  | *      |
| MarioSznol, M.D.                                                                     |  |                               | 397,161   | (6)                                    |  | *      |
| AlanKessman                                                                          |  |                               | 1,401,574 | (7)                                    |  | 2.1%   |
| HowardB. Johnson                                                                     |  |                               | 354,999   | (8)                                    |  | *      |
| Ivan King,Ph.D.                                                                      |  |                               | 323,659   | (9)                                    |  | *      |
| Ann LeeCahill                                                                        |  |                               | 44,290    | (10)                                   |  | *      |
| Terrence W.Doyle, Ph.D.                                                              |  |                               | 456,893   | (11)                                   |  | *      |
| Alldirectors and executive officers as a group (11persons)                           |  |                               | 4,164,915 | (12)                                   |  | 6.0%   |
|                                                                                 |  |                               |      |                                        |  |   |
| OtherBeneficial Owners                                                               |  |                               |      |                                        |  |   |
| RajRajaratnam                                                                        |  |
| Galleon Management,L.L.C.                                                            |  |
| Galleon Management,L.P.                                                              |  |
| Galleon Advisors,L.L.C.                                                              |  |
| Galleon Capital Partners,L.P.                                                        |  |
| Galleon Captains Offshore,Ltd.                                                       |  |
| Galleon Healthcare Partners,L.P.                                                     |  |
| Galleon Healthcare Offshore, Ltd. 135 East57th Street, 16th Floor New York, NY 10022 |  |                               | 3,979,671 | (13)                                   |  | 6.0%   |
|                                                                                      |

|  |
|--|
|  |  |
|  |

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

|     |                                                          |
|-----|----------------------------------------------------------|
| (1) | Reflects 67,051 sharesissuable upon exercise of options. |

|     |                                                           |
|-----|-----------------------------------------------------------|
| (2) | Reflects106,447 shares issuable upon exercise of options. |

|     |                                                          |
|-----|----------------------------------------------------------|
| (3) | Reflects 82,051 shares issuable upon exercise ofoptions. |

|     |                                                           |
|-----|-----------------------------------------------------------|
| (4) | Reflects 171,953 shares issuableupon exercise of options. |

|     |                                                                                                                                                                                              |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (5) | Reflects 190,874shares beneficially owned by Dr. Sartorelli's wife, as to whichDr. Sartorelli disclaims beneficial ownership. Also reflects 106,508shares issuable upon exercise of options. |

|     |                                                           |
|-----|-----------------------------------------------------------|
| (6) | Reflects 389,669 shares issuable upon exercise ofoptions. |

|     |                                                                                                                                                             |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (7) | Reflects 12,756 shares held by afamily trust of which Mr. Kessman is a controlling member. Alsoreflects 1,352,927 shares issuable upon exercise of options. |

|     |                                                           |
|-----|-----------------------------------------------------------|
| (8) | Reflects 354,999 shares issuable upon exercise ofoptions. |

|     |                                                           |
|-----|-----------------------------------------------------------|
| (9) | Reflects 311,215 shares issuableupon exercise of options. |

|      |                                                          |
|------|----------------------------------------------------------|
| (10) | Reflects 34,583shares issuable upon exercise of options. |

|      |                                                                                                                                                                      |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (11) | Reflects 43,400 shares held by Dr. Doyle'swife, as to which Dr. Doyle disclaims beneficial ownership. Alsoreflects 217,200 shares issuable upon exercise of options. |

|      |                                                             |
|------|-------------------------------------------------------------|
| (12) | Reflects 3,194,603 shares issuable upon exercise ofoptions. |

|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (13) | Based on data set forth in anamendment No. 1 to Schedule 13G filed with the SEC on February 14,2005. Of the shares of our common stock being reported as beneficiallyowned by: (i) 3,979,671 are held by Raj Rajaratnam; (ii) 3,979,671shares are held by Galleon Management, L.L.C.; (iii) 3,979,671 sharesare held by Galleon Management, L.P.; (iv) 507,950 are held by GalleonAdvisors, L.L.C.; (v) 200,600 are held by Galleon Captains Partners,L.P.; (vi) 1,360,748 are held by Galleon Captains Offshore, Ltd.; (vii)307,350 are held by Galleon Healthcare Partners, L.P.; and (viii)2,110,973 shares are held by Galleon Healthcare Offshore, Ltd. Pursuantto the partnership agreement of Galleon Captains Partners, L.P. andGalleon Healthcare Partners, L.P., Galleon Management, L.P. and GalleonAdvisors, L.L.C. share all investment and |

65

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | voting power with respect to the securitiesheld by Galleon Captains Partners, L.P. and Galleon HealthcarePartners, L.P. Pursuant to an investment management agreement, GalleonManagement, L.P. has all investment and voting power with respect tothe securities held by Galleon Captains Offshore, Ltd. and GalleonHealthcare Offshore, Ltd. Raj Rajaratnam, as the managing member ofGalleon Management, L.L.C., controls Galleon Management, L.L.C., which,as the general partner of Galleon Management, L.P., controls GalleonManagement, L.P. Raj Rajaratnam, as the managing member of GalleonAdvisors, L.L.C., also controls Galleon Advisors, L.L.C. The sharesreported herein by Raj Rajaratnam, Galleon Management, L.P., GalleonManagement, L.L.C., and Galleon Advisors, L.L.C. may be deemedbeneficially owned as a result of the purchase of such shares byGalleon Captains Partners, L.P., Galleon Captains Offshore, Ltd.,Galleon Healthcare Partners, L.P., and Galleon Healthcare Offshore,Ltd., as the case may be. Each of Raj Rajaratnam, Galleon Management,L.P., Galleon Management, L.L.C., and Galleon Advisors, L.L.C.disclaims any beneficial ownership of the shares reported herein,except to the extent of any pecuniary interest therein. |

Equity Compensation Plan Information

The following tableprovides information about shares of our common stock that may beissued upon the exercise of options and rights under all of theCompany's existing equity compensation plans as of December 31,2004.

|                                                          |  |                                                                              |            |                                                        |  |                                                                                                        |        |         |  |        |         |        |  |  |
|----------------------------------------------------------|--|------------------------------------------------------------------------------|------------|--------------------------------------------------------|--|--------------------------------------------------------------------------------------------------------|--------|---------|--|--------|---------|--------|--|--|
| Plan Category                                            |  | Number of SharesofCommon Stock tobe Issued UponExerciseofOutstanding Options |            | Weighted-AverageExercise PriceofOutstanding Options($) |  | Number of Shares ofCommon Stock Remaining Available for Future Issuance UnderEquity Compensation Plans |
| Plansapproved bystockholders:                            |  |                                                                         |       |                                                   |  |                                                                                                   |   |    |  |   |    |   |
| 2003Stock OptionPlan                                     |  |                                                                         | 1,218,093  |                                                   |  | $                                                                                                      | 3.38   |    |  |   | 781,907 |   |
| 1993Stock Option Plan(1)                                 |  |                                                                         | 3,007,641  |                                                   |  | $                                                                                                      | 4.90   |    |  |   | — |   |
| 2000Stock PurchasePlan                                   |  |                                                                         | (2         | )                                                 |  |                                                                                                   | (2     | )  |  |   | 399,151 |   |
|                                                     |  |
| Equitycompensation plans not approved by stockholders(3) |  |                                                                         | 10,147,115 |                                                   |  | $                                                                                                      | 3.02   |    |  |   | — |   |
|                                                          |

|  |
|--|
|  |  |
|  |

|     |                                                                                                   |
|-----|---------------------------------------------------------------------------------------------------|
| (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 warrants topurchase 1,192,349 shares of our common stock at $2.20 per share issuedto investors in connection with our June 2003 private placementexpiring on June 23, 2008. We registered the resale of these shares bythe investors pursuant to a registration statement on FormS-3; |

|  |     |                                                                                                                                                                                                                                                                                                                                         |
|--|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (b) | Outstanding warrants topurchase 4,439,313 shares of our common stock at $2.50 per share issuedto investors and a placement agent in connection with our privateplacement expiring on September 19, 2008.  We registered theresale of these shares by the investors and placement agent pursuant toa registration statement on Form S-3; |

|  |     |                                                                                                                                                                                                                                                                                                                                            |
|--|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (c) | Outstanding warrants to purchase 3,567,309shares of our common stock at $3.25 per share issued to investors and aplacement agent in connection with our private placement expiring onFebruary 11, 2009.  We registered the resale of these shares bythe investors and placement agent pursuant to a registration statementon Form S-3; and |

|  |     |                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | (d) | Outstandingoptions to purchase 948,144 shares of our common stock granted underour Senior Executive Stock Option Plan (the "SeniorPlan") to Mr. Kessman in January 1999 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. |

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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 options expire notmore than 10 years after the date of grant. 

ExercisePrice.    The exercise price for each share of Common Stockcovered by an option will be determined by the Committee at the time ofgrant.

Exercise of Options.    The Committee mayestablish vesting and other conditions or restrictions on the exerciseof an option and/or upon the issuance of Common Stock in connectionwith the exercise of an option as it deems appropriate. No option willbe exercisable during the first 6 months after the date of grant. TheCommittee may provide in the option agreement for the acceleration ofthe exercise date upon the occurrence of specified events and/oraccelerate the exercise date of an option at any time prior to theoption 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 

67

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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

We recorded research and development expenseof $200,000 during 2004 related to a gift to fund research throughMarch 31, 2006 at the laboratory headed by Dr. Sartorelli. The balanceof gifts of $250,000 at December 31, 2004 will be paid in five equalquarterly installments through the first quarter of 2006.

ITEM14.    Principal Accountant Fees and Services

Thefollowing table presents the aggregate fees for professional auditservices and other services rendered by Ernst & Young LLP, ourindependent registered public accountants, in 2004 and 2003:

|                    |  |                         |         |                                  |  |        |         |                                   |  |        |         |        |  |        |         |         |  |  |
|--------------------|--|-------------------------|---------|----------------------------------|--|--------|---------|-----------------------------------|--|--------|---------|--------|--|--------|---------|---------|--|--|
|               |  | Years ended December31, |
|               |  | 2004                    |         | 2003                             |
|               |  | Fees                    |         | %Approved by the Audit Committee |  | Fees   |         | % Approved by the Audit Committee |
| Audit fees         |  | $                       | 166,195 |                             |  |   | 100     | %                            |  | $      | 114,550 |   |  |   | 100     | %  |
| Audit related fees |  |                    | — |                             |  |   | — |                              |  |   | — |   |  |   | — |    |
| Tax fees           |  |                    | 28,000  |                             |  |   | 100     | %                            |  |   | 25,200  |   |  |   | 100     | %  |
| All otherfees      |  |                    | 1,590   |                             |  |   | 100     | %                            |  |   | — |   |  |   | — |    |
| Total              |  | $                       | 195,785 |                             |  |   |    |                              |  | $      | 139,750 |   |  |
|                    |

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 2004 include $73,000 ofaccrued audit fees for third-quarter 2004 review and the 2004 year-endaudit that were not billed until 2005. The fees for 2003 include$62,150 of accrued audit fees for the 2003 year-end audit that were notbilled until 2004.

Audit Related Fees consist of feesbilled for transaction consultations.

Tax Fees consist offees billed for tax compliance services.

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

68

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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 registered public accountants (the"Policy").

Under the Policy, proposedservices either (i) may be pre-approved by the Audit Committee withoutconsideration of specific case-by-case services as"general pre-approval"; or (ii) require thespecific pre-approval of the Audit Committee as "specificpre-approval". The Audit Committee may delegate eithertype of pre-approval authority to one or more of its members. Theappendices to the Policy set out the audit, audit-related, tax andother services that have received the general pre-approval of the AuditCommittee, including those described in the footnotes to the table,above; these services are subject to annual review by the AuditCommittee. All other audit, audit-related, tax and other services mustreceive a specific pre-approval from the Audit Committee.

TheAudit Committee establishes budgeted fee levels annually for each ofthe four categories of audit and non-audit services that arepre-approved under the Policy, namely, audit, audit-related, tax andother services. Requests or applications to provide services thatrequire specific approval by the Audit Committee are submitted to theAudit Committee by both the external auditor and the chief financialofficer. At each regular meeting of the Audit Committee, the externalauditor provides a report in order for the Audit Committee to reviewthe services that the external auditor is providing, as well as thestatus and cost of those services.

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PART IV

ITEM 15.    Exhibits, Financial Statement Schedules

**(a) 1.    Financial Statements**

Thefollowing is a list of the Financial Statements included in Item 8 ofPart II of this Report:

|                                                                                                                                                                    |  |        |    |        |  |  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--------|----|--------|--|--|
|                                                                                                                                                               |  | Page   |
| Reports of Independent Registered Public Accounting Firm                                                                                                           |  |   | 32 |   |
| Consolidated Balance Sheets as ofDecember 31, 2004 and 2003                                                                                                        |  |   | 34 |   |
| ConsolidatedStatements of Operations for the Years Ended December 31, 2004, 2003and 2002 and for the Period from May 1, 1994 (Inception) throughDecember 31, 2004  |  |   | 35 |   |
| Consolidated Statementof Changes in Shareholders' Equity for the Period from May 1,1994 (Inception) Through December 31, 2004                                      |  |   | 36 |   |
| Consolidated Statements of Cash Flows for the Years EndedDecember 31, 2004, 2003 and 2002 and for the Period from May 1, 1994(Inception) through December 31, 2004 |  |   | 39 |   |
| Notes to Consolidated FinancialStatements                                                                                                                          |  |   | 40 |   |
|                                                                                                                                                                    |

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)                                                                                                                                                     |
| 3.4        |  | —     |  | Certificate ofAmendment to the Certificate of Incorporation of Vion Pharmaceuticals,Inc. dated as of June 10, 2004(22)                                                                                                                                                     |
| 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)                                                                                                                                                                                               |
| 4.4        |  | —     |  | Amendment No.1 to Rights Agreement between Vion Pharmaceuticals, Inc. and AmericanStock Transfer & Trust Company dated as of August 16, 2004(23)                                                                                                                       |
| 10.1       |  | —     |  | License Agreementbetween Yale University and OncoRx, Inc. dated as of August 31, 1994(1,16)                                                                                                                                                                                |
|            |

70

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|            |  |             |  |                                                                                                                                                                  |  |  |  |  |  |  |
|------------|--|-------------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| ExhibitNo. |  | Description |
| 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)                                                          |
| 10.4       |  | —     |  | License Agreementbetween Yale University and OncoRx Corporation dated as of November 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      |  | —     |  | Reserved                                                                                                                                                         |
| 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 (6,25)  |
| 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(16,25)                |
| 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, Bijan Almassian and Ann LeeCahill (11)           |
| 10.26      |  | —     |  | Reserved                                                                                                                                                         |
|            |

71

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|            |  |             |  |                                                                                                                                                                                                                                                                                                        |  |  |  |  |  |  |
|------------|--|-------------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| ExhibitNo. |  | Description |
| 10.27      |  | —     |  | SeniorExecutive Stock Option Plan (11)                                                                                                                                                                                                                                                                 |
| 10.28      |  | —     |  | Reserved                                                                                                                                                                                                                                                                                               |
| 10.29      |  | —     |  | Development and License Agreement datedDecember 1, 1999 between the Company and Boehringer IngelheimInternational GmbH (12,25)                                                                                                                                                                         |
| 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, 25)                                                                                                                                                 |
| 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 (19,25)                                                                                                                                                                                 |
| 10.41      |  | —     |  | License Agreement between Vion Pharmaceuticals,Inc. and Beijing Pason Pharmaceuticals, Inc. dated September 12, 2003(19,25)                                                                                                                                                                            |
| 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(25) |
| 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(21,26)                                                                                                                                                                       |
| 10.48      |  | —     |  | VionPharmaceuticals, Inc. 2003 Stock Option Plan, as amended (through June2004) (22)                                                                                                                                                                                                                   |
| 10.49      |  | —     |  | Form ofStock Option Agreement for Executive Officers(22)                                                                                                                                                                                                                                               |
| 10.50      |  | —     |  | Amendment toOption Agreements with Mario Sznol (22)                                                                                                                                                                                                                                                    |
| 10.51      |  | —     |  | Consulting Agreement between Vion Pharmaceuticals,Inc. and Mario Sznol dated October 15, 2004(24)                                                                                                                                                                                                      |
|            |

72

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|            |  |             |  |                                                                                                      |  |  |  |  |  |  |
|------------|--|-------------|--|------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
| ExhibitNo. |  | Description |
| 21.1       |  |        |  | Subsidiariesof the Registrant                                                                        |
| 23.1       |  |        |  | Consent ofErnst & Young LLP, Independent Registered Public AccountingFirm                        |
| 24.1       |  |        |  | Power of Attorney(included on signaturepage)                                                         |
| 31.1       |  |        |  | Certification of theChief Executive Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002 |
| 31.2       |  |        |  | Certification ofthe Chief Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of2002  |
| 32.1       |  |        |  | Certification of theChief Executive Officer pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 |
| 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 reference to theCompany's Quarterly Report on Form 10-QSB for the quarterlyperiod ended June 30, 1998.       |
| (3)  |  | Incorporatedby reference to the Company's Current Report on Form 8-K filed onOctober 26, 1998.                               |
| (4)  |  | Incorporated byreference to 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)  |  | Reserved                                                                                                                     |
| (9)  |  | Incorporatedby reference to the Company's Quarterly Report on Form 10-QSB forthe quarter ended June 30,1997.                 |
| (10) |  | Incorporated by reference to theCompany's Annual Report on Form 10-KSB for the fiscal year endedDecember 31, 1998.           |
| (11) |  | Incorporated byreference to the Company's Quarterly Report on Form 10-QSB forthe quarter ended March 31,1999.                |
| (12) |  | Incorporated by reference to theCompany's Annual Report on Form 10-KSB for the fiscal year endedDecember 31, 1999.           |
| (13) |  | Incorporated byreference to the Company's Quarterly Report on Form 10-Q for thequarter ended June 30,2001.                   |
| (14) |  | Incorporated by reference to theCompany's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2001.             |
| (15) |  | Incorporated byreference to the Company's Annual Report on Form 10-K for thefiscal year ended December 31,2002.              |
| (16) |  | Incorporated by reference to theCompany's Annual Report on Form 10-K/A for the fiscal year endedDecember 31, 2002.           |
| (17) |  | Incorporated byreference to the Company's Current Report on Form 8-K filed onJune 20, 2003.                                  |
| (18) |  | Incorporated byreference to the Company's Current Report on Form 8-K filed onSeptember 10, 2003.                             |
| (19) |  | Incorporated byreference to the Company's Quarterly Report on Form 10-Q for thequarter ended September 30,2003.              |
| (20) |  | Incorporated by reference to theCompany's Current Report on Form 8-K filed on February 11,2004.                              |
| (21) |  | Incorporated by reference to theCompany's Current Report on Form 8-K/A filed on March 18,2004.                               |
|      |

73

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|      |  |                                                                                                                                                                                                                                                             |  |  |  |  |
|------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| (22) |  | Incorporatedby reference to the Company's Quarterly Report on Form 10-Q forthe quarter ended September 30,2004.                                                                                                                                             |
| (23) |  | Incorporated by reference to theCompany's Current Report on Form 8-K filed on August 16,2004.                                                                                                                                                               |
| (24) |  | Incorporated by reference to theCompany's Current Report on Form 8-K/A filed on November 9,2004.                                                                                                                                                            |
| (25) |  | Certain portions of this exhibithave been omitted pursuant to an order granting confidential treatmentby the Securities and ExchangeCommission.                                                                                                             |
| (26) |  | Certain portions of thisexhibit have been omitted pursuant to a request for an order grantingconfidential treatment by the Securities and Exchange Commission. Theomitted non-public information has been filed with the Securities andExchange Commission. |
|      |

74

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SIGNATURES

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

|  | VION PHARMACEUTICALS, INC. |
|--|----------------------------|

Date: March 15,2005  By: /s/ AlanKessman

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

|  | AlanKessmanChief Executive Officer |
|--|------------------------------------|

POWER OFATTORNEY

KNOWN ALL MEN BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Alan Kessman andHoward 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 datesindicated.

|                              |  |                                                                                  |  |                |
|------------------------------|--|----------------------------------------------------------------------------------|--|----------------|
| Signature                    |  | Title                                                                            |  | Date           |
|                              |
| /s/William R. Miller         |  | Chairman of the Board                                                            |  | March 15,2005  |
|                              |
| William R.Miller             |
|                              |
| /s/ Alan Kessman             |  | Chief Executive Officer and Director (PrincipalExecutive Officer)                |  | March 15,2005  |
|                              |
| AlanKessman                  |
|                              |
| /s/ Howard B.Johnson         |  | President andChief Financial Officer (Principal Financial and AccountingOfficer) |  | March 15, 2005 |
|                              |
| Howard B. Johnson            |
|                              |
| /s/ KarenSchmedlin           |  | Controller andSecretary                                                          |  | March 15, 2005 |
|                              |
| Karen Schmedlin              |
|                              |
| /s/Stephen K. Carter, M.D.   |  | Director                                                                         |  | March 15,2005  |
|                              |
| Stephen K. Carter,M.D.       |
|                              |
| /s/ Frank T. Cary            |  | Director                                                                         |  | March 15,2005  |
|                              |
| Frank T.Cary                 |
|                              |
| /s/ Charles K.MacDonald      |  | Director                                                                         |  | March 15,2005  |
|                              |
| Charles K.MacDonald          |
|                              |
| /s/ Alan C. Sartorelli,Ph.D. |  | Director                                                                         |  | March 15,2005  |
|                              |
| Alan C. Sartorelli,Ph.D.     |
|                              |
| /s/ Mario Sznol, M.D.        |  | Director                                                                         |  | March 15,2005  |
|                              |
| MarioSznol M.D.              |
|                              |

75

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